9/82 STABLE SHAREHOLDERS & FLOATING SHAREHOLDERS--THE RELATIONS BETWEEN COMPANIES AND SHAREHOLDERS.

The Japan Securities Economic Research Institilte

November 30, 198l

THE MAJORITY OF THE SHARES LISTED ON THE STOCK EXCHANGES ARE HELD BY STABLE SHAREHOLDERS

Looked at from the problem of the relationship between companies and shareholders, what is the problem with stable shareholders?

It is generally thought that the relationship between the company and shareholders moves via the barometer of the stock price. If, no matter what happens to the share price the shareholders do not change, liquidity in the share disappears and there is no meaning as all that everyone is looking at the stock price. Accordingly, the free interchange of shareholders in accord with the share price movements and liquidity is, needless to say, the desirable situation.

Moreover, the relationship between shareholders and companies can be expected to work via the automatic adjustment in the stock price. If you assume that there is no pressure from shareholders and there is no influence on share prices, it is only rational that the company accumulate all its profits internally and not pay out dividends (Editors note -- that is the case in Japan where Japanese companies pay out incredibly low dividends, virtually in total disregard of earnings performances -- but it also helps corporate cash flow and strengthens company reserves). However, shareholders do not complain. That said, to the extent that the general shareholders meeting is nonfunctional, and the shareholders do not in that way pressure the managers (editor -- that is the case in Japan where company management hired thugs called "sokaiya" to shorten the shareholders meeting and silence questioning shareholders), the demands of shareholders are not directly realized. On that point, shareholders of companies with low dividends sell the stock (editor-- unless, as in Japan, they expect capital gains). If that is the case, the stock price falls. If the stock price falls, it is not beneficial when it issues shares to raise capital. Thus the managers raise dividends.

This is called the "Wall Street Rule" in America where shareholders do exert pressure. However, this situation where the interest of the shareholders is reflected on the managers via stock prices is not only the case in Wall Street, it is possible to think of this theory as the basic function of holding shares. Abstractly speaking, this kind of situation where shareholders are free to buy and sell and based thereon influence the actions of corporate management, is the ideal type of status and idealization of a stock corporation. To the contrary, the shareholder who is in a special relationship with the company and will not sell no matter what the stock price is, is an undesirable shareholder. In addition, companies where shares are held based on relationships and have limited transferability should not have their shares listed on the stock exchanges.

IS THERE ANYONE WHO REALLY DOUBTS THAT IN JAPAN THE OVERWHELMING SHARE OF STOCKHOLDINGS IS HELD BY SUCH SHAKEHOLDERS?

According to research by the Research Division of the Tokyo Stock Exchange, the condition of stable shareholders in Japan is as listed on the table below. This is based on the 10 largest shareholders of each company as found in their securities report filed with the Ministry of Finance. The result is that most of such large shareholders are in special relationships with the companies. WHAT IS SURPRISING IS THAT THIS APPLIES TO THE MAJORITY OF THE COMPANIES LISTED ON STOCK EXCHANGES IN JAPAN, SHOWING LIMITED TRANSFERABILITY

The important point in comparing stable shareholders and floating shareholders is the rate of trading turnover. That rate is very low for the stable shareholders and very high for floating shareholders. In Japan, in particular, this contrast is exceedingly remarkable. The situation in Japan is that the rate of trading turnover of such corporate shareholders as banks and other corporations is incredibly low, while the rate of such trading by individual and investment trusts (Captive subsidiaries of the securities companies) is incredibly high. This is in stark contrast to the US. In the US, the rate of holding of shares by corporations is very low and banks are prohibited from holding shares (the shareholdings of the trust divisions of banks do not belang to the banks, they are trust assets). Furthermore, there is not much difference in the rate of trading between institutional investors and individuals.

IT IS NOW BEING SAID THAT WITH THE FURTHER ADVANCE OF INSTITUTIONAL INVESTORS IN THE US, THE WALL STREET RULE IS NOT WORKING (Mr. Aoki, " The systematic inefficiency of American corporations, SEKAI (WORLD), February, 1981). However, when looking at the condition of the large shareholders of the large American corporations, the shareholdings of large shareholders have shifted frequently, very different from the case in Japan. In the way the large shareholders in the US sell the stock and sink the stock price, they still affect the management. In contrast to this is Japan, where corporations do not sell their holdings. Thus the relationships between the companies and the shareholders do not change, making the managers less subject to shareholders pressure and strengthening the independence of management.

THE JAPAN LAWLETTER, September, 1982. By Roderick Seeman