Family Businesses and IPOs: The Case of Idemitsu Kosan

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Family Businesses and IPOsThe Case of Idemitsu
Kosan

• Minoru SHIMAMOTO
• Hitotsubashi University

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Idemitsu Kosan
A Venerable Firm
Headquarters
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Idemitsu Kosan
A Venerable Firm

• Founded in 1911
• The 2nd largest petroleum company in Japan
• Sales nearly 4,000 billion yen (38 billion
  dollars)
• Non-listed until 2006

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Idemitsu Kosan
A Well-Known Firm
Service Station
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Apollo mark
A Well-Known Firm
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Debt Reduction
A Serious Financial Crisis
Nearly 2,500 billion yen (30 billion dollars)
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Debt Reduction
Repayment Recovery
Nearly 2,500 billion yen (30 billion dollar)
Recovery plan planned repayment
IPO
Return from the crisis
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Debt Reduction
Repayment Recovery
What happened during this period?
IPO
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Excellent Performance V-shaped Recovery after
2000
Idemitsu Sales and Profit(Excluding Subsidiaries)
1999
2006
1993
IPO
Recovery Plan
Peak of the debt
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(Source) Nikkei NEEDS Financial Quest.
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Maintaining Profits
Idemitsu Sales and Profit(Including Subsidiaries)
2006
IPO
2002
President Tenbo
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(??)Idemitsu????????????2010?2010?6?11??(?)2010???
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Japans Second Largest Oil Company
Gasoline Market Share (March 2011)
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Summary
Founder
Sazo
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Summary
1885-1981
Founder
Sazo
Founders Son
Shosuke
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Summary
Debt
1885-1981
Bubble Economy in the 1980s
Sazo
Shosuke
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Summary
Debt
Globalization in the 1990s
1885-1981
Sazo
The Big Bang and Financial Crisis
Fear among Banks
Shosuke
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Summary
1885-1981
Sazo
Tenbo
Shosuke
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Summary
1885-1981
Idemitsus IPO Plan
Sazo
The Recovery Plan
Tenbo
Shosuke
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Summary
Sazos Principles of Management
Sazo
Tenbo
The Recovery Plan
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Summery
Debt
Sales Profit
Tenbo
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Sazo Idemitsu (1885-1981)
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History of Idemitsu
A Communitarian Firm

• 2011 is the firms 100th anniversary
• Idemitsu
• Is one of Japans 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

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Sazos Principles of Management
Sacred and Inviolable
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• Respect
• Paternalism
• Independence
• Empowerment
• Denial of the Greedy
• Pursuit of Wealth
• Consumer-Centered
• Business Mindset

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The Seven Wonders of Idemitsu
Idemitsu is a Big Family
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• 1. No firing
• 2. No forced retirement
• 3. No labor union
• 4. No time card
• 5. No announcement of salary
• 6. No peddling of labor for money
• (The value of labor is greater than mere
  wages.)
• 7. No overtime pay

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Expansive Growth Policy in the 1980s
Idemitsu's Financial Crisis

• Omni-directional expanding growth policy
• Collapse of Bubble Economy
• Runaway growth of interest-bearing debt

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Idemitsu as an Entrepreneurial Enterprise
Omens of a Crisis

• (1) Inviolable Management Philosophy
• (2) Paternalistic Personnel System
• (3) Freewheeling Corporate Strategy

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Idemitsus 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
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Governance as an Entrepreneurial Enterprise
(until the 1970s)
Only Founder Knows Everything
Founder
Proposal
Proposal
Approval
Oil Idemitsu Kosan
Petrochemicals Idemitsu Petrochemicals
Idemitsu Petrochemicals was a wholly-owned
subsidiary, but operated independently
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Governance after Sazo (in the 1980s)
After the Founders Passing
Founders Son
Negotiation for Investment
Negotiation for Investment
Oil Idemitsu Kosan
Petrochemicals Idemitsu Petrochemicals
Investment for measures against Oil
Liberalization
Investment for development into a General
Chemical Firm
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Idemitsu Groups Over-investment in the 1990s

• Each division competed for investment funds in
  the 1980s
• Altogether, the amount was enormous
• Idemitsu Groups investment was not managed
  systematically

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Akihiko Tenbo
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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

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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.

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Land Prices
1989-91
Stock
Land
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Idemitsu Petrochemicals 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
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Idemitsus IPO Plan (1995)
The Origins of Idemitsus IPO

• 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 Shosukes reply No.

