Abstract
This chapter has two purposes. The first is to consider why the managers of Japanese companies are reticent about appointing outside directors, despite strong pressure from foreign investors to make such appointments. The second is to empirically examine the relationship between the appointment of outside directors and the performance of Japanese companies that are listed on the First Section of the Tokyo Stock Exchange (TSE). My investigation reveals that the managers of TSE listed companies do not feel the need to appoint outside directors as they are satisfied with the current corporate governance system. This includes a board comprising at least three statutory auditors, of whom more than half are outside auditors, as well as the checks and balances provided by the board of directors. In addition, outside directors are expected to supervise management, but they are not necessarily required to become involved in managerial decision making. Some empirical studies, which analyze U.S. and Japanese companies, show no apparent enhancement of corporate performance by the appointment of outside directors. The results presented in this chapter confirm the findings of these studies and show that there is little likelihood that the appointment of outside directors has any significantly positive effect on corporate performance. This is likely to be a reflection of the above noted fact that managers in TSE listed companies do not necessarily expect outside directors to become involved in managerial decision making.
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Notes
- 1.
This revision of the Commercial Code enabled large stock companies to select either companies with committees or those with boards of statutory auditors. Subsequently, in 2006, the Companies Act was introduced, which prescribed the stock companies system and replaced the Commercial Code.
- 2.
The TSE released “Principles of Corporate Governance for Listed Companies” in December 2009. There is no description of the number of outside directors that should be appointed in listed companies in this document. However, there is the comment that “each listed company is required to sufficiently disclose the details of its corporate governance structure and the reasons for its selection of a particular structure” (Tokyo Stock Exchange 2009, p. 12).
- 3.
Miyajima (2008) also conduct the following estimation, where CGS br is replaced by a dummy variable, which takes a value of 1 when the company has outside directors, and 0 otherwise. The empirical results show that there is no significant relationship between the dummy variable and corporate performance.
- 4.
Miwa and Ramseyer (2005) define outside directors as follows: directors with previous career experience in a bank, another firm (other than a bank), or the government; and directors holding a concurrent position at a bank or another firm (other than a bank).
- 5.
Miwa and Ramseyer (2005) also conduct the following regression analysis, where a Majority Outside Directors dummy for the presence of a majority of outside directors is incorporated into regression models. The empirical results show that there is an insignificant relationship between corporate performance and the Majority Outside Directors dummy.
- 6.
The number of analyzed companies is 2,294. The breakdown is as follows: the number of companies listed on the TSE First Section is 1,669; the number of companies listed on the TSE Second Section is 443; the number of companies listed on the TSE Mothers is 182.
- 7.
The definition of “outside directors” in my empirical analyses is based on that prescribed by Japanese Commercial Code. Directors from a parent company or a main bank, and directors who are friends or relatives of the president can be regarded as outside directors because the definition of “outside directors” in Japanese Commercial Code does not necessarily require independence.
- 8.
- 9.
Lichtenberg and Pushner (1994) show empirically that ownership by business companies influences corporate performance negatively, although their empirical analysis does not directly focus on the relationship between the ratio of cross-shareholding and corporate performance. This result suggests that, even if a business company holds a lot of the shares of another company, the former does not necessarily give the manager of the latter discipline to enhance managerial efficiency. One of the reasons for this is that, in cases of cross-shareholding, the former is not likely to exercise voting rights at shareholders’ meetings against the managers of the latter, regardless of their level of performance. In addition, Hiraki et al. (2003) show empirically that mutual shareholding has a negative relationship with corporate value.
- 10.
CROSS data was collected and calculated by Nippon Life Insurance (NLI) Research Institute.
- 11.
- 12.
Kato et al. (2005) conducted an empirical analysis of Japanese companies and show that the adoption of stock options in Japanese companies is likely to improve corporate performance.
- 13.
For example, see Bradley et al. (1984) for the optimal capital structure model, in which several determinants of capital structure, such as bankruptcy costs, the tax system and so on, are taken into account.
- 14.
The definition of IOD is as follows. IOD = (the number of outside directors that have not had any work experience at banks, controlling companies, or affiliated companies) / (the total number of members of a board of directors).
- 15.
There seems to be no multicollinearity in all the estimated equations in Table 3.2 because the variance inflation factors (VIF) of all estimated equations are low.
- 16.
OLS estimation is likely to produce a spurious correlation between Q0408 and OD2004 (or IOD2004) because columns (A) and (C) do not contain industry dummy variables. This may be one of the reasons why every coefficient of OD2004 and IOD2004 in columns (A) and (C) is significantly positive.
- 17.
I conducted a t test and Wilcoxon rank-sum test as additional analyses, to examine whether or not there were differences in corporate performance (Q0406, Q0408, ROA0406, ROA0408) between companies with a board of statutory auditors and companies with committees of nomination, compensation and audit. I selected the data from July 2004 to distinguish between companies with a board of statutory auditors and companies with the three committees. The empirical results showed, in all variables, that companies with the three committees had better corporate performance than companies with a board of statutory auditors. However, they were not statistically significant at a significance level of 10 %, except for the case where the Wilcoxon rank-sum test was performed for Q0408. These results were also consistent with the results of the regression analysis that indicate that outside directors may not contribute to an improvement in firm performance.
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Acknowledgments
This paper was originally published as Miwa (2010) in Japanese. I have revised the original and translated it from Japanese into English for this chapter. I would like to thank the Japan Academy of Business Administration for giving me permission to reprint the original paper.
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Miwa, S. (2015). Empirical Analysis of the Influence of Outside Directors on Japanese Firm Performance. In: Kambayashi, N. (eds) Japanese Management in Change. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55096-9_3
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