Silviase/jgov_v1.4_full_ann huggingface dataset:
### 1. Introduction

Recent developments in corporate governance research have revealed that the management of firms is far more complicated than the classical microeconomic theory assumes $ ^{3} $ . According to the stakeholder view in Tirole (1999), not only shareholders and managers but also other stakeholders such as employees or customers might play significant roles in the decision-making processes of many firms. This implies that what is seemingly inconsistent with profit maximization might be conducted by firms for the sake of stakeholders, including employees. $ ^{4} $

Japanese companies, as well as those in continental Europe, have long been regarded as stakeholder-oriented, and firm employees are protected through the long-term employment system $ ^{5} $ . Japanese employment practices are often called the “lifetime employment system,” which gives job security to workers and accumulation of firm-specific human capital to employers. Some researchers regard this “traditional” employment practice as one of the most important characteristics of the Japanese economic system; it achieves efficient resource allocation with the help of the “contingent governance system” by the main banks, which tend to have the largest stockholder share among financial institutions (Aoki et al. (1994)).

On the flip side, the role of shareholders has been rather limited; they have weak powers of corporate governance authority. In large (listed) Japanese companies, boards
of directors are managing companies legislated by the Commerce Law. After the high growth of the 1950s and 60s, boards have mainly consisted of insiders selected among employees, with a few outside directors appointed by main banks. Hostile takeovers have rarely happened in Japan; managers are protected and employees do not have to worry about job security because of the life-time employment system.

Since the mid 1990s, however, several noteworthy changes have occurred among Japanese companies. The first change is observed in firm ownership. While financial institutions have decreased their shareholdings, foreign investors have increasingly purchased stock. The second is the growing presence of outside directors in the composition of board members. Although inside directors are still dominant in many companies, the ratio of outside directors among board members continues to increase. Third is the decreasing trend in the number of employees in large companies, partly due to the long economic stagnation in the 1990s and large-scale downsizing. Nowadays, large Japanese companies exhibit wide variations in their ownership structures, board composition, and employment practices. Some companies such as Toyota, a world-famous automobile company, are seemingly holding on to their traditional governance style and long-term employment policies, while others, such as Fujitsu, a computer maker, have gone through significant changes toward a new governance scheme.

Despite recent innovative changes in the corporate governance scheme, there has been little research in Japan to evaluate how changes in board composition have affected employment practices, which has been regarded as the core of the whole governance scheme. In this study, we create a firm-level comprehensive data set to link the degree of excess employment, detailed board composition and measures for
downsizing directly. As far as we know, our data set is the first in Japan to match those variables at firm-level; this enables us to perform an unusually integrated investigation on the implications of the transformation of corporate governance. Previous studies on this issue have failed to obtain either of those data sets. Boards typically consist of more than 20 directors with a variety of backgrounds, which makes it difficult for researchers to identify personal backgrounds of individual board members. Moreover, a proper measurement of excess employment is not available. Instead of measuring the degree of excess employment, Kang and Shivdasani (1997) assume that companies have excess capacity if their pretax operating income declined by more than 50% and other studies confine their studies to employment size adjustment.

In addition, our dataset contains company-level detailed information on specific procedures to reduce labor costs as well as other variables on firms' characteristics, so that we investigate the relation between the employee-oriented governance system and measures for downsizing in large Japanese firms. Concretely, those measures to reduce employment size include (1) reduction in wages, (2) reduction in labor hours, (3) reduction in management salary, (4) reduction in new hiring, and (5) exercising layoffs and firing. Under the traditional lifetime employment and thus the small liquidity in the Japanese labor market, this last measure must be very costly for incumbent workers. The record-setting high unemployment rate in the 1990s proves that even severe downsizing tactics have been adopted in many listed firms.

Thus, our unique data set provides the first opportunity to perform an integrated evaluation on corporate governance and employment policy. We take advantage of our unique data to confirm the following findings. First, we observe a drastic change in board composition, i.e. an increase in share of outsiders in the 1990s. Second, we
confirm that board composition affects employment policy. Firms with excess employment sizes tend to exercise layoffs and firings if a higher share of managers is not occupied by former employees. Those firms with a higher portion of insiders are instead inclined to reduce new hiring to protect incumbent employees. This finding is consistent with the moral hazard view, with an emphasis on a stakeholder-oriented firm. Insider-oriented firms, where employees are powerful and some of them are selected to be managers, tend to give benefits to existing employees, at the cost of new employees and shareholders.

