Internal Promotion and the Effect of Board Monitoring: A Comparison of Japan and the United States

Meg Sato
JEL codes: 
Asia Pacific Economic Paper No. 387

This paper analyses two pronounced features of Japanese corporate governance: large corporate boards almost entirely composed of insiders and the tendency to appoint
CEOs through internal promotions. It is often argued that Japanese boards are less effective in monitoring CEOs than U.S. boards which tends to be composed of a small number of directors, majority of which are outsiders. I show that Japanese corporate governance exhibits less inefficiencies than U.S. corporate governance. I further discuss the recent changes in Japanese corporate governance and provide theoretical explanation that they do not necessarily enhance board monitoring.