Cross-Shareholdings: Use Funds Generated from Stock Sales to Promote Corporate Growth

Editorial

14:00 JST, March 26, 2024

Companies are increasingly selling shares in cross-shareholdings that they have held to maintain ties with business partners and for other purposes. It is important to make effective use of the extra funds obtained from such sales and use them to enhance corporate value.

Companies cross-hold shares on the assumption that the shares will be held for the long term to facilitate smooth transactions with customers. Companies are obliged to disclose such holdings separately from shares held as pure investments seeking dividends or price appreciation.

The practice is peculiar to Japan, and the term “cross”-shareholding is used because such arrangements involve reciprocal ownership of shares in many cases. It is believed to have started after the postwar breakup of conglomerates in order to prevent takeovers via the buying up of shares.

As cross-shareholdings spread, companies became less exposed to the risk of takeover bids, making it easier to operate from a long-term perspective. It can be said that cross-shareholdings contributed to a certain extent to the development of Japanese companies during such periods as the high economic growth era in the past.

According to the Nomura Institute of Capital Markets Research, cross-shareholdings accounted for 50.7% of the shares of listed companies at the end of fiscal 1991. However, as foreign investment in the stock market increased, criticism of cross-shareholding grew stronger.

Companies tend not to oppose proposals from other companies whose shares they cross-hold because their priority is to maintain business relationships, and the function of shareholders’ oversight of management withers to a mere formality, resulting in collusion. This means that the invested funds are not being used effectively.

For this reason, the government and the Tokyo Stock Exchange since 2015 have urged companies to reduce their cross-shareholdings as part of a growth strategy. Furthermore, last spring, the TSE requested listed companies to manage their capital more efficiently, which also spurred the reduction.

Last November, Toyota Motor Corp. decided to sell some of its cross-held shares in its group company Denso Corp. Toyota group companies Toyota Industries Corp. and Aisin Corp. also said they plan to sell shares in Denso, and Denso said it plans to sell shares it holds in those two companies.

Toyota said it plans to make effective use of the funds obtained from the sale, such as using them for its electric vehicle (EV) business.

The percentage of cross-shareholdings in shares of listed companies is expected to fall to 11.5% by the end of this fiscal year on March 31. The strong performance of domestic share prices is believed to be due in part to companies’ moves to improve capital efficiency.

It is important for the sale of shares in cross-shareholdings to lead to investing in research and development and fostering human resources in order to achieve sustainable growth.

Meanwhile, activist shareholders such as foreign funds often demand short-term profits rather than corporate development. There are also fears that companies with technologies crucial to economic security may be at increased risk of being taken over.

The government should also pay attention to the negative effects of the reduction in cross-shareholdings.

(From The Yomiuri Shimbun, March 26, 2024)