Empirical Analysis of the Influence of Outside Directors on Japanese Firm Performance

This chapter has two purposes. The first is to consider why the managers of Japanese companies are reticent about appointing outside directors, despite strong pressure from foreign investors to make such appointments. The second is to empirically examine the relationship between the appointment of outside directors and the performance of Japanese companies that are listed on the First Section of the Tokyo Stock Exchange (TSE). My investigation reveals that the managers of TSE listed companies do not feel the need to appoint outside directors as they are satisfied with the current corporate governance system. This includes a board comprising at least three statutory auditors, of whom more than half are outside auditors, as well as the checks and balances provided by the board of directors. In addition, outside directors are expected to supervise management, but they are not necessarily required to become involved in managerial decision making. Some empirical studies, which analyze U.S. and Japanese companies, show no apparent enhancement of corporate performance by the appointment of outside directors. The results presented in this chapter confirm the findings of these studies and show that there is little likelihood that the appointment of outside directors has any significantly positive effect on corporate performance. This is likely to be a reflection of the above noted fact that managers in TSE listed companies do not necessarily expect outside directors to become involved in managerial decision making.