The Performance Effects and Determinants of Corporate Governance Reform 1

This chapter addresses the introduction of the executive officer system as an alternative to the traditional insider board structure. As a result, since 1997 board sizes have decreased and a greater separation has been made between monitoring and management responsibilities. Some firms have also introduced outside directors and performance-related compensation schemes, such as stock options. The extent of these reforms among Japanese firms is examined using a survey-based Corporate Governance Score (CGS) for each corporation. Higher CGS scores are associated with better performance, a higher percentage of foreign shareholders, and a lower percentage of stable shareholders. However, among firms exposed to capital market pressures, the presence of strong employee participation also has a significant positive impact on the degree of reform and suggests a strong mutual reliance on capital markets and long-term employment among strongly performing Japanese firms.