Interlocking Shareholdings and Corporate Governance

Abstract

This chapter discusses the interrelatedness of the financial feature of stable shareholding and the internal feature of permanent employment in the context of corporate governance. The chapter notes that the interlocking stable shareholding arrangement operates as a take-over insulation device for Japanese firms. This chapter explores the idea that some degree of insulation from competition in the market for corporate control is conducive to the operation of the permanent employment system. By making credible an investor's ex ante promise not to intervene in the ordinary state of business, stable shareholding provides incentives for managers and workers to invest in firm-specific intangible assets. This chapter also makes an interesting observation regarding the role of securities companies acting as intermediaries for stable reciprocal shareholding arrangements, which does not appear to have been written about before. Insulation from take-over may suggest to neoclassical economists enormous scope for managerial moral hazard. However, the chapter argues that the main bank acts as a kind of delegated monitor, particularly in its intervention role with regard to failing firms, analogous to the take-over mechanism. Also, it is argued that within the context of permanent employment system lower-level managers who have stakes in higher-level managers' decisions may be motivated to carry out internal monitoring.

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