EMPLOYMENT POLICY AND CORPORATE GOVERNANCE An Empirical Analysis on the Stakeholder Model in Japan

Japan's employee-based corporate governance is in a far-reaching transition, and has a larger presence of outside directors as board members in the 1990s. We examine how board composition affects measures for employment downsizing by constructing a unique firm-level measurement of excess employment with composition of board members in Japanese listed companies in 2001. Our findings confirm that outsiders are more motivated to commit to wage cuts and layoffs, or to increase voluntary (early) retirements, while insiders are more inclined to commit to decreases in new hiring. This implies that outsiders contribute to employment downsizing and insiders are more inclined to protect incumbent employees. Those findings are consistent with the stakeholder view on firms, rather than a profit-maximizing firms, as the neoclassical microeconomic theory assumes.