Diffusion as a source of variety:
Corporate governance reforms in
the Japanese electronics industry
Christina Ahmadjian
Hitotsubashi University
Shusai Nagai
Ritsumeikan University
An empirical puzzle




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In the 1990’s, a set of board of director reforms, based on US
practices, diffused among Japan firms
These practices spread at different rates: Firms selected some
practices, rejected others
Firms reinterpreted and reshaped the practices in different ways
Transplanted in Japan, board reforms took on very different
significance and function
Furthermore, the resulting Japanese corporate governance
landscape was marked by increased diversity rather than
isomorphism
What explains this partial diffusion and reinterpretation of the
practices?
Is corporate governance converging to
Anglo-American practice?



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Heated debate as to whether Anglo-American
corporate governance practices are spreading
across the globe
Increasing consensus that the outcome has been
neither convergence or continued divergence, but
rather, hybrid forms combining Anglo-American and
local practices
However, there is little research or theory about how
that hybridization is occurring
This paper explores mechanisms for hybridization,
by examining how external pressures for change
interact with internal, firm-specific factors
Neo-institutional theory provides only a
partial explanation of diffusion


Research on diffusion of new practices dominated
by neo-institutional theory
Neo-institutional theory posits that value of practices
is socially constructed


Organizations adopt new practices to confirm to
external pressures

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Notions of legitimacy, taken-for-grantedness, institutional
logics
Coercive, normative, mimetic
Diffusion processes lead to isomorphism within
institutional fields
But, what happens within the firm?


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In neo-institutional accounts of diffusion, the
organization is a black box
The adoption decision is binary
The organization is a passive and unitary
actor
These assumptions give us only a partial
picture of diffusion processes and outcomes
Black box/passive adopter image of the
firm in neo-institutional theory has long
been criticized




But, large scale, quantitative studies of adoptions of
new practices remain the rule
Some attention to firm and manager characteristics
Little research looks at the adoption decision on the
level of the organization
Very little theoretical development on how internal
firm dynamics might interact with these external
pressures
Older streams of theory provide guidance on internal
organizational processes in adoption of new practices

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Behavioral theory of the firm (Cyert and March)
 Problem-solving within firms
 Internal actors define problems
 Search for solutions within cognitive limitations
 Role of internal politics in defining problems and their solutions
March and Simon
 Cognitive limits to search
 Attention
Selznick’s “old” institutional theory
 Competing notions of legitimacy within the organization
 Transformation of organizational goals and values based on
internal dynamics and interactions with the outside world
Internal factors determining adoption
process include

Reasons for adoption: process of search
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Political dynamics
Cognitive limits
Competing notions of legitimacy
Interpretation: transformation of problem and
solution

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Political dynamics
Cognitive frameworks
Research objectives

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Contribute to development of neo-institutional theory
by examining interaction between external
pressures and internal dynamics of the firm
Provide a richer accounting for dynamics of diffusion
Answer a specific question: has the diffusion of
Anglo-American board practices led to convergence
in Japan to US-style practices?
Setting: Board reforms in Japan


In 1990’s, “corporate governance” became a
major debate in Japan
Triggered by increase in foreign institutional
investors, poor performance of Japanese
economy, increased interest in corporate
governance in US and around the world
Japanese boards of directors (pre-reform)
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Large (30-50 directors in large firms)
Independent directors rare to non-existent, outside
directors from related companies, retired
bureaucrats, bankers
Directors tended to have operational responsibilities
(head of business units or functions)
Boards tended to be rubber stamps, decisionmaking based on consensus
Board of statutory auditors (kansayaku), in theory,
monitored the board of directors
Board reforms of the 1990’s and 2000’s

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
Corporate executive officer (shikko yakuin) system
 Separate monitoring from execution
 Remove directors with executive responsibilities from the board
 Widely adopted (over 50% of TSE-listed firms)
Independent directors
 Appoint directors without other ties to the firm
 At most, one or two per firm
Board with committees system
 Permitted by Commercial Code revision of 2003
 3 committees, nominating, compensation, audit, with majority of
independent directors, statutory auditors not necessary
 Firms allowed to choose between this and existing Japanese
system
 Very low rate of adoption—5% of TSE-listed firms
Research questions


How did firms decide to adopt these
practices?
Were these practices adopted intact,
consistent with Anglo-American practices, or
reshaped to fit local context?
Case-based methodology

Case selection
 10 largest Japanese electronics firms (by sales)
 Why electronics?
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Board reforms originated with Sony
Wide variation in reforms adopted
Considerable variance in size, foreign ownership, diversification
Data
 Interviews with board members
 Analysis of annual reports, securities filings and newspaper articles
 Comparison of financial data
Approach
 Inductive
 Use elements of behavioral theory of the firm, “old” institutional theory, to
guide our analysis of case material
 Identify points of intersection between these external and internal
perspectives
Interviews