This paper proceeds as follows. Section 2 overviews the change in composition of board members and employment size in Japanese listed companies, providing backgrounds of economic performance. Section 3 describes the data sets used in this paper. Section 4 connects downsizing strategies with board composition and evaluates how board composition affects downsizing measures. The last section concludes.

### 2. Changing Composition of Board Members and Employment Size

Japanese corporate governance is in a drastic transition. After the 1990s, we observe a significant change in the composition of board members and downsizing measures for labor costs in Japanese large companies. The presence of traditional dominant stakeholders, main banks, and cross-holding companies has declined due to less dependency on financial institutions and larger shares of foreign investors in stock holdings (Fukao and Morita (1997)). Along with those changes, we notice an innovative change in board composition: a larger share of outsiders in smaller size of boards, which has been traditionally occupied by those promoted among employees. Table 1 reports
the change in board composition. The medium portion of insiders among all board members was 74 percent in 1990, but decreased to 67 percent in 2001 while that of outsiders had a larger presence. In this case, “insiders” are defined as those promoted among employees, and “outsiders” are board members who are not insiders. $ ^{6} $ If we break down the ownership of shares, we observe a sharp decline in the portion of financial institutions, which declined from 33 percent in 1990 to 25 percent in 2001 $ ^{7} $ .

We also notice that the average size of board members declined to 14.7 persons in 2001, up from 18.6 persons in 1990. This might be partly explained by the decade-long recession of the Japanese economy, which motivated large firms to downsize. The medium of employment size substantially declined from 954 in 1990 to 746 in 2001. This trend is accompanied with the decline in the return on assets. The ROA based on operating income decreased from 5.1 percent in 1990 to 3.3 percent in 2001. The decline is larger if we measure the ROA by profits before tax.

Those poor performances of Japanese firms in the 1990s observed in employment size and ROA are supposed to affect the change of board composition. Outside directors are expected to play a role to pursue maximization of shareholder's profits, which motivates firms to be more sensitive to revenues (Hermalin and Weisbach (2003)). Surprisingly, however, only a limited number of studies have been conducted to examine the relationship between excess employment and reform in the composition of board members. Most previous studies in Japan estimate the adjusting speed of employment size by examining the change between current and lagged employment size, after controlling for other variables related with sales or revenues of the firm as a proxy.
for excess employment $ ^{8} $ . However, all those studies have serious shortcomings in that those only dealt with net changes in employment, not gross-basis, without an in-depth examination of appropriate measures for excess labor for each firm. Moreover, those studies are based on an unrealistic assumption that all firms operate on the same form of production function. To our best knowledge, the data set in this paper is the first to match board members, excess employment, and measures for downsizing, which overcome the serious shortcomings of most of the previous works, and provide direct evidence on the effect of change in corporate governance on downsizing measures.

### 3. Description of the Data

This study utilizes three different data sources to create a unique and comprehensive data set to examine the relation between the employee-oriented governance system and measures for downsizing employment in Japanese large firms. First, we take advantage of an original and rich firm-level survey data from Kigali Kodo ni Kansuru Anketo Chosa (Annual Survey of Corporate Behavior) in 2001, compiled by the Cabinet Office, government of Japan. This is an annual survey and one of the most comprehensive data sets on corporate behavior in Japan with a high response rate. The target of this survey is all listed companies in Japan $ ^{9} $ . Out of 2,367 firms to which the government sent the questionnaire, 1,202 firms responded (719 for manufacturing and
483 for non-manufacturing), for a response rate of 50.8 percent.

The topics of the survey vary across years with several persistent questions, including corporate management’s subjective expectation of growth of the overall economy, industry size, and firm’s investment. The 2001 survey focused on corporate management, strategies to improve the financial situation, and measures for firm restructuring. Concretely, the survey asked each company whether the current employment level was in excess or shortage and what kinds of measures have been implemented (or are to be implemented) for employment downsizing: (1) reduction in bonuses, (2) reduction in wage rates, (3) reduction in managers’ salaries, (4) reduction in executive payments, (5) reduction in working hours, (6) reduction in hiring new employees, (7) expansion of layoffs, and (8) introduction of voluntary (early) retirement. $ ^{10} $ As far as we know, this survey is the only source in Japan to combine excess employment and the downsizing in each firm comprehensively.

