Changes in U. S. Corporate Governance : What changes have occurred and why should they be considered by Japanese firms?

After reviewing the legal changes beginning in 2002 in the U. S. and elsewhere, this studyexamines the size of boards, the number of and independence of directors, the separation of theBoard Chairman (CBD) and CEO, and the role of auditors by comparing U. S. firms (based onthe DJ 30 firms) to Japanese firms. The methodology uses data on the DJ 30 firms derivedprimarily from annual reports and firm web sites. Data from Japanese firms is based on a 2004survey by the authors of Nikkei 225 firms as well as journals and news sources.Findings show that although comparable changes have decreased the size of boards inU. S. and Japanese firms, the composition of Board members as insiders or outsiders differsdramatically. Outsiders dominate at U. S. firms while insiders dominate in Japanese firms. Althoughlegal changes now require U. S. firms to look at the independence of board members,Japanese laws currently do not require such independence. Despite calls for the separation ofthe CEO and CBD roles from academics and institutional shareholders, corporations in both theU. S. and Japan generally select one person for both roles. Finally, the legal changes have givenauditors of U. S. firms greater authority and have mandated more independence, while in Japanthe dominant governance system already relies on external statutory auditors, although they arenot always independent.Although cultural differences between Japan and the U. S. will continue to be reflected invariations in governance systems, effective systems should include using a significant number ofindependent directors on a board of manageable size where directors have access to neededinformation. Separation of the CEO and CBD roles and independent auditors with clear authorityare also critical components