The homogeneity of Japanese boards.

• Author: Kaplan, Steven N.

With such failure of board diversity, how have Japanese corporations managed to succeed?

Twenty men, all at least 60 years old, attend the meeting. They all work for the same company, all but two or three since they were in their twenties. There are no executives of other firms, no women, no minorities, no academics, no outsiders of any kind.

This describes a meeting of the board of directors of a typical large Japanese company.

The boards of large U.S. companies, in contrast, are smaller (typically with 12 or 13 members), are dominated by outsiders (typically 75% of board members), and include an increasing number of directors with diverse, non-CEO backgrounds.

Compared to U.S. boards - in fact, compared to almost any group in the U.S. - Japanese boards are extraordinarily homogeneous. Despite this incredible degree of homogeneity, Japanese companies have had their successes, particularly in international competition. It is natural to ask how the Japanese system has succeeded with such homogeneity and whether the Japanese system can succeed going forward.

It helps to begin by thinking about the roles of the board of directors, at least in U.S. terms. The primary goal of the board is to represent shareholders and, in so doing, maximize shareholder returns. In fulfilling this goal, directors perform two primary and, sometimes, contradictory roles. The first is to oversee the company's management on behalf of the shareholders. In this role, the board hires and, if necessary, fires the CEO, sets compensation, sets objectives, and evaluates the CEO's performance. When the company and the CEO perform poorly, this role becomes adversarial (or, at least, it should).

The board's second major role is, broadly stated, to advise the CEO. The arguments for more board diversity are typically based on the need for directors to have alternative viewpoints not present among existing board members - for example, a woman director of a cosmetic firm. "Advice" may also concern marketing, technology, supplier relations, political access, or access to particular constituencies. Retired politicians are quintessential "advisory" directors. They can provide access to government officials and advice on regulatory matters, but are less likely to be sophisticated managerially or financially or to be in a position to criticize the CEO.

Japanese boards, on the surface, fail miserably in both roles. With a board comprised entirely of insiders, it may be difficult for the...