Over the last decade, Japanese corporate boards have increasingly adopted US-style board practices designed to increase transparency and place shareholders’ interests at the forefront of decision-making. At the same time, a great many Japanese firms continue to perform poorly, and the Japanese economy has so far failed to recover from its post-boom slump in the 1990s contracting rather than growing for the last few years.
While the global economy, too, has left many nations looking for ways to jump-start their stagnant economies, the increasing willingness of Japanese firms to adopt US-style governance should bode better for its firms’ performance than that of other nations. That’s due in part to several SEC reforms in the post-Enron designed to protect shareholders. US corporate governance has a mandate to place shareholder interests front and center. With this tight focus, US firms have placed a high priority on increasing efficiency, shedding unprofitable lines of business and making difficult decisions in order to maximize returns to shareholders. And the United States remains phenomenally successful on this count: 133 of the Fortune 500 most profitable global companies in 2011 were US companies, while overall GDP per capita in the United States has outpaced that of Japan since 2001.
Japanese boards have a harder time embracing the notion of shareholder primacy than their American counterparts, says Professor Kathryn Harrigan, tending instead to view their constituency as a broad one made up of shareholders, customers, employees, and business partners. That difference in perspective may help to explain the uneven pace at which Japanese firms are adopting US-style corporate governance practices. As part of a project undertaken through the Columbia Business School Center on Japanese Economy and Business, Harrigan examined differences in governance practices as perceived by board members of both US and Japanese firms. The survey, which represented a cross-section of industries, was designed to assess governance structures in both countries and perceptions concerning how to manage poorly-performing assets. The survey also assessed how directors perceived the way board structure influenced decisions to exit poorly-performing lines of business.
Harrigan found evidence that many Japanese boards persist in different practices because they do not embrace shareholder primacy to the same degree as their US counterparts. For example, US boards typically have plenty of independent board members — those who do not have direct links to the firm through employment, family, suppliers, or clients, and who are therefore more likely to offer objective appraisals of a firm’s condition and needs. Despite Japan’s move toward US-style corporate governance practices and evidence that more Japanese boards have appointed independent directors in recent years, Japanese heads agreed that their directors are not independent. In contrast, 90 percent of US board heads consider their directors independent.
Further, the survey suggests that Japanese boards don’t yet entirely value independent directors as sources of constructive criticism: only 52 percent of Japanese respondents indicated that that the presence of independent directors was not a guarantee that the board would receive a balanced assessment of the firm’s management practices and recommendations for maximizing its value — and thus, maximizing returns to shareholders. Nor do Japanese boards privilege shareholders above stakeholders to the same extent as their U.S. counterparts: less than 25 percent of Japanese board members agreed that their board primarily represented the interests of shareholders rather than other constituents, while 87 percent of US board members surveyed believe that their boards act primarily in the interest of shareholders.
Similarly, all the Japanese respondents agreed that their boards’ audit and compensation committees were not independent, while 98.5 and 97 percent of US directors reported that their committees are independent, respectively. This suggests an even more significant gap: in the United States, SEC and National Association of Corporate Directors’ guidelines mandate that audit committees be totally independent and shareholder advocates urge for total independence on compensation committees, too. While similar guidelines have been proposed in Japan that at least half the membership of similar committees be comprised of independent directors, there is no good data on how many firms there have adopted the practice. The survey suggests few if any have.
Finally, Japanese firms historically have been reluctant to lay off employees during times of economic duress, viewing the shift of this risk from the firm to employees as inappropriate. Eighty-two percent of the US board members predicted that their firm would get out of an unprofitable line of business even if it would result in the loss of many jobs; only 38 percent of Japanese board members predicted that their firms would do likewise. That’s not surprising, says Harrigan, since Japan has traditionally embraced an ethos of lifetime employment, an idea that is only slowly receding.
Overall, the results suggest that Japanese boards continue to adopt U.S.-style practices but that the slow pace at which they are doing so is not likely to help spur growth at sluggish Japanese firms. “This survey helps to identify which board practices, adopted more broadly, could help improve performance at Japanese firms,” says Harrigan.
Kathryn Harrigan is the Henry R. Kravis Professor of Business Leadership in the Management Division at Columbia Business School.