Girl Power in Japanese Boardrooms? An Exploratory Study of Critical Masses' Impact on Firm Financial Performance.

Author:Pedersen, Martin Taarn

On 14 June 2013, the Japanese Cabinet approved the so-called "third arrow" of Abenomics, a growth strategy heralded by the incumbent Shinzo Abe Administration as the strategic means to revive Japan's stagnant economy. In a same-day video message released on YouTube, the prime minister proclaimed: "A society in which women shine is the core of my Growth Strategy," which includes a number of promises to fully utilize the "power of women" by promoting women's participation in the labor force and management. (1)


Bona fide empowerment of women in Japan, Inc. would undoubtedly need to include empowerment in the supreme decision-making body: the board of directors. As it stands, women's empowerment in Japanese boardrooms may read as an oxymoron. In 2012, only 1.6 percent of board members across corporate Japan were female, and on a macro level, policymakers and observers alike have highlighted the need for structural reform for some time now, including changes in the Japanese gender stratification. (2) When it comes to equality between men and women, the "Global Gender Gap Report 2012", released by the World Economic Forum, ranks Japan 101 out of 135 countries, making it a conspicuous example of gender inequality. (3) According to 2011 data from the World Bank, the Japanese labor force participation rate for women was 49.4 percent--below the Organisation for Economic Co-operation and Development (OECD) average of 50.9 percent--but, as Figure 1 shows, the rate has nonetheless witnessed an upward trend in the past few years. (4)

The makeup of boards of directors across Japan exemplifies the country's challenges in improving gender equality. As Figure 2 reveals, women have always constituted a negligible percentage of board membership in the country. Lately, board diversity--and particularly the gender of directors--has begun to generate public attention, and the debate is likely to be amplified by the Abe Administration's movement to impose diversity requirements on boards, though they have yet to materialize.

In other parts of the world, diversity requirements in boardrooms have already been implemented. Norway has taken the lead in terms of policy implementation directed at addressing the gender issue. (5) Perhaps the most well-known example is the Norwegian quota law of 2003, which stipulated that beginning in 2006 publicly traded companies must transform their boards by appointing at least 40 percent female members, or risk forced dissolution through a delisting from the Oslo Stock Exchange.

Two separate studies investigated how this legislation impacted the performance of the approximately 494 firms affected. One found a decrease in their profitability, and the other similarly found a decrease in their value. (6) However, both of these studies examined corporate boards that became gender-balanced within a short time frame of less than two years, as the companies in question had only until the end of 2008 to comply. Quite expectedly, the sudden surge in demand for female directors had a simultaneous side effect: the newly appointed female board members were generally younger and less experienced than the existing male and female board members. Hence, the decline in firm performance was not necessarily caused by the rise in the percentage of women directors. Rather, it could have been caused by the rise in the percentage of young and inexperienced directors. Accordingly, Japan makes for an interesting case to conduct research on boards that have yet to experience a distinct market shock in the demand and supply of female directors.

While the number of female workers in Japanese firms has risen and attracted discussion, little academic attention has been paid to the infamous glass ceiling barring women from executive positions in Japan. (7) Few would contest the notion that having a female director on a board is unlikely to be a panacea for Japan, Inc. Nevertheless, it is worth asking: what is the measurable impact of having increasingly gender-balanced boards of directors? And second, does it take a "critical mass" of females before this impact is significant?

Critical mass theory was introduced by Rosabeth Moss Kanter of Harvard Business School in 1977, who argued that only when women comprise at least 35 percent of a team, thereby creating more gender-balance, would gender diversity enhance team performance. (8) Kanter's theory was later expanded on by a number of other scholars who hypothesized that in board meetings, a critical mass of three female directors, constituting approximately one-third of the board, would catalyze board activeness and performance? In line with this hypothesis, and in the wake of the Abe administration's proposed structural reforms, it is compelling to empirically examine whether having at least three women appointed to the board of directors translates into increased financial performance in corporate Japan.


Despite an impressive array of literature on corporate governance, the issue of board diversity and female directorship has received relatively little attention in research circles, and Japan-specific board diversity issues, even less so. (11) Much of the academic literature on corporate board gender diversity pursues one of two lines of inquiry: first, low levels of board diversity raise significant ethical and economic concerns, and second, board homogeneity reduces the talent pool and, by implication, leads to sub-optimal firm performance. (12)

The first strand of literature argues normatively for greater board diversity, based on the belief that it is unethical for groups of people to be denied access to societal power on the basis of their gender, race, religion, or other individual traits unrelated to their professional skills. (13) The argument is that diversity is not only beneficial to society as a whole, but also constitutes a positive attribute for individual businesses by better reflecting the interests of their customers and stakeholders. Indeed, some of the literature argues that board diversity is desired by customers, employees, and other stakeholders for whom it is a demonstration of the sensitivity of management to stakeholder preferences, aspirations, and values. Hence, increased diversity may generate benefits such as improved employee motivation and retention, and improved customer loyalty. (14)

The second strand makes the economic case for improving board diversity, i.e., board homogeneity implies costs in terms of foregone talent and consequently, reduced performance. (15) Since board performance is affected by the combined intellectual capital available and the experiences, competencies, and views of its members, the argument is that the wider the talent pool from which directors have been appointed, the more capable and, by implication, better-performing the board should be. (16) Therefore, in cases where a given...

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