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Decision-Making Process in Japanese Board Room. Audit & Supervisory Board As a Source of Information to Outside Board Members: A Systematic Review

In the context of the Corporate Governance Code enactment in Japan, we examine how newly introduced outside directors in Japanese boards obtain information to take part in the decision-making process. We conducted a systematic review of the literature and found 18 peer-reviewed publications in a time span between 2000 and 2016 that described the asymmetry of information between the insider group of board directors (including the CEO) and the outside board members. Our findings show that for the course of more than a decade, despite all changes and reforms, the role of board directors, whether insiders or outsiders, is still supplementary. They are treated more as advisors than active part in the decision-making process. We reveal different insider sources of information as forming social ties with the CEO and/or inside board directors and collaboration with Audit & Supervisory Board (Kansayaku), which can help reduce this asymmetry and improve the decision-making process. We assume that it will be easier for the outsiders to establish contacts and form social ties with the Audit & Supervisory Board members because of their unspoken lower status and thus to obtain more information about the company internal affairs and discussions that take place during the informal meetings, where only insiders (including the CEO) are present.


Introduction
We observe the decision-making process in a particular context of Japanese corporate governance that is characterized with cooperation and collaboration between the management and Board of Directors, not so much with monitoring and control as in the Anglo-Saxon system (Dore, 2007b). Moreover, Board of Directors consists of insiders who grew up during their career up the corporate ladder (Ahmadjian, 2000) and the existence of Kansayaku or Audit & Supervisory Board (Ahmadjian & Okumura, 2006).
The difference between the two types of boards is in their responsibilities. While: According to the last enactment of Japanese Corporate Governance Code (2015), each company should appoint at least two independent directors and effectively use their background and knowledge. One of the sub-principles of the Code states that outside board members should share information among themselves, so that they can contribute to the discussions during the Board meetings from their "independent and objective standpoint". It is interesting to point out that one way of achieving this is with executive sessions -regular meetings consisting solely of independent directors. The meetings can also include independent Kansayaku.
Corporate Governance Code (2015) mentioned also some decisions that the Board of Directors have to take, which are connected with some major events in a company and have already been subject of interest in the extant literature: setting a strategic direction (Carpenter & Westphal, 2001), management remuneration (Westphal & Zajac, 1995;Ahmadjian, 2000;Geng, Yoshikawa, & Colpan, 2016), assessment of the senior management (Walsh & Seward, 1990;Del Brio, Yoshikawa, Connelly, & Tan, 2013), dismissal of senior management (Walsh & Seward, 1990;Shen & Cannella Jr., 2002), etc. However, from practical point of view, Boards of Directors are taking more operational decisions on each and every meeting they attend: approving new products, discussing and launching new projects, company structure changes, compliance regulations; sales, income, profit ratios, etc.
In the Anglo-American type of corporate governance, the CEO or the Executive has the controlling power over information (information asymmetry). The quality of independent directors' decision-making is dependent on the quality and volume of the information flow which the CEO makes available to them (Nowak & McCabe, 2003). In the Japanese case, the CEO and the inside board members are part of one group that have access to all the information about the company and they control what part of this information will be available for the outside board members during Board meetings. Our paper suggests that additional internal sources of information can help this asymmetry to be avoided and/or overcome.
The function of Kansayaku or Audit & Supervisory Board has been a subject of debate in the extant literature since the early 2000s. As Ahmadjian (2000) stated in her book chapter about corporate governance and Board changes, the Kansayaku are appointed by the company to monitor the Board of Directors on behalf of shareholders and to ensure that the Board complies with the law. Also as Jackson and Moerke (2005) added, there are minimal legal distinctions between inside and outside members or between management and monitoring functions, such as the role of the statutory auditors. Moreover, Ahmadjian and Okumura (2006) claimed that Kansayaku possess limited power and no voting rights on the Board. Even if they are independent and well-qualified people, they do not have the power and resources to monitor the Chief executive and Board. Finally, in their paper for adoption of committee-based system of corporate governance, Chizema and Shinozawa (2012) explained that auditors, who may attend meetings of directors and receive regular reports from directors, tend to be internally promoted employees of the corporation, most commonly having been directors or departmental chiefs. In short, most of the sources are examining the role or functions of the Audit & Supervisory Board but, as far as it is known to the authors, in the extant literature, there is no information for the Kansayaku board as an information provider. Therefore, we conducted a study to examine how outside directors in Japanese boards obtain information to take part in the decision-making process and how the Kansayaku board can be used as an internal source of information.

