Does the Effectiveness of Corporate Governance Restrain Excessive Executive Compensation? Monitoring Boards and Executive Compensation in Japan

This study examines how differences in corporate governance among Japanese firms affect executive compensation contracts and clarifies the effectiveness of the monitoring board structure typical of the United States (U.S.). Additionally, this study investigates how the organizational forms chosen by Japanese companies contribute to the establishment of efficient executive compensation contracts. Pooled ordinary least squares (OLS) and difference-in-difference (DID) analyses revealed two key findings. First, companies that transition to an audit and supervisory committee structure experience a decrease in excess executive compensation. This finding suggests that, in companies with an audit and supervisory committee, a monitoring board structure functions effectively to suppress both the total compensation and excess compensation paid to executives. Second, this reduction in excess compensation is more pronounced in companies that paid positive excess compensation prior to the transition to an audit and supervisory committee. This result implies that among transitioning firms, those overpaying their executives experienced a greater decline in excess compensation. These findings suggest that a U.S.-style monitoring board structure enables the design of executive compensation contracts that mitigate conflicts of interest between executives and shareholders. JEL Classifications: M41; J33 ; G32