The Toyota Disaster and Japanese Governance

Posted in Blog at 5:31 pm

Toyota’s recent public relations disasters involving the recall of their Prius hybrid because of sticking accelerators, and then of one of their SUVs because it rolled over too easily, prompted a great deal of reflection in the business press wondering what had gone wrong with a one-time champion of quality control?  Observers pinned much of the blame on an inbred corporate culture that could not admit to the rest of the world that the company was capable of making a mistake.  Corporate governance professionals noted that the denial of responsibility had run right up to the boardroom.  In response to a discussion which opened on the Society of Corporate Secretaries and Governance Professionals’ page, I was prompted to revisit observations I had originally made when I began to look at Japanese corporate governance nine years ago.  At the time, the accepted wisdom was that it was useless to engage Japanese companies, because the Japanese culture would never allow criticism of any sort from outside a company.  I was intrigued to discover that this wasn’t necessarily the case.

At the 2001 ICGN Conference in Tokyo, the CEOs of about eight leading Japanese companies addressed the conference. Toyota stood out as the only company adamantly opposed to any Western-style reforms of their corporate governance régime whatsoever. They were successful, they said, and they argued that therefore everyone else must be wrong. . .

This ignored the fundamental fact that corporate governance is a risk factor, folks, not a profit factor.  It doesn’t do anyone much good to defend one’s governance practices by pointing to the track record.  The point is to protect your company against what might go wrong in the future, both foreseeable risks, such as management succession issues and yes, product recalls, and the ‘Black Swans’ you can’t even envision.  Toyota wasn’t doing that, couldn’t respond properly when such an issue arose, and a major marketing disaster was the result.

Japanese companies almost all have boards that are much, much too large, composed entirely or almost entirely of employees.  No one is ever going to even question a management decision.  That’s not a board; at best, it might be a council of elder statesmen within the company, which can be used to sound out opinions when the CEO is genuinely uncertain what to do. But as soon as a decision has been made, or a consensus has emerged, such a group would be useless, even in a culture less-consensus-driven and anti-confrontational than Japan’s.

Of course, no Japanese director, no matter how independent, is going to get into a direct confrontation with the CEO, but the Japanese do have more subtle ways of indicating concern and even direct disagreement. Opposition can be expressed successfully, so long as it comes from respected counsellors, who understand and live within the Japanese culture. The problem is that rarely are directors with any real standing chosen from outside the company; in most cases, if there are token outside directors, they are both affiliated with the company, and chosen because they are not likely to make waves in the boardroom.

‘Twas not always thus. Before World War II, many companies had strong outside directors who represented major investors in the company. But MacArthur’s imposed destruction of the supposedly “fascist” concentration of capital and ownership after the war, and the fact that Japan was impoverished by her defeat, made the conquest of companies by managerialism very easy. The incredible expansion of the Japanese economy, and then of her neighbors, for forty years after the Occupation masked the problems that were accumulating, and allowed everyone to forget that there was nothing inherently ‘Japanese’ about their governance arrangements, that other approaches had once worked well in Japan.

Somehow, the Japanese have to be convinced that for their own good, they need to roll back some of this managerial power, and allow a little bit of old-fashioned financial capitalism back into their system.  Perhaps experiences such as this will help that message get through to those who can effect such changes:  the CEOs of the major institutional shareholders and the mandarins at METI and the Ministries of Law and Finance.  But it won’t be easy, because the primary impetus is going to have to come from inside.

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