Electronic copy available at: http://ssrn.

com/abstract=1536879
1


Corporate Governance Disclosure in the Banking Sector: Using data from
Japan


Authors:

(i) Kim Thomas
(ii) Dr Pran K Boolaky
University of Southern Queensland
School of Accounting, Economics and Finance
Contact Details:
boolaky@usq.edu.au

Submitted to:

Finance & Corporate Governance Conference
Venue: La Trobe University
Date: 7-9 April 2009
Electronic copy available at: http://ssrn.com/abstract=1536879
2

Corporate Governance Compliance and Disclosure in the Banking Sector:
Using data from Japan
Abstract
Using regression model this study investigates which characteristics of a bank is associated with
the extent of corporate governance disclosure in Japan. The findings suggest that on average 8
banks out of a sample of 46 disclose optimal corporate governance information. The regression
model results reveal in general that non-executive directors, cross-ownership, capital adequacy
ratio and type of auditors are associated with the extent of corporate governance disclosure. Of
these four variables, non-executive directors have a more significant impact on the extent of
disclosure contrary to total assets and audit firms of banks in the context of Japan. The findings
of this paper are relevant for corporate regulators, professional associations and developers of
corporate governance code when designing or updating corporate governance code.
Key words: Japan, Corporate Governance, History, banking Sector


1.0 Introduction

For a country to be able to demonstrate corporate governance compliance it is imperative that its
business entities have in place principles for good corporate governance and are applying them in
their business practices. For this reason, some countries have put in place a national code of
corporate governance which is inspired or adapted from the OECD core principles (ASIC 2007).
Corporations within these countries are either required, or encouraged to comply with this code.
In Japan corporate governance has been influenced by many factors such as the effects of war,
culture, changes in the economic conditions of the country, contribution in the world economy,
and as a member of some key international institutions including the OECD. During the pre-war
period, businesses in Japan were financed by shareholders of family owned networks of publicly-
quoted enterprises and controlled by central management teams known as Zaibatsu (1). After
being defeated by the Allied Forces, the Zaibatsu was removed and more focus was made on
individual shareholders protection. Interestingly the Japanese culture has remained predominant
in their business practices including corporate governance practices. However with changes in
Electronic copy available at: http://ssrn.com/abstract=1536879
3

the economic conditions, foreign direct investment and the setting up of the Tokyo Stock
Exchange (TSE) there has been a need for corporate transparency.
Japan being a member of the OECD is also encouraged to comply or adapt the OECD principles
of Good Corporate Governance because the International Monetary Fund (IMF) uses these
Principles as a basis to assess the level of compliance with international best practices when
conducting country audits on Observation of Standards and Codes
1
(OECD CGP 1999 p.9). The
findings of these audits are used by the IMF as input factors to determine how the country ranks
in terms of governance practices in the financial services sector. The private sector also uses
these findings as a basis for risk assessment when it comes to trade and investment decisions in
other countries (IMF 2009). As per the OECD model of corporate governance there are six
fundamental disclosure requirements for corporate governance. In Japan the Code of Conduct for
listed companies consist only five disclosure requirements for corporate governance and they are
less rigorous when compared to the wording paraphrases in the OECD Code. Compliance with
the Code is not mandatory.

Corporate governance disclosure is well documented in both management and accounting
literature (see, Shadur et al 1995; Sheifer & Vishny 1997, Jackson & Moerke 2005; Yoshikawa
et al 2007; Boolaky 2007; McInnes & Fearnley 2004; Rutherford 2002; Ronen & Livnat 1981;
Botosan & Harris 2000; Verrechia 1990; Charkham 1994; Magena & Pike 2005).
Sheifer & Vishny (1997), Jackson & Moerke (2005) refer to how the difference in cultures, legal
systems and business practices around the globe affect corporate governance practices and
disclosures. Macey & Ohara (2003) documented the need for high corporate governance
standards for banks due to the sensitive role they play in any economy. This view was also
supported by many writers on CGP disclosures including Morgan (2002), Polo (2007), Adams &
Mehran (2003). Most of the literatures on voluntary disclosures of corporate governance are

1
The IMF and World Bank have endorsed internationally recognized standards and codes in 12 areas as important for their work and for which
Reports on the Observance of Standards and Codes (ROSCs) are prepared. The 12 areas and associated standards as useful for the operational
work of the Fund and the World Bank. These comprise accounting; auditing; anti-money laundering and countering the financing of terrorism
(AML/CFT); banking supervision; corporate governance; data dissemination; fiscal transparency; insolvency and creditor rights; insurance
supervision; monetary and financial policy transparency; payments systems; and securities regulation; AML/CFT was added in November 2002
(IMF 2009).
4

much more concentrated on general business entities rather than on banks and in particular in the
context of Japan.
The objective of this study is to investigate the level of corporate governance disclosure in the
banking sector in Japan. The study seeks to determine the banks specific characteristics that are
associated with the disclosure of (i) separation of management and board, (ii) internal audit
committee and (iii) compensation committee. The rest of this paper is divided into five sections.
Section 2 is a brief histology of corporate governance in Japan. Section 3 is a review of
literature. Section 4 describes the methodology followed by section 5 which presents the results
of our findings together with a discussion. The paper ends with a conclude note in section 6.

