Cases in which rejecting a takeover damages corporate value are increasing. During crises, management, controlling shareholders and outside directors may move in the same direction, creating a structure that externalizes costs.
In recent years, Japan has seen cases in which corporate value deteriorated after companies rejected takeover proposals or going-private proposals. This article examines why management, controlling shareholders and outside directors may align during a crisis. Revisions to the Corporate Governance Code and disclosure requests from the market form part of the background. Dialogue with shareholders is emphasized in normal times, but this dynamic may change during a crisis.
Managers are said to have a rational basis for choosing a one-shot gamble over a prudent restructuring plan when their continued position is at risk. The assumption is that success will enhance their reputation, while their losses if the strategy fails will be limited. Shareholders, too, are considered able to take risks under limited liability, as long as those risks do not exceed their investment, leading to claims that risk shifting occurs.
Some founder-family and owner-related shareholders hold shares for reasons other than economic rationality. In many cases, they share information and decision-making with management, making independent oversight difficult to perform effectively. It has been pointed out that this relationship can influence corporate decision-making during a crisis.