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2-hour interview with one board member of
each firm
In Japanese, hand-transcribed
Arranged by co-author, a senior Japanese
bank executive and board member
Triangulation through comparing with publicly
available documents: annual reports,
securities filings
Table 1: Board characteristics by firm
Firm
board
with
committees
year of
introduction
(2007)
corp.
exec.
officer
system
year of
introduction
(2007)
number of directors
number of outside
directors
(1995)
(2007)
(1995)
(2007)
Hitachi
○
2003
○
1999
33
12
0
3
Sony
○
2003
○
1997
38
14
2
10
Toshiba
○
2003
○
1998
32
14
2
4
Mitsubishi
○
2003
○
2003
33
11
1
5
NEC
×
○
2000
39
15
5
3
Fujitsu
×
○
2002
32
10
2
2
Sanyo
×
○
1999
30
8
0
1
Matsushita
×
×
32
17
2
2
Sharp
×
×
34
25
0
0
Canon
×
×
26
27
0
0
Table 2: Firm characteristics
board with
committees
corp.
exec.
officer
system
% foreign
ownership
US listing
diversification
number of
segments
number of
employees
(2007)
(2007)
(1999)
(1999)
(2000)
(2000)
(1999)
Hitachi
○
○
29
○
0.23
5
323,827
-8.9
Sony
○
○
45
○
0.48
6
189,700
5.1
Toshiba
○
○
27
×
0.19
6
190,870
-1.6
○
Mitsubishi
○
○
16
×
0.17
6
116,588
-1.6
○
NEC
×
○
30
○
0.28
4
154,787
-1.6
×***
Fujitsu
×
○
28
×
0.24
6
188,053
-23.2
×
Sanyo
×
○
10
×
0.22
6
83,519
-1.5
○
Matsushita
×
×
23
○
0.34
3
290,448
×
Sharp
×
×
18
×
0.6
3
81,009
×
Canon
×
×
41
○
0.52
2
49,748
×
firm
performance
versus
industry*
company
system or
equivalent
(2007)
○
×**
Predictions of neo-institutional theory
have limited validity

Coercive isomorphism?

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Normative isomorphism?

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Board reforms are not related to foreign
ownership or listing
Board reforms are not related to educational
experience or career background of CEO
Mimetic isomorphism?


Yes, for corporate executive officer system
No, for board with committees
How do firms themselves justify adoptions
of new practices?


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Content analysis of interviews, securities
filings
Identify themes
Themes mentioned by 3 or more firms
Table 3-1: Themes related to introduction of board
with committees or corporate executive officer system
THEMES
Respond to shareholders
Improve monitoring of
management
Increase speed of decisionmaking
Increase transparency of
management
Number of
companies
mentioning
representative quote
7
"We have many foreign shareholders so we must have a
governance structure that they can understand."
6
"To strengthen the management monitoring function of the
board of directors and at the same time, give a wider scope of
authority to executive officers to make decision-making more
rapid."
7
"It is important in the electronics industry to have speedy
decision making on the board, since the product life-cycle is so
short."
6
"When we first adopted the board with committees system, we
were looking for greater transparency. With 30 or more board
members in the past, it was hard to expect anything to get
done in the board meeting—it was “like an elementary school
class.” Things were determined beforehand, and the point was
to make board meetings very simple, with very little
documentation, so things would proceed smoothly. All the
decisions were made in informal meetings before the board
meeting so there was no documentation on how the decisions
were actually made."
Table 3-2: Themes related to introduction of board
with committees or corporate executive officer system
Number of
companies
mentioning
representative quote
5
"Our governance system evolved as the company system was
evolving. So, our governance matches our management
style."
Push authority downwards
through giving more
authority to executive
officers
6
“Through the move to the committee system, we separate
monitoring and execution, and the board of directors will take
on the function of monitoring management and the corporate
executive officers will take on the job of execution. Also, the
authority to make decisions on many of the things that the
board was required to decide on will be passed to the
corporate executive officers.”
Respond to poor
performance/facilitate
restructuring
3
"…performance was very bad. There was a feeling that
management had to do something."
Respond to globalization
2
"Electronics is a very competitive and global industry, and we
are also listed in New York, We can’t just talk about Japan. "
THEMES
Facilitate group-wide
management, support the
"company system"
Companies hesitant to emphasize
“maximize shareholder value”
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“Shareholder value maximization is not the only
thing, and is not cultural-even good US companies
balance all stakeholders.”
“The board represents shareholders, community,
employees, customers. Probably, the shareholders
come first in this list, but we have to consider all the
stakeholders. We have to say that shareholders are
most important.”
Every firm justifies reforms in terms of “separation of
execution and monitoring”