2.0 A Histology of Corporate Governance of banks in Japan
Drawing from Yin (2003) any study on history of business which uses case studies requires
answering two basic questions, viz: (i) why did it happen? and (ii) how did it happen?. This
paper is not a case study on the history of corporate governance in Japan. Therefore these two
questions are not brought on board. But the purpose of this section is only to give readers a brief
histological presentation of corporate governance in Japan. For this reason we are using a third
question (when did it happen?) so as to provide a chronology of the events.
Corporate governance in Japan has a distinctive history dated back to the pre-World War I
period. In 1870 trading in public bonds began and in 1878 the Stock Exchange Ordinance was
enacted and the Tokyo Stock Exchange established and became operational.
Between 1878 and 1930 corporations were predominantly controlled on behalf of shareholders
by Zaibatsu, (1) except if they were state-owned enterprises. During the times of World War II
Japan was administered by a military government which established its own system of control.
The private shareholder model of corporations was turned down by the then government which
took some bold decisions such as (i) outlawing dividends, (ii) introducing taxes on private
stockholdings and (iii) encouraging banks to fund companies rather than utilising equity finance.
In 1945 the allied forces defeated the Japanese and took occupation of the country. Laws were
introduced to outlaw holding companies which entailed in the death of the Zaibatsu practices but
5

the enhancement of shareholder protection. The initial steps for transparency and auditing were
introduced at this time (Hoshi and Kashyap 2001; Morck and Nakamura 2003). However, the
Japanese culture was so predominant that the Zaibatsu was replaced by another system called
Keiretsu (2) which is still accepted in the Japanese culture. Under Keiretsu, related firms owned
small amounts of shares in one another which consequently aggregated to a majority stake in the
group company. That made it difficult for outsiders to gain a foothold in the company (Okazaki
1995; Sheard 1994). At the same time greater importance was given to employees in the country
and most of them obtained lifetime employment.
In 1980 due to deregulation and banks mergers and failures, there was excess capacity in
Japanese banking (Dinc 2006). In 1989 twenty-one banks merged into only seven banks by 2005.
The Japanese banking sector had a booming period for a half decade between 1984 and 1989 and
that period was called the Japanese Bubble. The stock exchange, as well as banks, were
healthy. Both stock prices and bank dealings were on the rise. But from 1990 prices of property
and stocks on the capital market crumbled down. Consequently a large number of banks became
unhealthy.
Between 1990 and 2000, there has not been any significant change to corporate governance in
Japan. Until 1998 when the Financial Supervisory Agency was set up, the Ministry of Finance
had a direct control over the governance practices of banks. The Financial Supervisory Agency
was given a mandate to control and supervise the financial system including banks in Japan. The
Financial Reconstruction Committee which was a supervisory board created from the Financial
Supervisory Agency was assigned to oversee the financial system. In 2000, both the Financial
Supervisory Agency and the Financial Reconstruction Committee were merged to form the
Financial Services Agency. That was basically for the banking sector and other financial services
activities.

In 2003 the Commercial Code was introduced which recommended that (i) a company is allowed
to have a committee system in place and (ii) that each committee should comprise non-executive
directors. Given compliance to the Commercial Code is voluntary; many companies do not have
in place a committee system. In 2004 the TSE issued a Code of Conduct for listed companies but
up-to-now there is no mandatory requirement for compliance with the Code.
6

In 2006 Japan adopted the (J-SOX) which is the Financial Instruments and Exchange law. It
made internal control reporting mandatory by management and that auditors have to assess this
report during the audit of financial statements of banks (Nagano 2007). The J-SOX took effect as
from April 2008. The next section is our review of literature and hypotheses development.

3.0 Literature Review and Hypotheses Development

The banking sector and corporate governance
Banks play an important role in the national economy. They should ensure a high standard of
corporate governance (Macey & OHara 2003). After the collapse of major banks in Germany
and the USA in 1974 the G10
2
Governors of Central Banks set up the Basel Committee on
Banking Supervision
3
. In 1999 the Basel Committee issued proposals for the capital adequacy
framework of financial institutions. After consultation with supervisory authorities worldwide,
two more proposals were released and revised in 2001 and 2002 which included principles of
corporate governance issued by the OECD. This led to the Basel Committee issuing a guidance
paper on corporate governance in 2006 (BIS 2006). In the meantime the banking industry has
suffered from setbacks in various parts of the world and that was attributed to poor corporate
governance (Kirkpatrick 2009). This view was supported in one of the policy papers of the
Association of Chartered Certified Accountants (ACCA) which suggests that the credit crunch
episode that the world has been experiencing over the previous two years is due to ineffective
governance at both the operational and strategic level in the financial sector (ACCA 2008).
Some authors, for example (Benton 1999; Kaufmann 2003) argue that banks should be more
transparent and need to be more closely monitored. In this vein, the normative argument is that
banks should (i) have a good corporate governance framework in place and (ii) should fully
comply with it so as to avoid risks of all types. Morgan (2002) argues that banks cannot be

