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247
Case Study
Nomura Securities
The presidents of Nomura Securities Co.
and Nikko Securities Co. announced their
resignation yesterday following reports of
their companies' ties with the underworld
and lavish payouts to major institutional
clients for losses incurred on financial
markets.
The resignations of Nomura President
Yoshihisa Tabuchi and Nikko President
Takuya Iwasaki will take effect at their
shareholders' meetings on Thursday.
Earlier Nomura Chairman Setsuya Tabuchi
(no relation) said he would step down
from his post as vice-chairman of Keidanren (the Federation of Economic
Organizations).
W
ith these words, on Tuesday 25 June
1991, the Mainichi Daily News in
Tokyo announced a dramatic turn of events
which was to have repercussions not only
on Nomura and Nikko, but on many other
parts of Japan's business community, including the Ministry of Finance and the government itself.
branch salesman is under almost unbearable
pressure to meet his monthly commission
quota and all commission is spoken of as a
percentage of that quota. Achieving a 65%
quota, as occurred in many branches after the
1987 crash, is disgraceful. Recording a 150%
quota is admirable, bringing showers of praise
from headquarters'' (Alletzhauser 1990).
Today Nomura has become a keiretsu, more
loosely knitted together than the old zaibatsu,
but with cross-holdings, cross-directorships,
intergroup trading and support and with a
vast set of obligation, loyalty and respect
networks locking its members together. The
scale and diversity of the Nomura keiretsu
at the time of this case is shown in the
Appendix.
The alleged link with the Yakuza
Nomura ± Zaibatsu and later
Prior to the Second World War the Nomura
Zaibatsu was a closely linked web of financial
enterprises with the Nomura bank, eighth
largest in Japan, holding the threads together.
It was tenth of the 14 largest zaibatsu in the
country. (The others were Mitsui, Mitsubishi,
Sumitomo, Yasuda, Asano, Furukawa, Fuyo,
Kawasaki, Nisso, Nichitsu, Okura, Riken and
Shibusawa.)
At the end of the war the conglomerate
held the dominant position in Osaka Gas, a
major utility company, as well as in other
major firms in the financial and textile
industries. The occupying forces, intent on
debilitating Japan's military potential, sought
to break up the zaibatsu. In the case of
Nomura it was only partly successful.
Nomura rebuilt its financial trading enterprises over the next 40 years by diligence
and incredibly hard selling. ``Every Nomura
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Industry sources said that Nomura President Tabuchi's resignation was spurred
by his firm's links with Susumu Ishii,
former leader of the Inagawakai yakuza 1
syndicate. It was reported that Nomura
and Nikko told their subsidiaries to arrange loans totaling 36 billion yen for
Ishii, accepting 16 billion yen in shares of
railway company Tokyu Corp. and other
firms as collateral.
Furthermore, it was reported yesterday
that Nomura actively traded Tokyu shares
between October and December 1989 and
that Ishii used his much appreciated Tokyu
shares to secure 25 billion yen in loans
from Nomura and Nikko.
Keidanren Chairman Gaishi Hiraiwa
said Setsuya Tabuchi's resignation was
``inevitable''. Hiraiwa, while not directly
criticizing the Nomura chairman, said at a
press conference last week that the nation's
securities industry ``lacks business ethics'',
adding that Nomura as the top brokerage
house, ``must live up to its responsibilities
as leader of the industry''.
Mainichi Daily News, Tokyo
Tuesday, 25 June 1991
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CORPORATE GOVERNANCE
In August 1991 a parliamentary committee,
convened to look into the situation, received
testimony from Messrs. Tabuchi and Iwasaki.
They confirmed that Nomura and Nikko had
traded millions of shares of Tokyu Corporation on behalf of Susumu Ishii, who at the
time was the leader of Japan's second largest
organized crime group, a position he had
retired from in 1990 (Asia Wall Street Journal,
31 August 1991).
Mr. Iwasaki confirmed that Nikko officials
continued to do business with Mr. Ishii for
at least two years after they learned in 1987
that he was involved in organized crime.
Mr. Tabuchi said that he was not aware of
Mr. Ishii's underworld affiliation until May
1991, when reports in Japanese newspapers
said that the two brokerage houses had
helped mobsters inflate the value of the
railway company's shares. He also acknowledged that there had been ``excessive'' trading after Mr. Ishii's stock purchases.
Reactions in the Japanese media to the
parliamentary committee testimony were
critical: ``rambling evidence, dominated by
sweeping apologies for the firms' behaviour''.
The Finance Ministry under
challenge
Following President Tabuchi's announcement, Chief Cabinet Secretary Misoji Sakamoto told reporters that the Finance
Ministry must enforce tighter controls to
prevent unfair trading practices from recurring.
