Toyota Test-Drives a New Hybrid
No, not that kind of hybrid.
Toyota shareholders last week approved the issuance of 50 million new shares -- and not just any new shares. The securities are a curious hybrid: They look like stock but behave more like convertible bonds. If you're interested in the quality of corporate management, it's an innovation worth watching.
The new "Model AA" stock, named after the Japanese auto company's first passenger car, locks owners in for five years. The shares carry voting rights but aren't listed on any exchange. At maturity, holders can sell the shares back to the company at the issue price or convert them to ordinary stock. During the lockup, Toyota will pay a guaranteed dividend that increases each year.
What does that have to do with corporate management? The idea, according to the company, is to raise patient money so Toyota can invest in the car of the future. "Patient" is the key: The firms' managers see locked-up investment as an antidote to the short-termism of the stock market. Sheltered from some of the pressure to drive the share price up immediately and fend off activists -- even at the cost of longer-term success -- they will be able to look further ahead and do a better job.
So they say. Many investors have questioned that rationale, partly on grounds of timing, and their suspicions aren't unwarranted.
A new Japanese law aims to encourage companies to sell large blocks of shares they hold in one another. Such cross-shareholdings have long allowed Japanese managers to shield themselves from activist investors, notably U.S. hedge funds. The new shares will partly offset the reform. Model AA shares are less suited to hedge funds and more to Japanese retirees, who'd be less of a nuisance to managers.
Toyota says it isn't trying to bypass the new corporate governance rules. This would be easier to believe if the company planned to sell the new shares to international investors rather than just Japanese investors. Toyota could go some way to answering its critics by making that change.
But here's the larger question: How much protection do the (supposedly) far-sighted managers of public companies need from their (supposedly) short-termist owners? Plenty of evidence suggests that short-termism is a real problem and that corporate-governance reform needs to address it. But it would be easy to go too far and give lazy, overpaid managers a quiet life.
There's no clear answer, and that's exactly why experimenting with different forms of financing is so valuable. If the hybrid concept works, it will give Toyota a long-term advantage, and as that becomes apparent, other companies could follow its lead.
The exact features of Model AA shares won't be suitable for every company, but the innovation is welcome. Let companies experiment with different combinations of lockup periods, voting rights, dividends and rights to cash flows. Let shareholders choose how long they are willing to commit themselves in exchange for protection from short-term risk.
Technology companies such as Alibaba, Facebook and Google have adopted a quite different model. Founders and early investors retain complete control -- thus allowing them to plan for the long term -- with shares that confer super-voting rights. Such dual-class systems have their own flaws, including that they disenfranchise large numbers of shareholders and may make it too difficult to remove ineffective managers.
Never mind: The thing about experiments is that they sometimes fail. Corporate finance is very much a work in progress. Hybrid securities look promising, and they're worth a try.
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