2
The Group of Ten is made up of eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden,
Switzerland, the United Kingdom and the United States) which consult and co-operate on economic, monetary and financial matters.
The Ministers of Finance and central Bank Governors of the Group of Ten usually meet once a year in connection with the annual meetings of the
International Monetary Fund and the World Bank (BIS 2009).

3
The Committee does not possess any formal supranational supervisory authority, and its conclusions do not, and were never intended to, have
legal force. Rather, it formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that
individual authorities will take steps to implement them through detailed arrangements - statutory or otherwise - which are best suited to their
own national systems. In this way, the Committee encourages convergence towards common approaches and common standards without
attempting detailed harmonisation of member countries' supervisory techniques (BIS 2009).

7

treated in the same way as other entities in other industries because of their opaqueness and
nature of their assets. Assets of the banks include loans which are a risk to the bank. It is
therefore pertinent that banks ensure a strong assets backing and that is possible by having in
place an effective assets monitoring policy. In this case our argument is that the assets backing of
banks will influence the level of disclosure including corporate governance disclosure. Based on
the above, it is hypothesised that:

H
1
: There is a positive relationship between banks total assets and the extent of corporate
governance disclosure.

Polo (2007) examines the arguments from various authors on the corporate governance of banks.
According to him some authors determine that banks are situated differently to other businesses
and as such, need separate governance functions (Macey & OHara 2003, Adams and Mehran
2003). Some argue that an increase in banking regulation increases the value and governance of
banks, whereas others are apprehensive and argue that banks should be controlled by the same
corporate governance mechanisms as other industries (Levine 2004, Caprio & Levine 2007). It is
therefore sensible to argue that regulation should concentrate on decreasing the opaqueness of
banks by increasing disclosure requirements in line with the third pillar of the Basel Accord
4
.

Moreover the legal framework of a country is likely to impact on its corporate governance
practices and principles (Shleifer & Vishny 1997, Shadur et al 1995, Jackson & Moerke 2005),
thus on the corporate governance in the banking sector as well. Sarra and Nakahigashi (2002)
have researched the evolving Japanese model of corporate governance with regard to the changes
in the Commercial Code in 2003 permitting, rather than requiring adoption of external board
committees to align Japan with the Anglo-American models. This type of corporate structure is
called iinka tou setti kasiha. However, Japanese companies that have listed on foreign
exchange markets must already comply with the listing rules of that nation. As such they are
likely to have a higher standard of corporate governance practices than required in Japan.

4
Pillar 3 provides enhanced public disclosures of capital adequacy and risk information. It includes disclosures related to capital and capital
adequacy, including the components of the capital structure and regulatory capital ratios, and to capital risk exposures.

8

Companies that choose to adopt iinka tou setti kasiha are required to transfer responsibility of
internal auditing functions from an internal corporate auditor to an internal audit committee. A
nomination and compensation committee must also be implemented and the introduction of an
executive officer (shikko-yaku) and a representative officer (daihyo shikko-yaku) are also
required.
5
Although adoption of iinka tou setti kasiha is optional, the governance changes are
mandatory if adoption is undertaken. Sarra and Nakahigashi expect that the new changes to the
Japanese Commercial Code will result in some convergence of corporate governance across
nations with increased transparency, corporate accountability, and increased shareholder
protection. In fact, the authors determine that the Japanese model may include the Anglo-
American attributes whilst retaining the positive Japanese attributes of corporate community.
Usui (2003) compared the Japanese Model with the USA using financial sector information.
They found that the regulatory bodies have limited power in Japan and that promoting corporate
governance policies are yet to be incorporated into legislative requirement. Based on the above,
we can infer that a country with a regulated system that makes corporate governance compliance
mandatory will ultimately end up with companies complying and disclosing corporate
governance information compared to a country where the regulatory system does not make
corporate governance mandatory. It is therefore hypothesised that:

Culture in Asia including Japan is another factor affecting corporate governance systems and
practices, (Lee et al 2000). The culture of Japan is based on a collective, rather than individual
nature, with a high need for uncertainty avoidance
6
, therefore avoiding risk (see Hofstede 1984).
The collective nature of Japanese culture is also present in their business ownership models.
Business structures are generally based on groups of Keiretsu (Cohen 1995). This cross
ownership model is very strategic in the sense that companies can rely financially on each other
in lean times, or their main bank, thus avoiding the risks of hostile takeovers from external
companies (Milhaupt 2001).

