Explore the differences in the japanese and american investment decision-making processes and the conflicts that arise from there.

TOKYO DISNEYLAND AND THE DISNEYSEA PARK: CORPORATE GOVERNANCE AND DIFFERENCES IN CAPITAL BUDGETING CONCEPTS AND METHODS BETWEEN AMERICAN AND JAPANESE COMPANIES In the spring of 1997, it had been 14 years since Tokyo Disneyland opened its doors for business. Company executives at Japanese Oriental Land Corp. (OL), known to many as the company that brought Disneyland to Japan [see Exhibit 1] were enjoying the success of their well-established company, and began looking at new business endeavours that would allow for further growth and enhance OLs earning capability. While there was an undoubted need for growth and expansion, the timing and approach of any new endeavour would be critical. Management knew that most of OLs customers were repeat visitors. However, while customers were expected to return two or three times, it was not clear if they would come back for a fourth visit. There was concern that customers would eventually get bored with the existing attractions and facilities, resulting in a severe shortage of customers. The company forecasted that the number of visitors in 1998 would be 4% lower than the year before. Some years before, OL had received an inquiry from their licenser, the Walt Disney Company (WD), to consider the idea of constructing a new entertainment park, the DisneySea Park Project. The conditions of this new joint project would be similar to the conditions of the originalOL would pay WD a licensing fee for the continuous use of the name Disney, and in return, WD would provide OL with valuable technical advice and management support for the new project. HKU568 This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 2 OLs directors had to make a tough decision. As a licensee, WD had its own agenda and negotiations with them had been hard in the past. Meanwhile, OL had a number of stakeholders it had to please including: the parent company, the main bank, landlords, and shareholders, all of whom had their own representatives on OLs board of directors. The relationship among these parties determined and controlled the firms strategic direction. OLs management had to incorporate all of these various interests in their decision-making process to come up with an optimal decision. The first step would be a thorough financial analysis of the new project, which could be presented to the various parties. The Original Tokyo Disneyland In April 1979, nineteen years after OLs establishment, the company signed a license agreement with WD, involving the design, construction, and operation of Tokyo Disneyland.1 In December 1980, the construction of Tokyo Disneyland began in Maihama district, in the village of Urayasu (currently Maihama, in the city of Urayasu). Less than three years after construction had begun, Tokyo Disneyland opened its doors for business in April 1983. Tokyo Disneyland was a smashing hit. The first year it drew 10.3 million visitors, in line with WDs expectations. After the opening year, the number of visitors never went below 10 million, reaching 13.38 million by the fifth year. The number of visitors peaked in 1998, at 17.45 million and the parks attendance figures never dropped below 16 million in the years that followed. A prediction that the initial enthusiasm would wear off was proven wrong [see Exhibit 2]. According to a visitor analysis conducted by OL in 1988, the percentage of repeat customers was 75%,2 far above US Disneys 50%. Geographically speaking, about 70% of the parks visitors were from the neighbouring Kanto area, near Tokyo. A large number of repeat visitors from other regions also contributed to the parks success. Visitors spent an average of 7,000 (US$59.31)3 on admission fee, foods, beverages and novelty goods exceeding the original estimate of 5,000 (US$42.37), resulting in total sales of 80 billion(US$0.88 billion).4 On revisiting, people had new experiences because the park kept adding new attractions. Some of those new attractions were: Tokyo Disneyland Electrical Parade (1985), Big Thunder Mountain (1987), and Splash Mountain (1992).5 1 For OLs chronology, see [www document] http://www.olc.co.jp/en/company/history/index.html. 2 For the ratio of repeat customers as a percentage of the total number of entrants, see Arima, T., Disneyland Story, Nikkei Business Bunko, July 1st 2001, pp 170-171. 3 This case uses the following rate for all currency conversions: US$1 = 118.02 in 1997. 4 See Takahashi, M. (OLs first president), An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 28, July 29th 1999, p 40. 5 As to the additional attractions, see Kagami, T., An excerpt from Umi wo Koeru Souzouryoku (Imagination Extending across Seas), Kodansha, May 26th 2003, pp 72-73. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 3 Negotiations Involving Tokyo Disneyland Walt Disneys Position In January 1979, OL received a stern letter from WD saying, If you cannot accept the terms, we have to stop this project.6 -Donn Tatum, chairman of WD Walt Disney had proven to be a tough negotiator when it negotiated the terms for Tokyo Disneyland. Although WD liked the location of Urayasu, its offer in 1979 was to provide only the know-how without shouldering any risk.7 It was not willing to pay anything for the construction of the park, but it wanted 10% royalty on the admission fee and sales of foods and beverages.8 OL strongly objected to this proposal, with its board of directors saying that We have never seen such a lopsided contract condition and high royalty.9 Finally, an agreement was signed which stipulated a license fee of 10% on admission fees and 5% on food, beverages and novelty goods. OL was able to make the project profitable in four years, despite hefty licensing fees that were an average 7% of sales. The reason was not an increase in the number of entrants, but rather an increase in customer spending on food and beverages as well as on novelty goods. At the time of the negotiations, Walt Disneys financial position was weak.10 Disneyland and Walt Disney World were attracting approximately 10 million entrants each year, and WD could not raise the entrance fee to increase income. Also, the