Methodology Data Collection Process
We undertook a review of previous studies up to 2016 on decision-making in Japanese boards and outside directors obtaining information to take part in it, in order to understand what we know and what is still missing. Following Tranfield, Denyer, and Smart (2003) framework for systematic reviews designed specifically for the management field, we made a holistic evaluation on the topic mentioned above. As a pilot search, we used "seed" papers (Janssen, Schoon, Ke, & Börner, 2006) to allocate the other actors of interaction with Board of Directors in the present literature, except the CEO. We identified the seed papers group by choosing from literature that we were personally familiar with. We also asked for suggested literature by our academic contact list, composed by leading scholars in the area of corporate governance, especially in the Asian region and Japan in particular. We extracted keywords from the seed papers and other papers in the field, allocated by their reference list.
Regarding the main search criteria, we performed Boolean searches in the main databases (i.e., Business Source Complete; Social Sciences Citation Index (SSCI)) provided by EBSCOhost, ISI Web of Knowledge (previous Web of Science) and Google Scholar were used to search for all articles (only peer-reviewed), books and book chapters in English 1 containing the terms "Decision making role" OR "information processing" AND "outside directors" in their Title/Abstract or Subject terms. We considered all journals included in the above-mentioned databases. As an area of the search, we limited it to only business and management research and for a country -Japan. Our initial search resulted in 176 publications.
We performed cleaning of the data after reading the title, abstract, keywords, research purpose or research questions of each record, if necessary, we referred to the full text of the publication. Studies were removed from the list if both reviewers agreed that a publication should not be part of the analysis. Cases of disagreement were referred back to both reviewers for re-evaluation. In the first round of cleaning, we removed papers/book chapters focused on different topics or on related topics not relevant to our study (e.g., applicable only for the US or the UK reality or focused only on stock prices dependency; or concerning particular type of industrybanking or automotive), book reviews, duplicates, company reports, letters from the editors, papers published by university journals, and student papers. It resulted in 49 sources left. In the second round of cleaning, we refined the data for Japanese corporate governance and Auditing & Supervisory Board (Kansayaku). For that reason, we removed the sources in which the studies have been conducted for other countries except Japan. This analysis enabled us to identify a final sample of 18 records (158 records were removed) that consisted of peer-reviewed articles, books and book chapters that were published in 17 sources in the years between 2000 and 2016. The cut-off was made on October 31, 2016, which includes online-first articles published up to this point.
Following previous reviews (e.g., Tranfield et al., 2003;Pugliese, Bezemer, Zattoni, Huse, Van der Bosch, & Volberda, 2009;Cuomo, Mallin, & Zattoni, 2016), we performed content analysis with criteria for codifying in two stages: (1) author/year; type of material -article, book, book chapter; methodology; country; concepts mentioned in connection to our topic; topic; and (2) for the concepts themselves, we identified additionally the number and percentage spread among the sources. The procedure we followed consisted of preliminary stage, in which two coders initially developed and tested the coding scheme on a sample of six articles. After that in the first phase, two different coders codified all the studies independently. Then in the second phase, we matched the two sets of data in order to measure inter-rater reliability using percentage agreement (Dewey, 1983). We found a high overlap as the percentage agreement was 94% and above the appropriate minimum level of reliability. Finally, we met to discuss the few cases where there was a difference of opinion in order to reach agreement about them.
