Master Thesis for International Business Management
How internationally diverse are Japanese corporations’
boards?
By Chen Bai
Supervisor: Dr. H.C. Stek University of Groningen Faculty of Economics and Business
ABSTRACT
Many scholars have studied the issues of top management team since the emerging of “Upper Echelon” perspectives in 1980s. However, the relatively less researches focus on nationality diversity of management board and its relations with other factors. Meanwhile, top management team in Asian country is omitted by western researchers. This paper investigates the relationship between nationality diversity and some company-related factors inside management boards of Japanese firms. Four propositions emerged that convey company-related characteristics (ownership structure, firm size, international activities and cross-border M&As) could explain differences in nationality diversity. The results show that nationality diversity in a Japanese firm’s board is related to ownership structure, firm’s size and cross-border M&As of the firm. Only the factor that the countries which firms active in do not affects the change of nationality diversity in management board.
Table of Contents
1. Introduction.……….4
2. Literature Review………....9
2.1 Previous researches on nationality diversity…………...9
2.2 Corporate Governance in Japan………...15
2.3 Propositions………...20 3. Methodology………...25 3.1 Sample……….25 3.2 Variables………..27 4. Descriptive Results………...29 5. Testing Propositions………..33
6. Conclusion and Discussion………...37
Acknowledgement……….46
How internationally diverse are Japanese corporations’
boards?
1. Introduction
The trend toward economic globalization is changing the world. More and more firms
continue to expand their business worldwide. Through sustained investment among
foreign nations, corporations find cheap labors, abundant resources and expand their
overseas market (Rugman, 1981; Vernon, 1966). However, every sword has two sides.
When sharing the benefits from economic globalization, firms have to face a great
deal of difficulties, such as culture differences, competitors for the similar market, and
etc. (Hitt, Hoskisson, & Kim, 1997; Mitchell, Shaver, & Yeung, 1992) Scholars have
studied many aspects which could affect firm’s international expansion process, such
as entry mode, competition, organizational implications and etc. One of these
important aspects is top management team (TMT).
Researchers believe that TMT exerts important effect on firm’s performance. In an
article about global board, Mandl (2003) said “Business is going global, and so are
boards or at least they should be if they are to maximize their effectiveness”. Some
researchers recommend management board should be globalized, which means that
more non-national managers should come into firm’s management team. Researchers,
a firm and national top managers worked in it. These foreigners infuse the knowledge
of their own culture and value system into firm’s business. If they are involved into
firm’s board, management team will hold a multicultural perspective and cognitive
diversity to firm’s global strategy development (Bartlett & Ghoshal, 1992; Quelch,
1992; Martinez and Quelch, 1996).
Scholars also notice some drawbacks of board globalization. For example, if great
cultural and economic development distance exists between the country where a
foreign manager comes from and the country which a firm within, the foreigner will
face difficulty to adjust himself (or herself) to the firm’s culture. And the process of
adjustment often takes a long time (Harvey, Novicevic and Speier, 1999). Meanwhile,
due to cultural distance, the process of decision making will be influenced when
conflict occurs between foreigner and national managers.
Until now, though not too many theories settle the issue that board globalization is
good or not, some studies on TMT from firm- and country-level find that board is
indeed becoming more and more global. And the globalized board has a positive
effect on firm’s performance. (Heijltjes, Olie, and Glunk, 2003; Staples, 2007; Veen
and Marsman, 2007)
Most of current studies about effects of TMTs to corporations’ performance are based
the problems that how firms fill executive position in their boards, and how TMTs
affect firms’ performances. This theory constructs a framework between managerial
background features of top managers and firm’s performance. Following the guidance
of this framework, later researchers studied TMTs and their impacts on the
performance and strategic behavior of firms. (Bantel and Jackson, 1989; Finkelstein
and Hambrick, 1990; Wiersema and Bantel, 1992; Bantel, 1993; Hambrick, Cho and
Chen, 1996; Keck, 1997) The attention of other researches is devoted to the effect of
managerial characteristics on multinational corporations’ degree and types of
international involvement. (Sambharya, 1996; Sanders and Carpenter, 1998;
Athanassiou and Nigh, 2000; Tihanyi, Ellstrand, and Daily, 2000)
Nationality diversity, as an index of managerial background features, is always been
neglected in the research of TMT. It only recently has drawn researchers’ attentions
and some studies are published which focus on this domain. (Heijltjes et al., 2003;
Staples, 2007; Veen et al, 2007) Even now, these studies put their attentions mainly on
European and American countries. In the Asian region, the study, especially for Japan,
is rare. In this paper, I will focus on nationality diversity within boards of Japanese
firms and try to explain whether nationality diversity will be affect by using some
company-related characteristics.
There are two reasons for me to study Japanese firms. Firstly, undergo a period of
bank-based to a market-based corporate governance system. (Okabe, 2006)
Market-based corporate governance is like that in the UK and the US. It means
Japanese firms improve efficiency and transparency in corporate management through
the reform of board members. In the researches of TMT of western firms, researchers
have found the percentage of foreign managers has increased every year. (Heijltjes et
al., 2001; 2003) It is worthy to study the issue that whether or not Japanese firms will
follow the trend to increase foreigners in board after the transformation of corporate
governance. Through studying Japanese firms, we might predict the future trend of
board’s development. Secondly, Japan is a special developed country around the
world. It is influenced by Confucian and western value system. We could find the
difference and similarity between Japanese firms and firms from western world on the
topic of nationality diversity. Meanwhile, Japan represents the most developed
country in Asian region. Because the researches on top management team in Asian
countries is rare, the reader could get a deeper understanding about what happens on
nationality diversity in Asian firms.
In this study, I will make a contribution to the literature in two different ways. Firstly,
I will use a much more extensive sample in terms of the number of managers and
companies in Japan. Secondly, I will develop four company-related propositions
(ownership structure, size of the firm, relative level of international activity and
cross-border M&A activities). The analyses will deliver further insights on the relative
internationalisation process in the board of Japanese firms.
