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Who Appoints Them, What Do they Do? Evidence on Outside Directors from Japan


  • Yoshiro Miwa

    (Faculty of Economics, University of Tokyo)

  • J. Mark Ramseyer

    (Harvard Law School)


Reformists argue that Japanese firms maintain inefficiently few outside directors, while theory suggests market competition should drive firms toward their firm-specifically optimal board structure (if any). The debate suggests three testable hypotheses. First, perhaps board composition does not matter. If so, then firm performance will show no relation to board structure, but outsiders will be randomly distributed across firms. Second, perhaps boards matter, but many have suboptimal numbers of outsiders. If so, then firms with more outsiders should outperform those with fewer. Last, perhaps board matter, but market constraints drive firms toward their firm-specific optimum. If so, then firm characteristics will determine board structure, but firm performance will show no observable relation to that structure. To test these hypotheses, we assemble data on the 1000 largest exchange-listed Japanese firms from 1986-94. We first explore which firms tend to appoint outsiders to their boards, and find the appointments decidedly non-random: board composition matters. We then ask whether firms with more outside directors outperform those with fewer, and find that they do not: board composition is endogenous. As we find no robust evidence that board composition affects firm performance during either the thriving 1980s or the depressed early 1990s, we suspect that the optimal board structure may not depend on the macro-economic environment. We note that until recently courts effectively barred shareholder suits in Japan. We speculate that the much higher level of outside directors in the U.S. may have nothing to do with efficiency or monitoring. Instead, it probably reflects the way U.S. courts let firms use such directors to insulate the firm from extortionate but otherwise costly-to-defend self-dealing claims.

Suggested Citation

  • Yoshiro Miwa & J. Mark Ramseyer, 2002. "Who Appoints Them, What Do they Do? Evidence on Outside Directors from Japan," CIRJE F-Series CIRJE-F-159, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2002cf159

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    Cited by:

    1. John Buchanan, 2007. "Japanese Corporate Governance and the Principle of "Internalism"," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(1), pages 27-35, January.
    2. Kathryn Harrigan, 2014. "Comparing corporate governance practices and exit decisions between US and Japanese firms," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(4), pages 975-988, November.
    3. Otten, J.A. & Heugens, P.P.M.A.R., 2007. "Extending the Managerial Power Theory of Executive Pay: A Cross National Test," ERIM Report Series Research in Management ERS-2007-090-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    4. Sakawa, Hideaki & Ubukata, Masato & Watanabel, Naoki, 2014. "Market liquidity and bank-dominated corporate governance: Evidence from Japan," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 1-11.
    5. Heechul Min, 2011. "Former Officials and Subsidies to State-owned Enterprises," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 36(2), pages 1-13, June.
    6. Pombo, Carlos & GutiƩrrez, Luis H., 2011. "Outside directors, board interlocks and firm performance: Empirical evidence from Colombian business groups," Journal of Economics and Business, Elsevier, vol. 63(4), pages 251-277, July.
    7. repec:ehu:cuader:15777 is not listed on IDEAS

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