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Corporate Governance Problems at Seibu, Japan's Major Private Railway: Board to be Blamed?


Code : GOV0019

Year :

Industry : Transportation

Region : Japan

Teaching Note: Not Available

Structured Assignment : Not Available

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Seibu: A Brief Profile Seibu group was founded in 1912 by Yasujiro Tsutsumi. Seibu Railway Company began operations as Musashino Railway in 1915. The company’s railway operations were electrified in 1922. The company evolved into amulti-business group over the decades. In 1944, Seibu Transportation Company was established. The company was renamed as Seibu Group in 1946. Seibu listed its shares in the Tokyo Stock Exchange (TSE) in 1949. In 1960, Seibu Transportation Company’s international freight division fulfilled the qualifications of an IATA4 agent and was contracted as an exclusive agent by the international airlines association...

Troubles at Seibu Seibu had several railway lines and large tracts of land that Yasujiro Tsutsumi bought from bankrupt land owners after World War II. Using these vast land holdings as collateral, Tsutsumi borrowed heavily from banks. His business expansion model was to increase businesses through real estate. At the time of the bubble economy in 1980s, Seibu’s appreciation brought about by the rising value of real estate was estimated at 13 trillion yen ($ 0.12 trillion). But Seibu witnessed 4 billion yen ($33.86million) net loss in the fiscal year endedMarch 1999 due to a slump in hotel and golf business at home and in Hawaii.

Seibu’s Corporate Governance and Constitution of the Board In viewof the changes in the business environment due to the collapse of the bubble economy during the 1990s and the globalization of the economy, Japanese companies found themselves burdenedwith bad debt and unprofitable businesses. This led to a debate on the implementation of corporate governance practices in the decision-making process in companies and adopt a systemof checks and balances. In Japanese companies, the directorswere promoted fromthe ranks ofmiddle managers of the company.The directors of USfirmswere outsiders representing the shareholders,while those of Japanese companieswere usually insiders.Similar to other Japanese companies, in early 1990,Seibu established a board comprising of 15 members from among inside managers with Tsutsumi as the chairman of the board.

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Reviving Seibu and Reforming Corporate Governance at Seibu In November 2004, after Tsutsumi resigned, the company established a management reform committee of outside experts to help the firm improve its business management and increase transparency. The reform committee had four outsidemembers. It was headed by KenMoroi, an adviser to Taiheiyo Cement Corp. The other threemembers included Takashi Goto – Mizuho Corporate Bank Deputy President, Hideki Matsushima – a lawyer well versed in corporate restructuring, and Tomoyuki Takahashi – a former transportministry bureaucrat. The reformcommittee was expected to work out specificmeasures to review the ties between Seibu and Kokudo and tomap out realignment strategies, including the sale of noncore operations.The committee stated thatSeibu had to enhance the transparency of its governance structure if it was to be listed on the Jasdaq over-the-countermarket...

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