Executive compensation and independent directors in Japan

Following the example of the United States, Japanese companies have been appointing more independent outside directors in recent years. Independent outside directors are regarded as playing a key role in determining executive compensation and other managerial oversight functions. Prior research mostly supports this idea with respect to U.S. corporations. However, some studies are more skeptical. Therefore, in response to a prior study on U.S. corporations by Chhaochharia and Grinstein (2009), this paper takes a sample of 322 Japanese non-financial corporations in the TOPIX 500 index that met certain criteria and analyzes the effect that having more independent directors has had on executive compensation. However, unlike in prior studies, we did not observe a statistically significant effect. In fact, we saw that executive compensation levels were affected more by the structure of executive remuneration that is determined across a company as a whole than by the composition of its board of directors.