Research Question:
How international are boards of Japanese firms? Whether some
company-related characteristics (ownership structure, firm size, international activities and cross-border M&As) could explain differences in nationality diversity?
First of all, I will present a literature review. It comprises three sub-sections. The first
section relates to the development of researches on top management team and
nationality diversity. Then the background information of corporate governance in
Japan is given. In the third subsection, four propositions will be developed which are
based on four company-related characters. After that, I would like to state the
methodology used in this research. And then, a detailed statistic analysis will be
shown to test propositions. Conclusion and discussion will form this thesis final part.
The discussion includes further suggestions for studying nationality diversity and
2. Literature review
2.1 Previous researches on nationality diversity
As I have mentioned in introduction, the relevant studies on nationality diversity of
management teams are rare. The reason is that nationality diversity is often taken as a
neglected factor in studies of top management team. The earliest study on managerial
background features and TMT is from Hambrick and Mason’s article (1984). They
discuss the “Upper Echelon” perspectives and argue that managerial background
characteristics of top managers will partially predict organizational outcomes.
Through synthesizing previously fragmented papers, they sum up several propositions
concerning with the relationships between upper echelons characteristics and team
performance. The characteristics include a series of observable variables (i.e. age,
functional tracks, socioeconomic roots, financial position, etc.). These characteristics
will influence top managers’ strategic choices in managing process, and indirect affect
firm’s performance. Their paper conveys that the issue between characteristics of top
managers and firm’s performance is researchable. The “Upper Echelon” perspectives
provide a framework for successors to make further researches on upper echelons
characteristics and relationships between the characteristics and team performance. In
the following studies, most researchers put too much attention on the effect of top
managers’ characteristics to firm’s performance. The relatively few studies focus on
upper echelons characteristics themselves. Meanwhile, in most studies on how upper
neglected. Many researchers think nationality of managers could affect firm’s
performance but not significant. (Ruigrok and Van Tulder, 1995; Carroll and Fennema,
2002; Athanassiou and Nigh, 2000) In Kuipers’ research (2007) on diversity
management team and company performance, he studied 82 top non-financial
transnational companies and found nationality diversity of TMT does not affect firm
performance. He also pointed out that TMT diversity is not positively or negatively
related to firm performance because of inherent cognitive conflict and biases of
diversity.
With the development of researches on upper echelon characteristics and performance
of top management team, scholars get a better understanding of the importance of
nationality diversity gradually. In a paper which concerns team size, CEO dominance
and firm performance, Haleblian and Finkelstein (1993) suggest that nationality
diversity could affect team performance. They provide an argument for future
researches that higher nationality diversity may improve quality of strategic decision
making, and result in better firm’s performance.
In recent years, some scholars and executive search firms concentrate mainly on
upper echelon characteristics themselves. The searching firms begin to collect
rudimentary descriptive and demographic data of board composition. In research field,
Gillies and Dickinson (1999) found 36.3 per cent of these firms contained at least one
around the world. In a follow-up study, Staples found the boards of world’s largest
transnational corporations became more globalizing during the past decade. (Staples,
2007a) Through comparing work, he found 75 per cent of large firms had at least one
non-national board member in 2005 compared to Gillies et al.’s result. However, he
pointed out that the rate increased rapidly, it was not yet very deep. Foreign managers
only made up a majority of the board in only 10% of his sample firms. The scholars
also found the development of nationality diversity within management boards was
uneven. In Staples’ research, he concluded European boards were the most globalised
boards comparing with American counterpart. The boards in Asian firms brought the
lowest amount. (Staples, 2007b) In the study of European boards, Heijltjes, Olie and
Glunk (2003) focused on two European countries, Sweden and the Netherlands. They
investigated the degree of internationalization of top management teams in two
countries. The corporations in both countries presented high multinational
composition in their management boards. After conducting a longitudinal analysis,
they found that the degree of internationalization of management boards had
increased during 10 years. In 1999, 26.6 per cent of the Dutch top 45 companies
possessed at least one foreign board member, which increased by 17.8% compared
with the ratio in 1990. They also found that the foreign sale increased by 17 percent,
which is related with the increase in the percentage of firms with foreign board
members.
only two articles study and compare top management team in Japanese firms and the
counterpart in Western countries. Wiersema and Bird (1993) study the composition of
top management teams and its effects on firm’s performance. They compare Japanese
firm’s board with counterpart in the United States. They find heterogeneities of top
managers’ characteristics (age, team tenure, the prestige of the university attended,
and etc.) are significant positively related with team turnover. This relationship in
Japanese firms is stronger than those studies in the United States. In Staples’ article
(2007a), he finds Japanese firms have the lowest percentage of foreigners within
board in all developed countries. Except the two articles, we know little thing about
top management team, especial nationality diversity within board, in Japanese firm.
The above studies show a sustained growth in nationality diversity within boards of
multinational firms, especially in European firms. However, these researches did not
give the explanation why and how nationality diversity in boards develops and which
factors would affect the board composition over time. To develop a better
understanding of the problems, researchers use two strands of academic literature to
find potential explanatory factors. The first strand of literature concentrates on
country differences. Scholars attempt to explain the mutual dependent relationship
between institutions in different countries and economic systems. (Whitley 1992; Hall
en Soskice, 2001; Morgan, Whitley and Moen, 2005) Due to differences in terms of
corporate governance systems and the structure of labor market, the composition of
differences in ‘governance regime’. (Maclean et al., 2005)
A second strand of literature concerns internal processes within corporations that
might affect the nationality diversity in management team. (Heijltjes et al., 2003;
Staples, 2007) These literatures research the factors inside a firm such as degree of
international activity, firm’s cross-border M&A activities, and size of the corporation.
Heijltjes et al. (2003) suggest several factors (such as the degree of
internationalization of firms in terms of foreign workforce, internationalization of
ownership, the industry, the country of origin and the strategies of the company) may
potentially affect the nationality diversity of boards. In Staples’ article (2008), he finds
cross-border mergers and acquisitions have positive relation with nationality diversity
of management board. The results show a cross-border M&As causes more
multinational board of directors.
