Academic journal article Journal of Financial Management & Analysis

Financial Management Indicators to Aid Decision Making (Statistics)

Academic journal article Journal of Financial Management & Analysis

Financial Management Indicators to Aid Decision Making (Statistics)

Article excerpt

Monitored by

Om Sal Ram Centre for Financial Management Research

Mum bai, INDIA

Japanese arid Korean Kinship Networks

In the last decade, Asian countries have made great and rapid economic gains. As many Asian firms out-performed their US counterparts, some researchers began to speculate on whether the organizational structures of business groups - - specifically, the Korean family-owned conglomerates called Chaebols and the Japanese conglomerates known as Keiretsus - - were the causes of these economic gains. Chaebols and Keiretsus are groups of independent companies operating in different markets with different products and services but under common administrative and financial controls. The groups depend on each other for leadership, human resources, and R&D functions, and are extremely important to the economies of their respective countries. The Chaebols are credited with the rapid development of the Korean economy after the Korean War and the Keiretsus are credited with the tremendous economic growth of Japan after World War II.

Ownership and Control

The stock of Korean Chaebol member companies is heavily owned and controlled by the owner' family members, whereas the controlling ownership in Japanese Keiretsu members are spread among their affiliated companies. These differences in ownership have resulted in different management styles (autocratic versus collective) and focuses (shareholder versus stakeholder).

CHAEBOLS

* Chaebol ownership generally follows one of three patterns :

* sole possession, whereby the founder or his family members and relatives own all affiliated enterprises.

* domination by the core company, whereby the founder or his family members and relatives own the core company, which in turn owns other affiliated enterprises.

* mutual possession, whereby the founder or his family members and relatives own the core company and/or some kind of foundation, which in turn owns other affiliated enterprises

It is a symbol of commitment and mutual obligation to the group. It is also a means of sharing risks and preventing hostile takeovers. However, with the risk to individual members reduced, the original intention of the practice as a reinforcement of group loyalty has been forgotten by some members.

KEIRETSUS

* Because the ownership of individual firms in a Keiretsu is spread among áffiliated companies without a major owner, leadership tends to be collective without a major owner, leadership tends to be collective rather than autocratic. Moreover, the individual firms are concerned more with stakeholders' interests than with those of shareholders. The member companies tend to collude and do what they consider to be in their own best interests rather than work toward increasing the total value of the group. The practice of cross-stock ownership seems to serve as a means of promoting self-interest rather than as a means of controlling group behaviour.

Chaebols - Keiretsus : Comparative Appraisal

In response to the recent financial crisis, Chaebols have acted much more quickly than the Keiretsus. As soon as the Korean Government decided to accept the International Monetary Fund (IMF) loans, Chaebol leaders reduced their investment priorities, focused on maintaining a stable cash flow, and increased efforts to downsize companies through wage freezes or layoffs. The Japanese Keiretsus have also been under a great deal of external pressure to reform. Either through direct or indirect ownership, Chaebols operate under the close supervision and control of a family, which in turn is responsible to its head.

This highly converged ownership has two major effects on the managerial orientation of the Chaebols:

First, family members can exercise a great deal of influence on managerial activities. Because 31 per cent of the executive officers of the top 20 Korean Chaebols consist of the, owners' family members, agency costs can be avoided. …

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