The Ministry of Finance, which came
under severe criticism for its lax supervision summoned executives from the Big
Four2 for questioning. Earlier, tax authorities said all four of the country's largest
securities companies were suspected of
compensating important institutional
clients for 65 billion yen in stock and bond
market losses from 1987 through 1990.
The four bought back, at inflated prices,
government bonds with warrants they had
earlier sold to corporate and institutional
investors, making up their major clients'
losses, sources at the National Tax Administration Agency said.
Under the Securities and Exchange Law,
securities firms are prohibited from promising in advance to reimburse them if
they incur losses. Although compensation
without such a promise does not violate
the law, it runs counter to a non-binding
1989 Finance Ministry notice discouraging
securities firms from compensating clients
for losses.
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October 1997
Moreover, the tax authorities alleged
that the four brokerages falsely declared
45 billion yen of the total as ``entertainment
expenses'' and other related taxable expenses on their March 1990 tax returns.
The brokerage houses, therefore, did not
have to disclose the identities of their
institutional clients.
It was also suggested that the Finance
Ministry had tacitly approved the compensation of corporate clients for losses
caused by the stock market plunge in
1989. Informed sources said the ministry
approved the practice when consulted by
major securities firms on ways to solve
troubles with institutional investors over
losses.
Mainichi Daily News, Tokyo,
Tuesday, 25 June 1991
The media discloses the
beneficiaries
Tom Ormonde, writing from Tokyo for the
Business Age of Australia on Monday 29 July
1991, commented that:
Japan collectively gasped in disgust today
when a secret list was revealed of international household-name companies that
have been taking suspect payments from
the nation's top securities houses. With
names like Toyota, Nissan, Sumitomo
and Hitachi, the list of more than 200
companies that received the alleged improper compensation payments reads
like a ``Who's Who'' of Japanese big
business.
To the horror of the companies involved
the list was published this morning by
Japan's main financial daily, the Nihon
Keizai, and then repeatedly read out on
television during the day . . . the favoured
clients shared in 128.3 billion yen that the
brokers ± Nomura, Daiwa, Nikko and
Yamaichi ± collectively paid in compensation for trading losses suffered . . .''
In the event all four of the major Japanese
brokers admitted publicly (25 June Manichi
Daily) that they had compensated their
institutional clients for losses incurred during
the 1990 Tokyo stock exchange price falls.
Agency takeover and descent from
heaven
Where was the Ministry of Finance, the
regulatory body, in this situation? Some
argued that the ministry saw its role as
# Blackwell Publishers Ltd 1997
CASE STUDY
offering administrative guidance (gyosei shido)
rather than regulating and enforcing conformance to rules. Others alleged ``agency takeover'' ± a ministry that was too cosy with
those it was meant to regulate, advancing the
interests of their industry, rather than regulating it. A reason for this, it was suggested,
was the practice of amakudari.
Amakudari ± in other words ``descent from
heaven'' ± is a practice in which well-paid
sinecures in the private sector are given to
senior bureaucrats from the regulators when
they retire. According to The Independent
(London, 13 July 1991) 80 officials from the
finance ministry parachuted down to the
brokerage industry in 1990.
Writing in Asian Wall Street Journal
(7 August 1991) Kenichi Ohmae said:
The Ministry of Finance is a dinosaur
designed for a time when Japan's financial
industries were young and were believed
to need protection and encouragement. But
today Japan's markets are grown up and
the ministry must grow up as well.
The ministry is a sprawling regulatory
and enforcement agency dwarfing anything in the United States . . . responsible
both for developing the Japanese financial
industry and simultaneously for controlling and monitoring the performance of
financial firms.
To reach maturity the ministry must
change in two ways: To reduce the potential for conflicts of interest, the ministry
must be broken apart into a number of
small regulatory agencies. And the ministry's mandate must shift from protecting
firms to defending investors, depositors
and all other users of financial services.
Kenichi Ohmae also drew attention to another
problem:
This subtle form of corruption (amakudari)
is well known. What is not so well-known
is a more blatant form. The Japanese
government has profited, directly and
enormously, from the anomalies in the
Japanese securities markets created by the
securities firms and banks. For example:
NTT (Nippon Telephone and Telegraph)
stock is now trading at less than one-third
its offering price, the price set by the
ministry. The ministry was able to persuade investors to buy stock at what now
looks an excessive price by taking advantage of the oligopoly of the Japanese
securities outfits and their research institutions. Telecommunications was hyped as
the industry of the future, and NTT's
perceived value was inflated.
