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

31 Pages Posted: 29 Aug 2002  

Yoshiro Miwa

Osaka Gakuin University

J. Mark Ramseyer

Harvard Law School

Date Written: July 2002


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 boards 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 1980's or the depressed early 1990's, 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

Miwa, Yoshiro and Ramseyer, J. Mark, Who Appoints Them, What Do they Do? Evidence on Outside Directors from Japan (July 2002). Harvard Law and Economics Discussion Paper No. 374. Available at SSRN: https://ssrn.com/abstract=326460 or http://dx.doi.org/10.2139/ssrn.326460

Yoshiro Miwa

Osaka Gakuin University ( email )

2-36-1 Kishibe-Minami
Suita, Osaka 5645811

J. Mark Ramseyer (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-496-4878 (Phone)
617-496-6118 (Fax)

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