Economic Debate

Different Viewpoints on the Livedoor Incident

Fellow, RIETI

A week after launching criminal investigation into livedoor Co., Ltd. (Livedoor), prosecutors arrested Takafumi Horie, then-president and chief executive officer, and other executives of the Internet startup en masse. Does the occurrence of this incident have anything to do with the structural reform aimed at turning Japan into a more market-oriented economy? And will this incident have any impact on the future course of the Japanese economy?

Market capitalism has turned out to be a wrong choice

The revelation of alleged wrongdoings by Livedoor has triggered an outpouring of criticism over the principles of market capitalism. The criticism can be broadly divided into two types.

A first type is emotional backlash against the personality of "Horiemon," as the former president and CEO of Livedoor, is popularly known.

Many people must have felt antipathy toward the former Livedoor president who provoked the public with his remark that "money can buy people's hearts." In the eyes of many Japanese people Horie seems to have been playing, whether consciously or unconsciously, the personification of the market capitalism's deformed image.

With his blunt way of speaking that defied conventional common sense, Horie was in step with the (superficial) image of market capitalism, whereby he succeeded in garnering support from many young people in search of new values and those advocating for structural reform.

At the same time, however, Horie must have been bitterly viewed as a vicious child of market capitalism by the layers of people opposed to the market-oriented economy.

Such a simmering sense of resentment surfaced with the revelation of the Livedoor incident. These detractors believe that a greedy spirit that justifies any act or means of earning money has resulted in accounting manipulations and other fraudulent conduct alleged against Livedoor and its executives. Their view is that we must stop lionizing dubious money-making tactics and return to the traditional Japanese economy where people working by the sweat of their brow are duly respected.

The second type of criticism is based on the idea that market-oriented structural reform including deregulation, which has allowed the rise of companies such as Livedoor, has been an incorrect policy choice.

Since the late 1990s, the government has implemented a series of deregulatory measures, particularly those related to corporate law, to encourage then-dispirited companies and urge them into mergers and acquisition (M&A) amid the prolonged depression.

Stock splits and stock-swap acquisitions, both of which were habitually used by Livedoor, are new financial tactics that have been made possible by deregulation.

Livedoor increased its market value, like an alchemist turning non-precious metals into gold, by using legitimate financial tactics in a scale and for purposes that had gone beyond the scope assumed by the regulatory authorities and other market participants.

Thus, the underlying idea of the second type of criticism is that the government's wrong decision to pursue market-oriented policies enabled ethically problematic companies such as Livedoor to take undue advantage and bring about this whole problem.

Livedoor opened up a crack in the cozy structure of the Japanese society

In response to such mounting criticism, the Liberal Democratic Party (LDP) and others who had been supporting Horie as the champion of reform are now desperately trying to defend and justify their behavior. Arguments from their standpoint can be described as follows:

What needs to be done is relatively clear under such government policies as deregulation.

When the institutional market environment is renewed as a result of certain regulatory reforms, it leads almost unavoidably to the emergence of certain companies that attempt to circumvent the law and regulations. Any institutional system, as it is made by human hands, cannot be perfect and all we can do is improve it through trial and error so as to realize what is the closest to the best. In the same way judicial authorities cope with new types of crimes through the accumulation of precedents or by revising the Criminal Code.

Because it is impossible to set up perfect market rules beforehand, whatever rules in place must be scrutinized for problems in an ex post facto manner and revised as needed; a process that is essential to market capitalism.

The Livedoor incident has shed light on the specific aspects of the existing market rules that must be corrected. Furthermore, there will be substantial discussion over the possibility of reinforcing the regulatory authorities as the guardian of market rules and self-regulating organizations such as stock exchanges.

However, the occurrence of incidents such as that of Livedoor does not necessarily mean that the philosophy of the market-oriented policy is in itself at fault.

Meanwhile, with respect to the personality of Horiemon, it is necessary to consider both the merits and demerits in terms of its impact on Japanese society.

Horie's conduct had a huge impact on Japanese society long characterized by its cozy and collusive nature.

When he made a bid to acquire a faltering professional baseball team, it shook up the professional baseball community which had been trying to reduce the number of teams through behind-the-scenes maneuvering.

Likewise, the block purchase of shares in Nippon Broadcasting System Inc. (NBS) exposed the critical distortion of the capital structure in which NBS, a radio broadcaster, controls a major TV broadcaster.

Thus, by putting forth an easy-to-understand capital theory, Horie opened up a crack in the conventional Japanese-style management that is staid and obscure. If he has been involved in any unlawful acts, he must make amends for them. But it is true that Horie served as a creative destructor.

Such would be the argument by those defending their support for Horie or structural reform.

Horiemon and structural reform must be looked at separately

Basically my view is close to those advocating for structural reform. At the same time, however, I think that those of us who have viewed Horie as a symbol of structural reform are also at fault.

Horie's management vision of seeking to become the "world's number one company in market capitalization" is not at all new. In the 1980s, Japanese banks sought to become the world's number one in asset value, ushering the nation into the bubble economy. Then-emerging real estate tycoons, who later were referred to as "bubble gentlemen," must have made boasts similar to those of Horie.

In the 1980s, real estate companies were considered to be the champion of the new era. Today, simply being engaged in information technology makes a company a reformer. Real estate companies have been replaced by IT companies but it appears there has been little change in the mentality of those of us who are willing to flirt with the economic bubble.

Of course, there is certainly a number of excellent IT companies operating under sound business models. However, I imagine that Livedoor, even if it might have started soundly, has been turned into a bubble company that pursues nothing but the monetary goal (market capitalization) by using its brand and image as an IT company. The emergence of such companies is a phenomenon that inevitably occurs in a thriving industry of any country in any age.

The allegations against Livedoor are extremely old-fashioned economic crimes such as the spread of false information, fraudulent transactions, window-dressing accounting and so on. As the investigations move forward, it will become clear to everybody's eyes that all these crimes Livedoor is being alleged to have committed are essentially unrelated to the philosophy of policies pursuing structural reform and a market-oriented economy.

Rather, it is all the more important to promote the further evolution of a market economy to prevent the occurrence of similar incidents. Problems occur because we have no other scales but market capitalization to evaluate companies. We should seek to create a highly efficient and sophisticated market which would enable companies to disclose their values and visions in various other forms - i.e. those not in the form of share prices - and investors to evaluate companies in various scales (e.g. intellectual asset).

Horie's simple "money-is-everything" management philosophy must not be equated with the philosophy of structural reform policy.

"Tolerance" over diversity which would accept even such extreme ideas and lifestyles as those of Horie is the very nature of the market economy. In the IT industry as well as in many other industries, there are certainly many successful entrepreneurs achieving business growth by pursuing management vision opposite to that of Horie.

After all, a society in which sober companies striving hard to earn money can continue to operate exists nowhere but within a free and open market where even the most extreme money worshippers (as long as they are legal) are not excluded.

In the aftermath of the Livedoor incident, will Japan return to the intolerant closed society that forbade maverick outsiders, or will it continue to promote further reform to become a more tolerant market society? The rest of the world is watching us.

>> Original text in Japanese

* This column originally appeared in Japanese in the January 30, 2006 edition of the Asahi Shimbun. Any reprinting of this column without the approval of the author and the Asahi Shimbun is prohibited.

January 30, 2006 Asahi Shimbun

February 10, 2006

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