5
The board of directors must elect one or more executive officers (shikko-yaku), one being the Chief executive officer or Representative Officer
(daihyo shikko-yaku).The Representative Officer must be elected by the board, not by the chief executive officers as has traditionally been the
case in Japan (Sarra and Nakahigashi 2002).
6
Uncertainty Avoidance (UA) determines the level of acceptance of uncertainty. A high UA indicates a nation that is structured and rules based
to avoid uncertainty, whereas low UA instigates less rules and greater risk.

9

This group ownership principle (to avoid financial risk and risk of takeovers) align clearly with
Hofstedes high level of uncertainty avoidance. This is because majority shareholdings can block
any takeover bids and inter-company loans and avoid the need to outsource borrowing thereby
avoiding the risk of financial collapse within the group.

Contrary to Milhaupt, Yoshikawa and Phan (2001) contended that the Keiretsu ownership did
not enhance corporate governance. They critically opposed Keiretsu in its proposition and its
objectives by claiming that Keiretsu is about all stakeholders and not the shareholders as in the
Anglo-American models. Our argument is that even Yoshikawa and Phan were on the wrong
premise because the UK Corporate Governance Code is stakeholders focus and not
shareholders focus. In the eyes of Yoshikawa & Mcguire (2007), the corporate governance
model of Japan should have been more of a shareholder-focus rather than the extended-
stakeholders-focus. Yoshikawa and Phan were more apprehensive to the Keiretsu principles
whereas Sarra and Nakahigashi (2002) contend that the new Japanese model could outperform
the other countries corporate governance model in the long-run. There has been no findings post
2003 to support this. This argument explains that even among the Japanese academics there is a
problem as regards Keiretsu and corporate governance. Some are shareholders-centred whereas
others are stakeholders centred. Given the mixed views on Keiretsu, the relationship between
cross ownership and corporate governance is not clear. Based on the above statement, it is
hypothesised that:

H
2
: There is an inverse relationship between cross ownership and the extent of corporate
governance disclosure by banks.

Anderson and Campbell (2004) examined the Japanese banking sector over the 1990s and found
that they lacked in corporate governance. The areas of greatest concern were the minimal
independence of the board of directors and lack of controls whereas Milhaupt and Miller (2000)
studied the financial failures in the 1990s and found that there is a need for more transparency in
the banking sector. The specific problem areas identified were the Jusen problem (3) and the
Convoy system (4) of protectionism that existed in Japan. The board of directors comprises
mainly of executive directors or representatives from the Ministry of Finance, but no non-
10

executive directors per se. Drawing from the OECD principles of corporate governance, a
company should have a minimum number of non-executive directors mainly to ensure
independence of the board and other management committees (OECD 2004). Along this line we
shall test the following hypothesis:

H
3
: There is a positive relationship between the number of non-executive directors and the
extent of corporate governance disclosure by banks

Dinc (2006) analysed 84 Japanese banks during the years 1984 to 1989
7
, including the 12
commercial city banks. The study focused on the corporate governance practices of management
and found that as large shareholders increased their shareholding, corporate governance
increased. There is also a different school of thought as regards large shareholding. That is when
shareholding is concentrated in a few shareholders who are themselves executive directors of a
company, corporate governance suffers. Boolaky (2007) investigated corporate governance
practices in the financial services sector of small island economies and found that in some
financial services companies, corporate governance is less effective when shareholding is
dominated by one or a few shareholders.

Drawing from accounting literature, many studies have suggested that the external auditors may
influence the extent of disclosure of firms (Gibbins, Richardson & Waterhouse 1990; Wallace &
Naser 1995; Watts & Zimmerman 1983). The bigger the audit firms the greater disclosure they
will demand from the client and vice versa. By bigger audit firms the authors are assuming the
big five. In this vein Wallace & Naser (1995) contended that larger audit firms are less sensitive
to clients demand and are therefore more prepared to insist on greater disclosure from firms.
Malone et al (1993) supported this argument by contending that small audit firms are more
sensitive to loss of clients and as such may not be prepared to demand on greater disclosure.
Based on the above studies we shall test the following hypothesis:


7
It includes all of the 84 banks that were listed continuously in the first section of the Tokyo Stock Exchange and
that did not take part in an acquisition or merger during this period.
11

H
4
: There is a positive relationship between auditors (large audit firms) and the extent of
corporate governance disclosure by banks.

