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What became of the zaibatsu

The trials and triumphs of being a family business in Japan

Akio Toyoda, center, attends a 2009 handover ceremony in Nagoya in which he took over the presidency of Toyota Motor from Katsuaki Watanabe, left.

TOKYO While the bulk of Asia's corporate behemoths emerged after World War II, many Japanese companies can trace their roots back to family-owned conglomerates that existed before the war.

The breakup of the prewar zaibatsu in Japan by the Allied occupiers, along with an increase in the maximum inheritance tax rate soon after the war, reshaped the family-owned giants. Today, Japan no longer has any equivalents of India's Tata group or Thailand's Charoen Pokphand Group, both family-run. Most of the companies in the Mitsubishi group, for example, are not controlled by the founding Iwasaki family, despite bearing the Mitsubishi name so closely associated with the family.

The complex web of cross-shareholdings between companies in the same group has been quickly unraveling. The collapse of the economic bubble in the early 1990s hastened the process. But Abenomics has also played a role. The Japanese government's revival strategy includes dissolving cross-shareholdings and reforming boardrooms to enhance corporate governance.

There is buzz that Japanese banks will put tens of billions of dollars of their cross-held shares on the market sometime within the next five years. The concepts of "group" and "affiliation," once so deeply a part of corporate Japan, continue to fade, just as the ownership of Japanese companies continues to diversify, domestically and globally.

Still, family bonds are not easily broken. At some companies, the founding family still wields influence of the type seen before the war despite no longer controlling the company in terms of capital. A good example is Toyota Motor.

LIVING LEGACY The company got its start as Toyoda Automatic Loom Works, founded in 1926 by Sakichi Toyoda, who has been called the "king of Japanese inventors." It was later spun off as Toyota Industries. Although the Toyoda family owns only about 2% of Toyota Motor, the automaker still considers it natural to select its top executive from the family.

That a multinational like Toyota still clings to such an old practice may strike some as strange. But the company is not so stubborn as to choose a family member over a more-qualified person when appointing a leader. That flexibility has proved a valuable asset.

In the 1990s toward the late 2000s, all three presidents were from outside the Toyoda family. During those years, Toyota went on a global expansion blitz, updated its management style and participated actively in the capital market. When the company was later slammed by the global financial crisis and quality problems in the U.S., President Akio Toyoda, the sixth from the Toyoda family, toned down the aggressive management style and adopted a longer-term approach, in which short-term profits were sacrificed for the sake of sustainable growth.

That kind of adaptability and willingness to embrace change helps explain why Toyota is one of the only Japanese companies that continued to rack up massive earnings during the "lost decades" that ensued when the bubble popped.

SUCCESSION HEADACHE Of course, not all companies have had such success in passing the baton to a new leader.

In the past year or so, there has been something of a "founding family revolt" in Japan. At Otsuka Kagu, Seven & i Holdings, Ootoya Holdings and Idemitsu Kosan, among other companies, clashes within founding families -- or between founding families and management -- over executive appointments or business plans have made headlines.

The companies may operate in different fields, but they are of a similar age, which may help explain all the drama. There have been two startup booms in Japan. One was in the Meiji era, when conglomerates mushroomed as Japan opened to the West and industrialized; the other was around the time of the Pacific and Korean wars, which created demand for Japanese businesses. The companies witnessing "revolts" belong to the latter group. This year marks the 71st anniversary of the end of the Pacific War, and those businesses are reaching a crucial stage of succession.

A lot of attention is given to how founders or founding families think about succession. Nidec, known for its aggressive takeover style, cites "excessive dependence on Chairman and President Shigenobu Nagamori" as a risk factor in its financial report. Nagamori founded the company and has built it into an enterprise with annual sales of 1 trillion yen ($8.8 billion). He is already over 70, however. SoftBank's financial report also mentions similar concerns about its founder, Masayoshi Son.

Business successions used to follow typical patterns: from a father to a child, from an older brother to a younger one, from a co-founder to another co-founder. But increasingly, the trend has been to hand over the keys to a professional manager.

Other formulas are also being employed. Sangetsu, an interior goods trader founded in 1953, headhunted an executive from a major trading company as president and asked a domestic investment fund to purchase a stake, creating a three-way governance system involving the president, the fund and the founding family. One U.S. business school has cited this approach as an example of a successful management model.

Family-owned businesses dedicated to playing the long game face the challenging task of balancing loyalty and pragmatism.

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