For nearly half a century, Seibu Railway Co. has given the Tokyo Stock Exchange false information about the equity stakes held by its major shareholders. In an unusually swift response, the TSE on Tuesday decided to delist the company, saying its systematic coverup of the stock ownership percentage for those shareholders — which exceeded a regulatory ceiling — has seriously undermined investor confidence.
The TSE also sent a reassuring message to the market with the announcement that it would soon begin a wholesale review of the listing management system. A plan now in the works would require all listed companies to commit themselves in writing to proper disclosure of information.
Financial authorities also moved promptly to ensure transparency in stock transactions. Mr. Tatsuya Ito, the state minister in charge of financial services, said his office would work out a new system for assuring the credibility of financial statements that listed companies are required to submit regularly.
Simply put, the problem with Seibu Railway is its opaque relationship with its unlisted parent company, Kokudo Corp. According to the TSE, Seibu used Kokudo to conceal stock deals that exceeded listing limits. Moreover, Seibu is suspected of insider trading, an illegal practice now under investigation by the Securities and Exchange Surveillance Commission. Delisting should not signal an end to the probe.
In a press conference Tuesday, Seibu President Terumasa Koyanagi announced plans to set up a management reform panel of outside experts. “The problem is that the group has lacked corporate governance,” he said. The real problem, though, lies in the hand-in-glove relationship between capital (share holders) and management. To be sure, capital and management are hardly separated in some family-owned companies, but Seibu is clearly an anomaly for a publicly traded company.
In fact, in most listed companies stock ownership is spread widely among general investors. This keeps management at a tension level that makes them more aware of their responsibilities in its dealings with shareholders. In Seibu’s case, nearly half of its equity capital was held by unlisted Kokudo, and the leading shareholder was Mr. Yoshiaki Tsutsumi, who last month resigned as Seibu chairman and relinquished all other positions he held in the Seibu group.
Mr. Tsutsumi’s ownership dominance allowed him, through Kokudo, to rule the Seibu group almost as he liked. On Tuesday, President Koyanagi expressed a willingness to reduce Kokudo’s stake. But unless the intimate shareholder-management relationship is corrected, the real picture of the Seibu group — which some describe as “Byzantine” — may not come to light.
Delisting, effective Dec. 17, could make Seibu even more opaque since the company will no longer be required to publicly disclose its financial status. Investors will lose an objective means of evaluating its value. Given its public standing as a mass transportation service, however, Seibu ought to disclose its vital statistics one way or another.
The company’s misreporting of ownership data has exposed another problem: the holding of stock by a shareholder different from that stated in a financial statement. A similar case of “name lending” has been discovered at Nippon Television Network (NTV). Experts say this practice in itself is not illegal as long as dividends are paid to the actual shareholder. Still, this kind of duality, if practiced widely, will obstruct the fair and open operation of the stock market.
In the past, the TSE has often requested compliance with disclosure rules, but to little avail. Tuesday’s announcement makes it clear that the Tokyo bourse is determined to strengthen the rules. One plan being considered would require member companies to submit documents confirming the accuracy of financial statements. Another plan would require members with parent companies to provide information about their relationships with those companies.
The Seibu scandal has all but shattered the belief that transparency in the Tokyo market has improved markedly in the past several years with the disappearance of the traditional cross-shareholding practice in which companies with close business ties hold each other’s stock. It seems as if the TSE is back to square one. “We must restore confidence to the market,” TSE President Takuo Tsurushima said following the decision to ostracize Seibu. “To this end, corporate managers must make greater efforts.”
Mr. Tsurushima hit the nail right on the head. Indeed, the TSE could well lose its eminent status as one of the world’s largest financial markets unless genuine efforts are made in this direction.
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