Previous studies have revealed that performance motivates the extent of disclosure in the annual
reports. There are many performance related variables that could influence disclosure. In this
paper we are referring to net income and the capital adequacy ratio of the banks. Going back to
1975 Buzby contended that a good performing company will tend to disclose more and detailed
information in order to demonstrate their leading role in the market and the industry. This is
basically the operations of the signaling theory which suggests that good performers will disclose
more information than the bad performers. The Net Income, Capital Adequacy Ratio and Total
Assets of banks are assumed to be associated with the extent of disclosure of corporate
governance. If these performance indicators are on the high side, banks will have nothing to hide
from the users (Belkaoui & Kahl 1977). Based on the above explanation, the following
hypothesis will be tested:

H
5
: There is a positive relationship between net income and the extent of corporate governance
disclosure by banks.
H
6
:There is a positive relationship between capital adequacy ratio and the extent of corporate
governance disclosure by banks.

In the next section we describe our research methodology.

4.0 Methodology

4.1 Data and Research Method
This study uses secondary data which are drawn from various reliable sources such as Japan
White Paper on Corporate Governance, 2009, the FSA and TSE for Japan, also the annual
reports of a sample of banks, (Eng 2003, Patel & Dallas 2002). These sources are official data
source. As regards the annual reports, information is assumed to be reliable because they contain
audited information (Choi et al 2007, de Andres & Vallelado 2008, Li-Ying et al 2007). The
annual reports of 2005, 2007 and 2009 are used in this study. Secondly there is no other means to
12

test the reliability of this information, other than using the audit report as a basis. Individual bank
data was collected from Annual Reports using OSIRIS or the companys website and then
counter-verified with data from the Tokyo Stock Exchange. No discrepancies were found.

4.2 Population and sampling design
The population in this study comprises all Japanese Banks, including international banks, not-for
profit banks and community banks. Because this study is looking at listed banks, the sample is
confined to only the listed banks and therefore excludes all the other financial institutions. 92
banks are listed on the TSE including 6 which are also listed on foreign stock exchanges. Those
having the foreign listing are excluded from this study. It therefore leaves a population size of
86. This study uses a sample of 46 Japanese banks which represents 53% of the population. The
principal reason for not having a larger sample is because many of the annual reports are in
Japanese language and secondly the 2009 annual reports were not yet issued at the time of
writing.



4.3 Data Analysis
Our study seeks to investigate the extent of corporate governance disclosure and its predictors in
the banking sector of Japan in 2005, 2007 and 2009. In this case content analysis is considered a
suitable method. Content analysis is described as the systematic technique for compressing
numerous words into a smaller amount of content categories based on a set of rules of coding
(Leedy & Omrod 2005 p.142; Stemler 2001 p.17). This methodology has been used in similar
type of researches/studies in the areas of corporate reporting. Using content analysis is relevant
in this study because it is a way to categorise various items of a document (Corporate governance
disclosures) into a number of categories so as to ease comparison (Bryman, 2006). Since the data
on corporate governance are basically narrative data, they are voluminous and content analysis is
the appropriate tool to use (Holsti 1969; Boyatis 1998; Boolaky 2007).

The specific disclosures considered in this study are:
1. Separation of Management and Board
13

2. Internal Audit Committee
3. Compensation Committee
To be able to determine compliance, the contents of the corporate governance disclosures in the
annual reports are scrutinised. In this process a sentence by sentence analysis is conducted.

As regards measuring compliance, the level of disclosure will be the determinant of corporate
governance practices. The following scoring technique (see Cooke 1991) is used: 1= No
disclosure; 2 =Disclosure of non compliance and 3= Disclosure of full compliance. This method
was also used in many previous researches (Cooke 1991, Boolaky 2003,Tauringana & Mangena,
2007; de Andres & Vallelado 2008). Reliability of the data can result from data entry errors
when transcribing data from the source to spreadsheets. The SPSS program has data screening to
assess normality and transformation tools to minimise the risk of any errors affecting the final
analysis.

4.4 Modelling and testing process
A regression analysis is run to determine the influence of the independent variables on corporate
governance disclosures by banks in Japan. The following regression model is assumed to hold
for the sample:

Cgd
i
=
0
+
1
TA
i
+
2
CRO
i
+
3
NED
i
+
4
DSO
i
+


5
AUDF
i
+


6
NI
i
+
7
CAR
i
+ E
i

Cgd
i
is the dependent variable,
0
is the intercept and E
i
is the residual. The independent
variables are

1
to

7.
They are described in table 1.
Table 1: Defining Variables
Signs Variable definitions Acronym
1 Total Assets of a bank TA
2 Cross ownership CRO
3 Non Executive Directors NED
4 Directors Share ownership* DSO
5 Large audit firms AUDF
6 Net Income NI
7 Capital Adequacy ratio CAR
None of the banks in the study disclosed Directors Share ownership (DSO), therefore, this independent variable has been
removed from the model

14

5.0 Findings and Discussions
This section begins by reporting our findings on the extent of corporate governance disclosure by
the Japanese banks and follows by the descriptive statistics. We also run a correlation test to
identify the presence of any collinearity problem(s). The regression analysis results are then
presented and discussed.