This paper focuses on company-related factors, which means the factors come mainly
from the second strand of literatures. Because of time limitation, I choose four factors
(ownership structure, firm size, international activities and cross-border M&As) to
conduct my research. Although these factors are internal characteristics inside a firm,
one of them (ownership structure) is still influenced by the first strand of literature.
Therefore, I need to present how governance regime can affect ownership structure,
and then influence nationality diversity of management board at first. Then, I will
management board.
Researchers suggest different governance system may affect nationality diversity in
management board. Due to differences exist in governance regime, recruitment and
dismissing of members in top management team are different, and then nationality
diversity in management board is affected. (Van Veen and Elbertsen, 2008) Glunk,
Heijltjes and Olie (2001) studied the system of corporate governance in Great Britain,
Denmark and the Netherlands. They reveal the UK belongs to an Anglo Cluster, while
Denmark and the Netherlands fall into a Nordic cluster. The UK owns the similar
system of corporate governance and labor relations with the US. Denmark and the
Netherlands represent a more continental European business system. In the UK, firms
follow one-tier governance system and the shareholder is pre-eminent. Shareholders
usually make decision for the composition of executive board. Dutch and Danish
firms abide a two-tier board structure – the executive board and the supervisory board.
The executive board bears collective authority and they are responsible for the
company. The supervisory board has to protect the interests of all groups alike. In the
Netherlands, shareholders do not have formal representation on the supervisory board
and stakeholders are the dominance. (Glunk et al., 2001) In another research of top
management team, Van Veen et al. (2008) study corporate governance and nationality
diversity in Germany, the UK and the Netherlands. They find Germany has the lowest
ratio for foreign managers in board. The percentage of foreign managers in board in
regime has an effect on nationality diversity. Japanese firms conform to a set of
special corporate regime. Therefore, before turning to discuss how corporate
governance affects Japanese management board, the detailed structure and
development of corporate governance in Japan must be given. The governance regime
in Japan has the similarity to that in the US and the UK, but not the same. At first, the
voting rights in a Japanese firm are mainly controlled by financial institutions and
small groups. Secondly, another characteristic of Japanese board is that most top
managers are promoted from middle-level. In recent years, there are some changes in
the development of corporate governance. Some firms introduce corporate
governance in term of a market-based system. The development of corporate
governance may affect the composition of management board, and also nationality
diversity of board. The following paragraph will introduce corporate governance in
Japan in detail.
2.2 Corporate Governance in Japan
Because Japanese society is influenced by the Confucian value system, Japanese firms
emphasis the absolutely loyalty to the group and outsiders are suspicious. (Yan and
Sorenson, 2004) The collectivist ideology is stressed in business interactions, they
only reluctantly admit outsiders into the group. (Tan and Chee, 2005; Slote and De
Vose, 1998; Hofstede, 1991)
governance in Japan. The board in Japan has similar structure with their counterparts
in the UK and US. The board is responsible to the shareholders in company and
mainly focuses on strategic and management decision. (Yasui, 1999) In Japanese
companies, the directors are often promoted from the ranks of middle managers of the
company. In other words, most of directors in Japanese firms are insider. (Yasui, 1999)
As a result of the special promotion process in Japan, the managers of the board
master good knowledge of the firm, and they can make appropriate decision to make
the firm to grow steadily. (Okabe, 2006) The Japanese board also has weaknesses.
Firstly, it tends to create a hierarchical structure, which can undermine the board’s
function to supervise the affairs of directors. (Yasui, 1999) Secondly, the number of
directors continues to grow over time due to reward long-serving managers. Facing
the large size of boards, Japanese firms often compose a committee (including the
president and a small number of senior directors) to make essential decisions.
In accordance with the Commercial Code requirement, Japanese firms should appoint
statutory auditors to counterbalance the power of the directors being promoted from
within. They are responsible to supervise the affairs of the directors for the benefit of
the shareholders.
Researchers found that a large portion of firm’s shares are held by some groups. These
groups are in most cases domestic banks and insurance companies as well as other
investigated that domestic financial institutions held approximately 40 percent of the
stocks, 22 percent of which belonged to banks, 10 percent by life insurance
companies. The phenomenon of cross-shareholding is common in Japanese firms. It
represents a long-lasting relationship between the two parties. It also constructs a
relatively concentrated and considerably stable ownership structure of Japanese
corporations. The ownership structure also influences the composition of management
board. As these shareholders are usually the affiliated companies in the same
corporate group (so-called keiretsu) or the important business counterparts of the
company, they have various occasions to communicate their demands to the
management informally. Furthermore, they sometimes send their personnel to the
board as directors or statutory auditors, which provide a means to control
management directly.
As the above data show, financial institutions, especially banks, control a large
number of stocks of Japanese firms. The banks have a close business relationship with
the firms. They service to monitor and discipline firms’ operations. The firm could
continuously borrowing funds for a long period from the bank. The bank carries out a
variety of banking and other transactions with the firm, such as foreign exchange
business and trustee function of corporate bonds. When the firm meets financial
distress, the bank will rescue the firm to protect shareholders’ interests. Also, the bank
maintains a close human relationship by dispatching executives to the firm. This
corporate governance structure.
Due to the uniqueness of board structure, ownership structure and bank influence, the
corporate governance shows the different characteristics with those in other countries.
This governance structure of Japanese corporations is often described as “contingent
governance” in which the board enjoys a relatively high degree of autonomy in usual
business situations but is subject to external control by the main bank when the
company is in distress. Although it helps Japanese firms avoid the hostile takeover
coming from the stock market (Okabe, 2006) and keep good relationships with banks.
