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Japanese Corporate Governance: Structural Change and Financial Performance

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Abstract

This paper analyzes institutional and legal changes related to corporate governance and their impact on financial performance in Japan since the second half of the 1990s. We attempt to address two issues systematically: (1) how much the governance reforms of Japanese firms transformed the conventional system of alliance capitalism and managerial control; and (2) what economic outcomes those governance changes have yielded. As the Commercial Code and other legal and institutional frameworks were revised, Japanese firms experienced shifts in terms of stock ownership, corporate control and managerial organizations. Our empirical results show that the influence of new ownership composition and reformed governance mechanisms on financial performance remains varied. We find that certain factors, such as foreign and financial investors, functioned positively, while others, like the executive officer system and stock options, had little or negative performance effect. Japanese management apparently appeased market investor pressure by superficially institutionalizing various governance reforms, while enhancing financial performance through strategic modifications.

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Notes

  1. While some studies found an inverted U-curve relationship between managerial ownership and performance (Morck et al., 1988), it was not apparent in this sample. We run the regressions with mean-centered executive ownership and its squared term, and the squared term was insignificant.

  2. A close examination of the only readily available data on executive compensation in terms of salary and bonus (that appears as an item among administrative and selling expenses in Nikkei Needs, which includes not only executives’ salary, but also the provision for executives’ retirement allowances and the executives’ bonus treated as administrative and selling expenses) shows that that data are often incomplete and inaccurate.

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Acknowledgements

We thank Hideaki Miyajima, Masahiro Shimotani, Michio Tsuchida and participants at the ABM conference of ITEC, Doshisha University for their helpful comments. Funding from the 21st Century COE (Center of Excellence) program of Institute for Technology, Enterprise and Competitiveness, Doshisha University is gratefully acknowledged.

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Authors and Affiliations

  1. Institute for Technology, Enterprise and Competitiveness, Doshisha University, Karasuma Imadegawa, Kyoto, 602-8580, Kamigyo-ku, Japan

    Asli M Colpan

  2. DeGroote School of Business, McMaster University, 1280 Main Street West, Ontario, L8S 4M4, Hamilton, Canada

    Toru Yoshikawa

  3. Graduate School of Management, Kyoto University, Yoshida Honmachi, Kyoto, 606-8501, Sakyo-ku, Japan

    Takashi Hikino

  4. Institute for Technology, Enterprise and Competitiveness, Doshisha University, Karasuma Imadegawa, Kyoto, 602-8580, Kamigyo-ku, Japan

    Hiroaki Miyoshi

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  1. Asli M Colpan
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Colpan, A., Yoshikawa, T., Hikino, T. et al. Japanese Corporate Governance: Structural Change and Financial Performance. Asian Bus Manage 6 (Suppl 1), S89–S113 (2007). https://doi.org/10.1057/palgrave.abm.9200240

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