The disclosure levels of all of the banks in this study are included in Table 2. Table 2 shows that
the overall level of disclosure has increased between 2005 and 2009. In 2005 a total of 13 out of
46 banks did not disclose on separation of management whereas 2009 reports a paradigm
increase where all banks in the sample disclose separation of management practices. Though
disclosure of non-compliance did not change significantly, the disclosure of full compliance
more than doubled (from 10 to 21) in the same year. Disclosure of non-compliance did not
change considerably from 23 to 25 banks, whereas disclosure of full compliance more than
doubled from 10 to 21 banks.
Similarly for internal audit committee there has been a remarkable increase between 2005 and
2009. As regards disclosure of full compliance it has more than doubled.The findings for internal
audit committee also increased in disclosure. There were 7 banks with no disclosure in 2005,
whereas in 2009 all banks had some level of disclosure. Again, disclosure of non-compliance did
not change a lot from 36 to 39 banks, whereas disclosure of full compliance more than doubled
from 3 to 7banks.
As regards compensation committee it continues to have 16 banks with no disclosures in 2009, a
change from 24 banks in 2005, whereas disclosure of full compliance has only increased from 4
banks in 2005 to 6 banks in 2009.
Although these findings report an increase in the level of disclosure, disclosure levels are still
minimal when compared to banks in the United Kingdom, US and so on. The majority of banks
disclosure of full compliance is for separation of management, rather than any of the committees.
These findings are consistent with the collective nature of Japanese society and the need to
protect the group (Hofstede 1984). The 2003 commercial code gave companies a choice between
the committee system and the board of auditors. Most banks have elected to continue with the
board of auditors because this system does not have to include non-executive directors, thereby
protection of the group.
15


Table 2: Disclosure levels of banks.
2005 2007 2009
No of Companies No of Companies No of Companies
1 2 3 1 2 3 1 2 3
Separation of Management 13 23 10 6 25 15 0 25 21
Internal Audit Committee 7 36 3 4 37 5 0 39 7
Compensation Committee 24 18 4 19 21 6 16 24 6
Total 45 79 20 30 85 29 17 90 37
1= No disclosure; 2= Disclosure of non-compliance; 3= Disclosure of full compliance

Descriptive Statistics
The descriptive statistics of both the dependent variables and independent variables are reported
in Table 3 showing the minimum and maximum values, mean and standard deviation for all
variables. The mean score for total corporate governance disclosures of 5.41 for 2005 has
increased to 6.39 in 2009 out of a possible maximum score of 9 suggesting that banks, although
increasing over time, provide less corporate governance disclosure in their annual reports in
Japan. The individual corporate governance disclosures of separation of management and board,
internal audit committee, compensation committee mean scores are also low, albeit increasing
over time. Separation of management has increased from 1.93 in 2005 to 2.46 in 2009, whereas
internal audit committee have increased from 1.91 in 2005 to only 2.15 in 2009 and
compensation committee have increased from 1.57 in 2005 to 1.78 in 2009. This shows that
banks are more likely to increase the governance of separation of management than initiating the
committee system. These findings are consistent with the levels of disclosure discussed in the
Table 2. The number of companies not incorporating and disclosing committee system is largely
due to the non-mandatory requirements for disclosure.

The expectations of Sarra & Nakahigashi (2002) that the new changes to the Japanese
Commercial Code introducing the committee system would increase corporate governance in
Japan, has proven the contrary in this study. The changes to the commercial code yielded
minimal change in the banking sector because only 6 of the 46 banks have fully implemented the
16

committee system. This finding is consistent with the Usui (2003) that the limited regulatory
powers of Japan do not enhance increased corporate governance.
We therefore support the hypothesis that the quality of corporate governance regulations
influences the extent of corporate governance disclosure.
17




Table 3 Descriptive Statistics

2005 2007 2009

N Min Max Mean Std. Dev Min Max Mean Std. Dev Min Max Mean Std. Dev
Separation of Management and Board 46 1 3 1.93 0.712 1 3 2.2 0.654 1 3 2.46 0.504
Internal Audit Committee 46 1 3 1.91 0.463 1 3 2.02 0.447 2 3 2.15 0.363
Compensation Committee 46 1 3 1.57 0.655 1 3 1.72 0.688 1 3 1.78 0.664
Total Corporate Governance Disclosure 46 3 9 5.41 1.586 3 9 5.93 1.569 3 9 6.39 1.183
Total Assets (TA) 46 564 99732 7680 14982 562 107011 8512 16469 827 1E+05 9025 1.82
Cross Ownership (CRO) 46 1 3 2.26 0.855 1 3 2.48 0.752 1 3 2.72 0.502
Non-Executive Directors (NED) 46 1 3 1.78 0.814 1 3 2.07 0.772 1 3 2.43 0.544
Director's Shareownership (DSO) 46 1 1 1 0 1 1 1 0 1 1 1 0
Audit firm (AUDF) 46 1 3 2.61 0.745 1 3 2.63 0.771 1 3 2.59 0.805
Net Income (NI) (US$m) 46 -234 389 27 77 0.22 441.35 46 100 -317 234 -12 81.8
capital Adequacy Ratio (CAR) 46 8.33 19 10 2 7.91 23.24 11.64 2.4 7.46 14.2 11.12 1.44
Valid N (listwise) 46