Some limitation of this system should be mentioned, for example, the inevitably
biased by the interest of banks which are also the shareholders of the firms and the
lack of proper risk assessment by banks and by companies. (Yasui, 1999)
In the 90s of last century, four factors (the changing patterns of corporate finance, the
dissolution of cross shareholding, the increased role of institutional investors, and ICT
innovation) pushed the development of corporate governance in Japan to a new
degree. (Okabe, 2006) The corporate governance is changing from a bank-based to a
market-based corporate governance system. Thus the system is anticipated to change,
from one in which disciplining pressure comes from a single institution (the main
bank), to one in which various markets (such as stock, debenture, ABS, and
derivatives markets) take over that role. Japanese firms took various measures,
improve efficiency and transparency in corporate management. Accompanied with the
reform of the board of directors, the functioning of the boards is strengthened and the
directors are more responsible for the existing and potential shareholders.
Scholars have researched the financial system and corporate governance in Japan in
recent years. (Yasui, 1999; Okabe, 2006) They argue there is a definite and strong
trend for Japanese corporate governance moving toward an Anglo-American or
market-based governance system. In this system, the financial transaction occurs in an
open market between the market participants keeping each other at arm’s length. Each
transaction is theoretically independent of previous and future transactions. Here,
financing takes place in the form of securities. In this system, firm’ dependence on
bank is relatively low and company only depends on bank for short-term funds. Due
to the weak relationship between firm and bank, it is necessary to hold abundant
internal funds for maintaining daily operations. Under this governance system, firms
are always widely held by shareholders. In the previous corporate governance system,
which is called a Japanese-German model, banks and firms maintain a long-term
relationship. A bank is both lender and shareholder for a firm, so that the bank comes
to participate in the management of the firm. Thus corporation is said to be monitored
and disciplined by banks, rather than controlled by the pressure of the stock market.
To be concluded, two kinds of corporate governance, which are bank-based and
the relations between firms and banks are weak. In another system, the situation is
controversy.
2.3 Propositions
According to La Porta et al.’s research (1999), they find that nearly 90 percent of large
firms in the UK are widely held and 80 percent of large firms in the USA. In Japan
and Germany, only half of largest firms are widely held because of their corporate
governance. As I have mentioned in previous parts, Staples (2007) study 80 largest
firms around the world. He suggests that large firms, which are widely held in the UK
and the USA, possess relatively more non-national managers in executive boards than
firms in Japan. Van Veen et al. (2008) studied the Governance Regimes and
Nationality Diversity in Germany, the Netherlands and the UK, they found out
Germany shows the lowest scores of three countries in terms of nationality diversity
and the UK has much larger nationality diversity.
Because of several decisive factors for corporate governance, there is little possibility
that Japanese firms will totally choose the Anglo-American mode. (Levine, 2002;
Bech and Levine, 2000) However, more and more Japanese firms have begun to
emphasize efficiency of capital, ROE, or efficiency of assets, ROA, rather than to
merely expand sales volume. In the study of ownership structure, La Porta et al. found
Japanese firms are mainly owned by various shareholders or banks and security firms.
governance, and those which are owned by banks and security firms still take the old
Japanese-German model. The former arguments show the result that firms from the
UK and the US have more foreigners in boards than firms in Germany (Van Veen et
al., 2008) In other words, widely-owned firms have more foreigners than firms owned
by financial institutions. Therefore, I suppose that Japanese firms which are widely
held have more foreign managers evolving in the boards.
Proposition 1: Japanese Firms which are widely held will have more foreigners in boards than Firms owned by financial institutions.
World investment report points out that Japan is the largest FDI outflow country in
Asia. (World Investment Report 2007) Japanese firms expand their factories and
markets to peripheral Asian countries and other regions. The more countries a firm
involved in, the more international risks it has to deal with. Due to difference in
dissimilar countries, firms need knowledge and experience to tackle with local
markets in other regions (Athanassiou and Nigh, 2000; Tan and Mahoney 2006).
There are two ways for Japanese firms to operate foreign markets. The first method is
to choose experienced expatriates inside the firms and send them out to foreign
factories or subsidiaries. The firms also can take the second way which is to appoint
knowledgeable foreign executives into firm’s executive board. The later measure
helps to integrate local knowledge and firms’ overall strategy. Comparing with
better understanding for local market. (Harvey, Novicevic, and Speier, 1999) When
the composition of a board reflects a firm’s international activities, the board will be
more successful. A board with foreign directors will make better strategic decision
making and lead to better firm performance.
Proposition 2: Japanese firms which active in more countries will have a higher nationality diversity of its board than those firms which active in less countries.
Thirdly, firm’s size might influence nationality diversity of board in Japan. In a
research of top management team, Tianyi et al. (2000) argue company size has an
indirect effect on firm’s international activities. As I mentioned in proposition 2 that
firm’s international activities would affect nationality diversity in its board, we could
assume firm’s size may also influence nationality diversity. Because large firms are
often listed on the top at stock market, and then they are more attract attention from
public. And large firms could provide more working opportunities than medium- and
small- sized firms. Potentially they could attract more international candidates to work
for them. Large firms have a higher level of nationality diversity in their workforce
over the world, which might increase the chance for international candidates come
into their management board.
No matter firm size are large or medium, most of Japanese firms expand overseas
countries besides continuing to fulfill the domestic demands. Because Japanese
domestic market becomes saturation, they could search for new opportunities in other
nations. Meanwhile, large-sized firms always hold more available capital than
medium-sized firms. They also kept a strong relationship with banks and government.
These advantages make large-sized firms to be more competitive than medium-sized
ones. For those medium-sized firms, they mainly focus on domestic markets. Because
of their lower ranks than large-sized firms and limited available capital, they do not
conduct competitions of the same level as large-sized firms in foreign markets. It is
easier to handle the situation overseas for the managers of medium- and small-sized
firms than their counterparts in large-sized firms. As mentioned previously, foreign
managers within board have their particular strength to deal with foreign issues. Due
to the more difficult issues in foreign markets for large-sized firms, I suppose
large-sized firms should employ more foreigners within board than medium-sized
firms.
Proposition 3: Large Japanese firms have a higher nationality diversity of its board than medium-sized Japanese firms.