But, language concerning monitoring is weak and vague.
 “Through the move to the committee system, we separate
monitoring and execution. The board of directors will take
on the function of monitoring management and the
corporate executive officers will take on the job of
execution.”
Firms justify adoption of board reforms in
terms of internal factors
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All firms mention speed, 6 mention
transparency in decision-making
Speed and transparency necessary because
of need for stronger “group management,”
pushing authority downwards
Table 2 (repeat): Firm characteristics
board with
committees
corp.
exec.
officer
system
% foreign
ownership
US listing
diversification
number of
segments
number of
employees
(2007)
(2007)
(1999)
(1999)
(2000)
(2000)
(1999)
Hitachi
○
○
29
○
0.23
5
323,827
-8.9
Sony
○
○
45
○
0.48
6
189,700
5.1
Toshiba
○
○
27
×
0.19
6
190,870
-1.6
○
Mitsubishi
○
○
16
×
0.17
6
116,588
-1.6
○
NEC
×
○
30
○
0.28
4
154,787
-1.6
×***
Fujitsu
×
○
28
×
0.24
6
188,053
-23.2
×
Sanyo
×
○
10
×
0.22
6
83,519
-1.5
○
Matsushit
a
×
×
23
○
0.34
3
290,448
×
Sharp
×
×
18
×
0.6
3
81,009
×
Canon
×
×
41
○
0.52
2
49,748
×
firm
performance
versus
industry*
company
system or
equivalent
(2007)
○
×**
Firm structure and strategy related to
board reforms
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The more diversified a firm, the more likely to
adopt board with committees system.
Intermediate levels of diversification are
related to adoption of corporate executive
officer system.
Firms that have adopted the “company
system” are more likely to adopt the board
with committees system.
Firms with poor performance are more likely
to introduce board reforms.
Company system

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An organizational structure in which business units are run as
much independently as possible, with separate P&L’s, distinct
HR and other systems (in theory, at least)
A half-way point towards the holding company system
As one manager said, “It might be desirable for companies this
diversified to go to the holding company form, but, this would
break up the company, and cut access to management and other
resources. The committee system is a way to duplicate the
function of a holding company system, but with the company as
one. The “companies” can remain in the same company, but they
can operate with different salary systems, performance targets,
etc—this is a way to push authority downwards.”
The crisis of the 1990’s led (some)
companies to rethink strategy and
structure



Increased restructuring through downsizing
and spinning off unrelated businesses
Decentralization of management decisions to
business unit level
Increased centralization of strategic decisionmaking at corporate level
Board reforms driven by poor
performance


The firms that adopted no reforms (Sharp
and Canon) had strong performance during
the entire period
Firms adopted board reforms when they were
underperforming the industry
Non-adopters of reforms tend to
emphasize internal communication


Companies that haven’t adopted board reforms
justify the need to maintain existing board structure
(large boards, dominated by executive officers) in
terms of promoting communication and interaction
between businesses.
For example, one firm says: “Other companies have
gone to the corporate executive officer system to
make decision-making more speedy—but this just
increases the separation between businesses.
Money-losing businesses can go off on their own
and nothing is done about them.”
Firms interpret role of independent
directors for their own needs

Independent directors



Adopt board with committees system while
keeping independent directors to minimum
(Toshiba, Hitachi, Mitsubishi)
Maintain existing group relationships through
independent directors (Mitsubishi, NEC)
Independent directors are seen as advisors rather
than monitors
Table 4: Affiliations of outside directors (2006)
Hitachi
Japan Association for the Advancement of
Working Women
Mitsubishi Corporation
Asahi Glass
Lawyer
Nippon Steel
Chuo University
JFE Steel
Lawyer
Fuji Xerox
Sumitomo Mitsui Banking
NEC
Orix
Sumitomo Mitsui Financial Group
Ericsson
Sumida Accounting Office
Toyota
Clayton Dubilier and Rice
Waseda University
Toshiba
Bank of Tokyo Mitsubishi-UFJ
Sumitomo Mitsui Financial Group
Korn Ferry International
Sony
Mitsubishi
Daiwa Research Institute
Taisho Pharmaceutical
Fujitsu
Sanyo
Matsushita
Fuji Electric Holdings
Hitotsubashi University
Daiwa Securities SMBC
Goldman Sachs
Nippon Life Insurance
Japan Post
The Promotion and Mutual Aid Association
for Private Schools in Japan
Sharp
None
Sumitomo Mitsui Banking
Canon
None
Toin University of Yokohama, Lawyer
Independent directors function as advisors,
not monitors


