CONFLICTS BETWEEN PARENT COMPANY AND NON-CONTROLLING SHAREHOLDERS IN STAKEHOLDER-ORIENTED CORPORATE GOVERNANCE: EVIDENCE FROM JAPAN

Kento Fujita,Akihiro Yamada

doi:10.3846/jbem.2022.16060

Kento Fujita, Akihiro Yamada

Open Access

https://doi.org/10.3846/jbem.2022.16060

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Abstract

When a company establishes subsidiaries with capital provided by a third party, the subsidiaries’ shareholders include the parent company (controlling shareholders) and minority (noncontrolling) shareholders. When shareholders’ interests are divergent, conflicts may arise, causing inefficiencies in the management of the subsidiaries or the corporate group. Such conflicts among shareholders are called principal–principal (PP) conflicts. However, adopting stakeholder-oriented corporate governance, a practice prevalent in Japan, may mitigate such PP conflicts. In fact, many Japanese companies report non-controlling interests in their consolidated financial statements. This paper investigates the influence of PP conflicts in Japanese corporate groups. The availability of nonconsolidated and consolidated financial statements in Japan allows for the comparison of parent companies’ data with those of the corporate group. The results reveal that (1) the larger the minority shareholders ratio (MER), the more the profits shifted to the parent company, and (2) the larger the MER, the higher the growth of the subsidiaries’ sales rates. These results suggest that while the parent company exploits the non-controlling shareholders through profit shifting, it also allocates sales growth opportunities to subsidiaries to mitigate PP conflicts.

Highlights

Focusing on a Japanese corporate group, this paper aims to investigate profit shifting to the parent company that can occur due to principal–principal (PP) conflicts between the parent company and the non-controlling shareholders of the subsidiary, and the allocation of sales growth opportunities to the subsidiary to mitigate PP conflicts
This study focused on a Japanese corporate group with stakeholder-oriented corporate governance and examined PP conflicts between the parent company and non-controlling shareholders in subsidiaries
The findings of this study revealed that (1) the larger the noncontrolling interest ratio of the subsidiaries, the more profits are shifted to the parent company; (2) the larger the non-controlling interest ratio of the subsidiaries, the higher is the

Summary

Introduction

Focusing on a Japanese corporate group, this paper aims to investigate profit shifting to the parent company that can occur due to principal–principal (PP) conflicts between the parent company and the non-controlling shareholders of the subsidiary, and the allocation of sales growth opportunities to the subsidiary to mitigate PP conflicts. In a company where management and ownership are separated, corporate governance is an important mechanism that. This section focuses on corporate ownership structures and summarizes the Anglo-American type of shareholder-oriented corporate governance and stakeholder-oriented corporate governance in Japan. In Anglo-American countries, market control is achieved by individual investors selling their shares in poorly performing companies (Judge & Zattoni, 2012). Corporate governance in Anglo-American countries can be characterized as shareholder-oriented corporate governance based on market mechanisms (Judge & Zattoni, 2012)

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