The expansion of firms over the world and the rise of FDI are mainly driven by
cross-border M&As (World Investment Report, 2007). Mergers and acquisitions
increase quickly during the late 1990s in Japan. The M&A activity mainly affect the
distribution, and oil refining and other materials industries. (Arikawa and Miyajima,
2007) Japanese firms’ M&As activities are mainly driven by economic shocks. The
firm, which has higher growth opportunity, likes to engage in more M&A activity for
gaining more profits. The firm, which faces sales decline, needs M&A activity to
relieve of burdens. M&As often mean to reallocate assets among industries.
In most cases, M&As often results in a reshuffling of management board. In
cross-border M&As, a new management board often leads to an increase in
nationality diversity. Staples (2007) find out that a cross-border acquisition almost
always results in a more multinational board of directors, that multinational boards are
more likely to do cross-border deals, and that once a board becomes multinational it
stays that way. Due to the importance of this company-related factor, I will also put
cross-board M&As in my research.
This lead to proposition 4: Japanese firms which are involved in cross-border
Methodology
Sample
To study the nationality diversity in top management teams in Japan, a number of
Japanese domestic firms were chosen. The selecting standard was different from
Staples’ research (2007). He studied 80 of the world’s largest transnational
corporations (TNCs)1. In his research, 14 Japanese firms were included. These firms definitely represented the top of Japanese firms according to foreign assets. (World
Investment Reports, 2003) My sample for this research mainly focused on domestic
firms in Japan which included large- and medium-sized firms. Because I chose nearly
200 firms in Japan, these firms represented typical every industry. It was appropriate
to study the overall status of nationality diversity in Japanese boards.
I chose firms from the list provided by Tokyo Stock Market (TSE) and the index of
TOPIX New Index Series (TOPIX 100, TOPIX Mid400). TOPIX was a major stock
market index for Tokyo Stock Market. It dealt with all domestic firms of the
exchange's First Section. TOPIX New Index Series were based on free-float adjusted
market capitalization and liquidity, and the companies had to provide the data for at
lease six months. (www.tse.or.jp) TOPIX 100 represented the 100 most liquid and
highly market capitalized stocks. TOPIX Mid400 represented the remaining stocks in
TOPIX 500 excluding TOPIX 100 stocks. In accordance with market capitalization
1
and liquidity, TOPIX 100 and TOPIX Mid400 belonged to TOPIX Large-Sized Stocks
Index and TOPIX Medium-Sized Stocks Index, respectively. TOPIX 100 and TOPIX
Mid400 comprised nearly all large and medium Japanese domestic firms. Through
researching these firms, we could achieve deep understanding of nationality diversity
in Japanese major firms. The second reason for choosing firms by two indexes was
that I could compare the differences between firms and prove my proposition. In other
words, I could learn whether nationality diversity was affected by firm’s size through
comparing large and medium firms. Due to time limitation, I chose 200 firms from the
firm list of TOPIX index. The first 100 firms included the firms in TOPIX 100. The
other 100 firms, which were randomly chosen from TOPIX 400, represented the
medium firms in Japan. I collected basic information of these firms in their 2006
annual reports. If the collected firm had a parent firm, and if its parent firm was a
foreign firm or a Japanese firm on TOPIX firm list, it was excluded.
All data were gathered from internet sources. The firms’ official websites were mainly
used. I collected the data of board members and firms were primarily from their
annual reports of 2007. If the annual report of 2007 was missing, I used the former
annual reports and their financial reports in 2006. Because there was not large change
in a year, the data were available. Meanwhile, a set of internet sources were used to
gather supplementary information. I used ‘Top Management’
(www.topmanagement.net), ‘Google Finance’ (finance.-google.com), ‘ZoomInfo’
data about stock information and personnel resume of managers in board. With these
sources of information, I could create a database which was quite reliable and hardly
any missing values on the variables.
Variables
The variables used in this paper were operationalized as follows. The nationality of
top directors and statutory auditors was defined as the nationality as reported in firms’
annual reports. To study nationality diversity within board of Japanese firms, the
proportion of foreigners per board was used as dependent variable. On a company
level, the international activities of the firms were measured by the number of
countries they were active in. Merge and acquisitions were hard to measure. The
detailed information like the volume, transaction agreement was difficult to get from
annual report. And there was not a completed database to use to collect data. I had to
use data provided by World Investment Reports to measure cross-border M&As of the
companies for the period 1997-2007. The data included only the M&As activities
which had a value of over $ 1 billion. Although not all M&As activities of Japanese
firms were covered, it still provided an estimate of M&As in recent years. (Van Veen
et al., 2008) The effect of M&As on nationality diversity can be investigated.
Company size was measured in two ways: the total number of employees and total
sales in 2006. To measure the ownership of firms, I looked for all shareholders who
control more than 10 percent of the votes. The cutoff of 10 percent was used because
disclosure of 10 percent, and usually even lower, ownership stakes. According to the
standards, I divided selected firms into six categories: widely held and owned by
financial institution, owned by state, owned by families, owned by personnel and
Descriptive Results
Table 1 and 2 show some descriptive results. Looking at the data, there are 196
Japanese firms and 3199 top managers (including directors and auditors) in the
sample. After calculating the percentage of foreign manager in the board, I find a
rather low percentage of foreign managers in firms’ board. Only 25 of the 3199
mangers are from foreign countries and 13 of 196 firms have foreign directors. It
means 0.8% managers in Japanese firms come from foreign countries and 6.6% of
Japanese boards have foreign directors. According to collected data, the auditors in all
Japanese board are natives. If I only calculate the percentage of foreign managers in
board without auditors, the ratio could improve to 1%. In those 13 firms who have
foreign directors, NISSAN MOTOR Co. Ltd has the higher ratio (29%) of foreign
managers in management board. Among these foreign managers, Americans take a
large portion. The 11 American mangers hold a total of 44% in all foreign directors of
Japanese firms. The second largest group of foreign managers is mainly from
developed countries, including the UK, France, Germany, Portugal and Australia.
