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We examined the boards of directors of Japanese companies listed on the first section of the TSE from 2005 through 2010 regarding the determinants and effects of their composition.

Those holding this view assert that each company selects the optimal composition of the board of directors according to the nature of its business, and appointing outside directors does not always lead to an increase in the corporate value. have chosen not to do so as they believe firm-specific knowledge based on the shop floor is indispensable to corporate decision making.

The ownership structure of Japanese companies has changed drastically in recent years from one dominated by banks and corporate shareholders toward one in which Japanese and foreign institutional investors together have a dominant presence.

However, as the extent of such shift varies greatly from one company to another, we have taken into account differences across companies in their ownership structures.

Increasing the presence of outside directors on the boards of Japanese companies is one of the most important reform issues in the area of corporate governance.

The proportion of "independent outside directors" (i.e., "outside directors" defined under the Companies Act excluding those from banks and corporations with shareholding of 15% or more) out of all directors in 1,445 non-financial companies listed on the first section of the Tokyo Stock Exchange (TSE) has increased over the years to reach 9.6% as of the end of March 2011.

In particular, the composition of their boards of directors is likely to be determined by the complexity of the business and the need for monitoring the management.

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