Purpose: The purpose of this paper is to examine how corporate headquarters control business units, the governing of which has emerged as a vital issue as business portfolios have grown increasingly complex due to diversification, globalization, and corporate group expansion via spinoffs and mergers and acquisitions. Design/methodology/approach: This study utilized questionnaire survey data from 251 firms listed on the First Section of the Tokyo Stock Exchange. The authors approached the issue of business unit governance by measuring the degree of decentralization and the intensity of monitoring, and compared the governance of internal business units with that of subsidiaries, and analyzed the impact of corporate governance characteristics on business unit governance. Findings: Comparing in-house business units and subsidiaries, the authors found a significant difference in their governance. The degree of decentralization toward subsidiaries was higher for strategic and personnel decision-making. However, the complementarity of decentralization and monitoring was not observed for subsidiaries, whereas it was for in-house business units. Subsidiary monitoring corresponding to decentralization was inadequate. Examining the relationship between corporate governance and business unit governance, the paper found that firms with reformed boards of directors and under a greater degree of pressure from capital markets monitored their business units more strictly. Originality/value: The paper shows how the business portfolios and governance arrangements of Japanese firms have changed since the 1990s, and analyzes business unit governance based on valuable data obtained from a questionnaire survey.
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