movie and TV production division was doing poorly. Under these conditions, collecting a fixed amount of money from their overseas partner, regardless of the theme parks success, was an attractive proposition for WD. This was a tough condition for the Japanese partner, but if Disney could find a partner who would want to do the project under these terms, they would draft a contract, assuming the partner could build a Disneyland to their stringent quality standards.11 In 1984, a management change at Walt Disney created a powerful team, with Michael Eisner as the companys chairman and Frank Wells as its president. With the help of the license income from Tokyo Disneyland, Eisners management team built hotels in Disney World. In turn, the income from the hotels helped to revive WD, whose performance had been at an all time low under the leadership of E. Cardon Walker as chairman (1980-1983) and Ron W. Miller as president (1980-1984).12 6 For the details, see Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), July 23rd 1999, p 40. 7 For the details, see Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 16, July 17th 1999, p 40. 8 Ibid. 9 Ibid. 10 See Arima, T., Disneyland Story, Nikkei Business Bunko, July 1st 2001, pp 146-147. 11 Ibid. 12 See Arima, T., Disneyland Story, Nikkei Business Bunko, July 1st 2001, p 174. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 4 Competitor For the development of Tokyo Disneyland, OL initially had a competitor, the Mitsubishi Estate Group, which was trying to bring Disney to the foothills of Mt. Fuji.13 WD had received more than 20 offers from Japan and one of them was Mitsubishi Estate Group. WD sent six top management people to Japan in December 1974. After visiting the site at the foothill of Mt. Fuji, they came to Urayasu, where Tokyo Disneyland was later built.14 Mitsubishi Estate Group offered WD 3 million tsubo (2,450 acres),15 which it owned at the foothill of Mt. Fuji, in exchange for WD constructing Disneyland. So although the Group offered the land, they would not construct the park and had no way of reaching an agreement with WD which, according to Masatomo Takahashi, wanted the royalty but [wanted to] pay nothing.16 Thus Urayasu, owned by OL and across the River Edogawa from Tokyos population of 33 million, was chosen as the site for Japans Disneyland.17 In fact, Mitsubishi Estate Group refused to accept WDs proposal as it thought it would hardly be possible to operate profitably under such a condition. OL, on the other hand, accepted the condition knowing that it would be hard for them to overcome.18 The Position of Various Stakeholders Mitsui Real Estate Group The Mitsui Real Estate Group (MREG), OLs parent company, owned 20.48% of OLs shares. Since the initial negotiations in 1979, MREG had been very critical of all the deals with WD. The first issue was the period of the contract. During a meeting between the American and Japanese sides in November 1978, Azuma Tsuboi, the MRECs president, objected to the terms of the contract. He said: While it is such a violently moving time that we have no way of knowing what is going to happen 10 years ahead, how come we can have a contract for as long as 50 years. Doing so makes it something similar to the US-Japan Trade Agreement of the Edo Period [some 100 years ago]. We will never be able to accept such a servile agreement.19 -Azuma Tsuboi, president of Mitsui Real Estate Corp. The second problem involved the license fees. WD originally demanded a 10% license fee, to which MREC strongly objected. 13 Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 13, July 14th 1999, p 40. 14 Ibid. 15 1 acre = 4,047m2 or 1,226.36 tsubo. 16 Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 13, July 14th 1999, p 40. 17 Ibid. 18 Arima, T. Disneyland Story, Nikkei Business Bunko, July 1st 2001, p 147. 19 For details, see Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 29, July 30th 1999, p 40. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 5 Disneyland is a remnant of the previous century. The Japanese would soon be bored of it. There is no way to be profitable if we paid 10% royalty to the US side.20 -Azuma Tsuboi, president of Mitsui Real Estate Corp. WD was infuriated when OLs management requested a lower royalty of 5%, in accordance with Azuma Tsubois demands. WDs fury in turn caused the Japanese parties to mistrust it.21 The third issue was risk-sharing. From the start of the project in 1978, MREC had guaranteed the project borrowing up to 48% of its investment but no more, in which case the remaining balance would have to be borne by WD. Azuma Tsuboi had the following to say about this issue. The matter is decided by our board meeting, [it is] not my personal decision. This is such a humiliating contract and we, as a company of the proud Mitsui Group, cannot accept it. If you really wish to do it, do it on your own.22 -Azuma Tsuboi, president of Mitsui Real Estate Corp. The Main Bank Tokyo Disneyland was financed by a group of 22 banks. The group was headed by the Industrial Bank of Japan (IBJ), and Mitsui Trust Bank was the second largest partner. WDs position in the Tokyo Disneyland contracttake no risk, just collect the feecaused a lot of commotion amongst the Japanese banks. Kisaburo Ikeura, IBJs president, called this policy a very strange one and stated: WDs position was that they dont offer any land or money, take no risk; you must construct as we tell you to do, and we collect 10% license fee for entrance fees and 5% license fee for beverages and novelty goods; such a policy was never heard of in Japan. 23 - Kisaburo Ikeura, president of IBJ IBJ was a successful bank and was often referred to as the Morgan Guaranty Trust Bank of Japan. It dealt with many large Japanese corporations in many complex and delicate transactions. But because it used to be a government-owned bank, its borrowers were chosen in accordance with current government policies, or were traditional companies in the heavy industries sector, such as steel, ships and machinery, which supported the recovery of the Japanese economy after the Second World War. IBJs top management, however, believed that the future of Japanese industries would shift toward the service industries, based on software and technology, and become much more internationalised, with joint ventures and export industries becoming popular.24So IBJ shifted its lending targets accordingly and was quite willing to lend to OL, as it considered OL to be a potential future leader.25 The group of 20 For details, see Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 19, July 20th 1999, p 36. 