Finally, we made a descriptive analysis -short explanation of the data as numbers and percentageauthor/year; type of material -article/book; methodology; country; concepts mentioned; and their derivatives (Pugliese et al., 2009). And also thematic results, based on evidence per concepts mentioned: Board of Directors, outside directors, CEO, type of auditors, regulatory act, type of reform, corporate governance mechanism, process and their derivatives (e.g., Pugliese et al., 2009;Boivie, Bednar, Aguilera, & Andrus, 2016;Khanna, Jones, & Boivie, 2014). 2

Data Analyses
Our results showed that the 18 publications evolved through time span between 2000 and 2016. In the first 5-year period, there is one publication per year with a peak in the last year (2005)   Step 1 (shows only the years that there were publications). On the vertical axis on the left -Numbers from 0 to 7 with Step 1; Vertical on the right -Numbers from 0 to 20 with Step 2; Bars -Number of publications per year; Line -Cumulative number of publications up to the corresponding year. The results are as explained in the Data Analyses part of the Methodology.
As for type of materials, there were 6 book chapters, 11 papers and 1 working paper. Among the 18 publications, 15 were about Japan only, 2 others were comparison between Japan and Germany and 1 study about Japan and South Korea.
For methodology, there were four qualitative studies, consisting of interviews, case study, multiple-case study and multi-level case study; there were eight conceptual publications and six empirical publications.
2 For the systematic review protocol, see Appendix A. We conducted content analysis of each paper, as we described above and tabulated the results according to authors/year; type of material; methodology; country; concepts mentioned in the publication (these are not keywords used by the authors but concepts in connection to our topic); and in the end topic of the paper as described by the author/s. More details can be seen in Table 1. Paper Empirical Japan Conventional auditor system, committee system This paper examines the adoption of the committee-based governance system (i.e., audit, nomination, and remuneration) in Japanese firms, a practice common in Anglo-American capitalism but potentially contestable in Japan.
16 Dore (2013) Book chapter Empirical Japan Decision-making process, Board of directors, CEO The chapter is devoted to describing and seeking to explain the changes themselvesthe changes in corporate governance broadly conceived -that have very substantially altered the "Japanese-style management" which American business schools discovered and celebrated in the 1980s. The paper examines the reason why Japanese firms have adopted executive stock option pay, which was developed with shareholder-oriented institutional logic that was inconsistent with Japanese stakeholder-oriented institutional logic. Note. * The concepts mentioned are not keywords used by the authors but concepts in connection to our topic in this review paper.
After that, we examined in more detail the concepts mentioned in the publications and calculated the number and percent spread of each of them, organized around main groups. In Table 2, we can see how in 11 publications are mentioned Board of directors, 5 of which are about outside directors. There are 7 publications about management structure, 11 for type of auditors, 5 for regulatory acts, 2 for type of reform, 2 for corporate governance mechanism and 10 for processes. We are showing the different variations of the same concepts in the way they were used in the original sources, for example, outside directors -external directors; or insider management, management, executive officers; or Board of auditors, statutory auditors, Kansayaku, etc.

Discussion
The topic for involvement of board directors in the decision-making process has been the point of discussion for a long time in USA. As Westphal (1998) identified, not only do they (board directors) have limited (if any) exposure to the day-to-day decision-making of managers, but they also typically lack the firm-specific knowledge and/or industry knowledge possessed by insiders. According to the author, such extreme information and knowledge asymmetries provide fertile ground for interpersonal influence behavior.
From our findings, we can assume that in the early 2000s even insider board directors in Japanese companies did not take an active part in the decision-making process. As Learmount (2002) stated, the decision-making power is concentrated in the hands of a small executive management committee. A few years later, Jackson and Moerke (2005) in their comparison between Japanese and German corporate governance are sharing Kubo's idea that a post on the Board of Directors is indeed a part of the career path in Japan, and the task of a director is to motivate the employees rather than maximize shareholder value. Therefore, insider directors are present on the Board as a result of loyalty to the company (a point we showed in the beginning of the study) but they have neither monitoring nor decision-making role.