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249
The problem hits the government
But the continuing pressure from the media in
Japan, together with growing international
interest in the scandal, swung the spotlight
onto the role and responsibilities of the regulatory agency. Ryutaro Hashimoto, Finance
Minister, and his senior staff admitted faults,
apologized and took a 10 per cent salary cut
to atone for their failure to control the brokers.
There were calls for Hashimoto's resignation, which Hashimoto resisted. He also
claimed that a body like the American
Securities and Exchange Commission was
unnecessary. ``Such a system would not fit
Japan . . .''
At this stage there were further allegations
that Nomura had manipulated the price of
Tokyu railway company.
Japanese Prime Minister, Toshiki Kaifu,
condemned the securities industry for bringing shame on Japan. ``The problems show the
importance of openness and transparency in
financial activities,'' he said, adding that he
believed the recent stock scandals are a ``rare
case'' and ``not a true reflection'' of the way
business is conducted in Japan. ``I will be
doing my best to make sure that this scandal
is not repeated,'' he added (Financial Times,
London, 1 August 1991).
The conspiracy theory
Rumours of an alternative scenario then
began to circulate in the restaurants of the
Ginza, and the nightclubs of Roppongi, in
Tokyo.
As Garth Alexander wrote from Tokyo for
the Sunday Times (London) on 14 July 1991:
. . . a growing number of foreign brokers in
Tokyo are coming round to believing that
the latest scandal has nothing to do with a
reform-minded Ministry of Finance but is
due to the security houses asking the
ministry to ``punish'' them so that they
have an excuse to disown their traditional
responsibility to compensate their big
clients. As the market fell 40% last year
and has slid 15% in the last few weeks they
could no longer honour payments that ran
into hundreds of billions of dollars.
Why else, the conspiracy theorists ask,
was the seemingly unconnected issue of
the brokers' dealing with a gangster
raised? And for what other reason would
Nomura's and Nikko's presidents originally deny knowing that they had been
dealing with a gangster ± and subsequently
contradict themselves and admit that they
knew all along?
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CORPORATE GOVERNANCE
Commentaries in the Japanese press
The perspective adopted by commentators in
the Japanese press is illuminating in this case.
The Asahi Shimbun newspaper commented:
Though rarely used in recent years, the
area around Kabuto-cho in Tokyo used to
be referred to as ``Shima'', meaning an
island. It was because the area was a kind
of closed community, with the streets lined
with securities houses, and the exchange of
the peculiar jargon used in dealing in stocks.
With the computerization of the stock
market in the past few years, such atmosphere has largely been dissipated. But its
idiosyncratic clubbiness seems to die hard.
President Yoshihisa Tabuchi of Nomura
Securities Co. resigned, taking the blame
for a series of scandals involving stock dealings with gangster organizations and providing compensation for losses incurred
by big clients. President Takuya Iwasaki
of Nikko Securities Co. also stepped down
under similar circumstances. Both presidents, however, did not leave their companies: they are to be kicked upstairs to
vice chairmanship of their respective
securities firms. How will the people outside view the change in their statuses?
Will not the people in the street think
that they were promoted from presidents
to vice chairmen? Nor is it known whether
Chairman Setsuya Tabuchi of Nomura,
reportedly the most powerful man in the
company, is stepping aside or not. Does
Nomura mean to say that the chairman, an
executive in the highest position, need not
take responsibility?
Osaka, Japan, 25 June 1991
(translated by Asahi News service)
The Japan Times:
But it is not only these securities firms
that are to be blamed. Former bureaucrats
fill many key posts at securities companies
and the Tokyo Securities Exchange. It thus
is highly unlikely that the Finance Ministry
had not been informed of such irregularities. This leads to the inevitable question: Without the media's disclosure and
subsequent playing up of the affair, would
it have been brought to public knowledge?
We also would like to point an accusing
finger at the Finance Ministry for its failures to take any more effective measure
than last year's advisory.
The cases of Nomura and Nikko offer
incontrovertible evidence that the foundation of this nation's securities industry is
still made of moral sand ± an eminently
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Number 4
October 1997
corruptible base. How else is one to explain
the absence of a sense of corporate responsibility as a social entity, the industry's
obvious indiscipline in doing business or,
indeed, the unacceptable laxness of the law
and regulations which govern industrial
behaviour. Both the industry itself and the
governmental bodies responsible for regulating the securities business must recognize the urgent need to create and enforce a
code of business ethics that matches the
economic status of this country.