21Ibid. 22 Ibid. 23 For details, see Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 19, July 20th 1999, pp 136-138. 24 Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 24, July 25th 1999, p 40. 25 Ibid. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 6 banks decided to lend 65 billion (US $0.55 billion) in August 1979 to OL. By 1997, when the DisneySea Park was being discussed, total bank loans amounted to 195 billion (US $1.65 billion), indicating the groups strong commitment to the project. The main banks in Japan were closely involved in companies internal affairs, both in crossownership and as a prime lender [see Exhibit 9].The relation between OL and the IBJ was close. Mitsuaki Mori, who was sent from IBJ, succeeded Masatomo Takahashi as the second president of OL. Mituaki Mori (19881992) passed away suddenly in 1992 and Masatomo Takahashi (19921995) returned as the third president. Landlord OL was granted a vast plot of reclaimed land by the government, which could be taken back if not used for its agreed upon purpose within a certain timeframe. 26 In March 1962, Chiharu Kawasaki, president of Keisei Electric Railway Co., one of OLs largest shareholders, asked Masatomo Takahashi to approach the prefecture to negotiate a grant of 1 million tsubo of reclaimed land to OL.27 When Masatomo Takahashi went to the Chiba prefecture to negotiate the land grant, they said: We hear that even the Disneyland in Los Angeles is only 90,000 tsubo (73 acres). Weve never heard of an amusement park as large as 1 million tsubo, which is 10 times that.28 -Chiba government office Eventually OL got 750,000 tsubo. Kawasaki later told Takahashi the reason he wanted a large piece of land. If you go to Disneyland in Los Angeles, you will learn that by the time the company wanted to build a few hotels close to the park as the business was booming, all the adjacent lands had been bought up by others. I didnt want to see the same thing happen to us.29 -Chiharu Kawasaki, former president of Keisei Electric Railway Co. In his autobiography, Takahashi wrote that he later found that Kawasaki had shown foresight when suggesting the acquisition of a large piece of real estate to accommodate any future expansion.30 With the opening of Maihama station on the Keiyo line in 1988a 43 km railroad between Tokyo and Sogathe number of entrants to Disneyland increased tremendously, topping 13 million that year.31 Then, there was a request from the Chiba prefecture, where Tokyo Disneyland was located, prompting the use of unused park land measuring around 300,000 tsubo. Since the land was public property, OL wanted to use it for something the public could 26 Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 13, July 14th 1999, p 40. 27 Ibid. 28 Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 13, July 14th 1999, p 40. 29 Ibid. 30 Ibid. 31 Ibid. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 7 enjoy.32 Moreover, OLs top management was also mindful of the fact that the plot of land was reclaimed from the sea, causing many fishermen to loose their jobs and way of life; they felt a social responsibility to help these people.33 Oriental Lands Listing on the Tokyo Stock Exchange OLs listing on the Tokyo Stock Exchange in 1996 resulted in an increase in the number of shareholders. The companys initial public offering (IPO) was welcomed by investors: the closing price on the first day was 8,850 (US$74.99) a share, exceeding its offer price by 9%. In the same year, OL reported total sales of 171.5 billion (US$1.45 billion), and income before tax of 28 billion (US$0.24 billion), with Tokyo Disneylands visitor numbers a shade below 17 million. The companys market evaluation after the initial enthusiasm had, however, been disappointing. The stock price in 1997 was about 8,000 (US$67.79), lower than its initial public offering price of 8,055 (US$68.26) in December 1996. The original investors were not compensated at all. The negative evaluation of this investment put pressure on OLs senior management to perform [see Exhibit 9]. A New Capital Investment: DisneySea Park Tokyo DisneySea was to be a unique institution, a first of its kind in the world. Japan was an island country surrounded by seas and as such the Japanese had a strong attachment to a theme concerning the sea. The target audience was those adults who had been children when Tokyo Disneyland had been introduced. Although economic conditions in 1997 were weak, OL had to decide whether to undertake a project as large as the Tokyo DisneySea Park. The initial investment alone would be 400 billion (US $3.4 billion); the companies total assets were valued at 355.18 billion (US$1.77 billion) and annual profits before tax were 28.32 billion (US$0.24 billion) in fiscal year 1997.34 On receiving WDs proposal to build this new amusement park, OLs directors ordered its planning department to conduct a financial feasibility study. The senior management wanted to know how long it would take for the DisneySea Park to start generating profits, and if the companys current profit earning capability would be able to sustain the investment period, assuming construction would start in 2000. The companys senior executives also consulted the stakeholders. This gargantuan investment in the midst of a poor economic climate led many to question the undertaking, creating doubt in the minds of not only the management but also parent company, shareholders and lenders.35 Tough Negotiations WD wished to maximise revenue from Japan through license fees. It therefore had a substantial interest in the new DisneySea Park project. WD expected income similar to that received for Tokyo Disneyland, and behaved as if it were a primary and lead investor. 36 The 32 Ibid. 33 Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 12, July 13th 1999, p 40. 