This group has a frequency of 12 (48%). Only two foreign managers are from Asian
countries, one is from China and another is from Thailand. The percentage of Asian
foreign managers is 8%.
So we can get a general understanding of nationality diversity in the board of
team is extremely low. Most Japanese firms choose domestic managers to conduct
firm’s operations.
Frequency Percent The Number of firms with foreign managers 13 6.6 The Number of firms without foreign managers 183 93.4
Total 196 100.0
Table 1: descriptive results of Japanese firms
Frequency Percent Valid Percent
Cumulative Percent Japan 3174 99.2 99.2 99.2 US 11 .3 .3 99.6 UK 3 .1 .1 99.7 France 4 .1 .1 99.8 Portugal 1 .0 .0 99.8 Australia 2 .1 .1 99.9 China 1 .0 .0 99.9 Thailand 1 .0 .0 99.9 Germany 2 .1 .1 100.0 Valid Total 3199 100.0 100.0
Table 2: Native country of executive: where does this person come from ?
According to the proportion of voting rights, the ownership structure is characterized
into six categories. In the sample of 196 firms, 31 firms are widely owned and 151
firms are owned by financial institutions (Table 3). The proportion of two group of
ownership structure stands at 92.9% of the whole population. The owners of other
firms (7.1% of all firms) include government, family, personnel and small groups.
Table 3 shows the difference of percentage of foreign managers in board is significant
firms take account in 22.6% of all widely-owned firms. For firms owned by financial
institutions, only six firms have 9 foreigners, and the ratio of these firms which have
non-national managers is only 4%. The other 7.1% firms do not have foreign
managers in their boards.
Number of Firms Firms with foreigners Percentage of foreigner in board
Widely-owned firms 31 7 22.6%
Owned by financial institutions 151 6 4%
Owned by state 4 0 0
Owned by families 1 0 0
Owned by personnel 2 0 0
Owned by small groups 7 0 0
Table 3: Descriptive results of different ownership structure of Japanese firms (N=196)
The third proposition focuses on relations between nationality diversity and firm’s
size. Table 4 indicates large-sized firms have a higher percentage of foreigners in
board (9.4%) than medium-sized firms (4%). The last proposition concerns
cross-border M&As’ effect on nationality diversity. Table 5 shows firms which have
cross-border M&As behavior have a rather high percentage of foreigners in their
board (62.5%) compare to the ratio of firms without cross-border M&As (4.2%).
Number of Firms Firms with foreigners Percentage of foreigner in board
Large-sized firms 96 9 9.4%
Medium-sized firms 100 4 4%
Number of Firms Firms with foreigners
Percentage of foreigner in board
Firms with cross-border M&As 8 5 62.5%
Firms without cross-border M&As 188 8 4.2% Table 5: Descriptive results of the difference of nationality diversity on firms with or without
Testing propositions
The first proposition is about the relationship between ownership structure and the
different levels of nationality diversity. Because the first proposition focus on two
kinds of ownership structures and nationality diversity, I exclude those firms which
are not owned by various investors and financial institutions in the test of this
proposition. In this test, 182 firms are included. Nationality diversity is
operationalized as the percentage of foreigners within boards of 182 firms. When
calculating the firms which are widely owned and owned by financial institutions, an
Analysis of Variance (ANOVA) reveals the differences between ownership structures
are existed and significant. (F=17.987, d.f. =1, p=.000). The correlation between the
ownership structure and nationality diversity is shown in Table 6. The correlation is
significant (r = -.301, p =.000, n = 182). However the correlation coefficient is
negative, it means a change in structure from widely held to more financial
institutions does have a negative effect on national diversity of the board. Proposition
1 will be accepted. Japanese Firms which are widely held have more foreigners in
boards than Firms owned by financial institutions.
Percentage foreign managers df F Sig. N Ownership of
the firm
-.301 1 17.987 .000 182
The second proposition relates nationality diversity to the number of countries which
a Japanese firm is active in. Table 7 shows there is not significant relation between the
number of countries and the nationality diversity (r = .053, p = .464, n = 196). The
second proposition is not accepted. No matter how many countries the Japanese firm
is active in, the nationality diversity within boards is not affected.
Size in total sales Size in no.of employees Ownership of the firm Countries active M&As
Percentage foreign managers .179 (.012) .171 (.017) -.171 (.016) .053 (.464) .570 (.000) Size in total sales .627 (.000) -.046 (.518) .415 (.000) .141 (.049) Size in no.of employees -.068 (.343) .327 (.000) .079 (.274)
Ownership of the firm -.073 (.308) -.019 (.794)
Countries active -.018 (.807)
Table 7: Cross table with univariate correlations and significance level (N = 196)
The third proposition concerns the relation between firm size and nationality diversity.
In the theoretical discussion, I think that a firm with large size may have higher
nationality diversity than medium-sized firm. The firm size is operated in two ways:
by the net sales in 2006 and by the number of employees. Table 7 shows the
correlation between the net sales and nationality diversity is significant (r = .179, p
= .012, n =196). The correlation between nationality diversity and the number of
employees is also significant (r = .171, p = .017, n =196). The third proposition is
proposition is accepted. We could find a strong relationships between cross-border
M&As and nationality diversity (r = .570, p = .000, n = 196). I also found the
correlation between cross-border M&A and net sales in 2006 are significant (r = .141)
at .05 level. Therefore a partial correlation analysis is needed. When net sales in 2006
is taken as a control factor, the correlation between cross-border M&As and
nationality diversity is still significant (r = .559, p = .000, n = 196). The significant
relation also confirms Staples’ finding (2007b). Cross-border M&As has a strong
effect on nationality diversity in management board.
Next, a multiple regression analysis is used to control for all the relations between
independent variables at once. Table 8 and Table 9 reveal the results of regression
analysis. The R-square equals .366. The explained variance is not high. Cross-border
M&As and ownership of the firm have relations with nationality diversity.