Another study on the topic by Dore (2007a) discusses some changes in the Board structure and in this way introduces the appointment of two or three outside directors. According to the author, neither of "these changes made the decision-making more efficient, speedier or less likely to lead to illegal or anti-social enterprise behavior" (p. 209). But what is the reason for the lack of results?
The same author this time in a book chapter provides some options for an answer to this question. He showed how outside directors in Japanese companies encounter difficulties to play an active role during the formal meetings in the board room because: The real discussions and decisions still take place in informal meetings at which the outside directors are absent. How much the outside directors can subsequently contribute at the formal board meeting depends on how much information they are given. In one firm they are always visited beforehand to receive background information on the items to be presented at the next board meeting. But as one outside complained, this merely wastes his time since the background explanation consists of exactly what is related at the board meeting as the reasons for taking a particular decision, whereas what he wants to know, and is never told, are what were the counter arguments raised in internal discussions and why they were rejected (Dore, 2007b, p. 382).
These ideas are drawn further by Buchanan and Deakin (2007), who discussed in their multiple-case study conducted by interviews, how outside directors had often been described as isolated within the (Japanese) companies in which they held office. They were often treated as advisers and the view that the Executive Board should be running the business persists. As a main reason for this, the authors pointed out that these people have not worked for the CEO. They gave an example with one of the companies that they held interviews in that he (the CEO) and his internal directors met once every two weeks for a discussion of major business and administration issues without involving their outside colleagues. The different stages of corporate governance reforms in connection to efficient decision-making are discussed by Dore (2013) in his conceptual paper, where he showed most of the options that we have already mentioned above and added the creation of an Advisory Board, usually of outsiders, which may be given a variety of powers including the monitoring of appointments and executive compensation but this is given as an example from only one company. The latest research (Miwa, 2015) also ascertained that managers expect outside directors to function as supervisors of management, but do not necessarily require them to be involved in managerial decision-making. This shows that for the course of more than a decade, despite all changes and reforms, the role of board directors, whether insiders or outsiders, is still supplementary.
In order to take part in these discussions and make the decision-making more effective, outside directors need information. The question is how to obtain this information? Where from and with the help of whom? Another point is that they need time -as served tenure on the Board after which they can be considered as ones who had "worked" for the CEO and as a part of the closed circle of insiders.
Another difficulty for outside board members about expressing freely their opinion and contributing to the decision-making process is the powerful figure of the CEO. Boivie et al. (2016) pointed out the CEO power as one of the group factors that creates barriers for Board of Directors in fulfilling their roles. This is even more essential in Japanese reality where insiders in the Board are with life-long careers at that company and have been part of each and every level of the hierarchy till they reached the posts of board members. In contrast to this, Garg and Eisenhardt (2016) in their study, based on interviews taken from CEOs and board directors, explored effective discussions during strategy-making process with one-on-one meetings between the CEO and each director outside the board room (informal meetings), and focused debate on a single formal strategy alternative inside the board room (formal meetings). They showed that better results are achieved also by CEOs who use external and internal personal alliances -political action. One reason for its effectiveness is that political action can unexpectedly yield creative advice from board members at late stages of the strategy-making process. Again, this confirms that forming social ties between the outside board directors and CEO can help the decision-making process.
We consider as one of the major inside sources of information for better decision-making, the Audit & Supervisory (Kansayaku) Board because as Kurihama (2005) mentioned in his study about the relationship between corporate governance in Japan and independent auditing, in the light of CSR, "auditing as an institution enables the users to secure autonomy as well as freedom in their decision-making" (p. 13).
