Abstract This chapter examines the impact of foreign institutional investors on various aspects of corporate governance and corporate restructuring. Alongside foreign direct investment (FDI) by foreign corporations, portfolio ownership by American and British mutual funds and pension funds has increased. Detailed interviews show how these foreign investors exert influence through the threat of exit and the cultivation of voice, thus exerting pressure for firms to improve corporate disclosure and engage with shareholders. A further analysis of the Japan Corporate Governance Index for 2003 for TSE 1st Section firms shows that firms with higher levels of foreign ownership are more likely to adopt Anglo-American style corporate governance reforms, such as equity-based performance measures, changes in the structure and function of the board, and communication with shareholders. Moreover, foreign ownership is also strongly linked to the likelihood of corporate downsizing in terms of employment or divestment.
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