Corporate Governance and Employment Adjustments at Small and Medium-sized Enterprises (SMEs)

Author Name SAITO Takashi  (Graduate School of Economics, Kyoto University) /TACHIBANAKI Toshiaki  (Faculty Fellow)
Creation Date/NO. June 2005 05-J-023
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This paper examines how the three key characteristics of a corporate governance structure (i.e., the composition of board members, the nature of the largest shareholder, and the background of the representative directors) affect the way companies adjust employment levels. With respect to the manufacturing sector, we have found that the pace of employment adjustment tends to be quicker at companies in which employees are promoted internally to the board of director or to the CEO post. Meanwhile, in the nonmanufacturing sector, the pace of employment adjustment is slower at companies in which founding family members have a greater presence on the board. In nonmanufacturing companies in which a founding family member serves as CEO, the pace of employment adjustment is quicker when such founding family member has been internally promoted to the top post. In contrast, when the CEO is not a member of the founding family, the pace of employment adjustment is slower when the CEO has been promoted internally. These findings show that small and medium-sized enterprises (SMEs) in the nonmanufacturing sector and their counterparts in the manufacturing sector differ in their attitude toward employees even if they have a similar management structure. Specifically, management practices at nonmanufacturing SMEs with an "employee sovereignty-type" management structure (i.e., those headed by an internally-promoted CEO) tend to attach considerable importance to employees' interests, whereas nonmanufacturing SMEs are less inclined to do so, even if the CEO and directors are appointed from within the company.