Academic journal article International Journal of Business

The Dark Sides of Institutionalized Informal Connections: Evidence from the Japanese Banking Sector in the Post-Bubble Crisis Era

Academic journal article International Journal of Business

The Dark Sides of Institutionalized Informal Connections: Evidence from the Japanese Banking Sector in the Post-Bubble Crisis Era

Article excerpt

I. INTRODUCTION

Appointing former government officials to the board of directors of a private enterprise has attracted considerable attention from strategic management scholars and business leaders (Hillman, 2005; Hillman et al., 1999; Lester et al., 2008). According to the literature, firms often have incentives to accumulate corporate political ties with the government since the government shapes domestic market rules that affect firms' business activities and their market performance (Hillman, 2003; Schuler, 1996). There are those who argue that having former government officials on the board of directors is a means to create and develop corporate political strategies (e.g., Hillman, 2005). Schuler (1996) argues that cultivating inter-organizational linkages between a firm and the government is a source of firm-specific competitive advantage to buffer the firm against environmental uncertainties such as intense international and domestic competition. Along with the resource-based view of the firm (Dyer and Singh, 1998), management scholars have acknowledged that the access to public decision-makers cannot always be imitated by competitors (Hillman et al., 1999). Corporate political strategies play a crucial role in strengthening a firm' s own resource position and capabilities to outperform rivals. One of the most widely cited motives for the acceptance of former top civil servants as board directors is the establishment of political access to gain desired strategic information on public policy issues, which in turn enables firms to prosper and minimize the chances of bankruptcy (Hillman, 2005; Lester et al., 2008).

A substantial body of empirical studies have directed their focus on the relevance of former government officials on the board to the behavior of firms, in particular the survival time of former government officials as outside directors (Lester et al. 2008), firm performance (Hillman, 2005; Moerke, 2005; van Rixtel, 2002; van Rixtel and Hassink, 2002; Yamori, 1998) and risk-taking behavior (Horiuchi and Shimizu, 2001). An empirical consensus on the positive impact of board interlocks in the state-business interplay on firm performance in the United States can be seen in resource dependence theory (Pfeffer and Salancik, 1978). For example, Hillman (2005) found out that the number of politicians on a board is positively related to adjusted market capitalization and adjusted market to book, especially in regulated industries. Similarly, using a sample of 605 German firms in 2006, Niessen and Ruenzi's (2010) study discovered that politically connected firms achieve higher stock market returns compared to politically unconnected firms.

However, in the Japanese context, the previous literature has revealed ambivalent results in terms of the impact on a firm's profit maximization (e.g., Horiuchi and Shimizu, 2001; Suzuki, 2001; van Rixtel, 2002; van Rixtel and Hassink, 2002; Yamori, 1998) of board participation by ex-bureaucrats either from the Ministry of Finance (MOF) or from the Bank of Japan (BOJ). The inflow of officials from regulatory authorities onto corporate boards could be valuable to private corporations with poor management as they could seek regulatory support at the expense of high salary (van Rixtel and Hassink, 2002). For troubled banks, the cultivation of board interlocks in the state-business relationship would serve as an informal institution-specific advantage not only to arrange mergers and acquisitions (e.g., Aoki, Patrick and Sheard, 1994) but also to maneuver ministerial staff to interpret the rules in favor of their business activities and opportunities (van Rixtel and Hassink, 2002). In a similar vein, van Rixtel (2002) also argues that an amakudari bank can maximize its own economic rents by manipulating established relationships with monetary regulators to its competitive advantage.

The key research focus of this paper is to reassess (1) how assigning high-ranking retiring bureaucrats to boards of directors affects bank profitability and (2) whether banks with more government officials as directors are more involved in risky lending activities than those with fewer directors in Japanese banking industry in the post-bubble period, particularly between 1997 and 2004. …

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