34 The Japanese fiscal year runs from April 1st to March 31st. 35 Kagami, T., An excerpt from Umi wo Koeru Souzouryoku (Imagination Extending across Seas), Kodansha, May 26th 2003, pp 99-114. 36 From the very start of the project in 1978 OL had been trying its best, in vain, to make WD bear some risks. For details, see Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 23, July 24th 1999, p 40. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 8 two companies could not agree on the next course of action and the relationship between the two was unharmonious. OLs top management went to the USA in August 1997 to smooth ruffled feathers. As OLs troop sat down to a dinner hosted by WD, a WD side spokesman said, Mr. Chairman, our president is furious. There is no point in any discussions. We have to ask you to go back to Tokyo.37 OLs top management, strongly opposed to the licensing fee format for the second park, responded on the spot: Since we are paying a royalty in excess of 6 billion (US$50.84) each year, we can hardly agree with a plan to do it under the same condition. It is quite unfair if the US side is to take no risk, use the land free with no financial burden, but collect the royalty. We dont want that.38 -Masatomo Takahashi, former president of OL Takahashi wrote extensively about his experiences as president of OL in his autobiography. Engaged in the landfill work, he developed a strong love for the land and strongly desired to use the land for the Japanese. He fought fiercely against those who resisted his ideas and was determined to push through the business he was entrusted with. He crossed the Pacific Ocean innumerable times for the sake of negotiations, often returning thoroughly fatigued.39 WD, on the other hand, had believed it had made a gross error in judgment by placing OL under such tough conditions. However, once it realised what a big success Tokyo Disneyland was, WDs top management claimed the earlier agreement with OL had been a big mistake. WD believed it had chosen a conservative route with its no-risk policy and had ended up with the short end of the stick, earning only a limited profit while being used by OL. 40 Consequently, WD changed its policy after its experience with Tokyo Disneyland and DisneySea to aggressively expand into overseas markets, with a motto of Never repeat the mistake of Tokyo Disneyland!41 The Board of Directors There were 28 members on OLs board of directors and their average age was over 60, reflecting Japans traditional promotion system based on seniority [see Exhibit 8]. While, on average, American boards had fewer than 15 members many Japanese companies had more than 30 directors. Directors in Japan were often senior employees chosen by the president. Thus, in many Japanese firms they were also corporate officers. Promotion to the board was a means of rewarding senior officers. Since OL was a new company, very few of the board members were from within the organisation and most of them were members representing main banks, shareholders, and property owners. They basically voiced the opinions of the organisations they represented. 37 Arima, T., Disneyland Story, Nikkei Business Bunko, July 1st 2001, p 36. 38 For details, see Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 29, July 30th 1999, p 40. 39 Masatomo Takahashi expressed his feelings in his autobiography. See Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 20, July 21st 1999, p 40. Also see Kagami, T., An excerpt from Umi wo Koeru Souzouryoku (Imagination Extending across Seas), Kodansha, May 26th 2003, p 50. 40 This was a comment by WDs president Eisner. For details, see Arima, T., Disneyland Story, Nikkei Business Bunko, July 1st 2001, pp 172-173. 41 For details, see Arima, T., Disneyland Story, Nikkei Business Bunko, July 1st 2001, pp 172-173. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 9 Financial Projections To overcome the deadlock in negotiations with WD, OLs senior executives asked the planning department for a financial analysis as top priority. Because DisneySea Park represented a key part of OLs strategic vision, a convincing financial analysis demonstrating a high rate of future profitability would help convince WD and all OLs stakeholders to commit to this new venture. A seven-year projection with sensitivity analysis was computed by OLs planning department. Financial data for 19982004 was projected based on historical data [see Exhibit 2] and a specific set of financial assumptions [see Appendix 1]. Since the new project would be an expansion of the existing company, the marginal contribution of the new investment had to be projected. As it was extremely difficult to separate the expanding project from the existing company, two projections of cash flow were drafted, one with the expansion and one without. The difference of the two projections would then represent the anticipated cash flow of the new project. The planning department projected the following exhibits step by step. Exhibit 3 Projected depreciation scheduling for OL, 19982004 (20 years straight line) Exhibit 4 Projected debt costs for OL, 19982004 (10-year loans) Exhibit 5 OLs projected financial data without the new project, 19982004 Exhibit 6 OLs projected financial data with the new project, 19982004 Exhibit 7 Income and cash flow from the new project The Capital Budgeting Exercise The planning department believed they had enough information to build a US model using net present value (NPV) on the project as well as a Japanese model using the average accounting return (AAR) [see Appendix 2 for the pros and cons of these techniques]. For hurdle rate and terminal value, OL had been using 5% as its weighted average cost of capital. OL decided to use a hurdle rate of 5.65% for this project due to the huge anticipated risks. OL considered that a reasonable estimate of the terminal value of the project beyond the five-year projection period could be calculated with a commonly used capitalisation formula: Terminal value = Cash flow of the fifth year / discount rate OL used a model based on the assumptions shown in Appendix 1 to conduct a sensitivity analysis using different projections of sales growth, the profitability ratio and interest rates. Interest rates were kept very low in Japan to counter deflation. Based on the incomes and cash flows from the new project 1999-2004, Tokyo DisneySea Park, the planning department calculated: 1. American NPV and internal rate of return IRR 2. Japanese AAR American corporate financiers differed greatly from their Japanese counterparts in their evaluation of the 400 billion investment for the development of the DisneySea Park in 2000. Using the American method, a positive NPV was calculated and the IRR was higher than the hurdle rate of OL. This suggested that the DisneySea Project was an appropriate and feasible investment. Conversely, from the perspective of the traditional Japanese average accounting return (AAR) method, the rate of return was very low and even reflected negative figures. Using this method, the DisneySea Park seemed neither attractive nor sensible. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 10 The conflicting results caused a dilemma for OLs senior executives. As was common in such cases, they took the results of the two analyses to IBJ, OLs main bank.42 IBJ tried to mediate between the diverging projections. IBJ told OL that, upon successful conclusion of the mediation between OL and WD, they would be interested in financing the project if the project analysis appropriately combined both the American and Japanese methods.43 With regard to the analyses, IBJ presented a third method as follows: New capital budgeting was based on a new concept, responding to the difference in opinions of the two parties, the US and Japan, called the average cash flow return method (ACFR) for the purpose of this discussion. The difference between this and the conventional average return method is that (1) the depreciation is added to the after tax income (therefore the numerator is not income but cash flow); (2) the denominator is the initial investment (not the average figure of the book values at the end of each year); (3) the book value of the fixed asset at the end of the final year is added to the cash flow of the final year (the sales value); and (4) discounted cash flow methods are not used. The average return (%) is then calculated.44 -Industrial Bank of Japan The planning department calculated the return based on IBJs suggestion. Their new calculations showed a return on the investment higher than that calculated under the traditional average accounting return method. Corporate Governance OLs senior executives realised that the following differences in the Japanese and Anglo/American theories of corporate governance were relevant to the decision making process in the case of Tokyo DisneySea Park (see Table 1). 1. The idea of maximising shareholder wealth was realistic both in theory and in practice in the Anglo-American markets. The firm had to strive to maximise the return to shareholders, as measured by the sum of cash flows, capital gains and dividends, for a given level of risk. In contrast, Japanese markets worked on the theory that a firms objective was to maximise corporate wealth. A firm had to treat shareholders on a par with other stakeholders, such as management, labour, suppliers, creditors, the local community and the government. The goal was to earn as much as possible, but to retain enough of the corporate wealth for the benefit of all stakeholders. The definition of corporate wealth was broader than financial wealth. It included the firms technical, market and human resources. (cont.) 42 For details, see Takahashi, M. (OLs first president)An excerpt from Watakushi no Rirekisho (My Personal History) series, Nikkei (Japan Economic Journal), no. 26, July 27th 1999, p 40. 43 Ibid. 44 Ibid. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 11 2. The difference in capital budgeting between Japanese and Anglo-American firms reflected the difference in their corporate governance. The NPV rule was most compatible with Anglo-American firms. Implementing the NPV rule on an investment, and deriving a positive NPV, allowed the NPV to then belong to its shareholders. This line of reasoning held true with Anglo-American corporate governance. However, this theory would adversely impact Japanese corporate governance, since maximising shareholders wealth was not the primary goal of management in Japan. 3. The study of agency theory examines the principal-agent relationship within a company. Agents (managers) are likely to have their own goals that do not directly accord with those of the principals. In Anglo-American firms, the principals (shareholders) goal is to maximise shareholder wealth. In order to reach this goal they can use positive or negative incentives to get agents on the same line as the principals. For example, liberal use of stock options in Anglo-American firms can get management to think like shareholders. In Japanese firms, the principals (stakeholders) themselves can have different goals. The principal-agent relationship is therefore far more complex. 4. Instead of seeking long term value maximisation, Anglo-American firms tended to seek short term value maximisation to meet the markets expected quarterly earnings. In contrast, Japanese firms tended to be patient and focus on long term stakeholder wealth maximisation. 5. Employees were important stakeholders in any firm. Although the permanent employment system in Japan was gradually changing, the traditional system was still used by many Japanese firms with little expectation of change [see Exhibit 10]. It was therefore natural for management to be more concerned with long term success instead of considering the interest of stockholders. The American NPV concept, which analysed investment success and profitability of stockholders, did not fit within this viewpoint. Table 1: Theories of Corporate Governance Decision Time After the financial analysis was presented to OLs senior management, OL went through several rounds of negotiations with WD and also consulted with all their other stakeholders. It was time to make a decision. They had to make a choice between the results of their internal study or the opinion of their various stakeholders. The decision was tough as they could not decide simply based on personal preference. All the numbers had to be based on a convincing financial analysis projecting a final high rate of profitability for the company to commit to the new venture. But Japanese firms typically did not rely on the numbers and figures alone as the final determinants in such a weighted decision. The decision maker had to consider all relevant non-financial factors as well. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 12 Conclusion: Success for Both? OL senior executives made a decision keeping in mind the vast differences in culture and principles that existed between the Japanese and the American methods of evaluating projects and various different positions of stakeholders. The DisneySea Park was given the go-ahead. It was 6 am on September 4th 2001. It was the day of the grand opening of the Tokyo DisneySea. The only concern was the weather.45 The management teams of both WD and OL expressed their profound joy for the success of the project. I feel I am honoured. I feel especially touched when I know that the Tokyo Disneyland and the Tokyo DisneySea, which resulted from the cooperation between OL and WD, proves the success of collaboration between a US company and a Japanese company and that it is possible to sustain the success. Japan will continue to be one of the centres in the fields of movies, theme parks, fashions, games and technologies as long as the world maintains its peace. I wish our success continues. 46 -Michael Eisner, president of WD I have a hope of jointly developing entirely different business, other than theme parks, in Japan and other areas of Asia together with your company. -Toshio Kagami, president of OL47 I feel that people are the same all around the world, joining the grand opening ceremony of the Tokyo DisneySea. Everybody will have smiles on their faces if we provide really wonderful entertainment, so that I see no national boundary in our business. - Michael Eisner, president of WD48 45 Kagami, T., An excerpt from Umi wo Koeru Souzouryoku (Imagination Extending across Seas), Kodansha, May 26th 2003, p 8. 46 Tokyo Disneyland was recognised for contributing to the advancement of US-Japan relations by the Japan Society of Northern California in October 2002. See Kagami, T., An excerpt from Umi wo Koeru Souzouryoku (Imagination Extending across Seas), Kodansha, May 26th 2003, pp 268-269. 47 See ibid. 48 See Kagami, T., An excerpt from Umi wo Koeru Souzouryoku (Imagination Extending across Seas), Kodansha, May 26th 2003, pp 268-269. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 13 APPENDIX 1: ASSUMPTIONS FOR FINANCIAL PROJECTIONS A seven-year projection with sensitivities was computed by OLs planning department. Future income and expenses were estimated for up to seven years based on 19961997 historical data [see Exhibit 2]. The following financial assumptions were made: 1. An initial capital investment in Tokyo DisneySea Park of 400 billion (US$3.4 billion) will be made in 2000. 2. The number of visitors will remain the same during the next four years and will increase 30% in 2002 when Tokyo DisneySea Park will be opened. They will increase 10% in 2003 and 2004. In 1997, the average admission fee per person was 10,421 (US$88.30). Given the deflationary climate, admission fees will increase by 2% annually during the four years after 1997, and will increase by 15% in 2002 at the opening of Tokyo DisneySea Park and will again increase by 10% in 2003. In 2004, admission fees will remain at the same rate as in 2003. If the new project is not undertaken, the number of visitors will remain the same during the seven-year period and admission fees will increase by 2% annually over those seven years.49 3. Operating costs other than depreciation (67% of the sales, the ratio of 1997 data), administrative expenses (7%), and other expenses (4%) will increase proportionately with the increase in sales. These projections will be applied despite OLs decision to invest or not. 4. Depreciation of the 400 billion (US$3.4 billion) investment in 2000 will be conducted using the straight-line method over 20 years. 5. Funds borrowed as of 1997 totalled 23 billion (US$195 million), for which interest payments in 1997 were 1 billion (US$8.5 million) (the debt interest rate is 4.34%). It was assumed that the cost of future borrowing would be 4.34% (the same as that in 1997). It was also assumed that for future investments, two-thirds would be financed by the internal withholding reserves and capital increases (including the issuance of preferred stocks) and one-third would be financed by borrowings. This assumption was made based on the past performance of the company.50 6. The Japanese rate of taxation was 43%. 49 For the basis of this data, see OLs website (Business Growth, Comparative Advantage, Management Message, etc.), http://www.olc.co.jp/en/ir/ir.html. 50 See OLs website, http://olc.netir-wsp.com/FaqU,locale,en_US.html (Frequently asked questions: How does the company plan to use cash flow in the future? What is the repayment schedule on the companys interest-bearing loans? What are the companys upcoming capital investment plans? ) This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 14 APPENDIX 2: PROS AND CONS OF DIFFERENT CAPITAL BUDGETING TECHNIQUES (US AND JAPAN) 1. Japanese Method (Average Accounting Return) Formula: InvestmentAverage Net IncomeAverage Return AccountingAverage = Features: (1) Use average net income. Sum net income / T years (2) No time factor, future values are not discounted. (3) Terminal value is not taken into consideration. (4) Investment is the average of the fixed assets (book value). Sum fixed assets (book value) / T years. Pros: (1) This conventional method has long been a common method of evaluating capital investment projects in Japan. (2) This method fits into Japanese management; for Japanese executives, the concept of opportunity cost is very difficult to comprehend. The concept of selling a corporation or its facilities to other parties is foreign to the Japanese. They have traditionally discarded the value of plants and facilities when a project is over. (3) It is easy to understand and is based on Japanese consensus decision making processes. (4) Japanese banks like this method since the refund period is calculated in the same way. Cons: (1) It does not take into account the matter of timing. It would have been the same if the net income in the first year had occurred in the last year. It does not discount the future income. (2) It does not have any guidance on what the right-targeted rate of return should be. It does not pay attention to the discount rate of the market. (3) It ignores all cash flow occurring after the operation period. Therefore it does not pay attention to the salvage value. (4) Depreciation is not added to the refunding resources since the investment amount is calculated on the basis of the book value after depreciation. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 15 APPENDIX 2 (CONT): PROS AND CONS OF DIFFERENT CAPITAL BUDGETING TECHNIQUES (US AND JAPAN) 2. U.S. Method (NVP and IRR) Formula: NPV is defined as follows: NPV = 0 C + = + T 1 t t r)(1 (1)CF t 0C = initial investment CFt = expected before-tax cash flow in year t = tax rate r = weighted average cost of capital T = life of the project The internal rate of return is defined as the value of IRR in the following equation: C0 = = + T t 1 t t (1IRR) (1)CF Features: (1) Use the cash flow. (2) Time factor (DCF method). (3) Terminal value is added. Pros: (1) These are theoretically the best approaches established in the US. (2) Cash flow is used. (3) The time value of money is accounted for by discounting cash flow. (4) Implementing the NPV rule on an investment and deriving a positive NPV allows the NPV to then belong to its shareholders. (5) It holds true with US corporate governance. (6) Open to new theories such as options approach. Cons: (1) It is more difficult to understand than the average accounting return method. (2) No popularity in Japan since managers in Japan are much less number driven. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 16 APPENDIX 2 (CONT): PROS AND CONS OF DIFFERENT CAPITAL BUDGETING TECHNIQUES (US AND JAPAN) 3. A New Method (Average Cash Flow Return Method) Formula: C AB ReturnCash FlowAverage + = A = Average Cash Flow (Sum cash flow / T years) B = Book value of the fixed asset at the end of the project C = Initial Investment Features: (1) Use cash flow. (2) No time factor. (3) Book value of the investments fixed asset is added as terminal value. (4) Use initial investments as the investment. Pros: (1) Compromise between Japanese and US methods without being radically different from either. (2) This method employs the concept of cash flow and uses the initial investment as the denominator. In this way, the numerator and denominator stand on the same basis, using both figures before deduction of depreciation. (3) Not only should this method win over Japanese managers but it would also become invaluable to American managers who strive to maintain alignment with the accounting methods implemented. (4) Aggressive Japanese banks like this method since their loan periods can be reduced as compared to the traditional method. Cons: (1) DCF is not used. (2) Eventually the US method will replace this method even in Japan. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 17 EXHIBIT 1: BASIC DATA OF ORIENTAL LAND CORP. (1997) Name Oriental Land Co., Ltd. Date of Establishment July 11, 1960 Paid-in Capital 63 billion (US$ 0.53 billion) Sales 180 billion (US$ 1.53 billion) Income before tax 28 billion (US$ 0.24 billion) President Toshio Kagami Members of Board 28 Employees 2,493 (full time) 6,355 (part time) Address 1-1, Maihama, Urayasushi, Chiba-ken, Japan Main Banks Industrial Bank of Japan Mitsui Trust Bank Major Shareholders Mitsui Real Estate Corp. (20.48%) Keisei Electric Railway Corp. (11.20%) Tie-up Company Disney Enterprises Inc. (USA) Source: Yukashoken Houkokusho (Annual Reports), Oriental Land Corp. 19962001. For the company profile, see [www document] http://www.olc.co.jp/en/company/profile/index.html. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 18 EXHIBIT 2: ORIENTAL LANDS PAST FINANCIAL DATA AS OF 1997 unit: US$1 million Year No. of visitors (thousands) Sales Revenue Operating Costs (exc. dep.) Depreciation Administrative Expenses Interest Paid Other Expenses Income Before Tax Taxes Income After Tax Investment Fixed Assets Total Assets --- Past --- 96 16,986 1,453.2 1,007.5 87.5 107.6 10.6 2.1 237.9 113.4 124.5 1,331.8 1,164.6 3,007.1 97 17,368 1,533.3 1,027.3 93.9 107.3 8.5 57.9 238.4 103.6 134.7 258.3 1,125.0 3,011.7 Source: Compiled from Yukashoken Houkokusho (Annual Reports), Oriental Land Corp. 19962001. See http://www.olc.co.jp/en/ir/ir.html. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 19 EXHIBIT 3: PROJECTED DEPRECIATION SCHEDULING FOR ORIENTAL LAND 19982004 (AT 20 YEARS STRAIGHT LINE) Unit: US $1 million Fixed Assets (Before Depreciation) Depr. Book Value New Invest. (2000) Depr. Book Value Fixed Assets After New Investment Total Depr. After New Investment 1997 (Actual) 1,218.86 93.9 1,124.96 1,124.96 93.9 1998 93.9 1,031.06 1,031.06 93.9 1999 93.9 937.16 937.16 93.9 2000 93.9 843.26 3,389.30 169.46 3,219.84 4,063.10 263.36 2001 93.9 749.36 169.46 3,050.38 3,799.74 263.36 2002 93.9 655.46 169.46 2,880.92 3,536.38 263.36 2003 93.9 561.56 169.46 2,711.46 3,273.02 263.36 2004 93.9 467.66 169.46 2,542.07 3,009.66 263.36 Note: Trial calculations based upon certain assumptions. Source: OLs annual reports [www document] http://www.olc.co.jp/en/ir/ir.html. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 20 EXHIBIT 4: PROJECTED DEBT COSTS FOR ORIENTAL LAND, 19982004 (AT 4.34%, 10-YEAR LOANS) Unit: US $1 million Existing Debt Interest Payments Outstanding for New Borrowings in 2000 Total Debt Outstanding After New Borrowings in 2000 Total Interest Payments 1997 (Actual) 195 8.46 195 8.46 1998 175 7.60 175 7.60 1999 157 6.81 157 6.81 2000 142 6.16 1,129 1,271 55.16 2001 128 5.56 1,016 1,144 49.65 2002 115 4.99 960 1,076 46.66 2003 103 4.47 903 1,006 43.66 2004 93 4.04 847 940 40.80 Note: Trial calculations based upon certain assumptions. Source: OLs annual reports [www document] http://www.olc.co.jp/en/ir/ir.html. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 21 EXHIBIT 5: ORIENTAL LANDS PROJECTED FINANCIAL DATA WITHOUT THE NEW PROJECT IN 19982004 Unit: US$1 million No. of Visitors (thousands) Admission Fee (US$) Sales Operating Cost (excluding depreciation) (67% of Sales) Depreciation Administrative Expenses (7% of Sales) Interest Paid 1997 (Actual) 17,368 88.3 1,533.3 1,027.3 93.9 107.3 8.5 1998 17,368 90.1 1,564.9 1,048.4 93.9 109.5 7.6 1999 17,368 91.9 1,596.1 1,069.4 93.9 111.7 6.8 2000 17,368 93.7 1,627.4 1,090.4 93.9 113.9 6.2 2001 17,368 95.6 1,660.4 1,112.5 93.9 116.2 5.6 2002 17,368 97.5 1,693.4 1,134.6 93.9 118.5 5.0 2003 17,368 99.5 1,728.1 1,157.8 93.9 121.0 4.5 2004 17,368 101.5 1,762.9 1,181.1 93.9 123.4 4.1 Unit: US$1 million Other Expenses (4% of Sales) Income Before Tax Taxes (43%) Income After Tax Fixed Assets 1997 (Actual) 57.9 238.4 103.6 134.7 1,125.0 1998 62.6 242.9 104.4 138.5 1,031.1 1999 63.8 250.5 107.7 142.8 937.2 2000 65.1 257.9 110.9 147.0 843.3 2001 66.4 265.8 114.3 151.5 749.4 2002 67.7 273.7 117.7 156.0 655.5 2003 69.1 281.8 121.2 160.6 561.6 2004 70.5 289.9 124.7 165.2 467.7 Note: Trial calculations based upon certain assumptions. Source: OLs annual reports [www document] http://www.olc.co.jp/en/ir/ir.html. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 22 EXHIBIT 6: ORIENTAL LANDS PROJECTED FINANCIAL DATA WITH THE NEW PROJECT IN 19982004 Unit: US$1 million No. of Visitors (thousands) Admission Fee (US$) Sales Operating Cost (excluding depreciation) (67% of Sales) Depreciation Administrative Expenses (7% of Sales) Interest Paid 1997 (Actual) 17,368 88.3 1,533.3 1,027.3 93.9 107.3 8.5 1998 17,368 90.1 1,564.9 1,048.4 93.9 109.5 7.6 1999 17,368 91.9 1,596.1 1,069.4 93.9 111.7 6.8 2000 17,368 93.7 1,627.4 1,090.4 263.4 113.9 55.2 2001 17,368 95.6 1,660.4 1,112.5 263.4 116.2 49.7 2002 22,578 109.9 2,481.3 1,662.5 263.4 173.7 46.7 2003 24,836 120.9 3,002.7 2,011.8 263.4 210.1 43.7 2004 27,319 120.9 3,302.9 2,212.9 263.4 231.1 40.8 Unit: US$1 million Other Expenses (4% of Sales) Income Before Tax Taxes (43%) Income After Tax Fixed Assets 1997 (Actual) 57.9 238.4 103.6 134.7 1,125.0 1998 62.6 242.9 104.4 138.5 1,031.1 1999 63.8 250.5 107.7 142.8 937.2 2000 65.1 39.4 16.9 22.5 4,063.1 2001 66.4 52.4 22.5 29.9 3,799.7 2002 99.2 235.8 101.4 134.4 3,536.4 2003 120.0 353.7 152.1 201.6 3,273.0 2004 132.1 422.6 181.7 240.9 3,009.7 Note: Trial calculations based upon certain assumptions. Source: OLs annual reports [www document] http://www.olc.co.jp/en/ir/ir.html. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 23 EXHIBIT 7: INCOMES AND CASH FLOWS FROM THE NEW PROJECT, 19982004 Unit: US$1 million Without the Project With the Project The New Project Depreciation Income Cash Flow Depreciation Income Cash Flow Depreciation Income Cash Flow Fixed Assets 1997 (Actual) 93.9 134.7228.6 93.9 134.7228.6 0 0 0 1998 93.9 138.7222.693.9138.5215.1000 1999 93.9 142.8226.793.9142.8219.0000 2000 93.9 147.0230.6263.322.5284.2169.4(124.5)44.93,219.8 2001 93.9 151.5234.8263.329.9291.2169.4(121.6)47.83,050.3 2002 93.9 156.0239.1263.3134.4388.3169.4(21.6)147.82,880.9 2003 93.9 160.6243.2263.3201.6450.8169.441.0210.42,711.4 2004 93.9 165.6247.5263.3240.9487.7169.475.3244.72,541.9 Note: Trial calculations based upon certain assumptions. Source: OLs annual reports [www document] http://www.olc.co.jp/en/ir/ir.html. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 24 EXHIBIT 8: MEMBERS OF ORIENTAL LANDS BOARD OF DIRECTORS (1997) Name Position Age Years of Service Former Affiliation Share Holdings (thousand shares) Kohzo Kato Chairman 70 13 Chiba Prefecture Office (Major shareholder and landlord) 65 Toshio Kagami President 62 26 Keisei Railroad Corp. (Major shareholder) 47 Noboru Kamizawa Executive Vice President 64 26 Asahi Tochi Kogyo Corp 47 Yasuo Okuyama Managing Director 57 33 -- 24 Toru Nakayama same as above 59 36 Japan Airline Corp. 14 Kazuo Kato same as above 60 5 IBJ (Major shareholder and main bank) 12 Teruo Mitsui same as above 58 5 Mitsui Trust Bank (Major shareholder and main bank) 12 Yutaka Kojima same as above 60 39 Keisei Railroad Corp. (Major shareholder) 8 Takeshi Okamura same as above 65 1 National Police Agency 0 Yoshiro Fukushima same as above 52 29 -- 3 Fumio Tsuchiya same as above 56 19 Keisei Railroad Corp. (Major shareholder) 3 Shigeru Matsuki same as above 55 22 Same 3 Masatomo Takahashi Director & Advisor 83 35 Founder 403 Kurao Murata same as above 75 4 IBJ (Major shareholder and main bank) 0 Junichiro Tanaka Outside Director 66 1 President, Mitsui Real Estate Corp. (Major shareholder) 0 Note; There were 13 other officer-directors. The total number of the board members was 28. Source: OLs Annual Report, Yukashoken Houkokusho (Annual Reports), Oriental Land Corp. 19962001. For OLs Directors, see http://www.olc.co.jp/en/company/profile/board.html. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 25 EXHIBIT 9: MAJOR SHAREHOLDERS OF ORIENTAL LAND (1997) No. of Shareholders No. of Shares (1000) % Government & Municipality 3 39,601 3.96 Banks 184 283,804 28.35 Securities Companies 42 4,665 0.46 Corporations 653 452,178 45.16 Foreigners 283 59,898 5.98 Individuals 75,617 161,073 16.09 Total 76,782 1,001,219 100.00 Source: OLs Annual Report, Yukashoken Houkokusho (Annual Reports), Oriental Land Corp. 19962001. This document is authorized for use only by Marla Polk (polkmarla@yahoo.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies 26 EXHIBIT 10: LIFETIME EMPLOYMENT SYSTEM Traditional lifetime employment in Japan is a system designed to reduce outflow of employees from the firm; those with knowledge acquired through training and experience in the firm are given special opportunities for promotion and offered premium remunerations when there is a large value placed on such human capital. This system in Japan is an economic as well as social institution, characterised by an implicit contract and reciprocal exchange of trust, goodwill and commitment between employers and workers. This institution emerged as an equilibrium outcome of the dynamic interactions among management, labour and government, and became an integral part of Japans employment system over the past hundred years. It was reinforced by complementary institutions such as state welfare policies, labour laws, corporate governance, social norms, family values and the education system. For details, see Moriguchi, C. and Ono, H., Japans Lifetime Employment: A Centurys Perspective, [www document] http://ideas.repec.org/p/hhs/eijswp/0205.html.