18

Correlation Analyses
Pearsons Correlation has been run using SPSS mainly with the objective to determine whether
there are any multicollinearity problems in the independent variables. This signals that
multicollinearity problems are unlikely because there is a not strong correlation between two or
more predictors in the regression model. According to Field (2000), if the collinearity level is
above 0.8 it is very likely that a good predictor of the outcome will be regarded as insignificant
and rejected from the model. The Pearson product-moment coefficients for all variables are
shown in Table 4. The findings of this model are that there is no high correlation among the
independent variables.

Table 4 Pearson Correlations between Banks Characteristics and Corporate Governance Disclosure
TA CRO NED AUDF NI CAR
TA 1
CRO 0.201 1
NED 0.253 0.275 1
AUDF 0.202 0.164 0.040 1
NI -0.266 0.042 0.038 -0.03 1
CAR 0.036 0.146 0.262 0.20 0.104 1
*. Correlation is significant at the 0.05 level (1-tailed).

Regression Analysis
Regression analysis is used in this study because it is a good predictor of a dependent variable
from a number of independent variables (Coakes 2009, p141).
The results from the regression analysis are reported in Table 5. This reveals that the model
explains 56.6% of the variation in the extent of corporate governance disclosure in the banking
sector in Japan in 2009, 74.8% (2005) and 70.4% (2007). The results indicate that the number of
non-executive directors, capital adequacy ratio, external auditors, cross-ownership are significant
explanatory variables for the extent of corporate governance disclosure by banks in Japan. Our
analysis reports that net income has a significant impact on extent of disclosure in 2005. But
report the contrary for 2009. This suggests that the net incomes of banks did not influence the
extent of corporate governance disclosure in Japan. The positive T-values indicate that banks

19

which (i) have non-executive directors on the board,(ii) employ bigger audit firms , iii) have
cross-ownership and (iv) a high capital adequacy ratio provide more disclosure on corporate
governance. The results suggest that non-executive directors and cross-ownership influenced the
Japanese banks to provide more corporate governance disclosure. The type of audit firm(s) that
banks engage to do their audit may also exert pressure for disclosure. High capital adequacy ratio
is an explanatory factor for more disclosure because the strength of the capital adequacy ratio
reflects the quality of corporate governance.





Table 5: R squared values 2005 2007 2009 2009-2005
1. Separation of Management and Board
All 0.682 0.868 0.931 .598
2. Internal Audit Committee
All .528 .430 .226 .365
3. Compensation Committee
All .569 .404 .223 .232
4. Total CGP
All .748 .704 .566 .510

Table 5.1 Coefficients 2005
Coefficients
a

Model
Unstandardized Coefficients Standardized Coefficients
t Sig. B Std. Error Beta
1 (Constant) 1.255 .808

1.553 .129
TA 2005 7.957E-6 .000 .075 .842 .405
CRO 2005 .438 .159 .236 2.755 .009
NED 2005 1.302 .173 .668 7.543 .000
AUDF 2005 .083 .180 .039 .461 .647
NI 2005 .006 .002 .281 3.328 .002
CAR 2005 .038 .068 .048 .558 .580
a. Dependent Variable: Total Cgd 2005

20


Cgd(2005)

= 1.255

+ .000008TA

+ .438

CRO + 1.302 NED

+ .083AUDF

+

.006 NI

+.038

CAR

+ E
i


Cgd(2009)

= -.545

- .0000026TA

+ .444CRO + 1.530 NED

+ .00001696AUDF

+

.182CAR

+ E
i


Table 6 summarises the outcomes of each of the hypotheses followed by a discussion.

