The Efficiency of Friendliness : Japanese Corporate Governance Succeeds Again Without Hostile Takeovers

It is widely assumed that hostile takeovers are a prerequisite for an efficient system of corporate governance. This assumption is false. Since the new millennium, Japan has transformed itself from being on the brink of one of the largest economic meltdowns in modern economic history to currently being in the midst of its longest period of postwar economic expansion (2002-2007). This astounding recovery was achieved without a single successful hostile takeover of a major Japanese company. True to its postwar tradition, corporate Japan has successfully restructured through government intervention, bank-driven reallocation of capital, and orchestrated and friendly mergers — the antitheses of the American corporate governance model, which is premised on hostile takeovers. The conspicuous absence of hostile takeovers in Japan's recent recovery is particularly remarkable considering that, during the recent recovery, market conditions for hostile takeovers were close to optimal. Almost all of Japan's “idiosyncratic barriers” to hostile takeovers (i.e., stable shareholdings, a cultural aversion to hostile takeovers, and inefficient takeover laws) were ostensibly dismantled, and the bust-up values of a substantial percentage of Japan's listed companies were considerably more than their cumulative stock price. To many experts, Japan appeared to be a utopia for hostile takeovers. Yet despite the pro-hostile takeover environment, there has never been a successful hostile takeover bid during Japan's period of economic recovery. Japan's unique system of corporate governance — lifetime employment and the influence of the government and banks — has fostered orchestrated and friendly (but not hostile) M&A as a significant force for restructuring. This is important because it provides evidence of “the efficiency of friendliness” in the era of globalization. Other countries can once again look to Japan's unique system of corporate governance as a viable alternative to the American corporate governance model based on hostile takeovers