COMPANIES WITHIN COMPANIES:
Corporate Divisions Gain Greater Autonomy

April 25, 1997

A growing number of large corporations are creating nearly independent companies within themselves. These quasi-companies have even greater autonomy than corporate divisions that keep separate books. The "in-house company" system has been designed to boost management efficiency through speedier decision-making and more clearly defined chain of command. With the ban on holding companies expected to be lifted next spring, a number of large firms have announced plans to turn all their divisions into in-house "subsidiaries."

Independent Personnel Policies
Under the new system, the "parent" firm virtually becomes a holding company, which is currently prohibited under Japan's Antimonopoly Law.

These in-house subsidiaries have all the trappings of independent firms: their own presidents, capital stock, financial statements, and distinct management strategies. They frequently have a strict mandate to achieve return-on-equity and other targets. A leading manufacturer of electronic equipment first introduced this system three years ago, and since then great interest in it has been expressed, particularly by larger firms.

Companies that have adopted this approach have generally maintained uniform hiring practices and base pay, and often there is still a single management position during negotiations for wage hikes and other issues. But recently, some corporations have begun doing away with even these vestiges of single management.

For instance, a leading trading house that adopted this system in April 1997 will have its in-house subsidiaries hire college graduates separately. It plans to recruit around 120 new employees; half of them will be hired by its subsidiary firms, who will be left to make all decisions on personnel transfers and promotions on their own.

The aim is to tailor work forces to more specialized tasks and to heighten the in-house firms' self-sufficiency.

A glass manufacturer that also introduced this system in April is allowing its subsidiary firms to do all the hiring by themselves. From the accounting period beginning in March 1999, moreover, it will release quarterly statements for each in-house firm, with twice-annual bonuses (comprising a sizable portion of full-time employees' annual pay) being partially linked to the performance of the particular unit the employee works for.

A major supermarket chain that turned its nine divisions into subsidiaries in February 1996 will have each handle wage hike negotiations separately starting next spring. "It's only fair and reasonable for salaries to reflect the actual performance of each in-house company," a spokesperson for the retailing chain said.

Enhancing Management Efficiency
The reason so many large corporations are establishing companies within themselves is simple: They hope to boost management efficiency by creating specialized units that are better able to adapt to changing market conditions.

Most large companies already have a system whereby divisional financial figures are reported separately. Recently, though, corporations have been getting bigger and more diversified. They now require different policies to adequately address the needs of the divergent markets they serve in such areas as style of operation, personnel administration, wage scales, and distribution of resources.

Thus the divisional approach has been taken one step further, engendering a more strategic setup with autonomous corporate units featuring the authority and speedy decision-making characteristic of independent companies. Often, these in-house companies are built around a distinct line of business, but some spin-off firms are being created to oversee just a single product line, marketing area, or function such as product development, manufacturing, or marketing.

In the United States, which does not have a ban on holding companies, most subsidiary companies are tied to their parent firm solely through financial investment. If a revision to the Antimonopoly Law currently being debated in the National Diet is passed, the ban in Japan will also be lifted, and bona fide holding companies will probably proliferate. This will mean not only the splitting up of large corporations into smaller, independent firms but also a grouping together and integration of unrelated companies through acquisitions by holding companies.

With corporate management becoming increasingly fluid, personnel policies are likely to give even greater emphasis to personal ability, and new forms of labor-management relations should arise. And a growing number of workers will be more willing to change employers in mid-career or to set up companies of their own. This will further erode such traditional Japanese management practices as seniority-based pay and promotions, lifetime employment, and company-based unions.