Corporate Governance and Firm Performance: Insights from Japanese Listed Family Firms

Corporate governance has long been a topic of intense scrutiny and debate among scholars, practitioners, and policymakers. The relationship between governance structures, ownership patterns, and firm performance continues to evolve, particularly as we examine these dynamics across different cultural and economic contexts. In this light, the unique characteristics of Japanese corporate governance, and more specifically, Japanese family firms, offer a fascinating case study that challenges many conventional assumptions in the field.

In our recent working paper – Corporate Governance and Firm Performance: Insights from Japanese Listed Family Firms – we explore the relationship between corporate governance and firm performance through a unique lens: Japanese listed family firms. Our study, which examines data from 1991 to 2010, reveals distinctive characteristics of these firms that set them apart both globally and within the Japanese corporate landscape.

One of our most striking findings is that many Japanese founding families maintain control over top management positions without owning substantial stock. This phenomenon is relatively rare outside of Japan, where low family ownership typically leads to the abandonment of family management. We focus on “heir managing firms,” where a family member serves as the senior manager after the founder’s death. Interestingly, we find that the vast majority of heir managing firms in Japan have less than 20% family ownership, with a significant number (37%) having less than 5% ownership. This stands in stark contrast to family firms in other regions, where ownership tends to be more concentrated.

Despite the low family ownership, these heir managing firms demonstrate accounting performance that is at least comparable to, and in some cases slightly better than, that of non-family firms in Japan. This is particularly noteworthy given that Japanese firms generally suffered from low accounting performance compared to their Anglo-American counterparts during the study period. 

We attribute this relatively good performance to several factors, chief among them being the high level of management ownership in heir managing firms. On average, management ownership in these firms is 4.416%, compared to just 0.226% in non-family firms. This significant difference persists even in firms with less than 5% family ownership. Our regression analysis reveals that management ownership is positively correlated with firm performance, as measured by Return on Assets (ROA) and Return on Equity (ROE). Importantly, this positive effect is observed even in firms with low family ownership, suggesting that management incentives play a crucial role in driving performance.

In addition to higher management ownership, we find that heir managing firms exhibit other characteristics that distinguish them from typical Japanese non-family firms. Heir managers often gain work experience at other companies before joining the family firm, their career paths are accelerated compared to salaryman managers, and they tend to have longer tenures as presidents. These features stand in stark contrast to the traditional Japanese corporate governance model, which is characterized by consensual decision-making, lifetime employment, and a stakeholder-oriented approach. We argue that heir managing firms are uniquely positioned to break free from the constraints of the “company community” norms that have hindered change in many Japanese firms during the period of economic stagnation. To illustrate our findings, we present four case studies of prominent Japanese companies - Mitsubishi Pencil, Brother Industry, Nisshin Seifun, and OMRON. These examples highlight the diverse ways in which family influence can persist in Japanese corporations despite low ownership stakes.

Our research has several important implications for corporate governance theory and practice. First, it suggests that management's equity incentives may play a crucial role in driving firm performance, even in the absence of strong shareholder-oriented corporate governance. This challenges conventional wisdom about the relative importance of shareholder monitoring versus management incentives. Second, our study demonstrates that different corporate governance mechanisms can coexist within the same country and influence each other. The unique characteristics of Japanese listed family firms appear to be a product of their interaction with the broader Japanese corporate governance environment. Finally, our research raises questions about the optimal balance between shareholder monitoring and management incentives in driving firm performance. We suggest that future research should explore which of these factors has a more significant impact and whether they are complementary or substitutable.

In conclusion, our study offers valuable insights into the complex relationship between corporate governance, ownership structures, and firm performance. By highlighting the unique characteristics of Japanese listed family firms, we challenge conventional assumptions and open up new avenues for research in corporate governance. As companies and policymakers continue to grapple with questions of effective governance, the lessons drawn from our analysis of Japanese family firms may prove invaluable in shaping future practices and regulations.

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By Hokuto Dazai (Nagoya University of Commerce and Business), Takuji Saito (Keio Business School), Zenichi Shishido (Hitotsubashi University), and Noriyuki Yanagawa (The University of Tokyo)

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