family businesses and ipos: the case of idemitsu kosan

1

Family Businesses and IPOs:The Case of Idemitsu Kosan

Minoru SHIMAMOTOHitotsubashi University

22

Idemitsu Kosan

Headquarters

A Venerable Firm

33

Idemitsu Kosan Founded in 1911 The 2nd largest petroleum

company in Japan Sales: nearly 4,000 billion yen (38

billion dollars) Non-listed until 2006

A Venerable Firm

44

Idemitsu Kosan

Service Station

A Well-Known Firm

55

Apollo mark

A Well-Known Firm

66

Debt Reductioninterest- bearing debt

0

500

1,000

1,500

2,000

2,500

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

year

billion

yen

Nearly 2,500 billion yen (30 billion dollars)

A Serious Financial Crisis

77


0

500

1,000

1,500

2,000

2,500

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

year

billion

yen

Nearly 2,500 billion yen (30 billion dollar)

Recovery plan &planned repayment

IPO

Return fromthe crisis

Repayment & Recovery

88


0

500

1,000

1,500

2,000

2,500

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

year

billion

yen

IPOWhat happenedduring this period?

Repayment & Recovery

99

0

500

1000

1500

2000

2500

3000

3500

4000

45001986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

十億

円：

売上

高

0

50

100

150

200

十億

円：

利益

売上高営業利益経常利益

(Source) Nikkei NEEDS Financial Quest.

IPORecovery Plan

1999 2006

Peak of the debt

1993

Excellent Performance: V-shaped Recovery after 2000

Idemitsu Sales and Profit(Excluding Subsidiaries)

1010

0

500

1000

1500

2000

2500

3000

3500

4000

45002

00

1

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

十億

円：

売上

高

0

25

50

75

100

125

150

175

200

225

十億

円：

利益


Idemitsu Sales and Profit(Including Subsidiaries)

IPO

2006

President Tenbo

2002

（出所） Idemitsu株式会社『ファクトブック 2010』 2010年 6月 11日。（注） 2010年度の営業利益は予想値。

Maintaining Profits

1111

JX Energy27%

Idemitsu15%

Cosmo13%

JX Metal12%

Tonen10%

Syowa10%

Others13%

Japan’s Second Largest Oil Company

Gasoline Market Share(March 2011)

12

Summary

Sazo

Founder

13

Summary

Shosuke

Sazo

1885-1981

Founder’s Son

Founder

14

Summary

Shosuke

Sazo

1885-1981

Bubble Economyin the 1980s

Debt

15

Debt

Summary

Shosuke

Sazo

1885-1981Globalizationin the 1990s

The Big Bang andFinancial Crisis

Fear among Banks

16

Summary

Tenbo

Shosuke

Sazo

1885-1981

17

Summary

Tenbo

Shosuke

Sazo

1885-1981

The Recovery Plan

Idemitsu’s IPO Plan

18

Summary

Tenbo

Sazo

The Recovery Plan

Sazo’s Principles of Management

19

Summeryinterest- bearing debt

0

500

1,000

1,500

2,000

2,500

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

year

billion

yen

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

十億

円：

売上

高

0

50

100

150

200十

億円

：利

益


Tenbo

Debt

Sales &Profit

2020

Sazo Idemitsu (1885-1981)

2121

History of Idemitsu 2011 is the firm’s 100th anniversary

Idemitsu: Is one of Japan’s pre-WWII international firms Is a latecomer to the oil market that eliminated its

late-starter disadvantage Has a No-layoff Policy Implemented an extremely difficult oil recovery project Imports “Apollo” brand gasoline Was the instigator of the Nishomaru Affair, competed

against the Oil Majors Withdrew from the Petroleum Association of Japan

when opposed to regulation by the Government

A Communitarian Firm

2222

Sazo’s Principles of Management

Respect Paternalism Independence & Empowerment Denial of the Greedy Pursuit of Wealth Consumer-Centered Business Mindset

人間尊重

大家族主義

独立自治

黄金の奴隷たるなかれ

生産者から消費者へ

Sacred and Inviolable

2323

The Seven Wonders of Idemitsu

1. No firing2. No forced retirement3. No labor union4. No time card5. No announcement of salary6. No peddling of labor for money (The value of labor is greater than mere wages.)