“Our corporate culture is closed—people grow up drinking the
same water and eating rice from the same pot, It is necessary to
be able to explain our decisions to outsiders, and not just nod
and agree with each other. This is an important part of
transparency. It is also important for outsiders to suggest all the
choices—for example, one outside director who asked ‘What
would happen if you don’t make this investment?’ Someone from
the inside of the firm cannot say this.”
“There is more of a sense that people from the outside are
looking at us. In day to day management, management are more
aware that outside eyes are upon them, and even the president
will frequently ask me, What do the outside directors think of
this?”
“Independent” directors often from the
same business group or even same
company


Mitsubishi Electric: Directors from Mitsubishi
Bank and Mitsubishi Corporation
Fujitsu: Fuji Electric
Firms reshape corporate executive officer
system to fit own needs


Continue to keep executive officers on
boards despite talk of separation of execution
and monitoring
New system determines who are insiders and
who are outsiders—reshapes political
dynamics
Table 5-1: Affiliations of inside directors
(companies with corporate executive officer system only)
Hitachi
chairman of the board
chairman
chairman
president
president
VP and head of electronic devices
group, division manager for
innovation promotion
director
VP
Hitachi Chemical Co.
VP and head of consumer
electronics group, etc.
Hitachi Software Engineering Co.
Hitachi High Technologies Co.
Hitachi Capital Co.
Sony
Toshiba
VP
Hitachi Construction Machinery Co.
VP and head of digital products
group, etc
chairman
head of legal department
president
head of security and finance
department
head of TV/Video group
director
director
Table 5-2: Affiliations of inside directors
(companies with corporate executive officer system only)
chairman
chairman
president
vice-chairman
VP and head of planning department
president
VP and head of finance department
VP
Mitsubishi
CFO
Fujitsu
NEC
director
head of personnel department
director
director
director
director
director
director
chairman
director of intellectual property
department
president
director
VP and CFO
chairman, chief of "brand"
VP and head of manufacturing and
electronic devices
VP and head of international business
VP and head of domestic business
Vice Chairman
Sanyo
president
Table 6: Shareholder-oriented policies not associated with
board reforms
board with
committees
corporate
executive
officer
system
share buybacks
% change in
dividends
stock
options
mention of increase
shareholder value?
(2007)
(2007)
(total from 2003-2006, yen)
(2000-2006)
(2006)
(annual report,
2006)
Hitachi
○
○
40,749,282,000
-50
○
○
Sony
○
○
8,199,942,000
-75
○
×
Toshiba
○
○
0
267
×
○
Mitsubishi
○
○
4,740,142,000
100
○
×
NEC
×
○
0
-33
○
×
Fujitsu
×
○
0
-40
○
○
Sanyo
×
○
0
-100
○
×
Matsushita
×
×
400,688,742,000
140
○
○
Sharp
×
×
4,182,996,000
117
×
○
Canon
×
×
199,999,521,000
488
×
×
Name
Combining neo-institutional theory and
internal dynamics




Board reforms diffuse at the same time that (some)
firms face low performance, need for restructuring,
changes in organizational structure and decisionmaking practices
Board reforms adopted as a solution for these
internal problems
Legitimacy and prevalence of board reforms makes
them easily accessible and easy to justify
Firms reshape reforms to fit their needs


Adopt selectively
Interpret “independent director” and “executive officer” to fit
their own situations
If we had only used a neo-institutional
theory lens we might have…



concluded that firms are “decoupling” or
managing symbolically, adopting board
practices cynically
looked at adoptions as yes/no, not
considering how they were interpreted and
shaped to the situation
underestimated the degree to which the
diffusion of board reforms was generating
greater diversity
Rather, we find…



Problem-based search
Local search for available solutions
Solution chosen and tailored in response to
internal political dynamics
Implications for
neo-institutional theory




De-coupling over-emphasized?
Importance of legitimacy, institutional logics as
internal justifications
Degree to which organizations are able to
selectively adopt, customize, reshape practices
requires greater consideration
Importance of more case-based research on
diffusion and adoption
Puzzles, limitations, further research

Does the diversification/board reform relationship
hold in other companies and industries?


But, our main point still holds—the importance of
understanding internal organizational factors in studying
diffusion of new practices
Why isn’t foreign ownership more correlated with
these board reforms?

Evidence of relationship between foreign ownership and
other practices related to corporate governance
Summary



Firms adopt board reforms to address internal problems
 To respond to new demands for decentralization of operating
decision-making and centralization of strategic decision-making
in diversified firms
 Legitimacy and prevalence of new board forms help internal
actors justify new decision-making system: also, increase the
familiarity of these forms
Firms shape board reforms to fit their own needs
 Choose practices selectively, to facilitate internal decision-making
without increased outside pressure
 Tailor practices in accordance with internal politics
Firm-specific factors interact with external pressures for board
reform to promote increased diversity