Japan has made major strides in corporate governance over the past decade. Reforms have included increasing board independence and modernizing committee structures. Yet one component of Japanese boards remains relatively unchanged: age. That’s a material oversight, in our view. Corporate boards that are too monolithic could be putting a damper on profits.
Corporate boards in Japan have long been characterized by seniority and continuity against a backdrop of lifetime employment. More than 95% of directors in the TOPIX 100 are in the bubble generation or older, while fewer than 1% are under the age of 50. This level of experience provides stability and institutional knowledge, but it may also entrench decision-making and hinder capital efficiency.
Many boards in Japan prioritize balance sheet safety over returning capital to shareholders and taking calculated risks. This has helped contribute to a more than 10% gap in return on equity (ROE) between Japanese and US equities . In a market long challenged by poor capital allocation, we think multigenerational boards can help buck this trend.
Multigenerational Boards Can Boost Performance
Studies in both the US and Europe present a clear link between multigenerational boards and financial performance. He, Miletkov and Staneva found that companies with younger directors not only generate higher return on assets but also command higher price-to-book values—particularly for firms that invest more in R&D and engage in patenting activity.
Younger boards can also mean less exposure to defaults—and chicanery. Janahi, Millo and Voulgaris discovered that banks with multigenerational boards experience fewer nonperforming loans, while Neukirchen, Posch and Betzer observed less corporate misconduct among firms with a greater age range.
These findings cumulatively suggest that multigenerational boards have the potential to improve capital allocation, reduce risk and boost valuations.
Mind the Gaps: Age and ROE
Our own in-house research confirms these findings. We tracked TOPIX constituents over a 10-year period—the largest study of its kind. The results were striking.
Firms with a more than 30-year age gap between the youngest and oldest director—what we define as multigenerational boards—delivered ROE more than 200 basis points higher, on average, than companies with more senior boards. This outperformance occurred in every calendar year during the period, and the results were statistically significant across sectors. Multigenerational boards achieved superior ROE in all but one sector, with the dispersion independent of size, style or founder-led status (Display).