7. No overtime pay

馘首なし

定年なし

労働組合なし

出勤簿なし

給料公示なし

給料は労働の対価でない

残業代受け取らず

Idemitsu is a Big Family

2424

Expansive Growth Policy in the 1980s

Omni-directional expanding growth policy

Collapse of Bubble Economy

Runaway growth of interest-bearing debt

Idemitsu's Financial Crisis

2525

Idemitsu as an Entrepreneurial Enterprise

(1) Inviolable Management Philosophy

(2) Paternalistic Personnel System (3) Freewheeling Corporate

Strategy

Omens of a Crisis

2626

Idemitsu’s Governance Structure under Sazo (through the 1970s)

Each department chief negotiated directly with the founder

The founder was responsible for all major decisions

This arrangement was not rare (e.g. GM in the early 20c.)

Only the Founder Knows Everything

2727

Governance as an Entrepreneurial Enterprise （ until the 1970s ）

Founder

Oil

IdemitsuKosan

Petrochemicals

IdemitsuPetrochemicals

Idemitsu Petrochemicals was a wholly-owned subsidiary, but operated independently

Proposal ProposalApproval

Only Founder Knows Everything

2828

Governance after Sazo (in the 1980s)

Founder’s Son

Investment for measuresagainst Oil Liberalization

Investment for developmentinto a General Chemical Firm

Negotiation forInvestment

Negotiation forInvestment

After the Founder’s Passing

Oil

IdemitsuKosan

Petrochemicals

IdemitsuPetrochemicals

2929

Idemitsu Group’s Over-investment in the 1990s Each division competed

for investment funds in the 1980s

Altogether, the amount was enormous

Idemitsu Group’s investment was not managed systematically

3030

Akihiko Tenbo

3131

Akihiko Tenbo 1939: Born in Tokyo 1964: Graduated from the University of

Tokyo 1988: President, Idemitsu Europe 1991: Accounting General Manager 2002: President 2009: Chairman

3232

Rough Assumption of Continuously Growing Economy

Idemitsu continued investing in refineries and land procurement on the scale of 100 billion yen per year – entirely financed with debt.

One senior executive said to Tenbo: “An Idemitsu accounting general manager should simply collect money without a word.”

3333

Land Prices 1989-91

Land

Stock

3434

Idemitsu Petrochemical’s Losses (1993) Ordinary loss of 27 billion yen (270

million dollar) in 1993 due to over-investment

A Prompt re-structuring was necessary.

Idemitsu Kosan supported Idemitsu Petrochemicals

Financial Institutions Began to Hesitate to Lend

3535

Idemitsu’s IPO Plan (1995) Tenbo began to seriously think about

an IPO

In 1995, with President Akira Idemitsu, Tenbo tried to convice Chairman Shosuke of the necessity of an IPO

Chairman Shosuke’s reply: “No.”

The Origins of Idemitsu’s IPO

3636

Sazo's Stand Against Public Financing

“After all, zero capital is ideal.”

“A public offering could cause the fall of Idemitsu.”

Shosuke waited for five years to approve the IPO.

Sazo

Shosuke

Sazo rejected public capital markets.Shosuke was his son.

3737

The Big Bang (1996) Collapse of the “Convoy System” (Banks

had been protected by the MOF) Deregulation by the government Reform toward Free, Fair and Global

Finance Intensified Competition between the

Banks This led to a credit crunch as bank’s

struggled to meet BIS capital-adequacy requirements

Globalization & The Big Bang

3838

Unwanted Credit Rating(1998) Moody's assigned a “B2”

to Idemitsu in 1998

It was a kind of surprise attack

AAAAa1Aa2Aa3A1A2A3Baa1Baa2Baa3Ba1Ba2Ba3B1B2B3

3939

Fear Among Banks The interesting-bearing debt

still reached about 2,000 billion yen in 1998.

Banks were afraid that Idemitsu might not repay borrowed money.

In 1998, Tenbo began to contact banks to discuss debt repayment.

4040

Idemitsu’s Recovery Plan In 1999 Tenbo decided to start the

Idemitsu Recovery Plan

Tenbo gathered leading middle managers from each department cross-functionally

These middle managers used their area expertise to help Tenbo formulate the grand plan

Tenbo

Nakano

4141

Idemitsu’s Recovery Plan

1. Reduction of fixed costs2. Debt load reduction by selling

non-core assets3. Sale of non-core businesses 4. Enhancement of competitiveness

through alliance

4242

Tenbo’s Campaign of Persuasion

Tenbo had to convince both the Idemitsu Family and Employees of the gravity of the crisis with actual data and figures

Idemitsu Family Idemitsu Employees

Internal Conflictabout IPO?