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Sazo's Stand Against Public Financing
Sazo rejected public capital markets. Shosuke was
his son.

• 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
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The Big Bang (1996)
Globalization The Big Bang

• 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 banks struggled
  to meet BIS capital-adequacy requirements

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Unwanted Credit Rating(1998)
AAA Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba
3 B1 B2 B3

• Moody's assigned a B2 to Idemitsu in 1998
• It was a kind of surprise attack

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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.

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Idemitsus 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
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Idemitsus Recovery Plan

1. Reduction of fixed costs
2. Debt load reduction by selling non-core assets
3. Sale of non-core businesses
4. Enhancement of competitiveness through alliance

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Tenbos 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 Conflict about IPO?
Tenbo kept silence about IPO internally?
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Idemitsu Family
Pro- IPO
Anti- IPO
Sazo
Keisuke
Akira
Shosuke
Chairman
President
Tenbo
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General Manager
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Tenbos Point of View
Persuading Shosuke

• 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 companys role is not only to create profits
  for stockholders but also to fulfill its social
  responsibility. This is possible even after
  listing on an exchange.

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Sosukes Acceptance

• In 2000, Shosuke admitted the necessity of an IPO
  
• Tenbos Words
• It was not a one-shot meeting, we discussed it
  many, many times. It was a five-year meeting.
• In 2001 Shosuke resigned

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The Recovery Plan and Sazos 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)

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The Recovery Plan and Sazos Principle of
Management(2)

• Idemitsu formed an employee stock society in
  2001.
• 80 of employees hold shares
• (? Rejection of the Greedy Pursuit of Wealth)

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The Recovery Plan and Sazos Principle of
Management(3)

• The Seven Wonders of Idemitsu were restricted by
  an internal control system implemented in 2002.
• (? Independence Empowerment)

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The Recovery Plan and Sazos Principle of
Management(4)

• An effective production/distribution system was
  established though the closure of refineries and
  the reform of distributors
• (? Consumer-Centered Business Mindset)

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Sazos Principle of Management
Inviolable Management Philosophy
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• Respect
• Paternalism
• Independence
• Empowerment
• Denial of the Greedy
• Pursuit of Wealth
• Consumer-Centered
• Business Mindset

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Sazos Management Principles
Consumer-Centered Business Mindset
Respect
Independence Empowerment
Denial of Greed
Paternalism
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Sazos Principle of Management
Effective Production/ Distribution System
No Layoffs
Consumer-Centered Business Mindset
Respect
Independence Empowerment
Denial of Greed
Paternalism
Internal Control System
Strategic Alliance
IPO
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Sazos Principle of Management
Effective Production/ Distribution System
No Layoffs
Consumer-Centered Business Mindset
Respect
Independence Empowerment
Denial of Greed
Paternalism
Internal Control System
Strategic Alliance
IPO
Employee Stock Society
10 Pay Cut
No MA
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The Seven Wonders of Idemitsu
Paternalistic Personnel System
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• 1. No firing
• 2. No forced retirement
• 3. No labor union
• 4. No time card
• 5. No announcement of salary
• 6. No peddling of labor for money
• (The value of labor is greater than mere
  wages.)
• 7. No overtime pay

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The Seven Wonders of Idemitsu
Modern Personnel System
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• 1. No firing
• 2. No forced retirement
• 3. No labor union
• 4. No time card
• 5. No announcement of salary
• 6. No peddling of labor for money
• (The value of labor is greater than mere
  wages.)
• 7. No overtime pay

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Debt Reduction
Source Idemitsu Kosan
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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

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Concluding Remarks(2) Financial Globalization

• Financial globalization
• This reform effort began as a an effort to remedy
  weak points in Idemitsus governance structure
  under pressure from the globalization of finance

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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

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Concluding Remarks

• If capitalisms 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

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The End

• Thank you for listening.

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Tenbos Point of View (2000)
Persuading Shosuke

• A bankruptcy due to an overly-strict
  interpretation of Sazos philosophy would
  obviously violate Sazos precepts and Idemitsus
  philosophy
• And inconvenience Idemitsus customers
• And interrupt Japans stable supply of energy
• And cause employees to lose their jobs

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Accounting Directors Statementat the Press
Conference

• Idemitsus mottos are Respect and
  Consumer-Centered Business Mindset, and we have
  not pursued economic rationality only.

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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

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