We combine the micro-level data from Annual Survey on Corporate Behavior with information on composition of board members in each firm. The information on the background of individual outside directors in each firm is available from “Directors Data” published by Toyo Keizai Shimpo-sha. The data are released every year and provide detailed information on board members in all Japanese listed companies, which enables us to discern insiders and outsiders. As discussed in the previous section, we
define insiders as those who promoted among employees, and outsiders as other directors. To construct variables on board composition, we construct a dummy variable for former bankers, and variables on the ratio of insiders or outsiders in a board following Kaplan and Minton (1994) and Morck and Nakamura (1999).

The third source is official financial statements from all listed firms as of the end of March in each year. Those financial variables for each firm are obtained from the “Nikkei NEEDS.”

Those three different data sources can be matched completely. In what follows, we confine our sample to 496 manufacturing firms, all of whose variables are available in the next section. The basic statistics are reported in Table 2-1A for the 496 firms and Table 2-1B for companies that claimed to have excess employment explained below shortly. The average portion of insiders in board members is 67 percent for both samples, substantially lower than that in the beginning of the 1990s, as described in the next section. While most variables have similar values between two samples, the variables “Expected Industrial Growth for Next 5 Years” take very different values. Companies with excess employment have lower expected growth rates than the average company, and we cannot find large differences in ROA. This suggests that future expectations play significant roles in companies’ decisions about restructuring.

Regarding excess employment, the survey asks corporate managers about the rank of excess employment. Table 2-2 reports that 64 percent of all firms responded that they had excess employment. More than 30 percent of companies had excess employment by 20 percent or more. As Table 1 reports, Japanese listed companies began to decrease their employees in 1993, and continued to shrink them. Table 2-2, however, reveals that there were still many companies with excess employment in 2001.
### 4. How Does Measure of Downsizing Depends on Board Composition?

In this section, we conduct multivariate probit analyses to investigate the effects of board composition on the measures of downsizing. $ ^{[11]} $ More concretely, we examine how a larger portion of outside (inside) directors affects the measures adopted for employment downsizing among firms with excess employment. We have information on those measures for downsizing employment in eight categories, explained in Section 3. The variable takes 1 if a firm has implemented or will implement the measure. In what follows, we restrict our samples to 317 firms with excess employment only. The model we use consists of eight equations as follows;

$$ y_{i j}=\boldsymbol{\alpha}_{1j}+\beta I n s i d e r R a t i o_{i j}+\gamma X_{1i j,+}+\phi X_{2i j}+\boldsymbol{\varepsilon}_{i j}, $$

(i: firm index, j: equation index: 1,2,...,8)

where

$ y_{i1} $ dummy variable for implementation of bonus reduction;

$ y_{i2} $ : dummy for wage reduction;

$ y_{i3} $ : dummy for reduction in managers’ salaries;

$ y_{i4} $ : dummy for reduction in executive payments;

$ y_{i5} $ : dummy for reduction in working hours;

$ y_{i6} $ : dummy for reduction in hiring new employees;
$ y_{i7} $ : dummy for expansions of layoffs;

$ y_{i8} $ : dummy for introduction of voluntary (early) retirements.

Insider ratio: the ratio of insider in the board of directors.

$ X_{1ij} $ : Firm characteristics (ROA, departure from the industrial median of expected industrial growth for 5 years, the number of employees, total assets, excess employment index, and presence of bank-appointed directors).

$ X_{2ij} $ : Ownership structures (shareholdings by special few $ ^{12} $ , foreign ownership, and financial ownership).

As is discussed previously, the ratio of inside directors is expected to have negative effects on the adoption of measures that are costly for incumbent employees. Considering Japan’s illiquid labor market, job-loss seems to be a more serious issue for employees than wage or bonus reductions. A company whose board of directors is occupied by former employees can be regarded as a firm that considers employee benefits most important. In our data set, $ y_{i7} $ and $ y_{i8} $ , that is, expansion of layoffs and introduction of voluntary (early) retirements, correspond with the measures that lead to job-loss for employees. On the other hand, the reduction in new employees does not impair existing employees directly. Therefore, we expect that the inside ratio has a positive effect on the reduction of new hiring, $ y_{i6} $ . Moreover, ROA, pessimistic expectation of future growth, excess employment index (the smaller, the more serious excess employees), and the number of employees are expected to have negative effects on the adoption of labor cost reductions.
The effects of ownership structures are difficult to interpret a priori. If we consider monitoring roles by large shareholders or banks, a company with concentrated ownership or strong ties with the banking sector obeys to strong monitoring that forces the company to conduct profit-maximizing behaviors. In this case, a company with large shareholding by banks is more likely to conduct job-cuts. On the other hand, if we adopt the view by Aoki et al. (1994) that assumes that relations with the main bank are complementary to the lifetime employment system, a company with strong ties with banks is less likely to exercise job-cuts. In addition, we may regard the degree of shareholding concentration as a proxy for traditional Japanese companies, because Japanese companies used to be protected by cross-shareholdings among firms from hostile takeovers. Since the signs of the coefficients on those ownership structures are ambiguous, we conduct the estimation under several different specifications. A company with larger foreign ownership can be regarded as a firm that is preferred by foreign investors. If this is the case, foreign ownership is expected to have a positive effect on the adoption of the introduction of voluntary (early) retirements, $ y_{i8} $ , which is minus traditional Japanese labor adjustments.