Tenbo kept silenceabout IPO internally?

4343

President

Idemitsu Family

Sazo Keisuke

AkiraShosuke

Tenbo

Chairman

General Manager

Pro-IPO

Anti-IPO

4444

Tenbo’s Point of View An IPO is a tool, not a philosophy

If Sazo was alive he would permit an IPO, in view of the now-mature stock market

A company’s role is not only to create profits for stockholders but also to fulfill it’s social responsibility. This is possible even after listing on an exchange.

Persuading Shosuke

4545

Sosuke’s Acceptance In 2000, Shosuke admitted the

necessity of an IPO

Tenbo’s Words: “It was not a one-shot meeting, we

discussed it many, many times. It was a five-year meeting.”

In 2001 Shosuke resigned

4646

The Recovery Plan and Sazo’s Principle of Management(1)

A 10% pay cut for employees was implemented between 1999 and 2002

The decision was to not to cut jobs but rather to share the pain together

(→ Respect, Paternalism)

4747


Idemitsu formed an employee stock society in 2001.

80% of employees hold shares

(→ Rejection of the Greedy Pursuit of Wealth)

4848


The Seven Wonders of Idemitsu were restricted by an internal control system implemented in 2002.

(→ Independence & Empowerment)

4949


An effective production/distribution system was established though the closure of refineries and the reform of distributors

(→ Consumer-Centered Business Mindset)

5050

Sazo’s Principle of Management

Respect Paternalism Independence & Empowerment Denial of the Greedy Pursuit of Wealth Consumer-Centered Business Mindset

人間尊重

大家族主義

独立自治

黄金の奴隷たるなかれ

生産者から消費者へ

Inviolable Management Philosophy

5151

Sazo’s Management Principles

Respect Consumer-Centered Business Mindset

PaternalismIndependence &Empowerment

Denial ofGreed

5252




Denial ofGreed

Internal ControlSystem

Strategic Alliance IPO

No LayoffsEffective Production/Distribution System

5353




Internal ControlSystem

Strategic Alliance IPO

Effective Production/Distribution System

Employee StockSociety

10% Pay Cut No M&A

Denial ofGreed

No Layoffs

5454



7. No overtime pay

馘首なし

定年なし

労働組合なし

出勤簿なし

給料公示なし



Paternalistic Personnel System

5555



7. No overtime pay

馘首なし

定年なし

労働組合なし出勤簿なし

給料公示なし



Modern Personnel System

5656

Source: Idemitsu Kosan

Debt Reduction

5757

Concluding Remarks(1) Reform by Professional Managers:

Idemitsu Kosan faced a financial crisis in the mid-1990s

Tenbo gathered core employees cross-functionally to formulate a recovery plan

He immediately implemented a series of managerial reforms

5858

Concluding Remarks(2) Financial Globalization

Financial globalization This reform effort began as a an effort

to remedy weak points in Idemitsu’s governance structure under pressure from the globalization of finance

5959

Concluding Remarks(3) Governance Reform

Governance Reform 　 With the assistance of finance

institutions, professional managers were able to fundamentally alter the governance of a company that had been heretofore completely controlled by the founding family

6060

Concluding Remarks If capitalism’s driving force can be

said to be innovation, it is necessary to fumble towards and find the best way of effecting organizational change during adversity 　

Idemitsu demonstrates one such way

6161

The End Thank you for listening.

6262

A bankruptcy due to an overly-strict interpretation of Sazo’s philosophy would obviously violate Sazo’s precepts and Idemitsu’s philosophy

And inconvenience Idemitsu’s customers

And interrupt Japan’s stable supply of energy

And cause employees to lose their jobs

Tenbo’s Point of View (2000)

Persuading Shosuke

6363

Accounting Director’s Statementat the Press Conference

“Idemitsu’s mottos are Respect and Consumer-Centered Business Mindset, and we have not pursued economic rationality only.”

6464

Rough Assumption of Continuously Growing Economy

Many investment projects proceeded without top management's approval.

Facilities and land (assets) increased in value during the 1980s

As the value of land rise in the 1980s, simply holding facilities and land appeared to be a good strategy

family businesses and ipos: the case of idemitsu kosan

Documents

idemitsu kosanfounded

apollo marka wellknown

profitnet profit20032

dollars nonlisted

debtsheet1nippon oil10

debt reductionnearly

japan energy3

exxon mobil5