1 DO INDEPENDENT BOARDS EFFECTIVELY MONITOR MANAGEMENT? EVIDENCE FROM JAPAN DURING THE FINANCIAL CRISIS*

The authors investigate whether outside directors effectively monitor management in the interest of shareholders. Specifically, the authors examine the relationship between board independence, management turnover and dividend policy in Japan. As shown in previous studies, companies that perform poorly tend to suffer management turnover (Kaplan, 1994; Warner et al., 1988). Typically, firms replace management to accelerate substantial corporate restructuring in response to poor performance. If outside directors are effective in monitoring management in the interest of shareholders, firms that have more independent boards likely will tend to experience more management turnovers. In addition, there are likely conflicts that exist regarding the distribution of decreased cash flow; managers have an incentive to decrease dividends in order to retain cash holdings. Particularly in Japan, managers tend to care more about employee wealth than shareholder interests (Allen and Zhao, 2007; Yoshimori, 1995). While it is beneficial for managers and employees to retain firm solvency by decreasing dividends, shareholders will desire managers not to do so. However, if outside directors monitor management to the benefit of shareholder interests, over-reduction in dividends should be prohibited