Performance Impact at the Board Level: Corporate Governance in Japan

Abstract

The purpose of this paper is to investigate performance impact at board level in the corporate governance of Japanese companies. We have investigated the size and composition of boards (with reference to outside directors and auditors), and applied this to a set of 821 Japanese manufacturing companies. We found evidence that board size does not matter, but a higher ratio of outside directors/outside auditors appears to relate to better company performance. As a second step, we put Japanese companies into three groups, ‘traditional companies’ (without outside directors), ‘new Japanese companies’ (which have appointed outside directors) and, as a third group, companies who apply the ‘US-style’ committee system. Traditional Japanese companies showed the weakest and US-style Japanese companies the strongest performance. The results are important as they suggest that Japanese companies can benefit from a high ratio of outside directors and outside auditors. In addition to this, our second area of research suggests that Japanese companies considering getting financed by the capital market should introduce the US-style system, as this clearly outperformed the other categories.