The estimation results are summarized in Table 3. What is commonly observed is coefficients on ROA (deviation from the medium) are always negative in measures related to remunerations. Firms with lower ROA tend to decrease wage costs. The coefficients on projections of industry growth (deviation from the medium) are positive and significant for bonus or executive payments, which imply that those types of salaries are closely related with a firm's performance.

Next, we turn to the coefficients on the insider ratio, the main interest variable. We observe negative but insignificant coefficients on wage reductions ( $ y_{i1} $ to $ y_{i4} $ ). The
coefficient on reduction in new hiring reductions $ (y_{i6}) $ is positive and significant, which implies that a firm with a higher portion of insiders on its board tends to diminish the number of new hires for an employment downsizing measure. On the contrary, the coefficients on expansion of lay-off $ (y_{i7}) $ and earlier or voluntary retirement $ (y_{i8}) $ are negative and significant. This means that a firm with a higher portion of insiders in its board members is less inclined to commit those measures, which are disadvantageous for incumbent employees. Those results indicate that insiders are less motivated to wage reduction and changes in retirement policies, but are more aggressive in reduction of new workers.

Finally, coefficients on variables related with ownership structures are generally inconsistent. The exceptions are (1) the special few shareholdings on retirement and reduction in working hours, and (2) financial ownership in layoffs. A company whose share is concentrated tends to decrease working hours and avoid introducing job-cuts. This result is consistent with the effects of insider’s ratio if we regard the shareholding by the special few as a proxy for the traditional Japanese company. Financial shareholding has positive effects on the layoffs; that is, a company whose share is held by a financial institution tends to significantly increase layoffs when excess employment exists. This might be the result of the monitoring roles of a main bank that enforces profit maximizing behaviors. Since the number of companies that implemented layoffs is only 46 out of 317, as reported in Table 3, and financial ownership does not have significant effects on other measurers such as wage cuts or retirement policies, caution must be exercised in interpreting the results. $ ^{13} $

In sum, what we observe is as follows. Once a firm is aware of excess
employment, outsiders are more motivated to commit to wage cuts, layoffs, and voluntary (early) retirement, while insiders are more inclined to commit to decrease in new hiring. This implies that outsiders contribute to employment downsizing and insiders are more inclined to protect incumbent employees by avoiding wage cuts, retirement-promoting policy, and replacing employees. Those findings are consistent with the stakeholder view on firms, rather than profit-maximizing, as the neoclassical microeconomic theory assumes. That is, a company whose board is dominated by insiders is inclined to consider the welfare of incumbent employees more than a company with a higher portion of outside directors.

### 5. Conclusion and Future Research

This is the first study to evaluate how the change in board composition in Japanese listed firms has affected their measures for downsizing employment. Our firm-level unique data set, which combines the degree of excess employment, board composition, and other firms' characteristics, enables us to perform an unusually integrated investigation on the implication of the transforming corporate governance. Our findings confirm that outsiders are more motivated to commit to wage cuts and layoffs, and to increase voluntary (early) retirement, 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, as the neoclassical microeconomic theory assumes.

This research focuses on employment downsizing. Future research should also
examine changes in wage rates and wage structure in Japan’s changing corporate governance, since the traditional lifetime employment practices have been connected with steep-wage seniority. The change in board composition and the decade-long stagnation plausibly affect traditional wage scheme. Further research should expand our analysis to capital, i.e. measure excess capital and the strategy for downsizing excess capacity, and examine the restructuring strategy for capital and labor jointly. Such an analysis will shed light on the role of different types of outside directors in detail, focusing on decision-making based on coordination and conflicts among directors with different behavioral characteristics. Although those studies primarily examine the effect of board composition on corporate strategies, it is also important to explore the determinants of the board composition in different economic situations.