Table 6: Hypothesis testing: Summary and outcomes
2005 2009
Hypotheses t. values Sig. Accept/reject t. values Sig. Accept/reject
H1 .842 .405 .316 .754
H2 2.755 .009** Accept 1.720 .094** Accept
H3 7.543 .000** Accept 6.346 .000*8 Accept
H4 .461 .647 .000 1.00
H5 3.328 .002** Accept -2.90 .769
H6 0.558 .58 1.938 .060* Accept
** Significant at 5% level
* Significant at 10* level

The findings from the hypothesis testing confirm as well as rejected the findings and conclusions
reached in previous research. Our findings are consistent with those Anderson and
Table 5.2 Coefficients 2009
Coefficients
a

Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig. B Std. Error Beta
1 (Constant) -.545 1.405

-.388 .700
TA 2009 -2.617E-6 .000 -.040 -.316 .754
CRO 2009 .444 .258 .188 1.720 .094
NED 2009 1.530 .241 .699 6.346 .000
AUDF 2009 1.696E-5 .167 .000 .000 1.000
NI 2009 .000 .002 -.037 -.296 .769
CAR 2009 .182 .094 .219 1.938 .060
a. Dependent Variable: Total Cgd 2009


21

Campbell (2004) that the total assets of banks in Japan does not influence the corporate
governance disclosure, but non-executive directors have a direct affect on corporate governance.
Contrary to Buzby (1975) and Belkaoui & Kahl (1977), we found that there is no relationship
between net income and corporate governance disclosure and between capital adequacy ratio and
corporate governance disclosure, except if we reduce the significant level to 10% in the case of
capital adequacy ratio. As regards the effect of auditor(s) on the extent of disclosure on corporate
governance our result suggests the opposite to the findings of Tauringana & Mangena (2007) on
narrative disclosures. Our argument to support this finding is that auditor may not necessarily
influence the disclosure level because they are not engaged to audit corporate governance.

6. 0 Summary, Conclusion and Limitations
This study has investigated corporate governance disclosure in the banking sector of Japan.
Three specific disclosures are considered and their predictors identified to determine their impact
on these disclosures. The annual reports of a sample of 46 banks in Japan were investigated to
assess the level of disclosure. Findings from our study suggest that average disclosure score for
the 46 banks is higher in separation of management. Though compensation committee disclosure
is lower compared to separation of management, interestingly it has improved between 1989 and
2009.
As regards disclosures of corporate governance by banks in Japan it is inferred that the level of
disclosure is low when compared to the banking sector of other jurisdictions such as the United
Kingdom, France and the United States. The principal reason is that corporate governance is not
mandatory in Japan. We therefore argue that with the implementation of the recommendations in
the 2008 White paper on Corporate Governance in Japan, it will be interesting to conduct a
second study after 2011 in order to determine if the level of disclosure increases. We further
believe that the result of our study is relevant for policy makers, regulators, professional
associations such as the Institute of Directors, Association of Minority Shareholders when they
meet to review the corporate governance principles and practices in Japan. We are also
highlighting that our study has not anywhere investigated as to whether corporate governance is
either good or bad in Japan. But we believe that Japan which plays a key role in the world
economy, especially the banking sector, need to align its corporate governance practices to
international best practices.
22

This study has a number of limitations which should be considered when interpreting the results.
Though content analysis has been used to evaluate the extent of disclosure there is always a
chance factor that all the contents have been accommodated in the analysis. This is because of
difference in wordings and meanings. Secondly the sample size could have been larger which
would then give room to make a more generalization of the results. However it has not been
possible due to the annual reports being in Japanese language.
The nature of our study suggests that there is a need for more research in arena of corporate
governance in Japan in order to find out (i) whether the Code of Conduct of Listed Companies in
Japan sits well with the OECD Code of Corporate Governance, (ii) how the cultural factors in
Japan affect corporate governance practices.
23

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29

Notes
(1)
Keiretsu structures comprised of groups of financial and industrial companies, including suppliers and
purchasers. Shares were cross-held by companies in the same Keiretsu as a means to prevent take-overs
by outside investors and for long term commercial commitments. A crucial feature of the Keiretsu system
is the inclusion of a shareholder bank that exerted control as primary lender and shareholder of the
Keiretsu companies (Avery 2000).

(2)
Zaibatsu describes a limited partnership holding company structure where family owners controlled
diversified networks of publicly-quoted enterprises, run by professional
Management. Bank lending was mostly at arms length, on a short-term basis. Some Zaibatsu banks with
very close relationships to Zaibatsu holdings but these relationships were not monitoring ones; nor were
Zaibatsu banks the primary sources of finance for the Zaibatsu (Morikawa 1992).

(3)
Jusen institutions were initially established as real estate lenders primarily for home lending. The Jusen
problem evolved when, during an economic boom, Jusen institutions were lending increasing amounts on
overvalued real estate lending to developers and speculators. The problems surfaced when the property
market collapsed. Many of the Jusen institutions should have collapsed along with the property collapse,
however, because of the protection of the convoy system, banks supported the Jusen institutions (most
were bank subsidiaries) allowing them to avoid financial ruin (Milhaupt and Miller 2000)

(4)
The convoy system involved banks adjusting bank lending policies and interest rates for the weakest
companies of the industry sectors to ensure survival of the industry. Jusen institutions should have
collapsed along with the property collapse, however, because of the protection of the convoy system,
banks supported the Jusen institutions (most were bank subsidiaries) allowing them to avoid financial
ruin (Milhaupt and Miller 2000).