A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Raddant, Matthias; Takahashi, Hiroshi Working Paper Corporate boards, interorganizational ties and profitability: The case of Japan Economics Working Paper, No. 2020-02 Provided in Cooperation with: Christian-Albrechts-University of Kiel, Department of Economics Suggested Citation: Raddant, Matthias; Takahashi, Hiroshi (2020) : Corporate boards, interorganizational ties and profitability: The case of Japan, Economics Working Paper, No. 2020-02, Kiel University, Department of Economics, Kiel This Version is available at: http://hdl.handle.net/10419/214154 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Abstract We analyze the ties between 4,000 Japanese corporations in the time pe- riod from 2004 until 2013. We combine data about the board composition with ownership relationships and indicators of corporate profitability. We find that both the network of corporate board interlocks as well as the own- ership network show a high degree of persistence. The overlap between these two networks is surprisingly small. In the analysis of the board composition we find that the number of outside board members is low yet increasing. Firms with large foreign shareholdership are at the forefront of this devel- opment. Upon retirement board members in central positions are replaced with similarly central executives, maintaining the general structure of the network. Women in corporate boards remain scarce. The connectivity of firms in the ownership and board network can be related to firm profitabil- ity. Firms that are linked to peers with above average profitability are likely more profitable than firms in other relationships. Keywords: corporate board interlock, firm performance, firm networks 1. Introduction We study the interorganizational networks of Japanese corporates from 2004 until 2013. We focus on corporate board interlocks and ownership ties. We investigate the network structure and we analyze if and under which 1 conditions ties in either network are related to firm profitability. Board interlocks emerge when directors serve on the board of more than one company. These interlocks have been investigated in the literature for several reasons. Some studies have analyzed to which extend shared direc- tors exist as a natural consequence of ownership and control. More impor- tantly however board interlocks and other interorganizational networks have been analyzed as influencing factor for firm profitability, strategy, manage- rial practice and corporate governance (see, e.g., Hermalin and Weisbach, 2003; Provan et al., 2007; Mizruchi, 1996; Gulati and Gargiulo, 1999). Our analysis therefore combines the analysis of corporate boards with the anal- ysis of ownership relationships and corporate profitability. In the literature firm connectivity is mostly regarded as necessary to provide opportunities for firms to develop (see, e.g., Uzzi, 1996). Yet, many studies also stress that ties should be carefully managed since they can have a positive or negative effect on firm performance (Barroso-Castro et al., 2016; Sullivan and Tang, 2013). Most of these studies analyze samples of limited size or focus on spe- cific aspects of firm behavior. Our approach is comparably general and is applied to a large sample of firms. We show that while the board composition and the number of interorganizational ties might vary, it is ultimately the performance of ties that influences firm profitability. Corporate interlocks are also an interesting phenomenon for social net- works science, since the networks of directors with multiple mandates are (partly by construction) very dense and show high degrees of clustering, even though the average connectivity is very low (Conyon and Muldoon, 2006; Davis et al., 2003; Battiston and Catanzaro, 2004). This raises the question how the structure of this network might influence decision mak- ing and the formation of interest groups. (Haunschild and Beckmann, 1998; Kramarz and Thesmar, 1992). Less research has focused on the dynamics of corporate interlocks, but it seems clear that some amplification mecha- nisms are in place that foster multiple mandates at highly capitalized firms 2 and that imply replacement of very central directors with alike peers when managers retire or leave the company (Milakovi´cet al., 2010; Bellenzier and Grassi, 2014; Mariolis and Jones, 1982). The dynamics of corporate interlocks have also been analyzed with re- spect to changes in the relationship of public and private companies as well as the changes in funding policies and capital market requirements. The pri- vatization of former public companies and the emphasis of shareholder value principles are forces that tendencially lead to the desolution of dense clusters of board interlocks (Heemskerk, 2007). Current research has however shown that rather a quantitative but not a qualitative decrease of board interlock can be observed (Kogut and Walker, 2001; Raddant et al., 2017). A topic that is specific for the Japanese economy are the fading effects of the so-called keiretsu (Lincoln and Shimotani, 2001). This term describes six historic conglomerates of corporations that have dominated the Japanese economic landscape after the second World War. Studies found that today only very few traces of their former structure can be found even though the names of the original concerns persist. Risk sharing mechanisms within own- ership structures are likely to influence performance and will therefore be part of our analysis. Previous studies on Japanese corporate ties include Schaede (1995); Lincoln and Gerlach (2004); Nakano and Nguyen (2012) and Lincoln et al. (1992). An older yet seminal paper is Asanuma (1985) who focuses on ties in the automotive industry. Kanamitsu (2013) finds that the relationship between having long-serving CEOs and high firm centrality is fading, which could indicate a restructuring of the Japanese board and ownership networks towards more relationships within specific business sectors. A different facet of this debate is the composition of the board. There is no consensus on the question if the appointment of outside board members is of any benefit to ensure good governance and accurate reporting (see the survey by Petra, 2005). And even if an independent board is generally re- garded as best practice, a link to performance can mostly not be established 3 (Dalton and Dalton, 2011). Nevertheless, we observe an increasing number of outside board members in Japan. Traditionally they often come from banks, related corporations or are retired government officials. There is however no evidence that this leads to significant differences in firm performance (Miwa and Ramseyer, 2005). There is however evidence that foreign ownership has an effect on firm valuation (Mian and Nagata, 2015), which leaves the ques- tion if the growing number of outside board members can be connected to such influences. In our study we find that the Japanese board network exhibits some clustering, which however is probably not a keiretsu remainder. Ownership relationships explain only a very small amount of board network ties. In general, ties between companies are very persistent and we show that this is likely an effect of selective executive replacement. There is some increase in the number of outside board members, even though these are more likely to be replaced than regular board members. In our analysis of firm profitability we find that ties in the board or ownership network can only be beneficial under one condition: links have to be formed to firms with above average profitability. In the following we will first review the data set and the methods that we have applied in section 2. After this we will discuss the structure of the network and the determinants of the survival of ties and board members in section 3. In section 4 we discuss board