Survey results on companies moving or considering moving over to the holding company system highlight issues and measures necessary for the development of a Japanese approach to holding company management

The Japan Research Institute, Limited (JRI) recently implemented two surveys on companies moving or considering moving over to a holding company system, a questionnaire-based survey conducted among 2,331 companies (mainly listed companies) in November-December 2008 and a survey based on the analysis of published information conducted among all listed companies in January-June 2009.

Since full-scale deregulation in conjunction with the 2002 revision of the Anti-monopoly Act, the number of companies moving over to the holding company system has been increasing and the number of holding companies among listed companies has been rising. The surveys revealed that moving over to the holding company system is motivated by a strong need to "strengthen the autonomy of business companies and accelerate management processes" (57 companies out of the 69 that had already made the move), "respond rapidly to M&A" (35 companies) and "reorganize business promotion units/structure" (35 companies) among other factors. In addition to the survey based on published information and that based on a questionnaire, JRI also conducted direct interviews of individual companies that had already moved over to the holding company system, by way of a supplement to the questionnaire-based survey. These interviews helped to shed light on the status of and issues currently facing companies that have moved over to the holding company system, and the survey reports also record companies' views on what measures would be effective in overcoming these issues and ensuring the success of Japanese-style holding company management.

The results of the surveys are outlined as below.

Survey

Target: 2,331 companies, centering on companies listed on the 1st and 2nd sections of the Tokyo Stock Exchange, but including 27 non-listed companies. The target was divided into companies that had already moved over to a holding company system (265) and companies that had not yet made the move (2,066 companies).
Number of responses: 299 companies (response rate: 12.8%)
[Breakdown: 69 companies that had already moved over to a holding company system (response rate: 26.0%); 230 companies that had not yet made the move (response rate: 11.1%)]
Methodology: questionnaire (non-anonymous; multiple choice and free response questions)
Content: Status of move to holding company system and management situation of holding companies
Period: November-December 2008

Survey based on analysis of published information
Target: All publicly listed companies
Methodology: Analysis of IR information such as financial statements
Content: Verification of status of process of conversion to holding company system and basic financial information
Period: January-June 2009 (reflecting accounts for year to March 2009)

Outline of Results:

• The number of holding companies in Japan has been rising steadily since the 2002 revision of the Anti-monopoly Act (from 9 before fiscal 2001to 254 in fiscal 2008) and awareness of the holding company system of management is increasing rapidly. The trend has been motivated companies' desire to benefit from the advantages of the holding company system, such as "autonomous business management, dynamic organizational management including M&A and stronger group headquarters functions". Progress has been made in creating the necessary the legal, tax and accounting infrastructure and the height of the hurdles to be cleared before a holding company can be established has been significantly reduced.
• The number of holding companies in Japan has been rising steadily since the 2002 revision of the Anti-monopoly Act (from 9 before fiscal 2001to 254 in fiscal 2008) and awareness of the holding company system of management is increasing rapidly. The trend has been motivated companies' desire to benefit from the advantages of the holding company system, such as "autonomous business management, dynamic organizational management including M&A and stronger group headquarters functions". Progress has been made in creating the necessary the legal, tax and accounting infrastructure and the height of the hurdles to be cleared before a holding company can be established has been significantly reduced.
• When moving over to the holding company system, the division of functions between the holding company and the business companies is a key issue. It appears that the two functions fulfilled by holding companies are "acting as a point of contact between the group as a whole and the outside world" and "the selection of businesses and allocation of resources to businesses within the group". The functions given to holding companies match the functions that companies wish to strengthen in the future, as corporate groupings.
• An analysis based on the results of the questionnaire and interview surveys conducted among companies that had moved or were considering moving over to holding company management showed that companies using the holding company system of management face a number of problems. These can be grouped under three headings: "the gap between the initial concept and implementation in practice", "lack of infrastructure to support group management" and "lack of related structures".
• To maximize the benefits of moving over to the holding company system, it will also be necessary to resolve a number of issues. The operation of holding companies in Japan will have to take account of the unique business management conditions that prevail in this country. Specifically, there must be an emphasis on "corporate cultural and organizational development", "long-term business development" and "the pursuit of synergies" and a Japanese style of holding company management must be pursued.

If Japan is able to clear up the issues surrounding holding company management and to maximize its benefits, the potential for holding company management to be an effective method of business management is likely to increase. However, as the current concept of "holding company management" in Japan is modeled on Western management methods, some aspects do not fit in with the Japanese approach to business management. If holding company management to fit in with the Japanese approach to business management, it will be necessary to take into consideration the Japanese approach to group management, which emphasizes the three areas of "corporate cultural and organizational development", "long-term business development" and "the pursuit of synergies". On this basis, the holding company system has the potential to be very useful as a means of implementing the Japanese approach to group management in that it allows an enterprise to focus on maximizing overall corporate value, without becoming over-involved in the profitability of particular businesses or in timelines. Japan should not by any means reject the western style of management altogether but should seek to learn from it a rational system for the assessment of corporate value, emphasis on clear accountability, etc. and other attributes that Japanese companies have lacked in the past. The strength of the Japanese-style holding company system of management is that it incorporates the best points of the western approach to business management while retaining the advantages of some elements of the Japanese approach to group management.

For more information on the content of this report, please contact Sawako Wasada, the Japan Research Institute, Limited.

Tel: 03-3288-5014
E-mail: wasada.sawako@jri.co.jp