A Corporate Governance Review of Toyota

Governance mechanisms

Governance mechanisms exists to ensure that managers do their work in accordance with the owners. The corporation has increased focus on corporate governance in the past years, and the initiatives and following related mechanisms will be looked at in the following.

 

Management incentives

To make sure that management work in the interest of owners, it is possible to adopt a incentive system. This was not a typically thing to do in Toyota, but the latest corporate governance report shows that this has been adopted by the Japanese corporation. This is done by offering inside directors and other relevant employees stock options. By doing this, the directors, managing officers and senior managers will work in the interest of the owners. The higher the share price, the better the profit from the option, and therefore the managers will work to improve share price. This is definitely a step in the right way for the Toyota Motor Corporation, and a mandatory point on the corporate governance checklist of any major global corporation.

Board system

Typically for the Japanese companies, Toyota has a one tier system. Different from for example Scandinavian countries where companies by law are forced to have two levels of management. The board of directors consists of 29 persons, which is a fairly large amount for a board. However the board has been larger, so this is a good move as a smaller board is likely to be more effective in its decision-making.

The board of directors consists only of insiders, as Toyota prefers "... it is important to elect individuals that comprehend and engage in TMC's strengths, including commitment to manufacturing, with an emphasis on frontline operations and problem solving based on the actual situation on the site". The corporation will however consider suitable outside directors. But this is a clear sign that Toyota prefer to have "company men" at the top of the power. These will most likely have a special relation to the company, know each other, have a long history within Toyota and will therefore might not act in accordance to the interest of the owners, but instead of to the company.

The board has been under some pressure from the media, and especially president and CEO Akio Toyoda. The image of Toyota has suffered under his management. He has been called 'Mr. No Show' because he rarely speaks publicly and experts think he never should have been CEO.

Auditors

A vital part of any corporate governance system, the auditors will ensure that the accounts present a true and fair view of the company's performance and financial situation. This is important to owners, as they want to know exactly how the company is performing. In the worst case, a bad performing management could try to hide poor performance in the financial statement.

Toyota has established a board of corporate auditors, to ensure audit plans, methods and results are optimal. The board consists of 7 persons, of these 4 are external auditors with no direct relation to the Toyota group or any of its subsidiaries.

The establishment of a internal board of auditors is without a doubt a good decision in accordance to corporate governance. The board is supposed to be supported by a department, but this department has not been established so far. To have full usage of the board of auditors, this department should be established on order to support them with the necessary informations.

Internal guidelines for corporate governance

With the release of the latest corporate governance report it shows that Toyota has established a set of guidelines. These are created to ensure that employees (directors, senior-managers and such) execute their responsibilities in compliance with relevant laws and regulations. Furthermore to ensure that they exercise their duties efficiently, by following policies, procedures and plans.

Identity of owners

The owner of Toyota Motor Corporation, The Toyota group, is the single largest company in Japan and is the biggest of the vertically-integrated Keiretsu groups. Keiretsu, being a type of cross ownership, secures the companies from hostile takeovers. The companies within a Keiretsu group own shares of each other, and thus securing the entire group from takeover. Toyota Motor Corporation is furthermore a vertically-integrated Keiretsu group, meaning that the companies in the group is vertically integrated with each other. The other companies in Toyota is producing components for cars and so on. A hostile takeover of the entire Toyota Motor Corporation needs a huge capital backup, so that is not as likely as it is with the subsidiaries. A takeover of subsidiaries could be probable, but here the Keiretsu system is adopted to defend these. The Japanese feel so confident that their Keiretsu group system is secure against hostile takeovers, that they have not adopted further measures to defend against attacks.  They are not planning on doing so in the future.

Informal mechanisms

Toyotas reputation and media exposure in 2010 has not been positive, leading to the informal mechanism to kick in. The informal mechanism is unpleasant for the entire Toyota corporation, and has forced changes in the corporation. There has been a total of 10 individual cases of recall of Toyota cars from all over the world. 5.2 million cars in three separate cases was in January recalled because of a problem with the accelerator pedal. Another 7 cases influencing 1.1 million cars has followed after the disastrous start to 2010.

The effect was instant, the share price fell nearly 22% from mid January to start February. This included a record-high volume of 18.6 million shares shifting hands on February 3rd. This has of course led to intense attention from the Toyota Corporation, with the establishment of several related procedures to avoid future situations. Furthermore the Toyota has been forced to publish more information about these recalls, this is done on their webpage at toyota.com/recall. This is not a dream scenario for a car manufacturers webpage.

Besides the multi-billion loss, the intense media exposure because of the recalls has forced the Toyota to change their ways. And by this the informal mechanism has affected Toyota.

Possible merger and acquisition

The market for automobiles is always very interesting, because it is shows consumer confidence towards the future and it is therefore a good tell on how the global economical situation is. When the world was hit by the global financial crisis it therefore affects the automobile industry, and we have seen several changes in the industry over the last years. General Motors sold Saab to the Dutch Spyker and Ford sold Volvo to Chinese Geely. It is highly unlikely that Toyota Motor Corporation will be victim for a takeover, but acquisitions with Toyota on the other end could be a possibility. In bad times it is naturally for a consolidation in the market, with the weaker players being taken over by the larger and more stable companies. Therefore it is possible that Toyota is going to buy up possibilities in the market. Just as they already have. In May Toyota bought a stake in the California-based Tesla, a company focused on electric cars.

Going in the right direction?

With the establishment of several corporate governance systems, the board of Toyota is going in the right direction. The board of directors has been cut in size, a board of auditors has been established, management incentives has been adopted, a corporate governance has been implemented and finally the release of the corporate governance report. All of these rather newly established activities shows that Toyota is moving in the right direction. However there is room for improvements to be made, in order to secure a better level of corporate governance. This includes the establishment of a fulltime department to support the board of auditors, the introduction of outside directors to the board of directors and perhaps even a second level of management.

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