+

Koito Manufacturing, Ltd.

+ Suppliers
As with the owners, suppliers can also be divided in the 2 groups; suppliers that share experiences regarding one company and have informational benefits that reduce certain agency problems, while external suppliers do not have this information

As in the case of Koito, suppliers fulfill an important role as Toyota came up with a new ownership structure among its suppliers. First, each supplier buys equity in some other supplier of the same tier Second, Toyota created kyroyokukai which meant a club for co-prospering with Toyota

Based on this approach, each supplier is highly connected with another supplier. Because suppliers highly rely on the same company, they share the same experiences with each other regarding this company, which diminishes private information and reduces asymmetrical agency problems

+Motives T. Boone Pickens

T. Boone Pickens , chairman of the hedge fund BP Capital Management, is a globally renowned American financier. Throughout the 1980s Pickens became widely known as an aggressive, tenacious, and generally hostile bidder . Pickens made a fortune by investing undervalued equity and re-selling them at a substantial profit. Pickens stated (public) motive was only to participate in Koitos long-term management and growth, however, Koitos management was sceptic about that.

Some of his alleged (hostile) motives were:

To gain board representation for the stockholders interest (and so himself) which clashes with the Japanese stakeholders-based corporate culture. To raise dividends to increase shareholders wealth, and so that of himself.

To challenge the Japanese market to open up for foreign investment opportunities

Overall, with the information provided we cannot conclude what his real motives are. However, due to Pickens ambiguous reputation it is nave to think that its only motive was to participate in Koitos long-term management and growth.

+ The Dividend Issue (i)

Legal:

T. Boone Pickens demanded higher dividend pay-outs. However, only if Mr Pickens owned 34 % or more of the stock according to the Japanese code, he could propose a shareholder resolution to change the dividend pay-outs. Since Mr Pickens only owns 26, 4% of the shares, looking from this legal perspective, his demands were not justified

Benchmark:

To extent the analysis, we compared the average dividend yield and average prices of Koito with the average dividend yield and prices at the Tokyo Stock Exchange (see figure 3 and 4) to quantify if Koitos pay-out strategy was indeed justified oppose to the averages of the companies in Japan. As can be seen in the graphs, the dividend yield of Koito was 0,16 % which was approximately in compliance with the average dividend yield at the TSE. The demands of Mr Pickens therefore were also from this perspective not justified

Douglas Kennedy compared the relationship between a core keiretsu company and its suppliers with that between a remora and a shark:
As long as its attached to the shark, the remora doesnt get eaten. Meanwhile, it can scoop up the little shreds of nourishment that fall out of the sharks mouth

Source: How Asia got rich: Japan China and the Asian miracle. Edith Terry M.E. Sharpe, 2002

+ ASSUMPTIONS
Description of Assumptions
The assumptions are based on the average value and the average growth based on the last periods ranging from 1982 to 1990. The cost of capital is taken from the website of the Tokyo Stock Exchange. Although the equity return was as high as 24% over the last nine years we do not think this is a representative figure for the future. From the website of TSE we found that the average return of the industry was around 12%. That is what we took as the cost of capital. The future growth rate is equal to 5%. We think this is a reasonable growth rate bearing in mind the high growth in the past of as much as 9%. This is not a sustainable growth rate however

Assumptions
Cost of Capital Future Growth rate Sales growth Cost of goods sold growth SG&A growth rate Non operating income (Int. % div. Received) Non operating expenses (Int. & Discount) Extra ordinary gain per year Extra ordinary loss per year Provision tax rate Capex % of sales Depreciation % of sales Sales growth reduction

Numbers
12,0% 5,0% 8,5% 7,1% 8,9% 8,7% 8,8% 12,5% -12,1% 459 322 48,36% 3,86% 17,15% 48%

Conclusion: are Large Shareholders an Effective Solution? (I)

From Toyota perspective: Toyota, being a large shareholder, created a large advantage by influencing the Board of Koito. They managed to get lower prices for the products that they bought and thereby creating self-dealing transactions. In this way, it was not an effective solution to the corporate governance problem From Pickens perspective: Although not fully effective, Pickens, being a large shareholder and not a member of the keiretsu, does show how large shareholders can influence the effectiveness of a company. Mainly due to the keiretsu system Pickens was not able to achieve his goals. Still, Pickens did eventually increase dividends and raise awareness of the downside of the keiretsu which was beneficial to the small shareholders. In this way, it was an effective solution to the corporate governance problem

+ What really happened?

In hindsight we know that Mr. Pickens pulled out of Koito in 1991 because he was not able to get board representation. Koito's stable shareholders, including Toyota, other group firms and financial institutions, had more than 70% of Koito's outstanding shares and did not let him enter

Pickens testified many times before Congress about his Japanese experience and the uneven corporate and trade ground between the United States and Japan. Although the situation became intractable and Pickens ended up selling his stake in Koito, the high-profile episode forever changed the playing field. Slowly, the idea that the shareholders in a Japanese corporation no longer finish dead last in the eyes of management gained ground. While major U.S.Japan investment and trade inequities remain, Pickens took a crowbar to a long-closed door and let a bright light shine into the room

Figure 1: Ownership Structure

Ownership in %

Boon Co.

Toyota Motor
Nissan Motor Matsushita electric Industrial Nippon Life Insurance Dai-Ichi Mutual Life Insurance Matsusita Real Estate Japan Securities Finance Sumitomo Bank Dai-Ichi Kagyo Bank Mitsubishi Bank Other

Source: T. Boone Pickens, Secrets Koito Hoped to Hide by Keeping Me Off Its Board, Wall Street Journal, March 28, 1990, p. A14; Pickens Tries Histrionics at Koito, New York Times, June 29, 1990, p. D1

Table 2: Growth Prospects including Toyota

+Table 4: Growth prospects excluding Toyota