Diversification of Japanese firms: how hybrid organizations evolved through corporate governance reform

Abstract

Confronted with the critical business situations in the late 1990s, Japanese firms initiated two kinds of corporate reform: corporate governance and human-resource management reform. In the beginning, it was assumed that Japanese firms would change from organization-based to market-based corporations by adopting the US-style shareholder-oriented corporate governance. However, the actual change is not such an overall transformation, but rather incremental and cumulative. As such, we focus on the managerial reform through the introduction of the corporate executive officer system, and examine the resulting changes in human-resource practices. In particular, we find a new type of organization, which introduces performance-related pay, while maintaining long-term employment, and also find another type of organization, which introduces performance-related pay and restricts or abandons long-term employment. Although both types have evolved from the traditional Japanese firms, it is not yet clear how such diversification is generated by the effects of corporate governance reform. Thus, this study investigates the evolutionary process of diversification in Japanese firms, using two data sets covering the ongoing changes in corporate governance and human-resource management.