Determinants of Director Board and Auditor Board Composition: Evidence from Japan

This paper analyzes the determinants of the composition of the boards of directors and auditors (Kansayaku) at Japanese companies. Although the importance of boards of auditors has long been pointed out, it has never been studied so far. For the composition of the board of directors, this research expands on previous studies in two aspects. The first is how the composition of auditor board affects that of the board of directors. The second is what factors affect the selection of outside directors. For this purpose, we empirically analyze the determinants of the boards using a sample of companies listed on the Tokyo Stock Exchange fs first section from 2005 to 2010. We find that the cost of acquiring information, which has a substantial effect on the proportion of outside directors in previous studies, has significant effect on the composition of the board of directors but not on the composition of the board of auditors. For the relationship between the boards of directors and auditors, the current numbers of outside auditors do not affect the number of outside directors. However, the number of outside auditors in 2001 affects the current number of outside directors. This finding contravenes a reason often cited for not introducing outside directors: that similarly with outside directors, outside auditors play an important governance role. In addition, we find that outside directors were generally selected based on the types of advice necessary. An example is a case in which a company with a high overseas sales ratio selects a former government official.