Tokyo, 27 June 1991
Asahi Shimbun newspaper:
The Finance Ministry says that it is working on a revision of the law which will
make it illegal to make ex post facto
compensation. That is as it should be. But
should not the ministry, which is in a
position to supervise the stock-dealing
industry that caused the scandal be held
accountable? Did not the ministry know
much earlier that compensation was being
made for the losses in stock dealings? The
traditional manner of disposing of the
matter, which has now been ritualized, of
giving the culpable executives a good
dressing-down is also called into question.
Osaka, Japan, 25 June 1991
(translated by Asahi News service)
Notes
Original research for this case was undertaken by
Christine Leu, Tetsuo Kohmo, Maxwell Twartz,
Nick James and Michael Freedman, MBA students
at the Australian Graduate School of Management.
1. Yakuza ± organized crime syndicates such as
``The man with 21 faces'' (Kester, 1991).
2. The big four brokerage houses are Nomura,
Nikko, Daiwa, Yamaichi.
References
Alletzhauser, Al; The House of Nomura; Bloomsbury
Publishing, London, 1990.
Kester, W. Carl; Japanese Takeovers ± The Global
Contest for Corporate Control; Harvard Business
School Press, Cambridge, MA, 1991.
Questions
1. Why do you think Mr. Tabuchi and Mr. Iwasaki
resigned?
2. In what ways do attitudes to corporate governance differ between Japan, the United States and
Europe? Why is this?
3. Is it necessary for there to be a convergence of
regulatory procedures, board level attitudes and
corporate governance processes throughout the
commercially advanced world?
# Blackwell Publishers Ltd 1997
CASE STUDY
251
Appendix: The Nomura Keiretsu
COMPANY
HOLDINGS
Nomura Securities Co., Ltd
Subsidiary companies:
. The Nomura Securities Company
(the world's largest stockbroker)
97.4%
2.6% Toyo Trust and Banking
. Nomura Securities Investment Management
(Japan's largest money manager)
100%
. Nomura Securities Investment Trust Management
(Japan's largest unit trust)
. Nomura Research Institute
(Commercially owned research enterprise)
(incorporates Nomura Computer Company)
100%
. Nomura Wasserstein Perella
(Mergers and acquisitions)
80%
20% Wasserstein Perella
. JAFCO
(Venture capital subsidiary)
. Nomura Land and Building
(Management company for Nomura properties)
. Nomura Tourist Bureau
(Travel agency for Nomura companies)
. Nomura Card Services
100%
. Nomura Real Estate Development
(Japan's fifth largest real-estate firm)
100%
100%
100%
100%
100%
The Nomura Group
Companies owned by Nomura Group, with other Nomura company holdings:
. Daiwa Bank
. Toyo Trust and Bank
. Dai-Tokyo Fire and Marine
. Kokusai Securities
. Osaka Securities Finance
. Itogin, World and Takagi
Securities
. Cosmo Securities
Nomura Securities
Tokio Mutual Life
Osaka Gas
Nomura Securities
Nomura Land and Building
Nomura Securities
Nomura Land and Building
Toyo Trust and Banking
Nomura Securities Investment Management
Nomura Research Institute
Nomura Land and Building
Nomura Securities
Daiwa Bank
Nomura Land and Building
Nomura Securities
Daiwa Bank
Daiwa Bank
2.9%
2.7%
2.6%
4.9%
2.3%
4.8%
4.9%
3.7%
16.0%
8.3%
6.2%
4.9%
2.9%
12.0%
5.0%
4.1%
4.9%
. Nomura Industrial Construction
. Nomura Microscience
. Nomura Trading
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CORPORATE GOVERNANCE
COMPANY
. Shikibo
(Osaka-based spinning company)
. Hokko Chemical
(agrochemicals)
. Meiji Leather
HOLDINGS
Daiwa Bank
Osaka Securities Finance
Tokio Mutual Life
4.9%
4.1%
4.9%
Tokio Mutual Life
Nomura Construction
Nomura Securities
Daiwa
Tokio Mutual Life
Nomura Land and Building
Nomura Securities
Daiwa Bank
Nomura Trading
7.4%
7.2%
4.9%
4.9%
9.9%
5.0%
5.0%
5.0%
5.0%
Affiliated companies with Nomura involvement:
. Sanyo Securities
. Wasserstein Perella
Nomura Land and Buildings
Nomura Securities
Nomura Securities
. Osaka Gas
. Nippon Television Network
Daiwa Bank
Nomura Securities
. Sugimura Warehouse
Nomura Land and Building
Toyo Trust and Banking
Nomura Securities
Daiwa Bank
4.9%
2.9%
20%
4.9%
4.5%
27.9%
13.2%
5.0%
5.0%
Sources: Company published information and Alletzhauser (1990).
Volume 5
Number 4
October 1997
# Blackwell Publishers Ltd 1997