Cross-border M&As has the biggest effect on nationality diversity. Ownership of the
firm is negative relevant. The other three independent variables (the number of
countries which a firm is active in, the total sales in 2006 and the number of
employees) are not significant. They are irrelevant to explain nationality diversity in
management board.
Model R R Square Adjusted R Square
F df p N
1 .605 .366 .349 21.949 5 .000 196
B Std. Error Beta t Sig.
(Constant) .014 .006 2.451 .015
M&As .101 .011 .557 9.505 .000
Size in total sales 5.27E-008 .000 .031 .392 .695 Ownership of the firm -.006 .002 -.157 -2.714 .007 Countries active 1.49E-005 .000 .008 .124 .902 Size in no.of employees 6.22E-008 .000 .094 1.266 .207
Conclusion and Discussion
The results of this paper suggest the proportion of foreigners within board in Japanese
firms is very low. On the basis of a database including 3199 top managers of 196
Japanese firms, foreigners only take count in 0.8% of the whole population. Most of
these foreign managers are from the US and European countries. Less than 10% of
them are from other regions. These results prove Japanese firms have the lowest
nationality diversity within board among developed countries (Staples, 2007a). A
large gap in nationality diversity still exists between firms in Japan and other
developed countries.
In the descriptive results, two kinds of firms—firms are widely owned and firms
which have cross-border M&As behaviors—draw my attention. Foreign managers in
these two kinds firms are much higher than other kinds of firms in Japan. Nearly one
of four widely-owned firms and more than 60% of firms (which have cross-border
M&As) have foreigners in their board. The results shows ownership structure and
cross-border M&As do have effect on nationality diversity. The first and the fourth
propositions are also proved in statistic analysis.
Results show that nationality diversity in a Japanese firm’s board is related to three
factors (ownership structure, firm size and cross-border M&As of the firm).
more M&As activities happen, the more foreigners are included in board. The
relationship between ownership structure and nationality diversity shows negative
signal which means a change in structure from widely held to more financial
institutions does have a negative effect on national diversity of the board. The firms
which are widely owned have more foreigners in board than firms owned by financial
institutions. There are two reasons to explain why widely-owned firms have more
foreigners than those owned by financial institutions. Firstly, as mentioned in
previous part, widely-owned firms have lower dependence on bank than those owned
by financial institution. With less support from banks, corporations need to hold
abundant internal funds to maintain daily operations. At the same time, the boards of
these firms should try their best to maximize profits due to their responsibilities for
firms’ shareholders. To achieve the best effect, the boards have to choose talent
candidates worldwide for their business instead of being limited in domestic human
resource. Secondly, many foreign firms own shares in these widely-owned firms. In
these firms, foreign firms always hold more than 30% of their stocks. However, in
those firms which are owned by financial institutions, foreign firms don’t have too
many stocks. Though in some special cases, foreign investors could hold more than
30% of firm’s stocks, they still don’t stand for the top stockholders. The shares owned
by foreigners are relatively dispersed. In other words, most of stocks are still control
by banks or insurance firms. The voting rights for foreigners are limited in firms
owned by financial institution. And then, those firms, which follow a
Firm size is also related to nationality diversity in Japan. The finding is consistent
with Veen et al.’s result (2008) in their research for corporations from European
Union. They use two same indicators (total sales and the total number of employees)
to operate size of multinational firms. And they found larger firm has a higher
percentage of foreigners in its board.
Only a factor (the countries which firms active in) does not affect the change of
nationality diversity in management board. The result is different from the findings in
the study of management board in European countries. Veen et al. (2008) find the
factor (the countries which firms active in) has positive relation with nationality
diversity in the board of European firms.
The results raise some further considerations. First of all, we find that foreigners in
Japanese boards are mainly from the US and European countries. According to World
Investment Report (2007), Japan’s FDI outflow increased in 2006. Western Europe
received the largest share of Japan’s outward FDI flow, Asia was the second largest
recipient. The United States, however, was the single largest country recipient of
Japanese FDI. Japan has kept a strong bilateral links with United States since 1985.
These facts reflects why foreigners from the US and Western countries are more than
managers from other regions indirectly.
Japanese firms’ board is so low. To compare Japanese firms with their counterparts in
Europe, there is a large gap in nationality diversity of board. The Japanese culture has
a great effect on firms’ operations. Although Japan is influenced by western countries
in 19 century, the root of its culture is still oriental elements. Japanese culture affects
corporate regime of domestic firms a lot. Japanese firms incline to promote managers
inside the firms. Because they believe those people are safer and more loyalty than
outsiders. Meanwhile, due to the lifetime employment pursued by Japanese firms, a
director always holds a steady position in board for a long time. This situation is
normal in Japanese firms, and the overstaffing board does not have many
opportunities for outsiders. The corporate governance makes outside candidates,
especially foreigners, do not have too much change. Top managers in the future from
other country need to start to work from the junior level in Japan.
Thirdly, nationality diversity in Japanese board does not relate to how many countries
which a firm actives in. In my database, a firm has international businesses in 17
countries on average. Whether or not a firm’s international business is affected by low
proportion of foreigners in board? The answer is negative. Because in the process of
collecting data, I found an interesting phenomenon that many foreigners took part in
firm’s international operations as executive officers in most subsidiaries and offices of
Japanese firms. In this paper, I did not make a research which focused on these
executive officers. But I think these foreigners exert positive effects on day-to-day
take charge in making strategic decisions for long-term development of firms. When
firms increasingly seek opportunities worldwide, they will continue to look for
foreign talents who own international experience and expertise. These people will
help firms to capitalize on these investments. (Staples, 2007a) The importance of
cross-border M&As is proved once again. In my results, cross-border M&As make
the biggest contribution for nationality diversity in board. Those firms, which have
experiences of cross-border M&As, have relatively high percentage of foreigners in
board, and they are more likely to conduct cross-border M&As for more times.