As we mentioned above, the Audit & Supervisory Board is a feature of the Japanese corporate governance system. According to the Corporate Governance Code (2015), they audit the performance of duties by directors and the management and have investigation power by law. In previous studies, the Audit & Supervisory Board position is described like a consolation prize for those unable to attain board membership (Ahmadjian & Song, 2004) and again as ex-directors or ex-employees who fell just short of becoming directors (Dore, 2005). Thus, we can suggest that they have a lower status than the board directors, just like the newly appointed outside directors. But at the same time, they are insiders who have worked with the CEO through the course of their entire career and possess all the information for the company because of the position they held. As Kurihama (2007a, p. 112) identified, "the commitment of managers and the monitoring and check of managers' decision-making and behaviors is very important". And he continues: For example, today, it is necessary for Japanese corporate auditors (Kansayaku) to fulfill their duties with a basic viewpoint to the establishment and operation of the system of good corporate governance. And, it is desirable for corporate auditors to prevent corporate misdeeds and scandals and to ensure and safeguard sustained growth and development of their corporation as their fundamental duties. The main scope of activity of corporate auditors is "audit of director's performance of duties", "audit of decision-making of board of directors", "audit of status of internal control systems", "monitoring of independent auditors", and "audit of financial reporting system" (Kurihama, 2007a, pp. 116-117). Therefore, we can assume that it will be easier for the outsiders to establish contacts and form social ties with the Audit & Supervisory Board members because of their unspoken lower status and thus to obtain more information about the company internal affairs and discussions that take place during the informal meetings. As we could observe, the statutory auditors are performing "audit of decision-making of board of directors" which means that they possess all the information for the steps taken in the process of reaching to every decision.  (2016), anged the ex Japanese com utside board ead to positiv odel type abo see Figure 2) king process in -making proces s paper. The fig ce between eac al" and "inform executive sessio ows "one-on-on right side is a li nts towards a sm " sign. Under th nother one with finishes at the r t the informa ct in. Out study contributes to extant literature in several ways: First, we use Behavioral Theory in connection of the Japanese Corporate Governance Code enactment. Cuomo et al. (2016) in their review of Corporate Governance Codes mentioned that the Agency theory is mostly used by authors, followed by institutional theory. Other theories (e.g., stakeholder theory, political theory, efficiency theory, stewardship theory, contingency theory, conflict and signaling theories, and financial system theory) are rarely adopted. Behavioral theory in connection to corporate governance codes is not mentioned at their work. This is a new element that can be explored in more detail with empirical or case study in the future.

Model of I
Second, we use a behavioral perspective on the CEO-board relationship that is less atomistic, more dynamic, and focused on firm performance (Garg & Eisenhardt, 2016), in the context of Japanese reality. We show the Board of Directors-CEO relations from a new perspective that is typical only for Japan. Here, the insiders group of board members includes the CEO and the top management team, so that the relations are between this group and the outside board members.
Third, we explain in the context of Japanese corporate governance the role of the Board directors as participants in the decision-making process. Since in Japan which has community-like corporations, the effective mechanisms which impose discipline on those who manage corporations can be not external at all, but internal (Dore, 2003). Provided that monitoring is executed by inside forces, the outside directors have a helping function: advice and resource provision role.
Fourth, we explore the role of the Kansayaku board as an information provider for newly appointed outside board directors.
Our review paper has some limitations. Firstly, it is based on extant literature in English only. Some of the sources written in Japanese have been taken like citations as parts of other English papers. Secondly, the enactment of the Corporate Governance Code is too recent and the changes following it are going to be examined more thoroughly in the years to come. Finally, other inside company members' groups can be also considered as an important source of information and collaboration with outside board members.
Our study opens an agenda for future research. A case study and/or empirical research can be conducted in order to explore in more detail the information flow between insider and outsider board members; and the internal and external sources of information that can help the Board of Directors to reach the best decisions for the companies' stability and growth. Another point to be explored empirically in the future is the executive sessions between the outside board members and the Audit & Supervisory Board. As we showed in our study this type of communication has not been subject of the existing research literature. (1) Author/year; type of material -article, book, book chapter; methodology; country; concepts mentioned in connection to our topic; topic; main findings; (2) For the concepts themselves, we identified additionally the number and percentage spread among the sources 5.4. Coding scheme and the procedure followed Then, we matched the two sets of data in order to measure inter-rater reliability using percentage agreement (Dewey, 1983). We found a high overlap as the percentage agreement was 94% and above the appropriate minimum level of reliability 5.4.4. Third phase Finally, we met to discuss the few cases where there was a difference of opinion in order to reach agreement about them