Abstract
The corporate governance reform promulgated in 2015 in Japan has contributed to a substantial increase of board independence and a reduction of average board tenure. Our empirical analysis covering 3405 public companies demonstrates that reinvigorated corporate oversight and an increasing post-reform shift towards prioritization of shareholder value have led to a persistent increase of corporate profitability, asset productivity, dividend payouts, acquisitions’ value, and valuation multiples. We also document a significant increase of sensitivity of executives’ and directors’ compensations to the dynamics of firms’ bottom lines. The positive changes are the most pronounced within companies where independent directors constitute a majority on the board. The most notable drawbacks of the reform are a significant reduction in net employment creation and in employee turnover within the largest companies. These might be a possible reason for the documented improvement in corporate performance. The number of part-time employees has also seen a significant increase. While being prima facie focused on reinvigorating the private sector, the corporate governance reform may implicitly undermine the established social contract based on job security. Therefore, our study is important from the perspective of sustainable development of the corporate sector as it demonstrates that while concentrating on improving corporate governance, it is also necessary to consider the business’ social responsibility.
Highlights
On March 5, 2015, Japan’s Financial Services Agency published Japan’s Corporate Governance Code (Code), which was enacted in June 2015 (Code, 2015)
We try to establish whether the reform managed to fulfil its formal goals, i.e., lead to a substantial increase of board independence, and whether it led to a deeper reconstruction of the architecture of corporate governance with goals and priorities of supervisory boards shifting towards shareholder value maximization
Where PERFORMit—firm-level operational performance indicator (OPM, return on equity (ROE) etc.) or discretionary financial policy variable (DIVIDEND, CASH, ACQUISITION etc.), REFORMi—binary variable encoding the subperiod following the enactment of the 2015 reform, BOARD.INDit—percentage of independent supervisory board members, FIRM.CONTROLit —a set of firm-level control variables
Summary
On March 5, 2015, Japan’s Financial Services Agency published Japan’s Corporate Governance Code (Code), which was enacted in June 2015 (Code, 2015). The present paper attempts to quantify the broad consequences of the reform for corporate performance across a number of dimensions: (1) profitability and asset productivity; (2) shareholder value creation; (3) labor relations. While we show that the Reform manages to reach its goals, dynamize the corporate sector, and remedy the long-term underperformance of Japanese companies in the eyes of international institutional investors, we pinpoint the area, where regulatory changes are likely to produce side-effects. It is the first study to comprehensively assess the 2015 reform along a number of dimensions including its repercussion for labor market and corporate valuations It contributes to the corporate governance literature by drawing on the empirical evidence from a natural experiment designed to substantially increase board independence: we demonstrate that independent directors are able to dynamize companies, improve their performance, and increase executives’ accountability. The subsequent sections discuss key empirical findings and their implications
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