There are some limitations in this paper. First of all, I do not concern the effect of
country-based factor on nationality diversity. The only thing related to this kind of
factor is that Japanese corporate governance system will affect firm’s ownership
structure and recruitment regulation. Because the paper is mainly focus on one
country – Japan, the effect of country-based factor to nationality diversity is not
reflected. If we want to validate its effect, we should include more countries and
compare the differences among them. The second weakness of the paper is how to
evaluate the influence of cross-border M&As. I conducted research mainly based on
cross-boder M&As over 1 billion dollars between 1997 -2007 in World Investment
Report. In the process of analyzing data, I sort Japanese firms into two categories
according to whether they conducted cross-border M&As or not. However, details of
M&As are not researched. For instance, the position of Japanese firm in M&As
countries-of-destination. These detailed factors would affect nationality diversity.
This paper also raises some suggestions for future researches. Firstly, the issues about
the relations between country- and company- based factor should be elaborated. First
of all, we should pay attention to the matter that how firms grow over time and
company internal factors (they will stimulate the velocity of firms’
internationalization). This issue needs a further specification. Researchers have found
the proportion of foreigner is continually increasing in companies. (Staples, 2007a;
Heijltjes, 2003) The more knowledge on firms’ internal dynamics we get will increase
our understanding of this issue.
Secondly, a further exploring of cross-border M&As’ effects would be interesting.
As mentioned in a report (Financial Time, 2008a), The value of M&As is rocketing in
Asia as region’s leading companies grab opportunities to expand scale and secure
resources in nearby fast-growing markets. According to the data provided by Dealogic,
the total value of announced cross-border deals reached $54bn in 2007. In the paper, I
find the cross-border M&As have the positive relation with nationality diversity in
Japanese firm’s board. More foreigners will enter into management board as a firm
makes cross-border deal. We can expect Japanese firm’s board will have more foreign
managers in the future. Colin Banfield, an analyst in Asia-Pacific M&A for Lehman
Brothers, said Asian companies continue to acquire assets within Asia. The reasons
with their existing operations, a cultural fit and the expectation.” (Financial Time, 2008a) It is
easier for acquiring firm to manage and integrate. However, we find Japanese firms
appoint more foreigners from the US and European countries in their boards.
Foreigners from other Asian countries only have a small percentage (8%) in Japanese
firm’s board. The future study could focus on those Japanese firms which have
cross-border M&As deals within Asia and explore nationality diversity in their board.
In Staples’ research (2007b), he finds a strong relation between cross-border M&As
and nationality diversity. He argued in his conclusion that “a cross-border acquisition
almost always results in a more multinational board of directors, that multinational boards are more likely to do cross-border deals, and that once a board becomes multinational it stays that way.” In my paper, I find a case which shows the strongest relation between cross-border deals and nationality diversity. Nissan Motor Co. Ltd is
one of the firms which conduct the most cross-border deals. In 10-year-times, the firm
had four M&A deals and all deals were more than 1 billion dollars. The data shows its
board has the highest nationality diversity among all Japanese firms. A detailed case
study on a Japanese firm for several years is need. Through this kind of research, we
could get more deeply understanding on the issue that how cross-border M&As affect
boards in two firms before the deal and the nationality composition in a post board.
An extra advantage to study particular case is that we could find whether firm perform
better as more foreigners come into management board during a certain period. The
Thirdly, we could operationalize the analyzing progress in different constructs. In this
research, international activity of Japanese firms is measured by the number of
countries they are active in. We could adopt other operationalizations, for instance,
different transnationality indexes for MNCs (Ruigrok and Van Tulder 1995, World
Investment Report 2006). In the same way, cross-border M&As can be measured in
much more detail by incorporating issues of the position of Japanese firm in M&As
activities, (an acquisiting firm or an acquisited firm), countries-of-origin,
countries-of-destination, and so on. The further study of nationality diversity could
include more variables. These variables may help to carry through research from three
level (individual-, company- and country-level). Heijltjes et al. (2003) suggest a
number of potential determinants of nationality diversity, including the size of the
foreign workforce, an international orientation of the firm, geographic diversification,
the type of industry, the degree of foreign involvement in terms of foreign sales. Van
Veen et al. (2008) argue that the specification of governance regime dimensions
would be helpful (i.e. labour market structures, business elite, country size, historical
artefacts). Meanwhile, we should include potential individual variables into research,
such as tenure, expatriate experience, and etc. A multiple level model can be
constructed which concerns characteristics on country-, company- and individual-
level. In further researches, a model will be developed with these different
characteristics.
The future researches could extent to other Asian countries, for instance, China,
Korea, Singapore and etc. These countries have the great impacts on Asian economy.
China, as the biggest developing country in the world, it maintains a rapid economic
growth since 80s. More and more local enterprises become integrated with global
market. To accommodate the capacity of international competition, Chinese firms
begin to absorb whatever experience is useful to them from multinational firms in
developed nations. At the same time, the management strategy, human resources, and
value chain are being adjusted to fit the challenges in oversea market. Realizing the
importance of overseas market, Chinese firms start to attract foreign talents into
management boards and then affect firms’ international strategies. South Korea and
Singapore are the most developed countries in Asia. They are characterized by open
economies, a tradition of internationalization and many large multinationals.
Considering the high degree of internationalization, multinational firms in Korea and
Singapore are good cases to analyze the nationality diversity of management team. A
comparison study among these countries will be helpful to understand nationality
diversity in Asia.
To sum up, albeit Japanese firms show the lowest nationality diversity within board,
we still expect that more foreign managers will be involved into firms’ managing
process by reason of globalization. It is worthy to make further research on nationality
Acknowledgement
I would like to thank Dr. H. Stek. He gives helpful and constructive comments and suggestions on this paper. His patience and kindness are greatly appreciated. Furthermore, I would like to thank my Co-referent Dr. Marjolein van Offenbeek for her critical remarks. I also want to express my gratitude to my friend Lei Chen, his ideas enlighten me to this topic.
Special thanks go to,
My family, for their indefinite love and support… My friends, for their frequent encouragement…
Signed, August 2008,
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