Corporate Governance - Toyota Corporations Background - Case Study Example

RЕVIЕWING АND MОNITОRING СОRРОRАTЕ GОVЕRNАNСЕ Name: Course: Tutor: Date: 1. BRIEF SUMMARY OF THE TOYOTA CORPORATION’S BACKGROUND Toyota Motors Corporation is a company started in 1937; the company specializes in the designing, manufactory, assemblage and the sale of vehicles, accessories and vehicle parts in America, Asia and Europe. As a competitor in the automobile industry, the company has adjusted its business strategy with respect to industry and economic changes. For example, the drastic increase in fuel prices and the pressure exerted on vehicle makers – compelling them to produce vehicles that are more environment-friendly have been among the trends that have shaped the company’s values and mission (Ellsworth, 2002). Toyota’s background as projected through its mission and values The guiding principles that form the basis of Toyota’s mission present a definition of the mission of the company and were adopted in 1992. The guiding principles for the company form the framework for the operations of the company throughout the world, and they have continued to be the definition of the company’s past, present and the future. The mission of the company is grounded on the observance of the spirit of the law, for all the regions where the company does its business (Ellsworth, 2002). The company has taken the stance in doing its business in a fair and open manner, in order to remain and operate like an excellent corporate citizen throughout the world. The second guiding principal that forms the basis of the company’s mission of respecting the customs and the culture of all the countries it operates in, towards becoming a contributor towards contributing towards social and the economic development. Through respecting the customs and the cultures of the nations and the societies where the company operates, the company seeks to promote the corporate responsibility of the different communities. The third guiding principle for the company’s values and mission is that of dedicating its resources and capacity towards the provision of safe and clean products, which can enhance the lives of the people it serves throughout the world. The fourth guiding principle for the mission of the value, which also forms an intrinsic part of its value, is that of developing and selling products and technologies that are advanced and which fulfil the needs of all customers globally. The fifth guiding principle is that of creating an organizational culture that fosters teamwork and personal creativity, while at the same time creating an environment full of respect and mutual understanding between the management and the employees of the company (Ellsworth, 2002). The mission of the company is also, to a large extent grounded in the pursuit of harmony-driven growth, by promoting the innovativeness of the company’s management. The mission of the company, further, draws a lot from partnering with research enterprises, in order to actualize long-term, mutual and stable benefits, while at the same time remaining open to new partnerships for growth. In light of the guiding principles adopted by the Toyota Motors Company, the company pursues the vision of uniting the company with industry success in the future, through delivering better products, enriching communities and the people and fostering the sustainability of growth. The vision of enriching the lives of its consumers and the provision of better cars is grounded in the roots of the company, which are articulated through its values and mission (Ellsworth, 2002). The power provided by the values and the mission of the company are supported by a stable business base – all with the goal of realizing sustainable growth in the short and the long term. The values encapsulated in the company’s mission and values are condensed in its vision of becoming the most respected and admired company throughout the world. The condensed version of the company’s mission is a solidification of its values, including those of developing outstanding vehicles and services for their customers, and enriching its partners, customers and the environment as a whole. Toyota’s business, products and services The company has remained a dominant player in the production of vehicles. The company produces different vehicle types, including vans, cars, sports and recreation-utility, commercial vehicles like trucks and vehicle accessories and parts. Apart from the development of vehicles, the company produces marine and craft engines. One of the major service areas that the company provides is that of financing its customers and dealers, for the lease or the purchase of vehicles. The company is operating in more than 27 countries, and has about 50 production facilities – throughout Europe, North America and Asia; the vehicles and the other products produced by the company are sold in more than 170 nations. The products and the services of the company are tailored to meet the needs of different target clusters, including corporate clients, consumers, non-profit and state-owned organizations – through the provision of financial services that meet the specific needs of the given cluster. The major competitive edges of the products of the company include flexibility and heterogeneity, and also the administration of business in a transparent and simple manner (Ellsworth, 2002). In order to offer the best flexibility and convenience for its different client clusters, the company offers a wide range of credit and leasing products, for the purchase of vehicles and other machinery – used and new, including BT handling systems. Additionally, the company offers insurance services for its clients, apart from the developed credit and leasing line that has remained a flagship line for the company. At the peak of the company’s service delivery, was the recall of millions of cars, due to the speculation that many of them had production glitches that prevented them from being safe for the users (Yan, 2014). The vehicle models recalled for free remodelling, servicing and elimination of production defects had been sold across the globe, and they included a variety of brands: Highlander, Corolla, Matrix and Camry. During the customer service mission, the company set out to inspect and, where necessary, replace the components of the recalled vehicles, including steering systems, seat rails, starter systems, airbag wiring and wiper motors (Yan, 2014). Toyota’s customer’s profile The customers of the company include the environment-sensitive consumers of the world, including those seeking to reduce their carbon footprint, by reducing their carbon dioxide emissions. These customers are catered by the company’s hybrid-electric drive vehicles, including the Prius and Lexus; the hybrid drive system was unveiled in the market in 1997. This group is also served by the plug-in hybrids and the fully-electric driven vehicle segment, including the Prius and the RAV4 EV, respectively. The second cluster of customers is that seeking to purchase alternative fuel vehicles; this customer segment is served with products like the hydrogen fuel-cell-driven vehicles. The target customers of the company also include the users of cars, crossovers and SUVs, luxury vehicles and trucks. The third customer segment for the company is that of motor-sport, and the brands that serve these customers include the Lexus sports cars and the buyers of parts and accessories for formula 3 and Nippon among other sporting lines. The fourth customer segment is comprised of the consumers of aerospace products; the company has invested in the development of the Mitsubishi jet and also the production of the TAA-1 jet. The company has also targeted the consumers of philanthropic services, and is also offering services in higher education, through the company’s technological training institute. Other customer segments served by the company include the users of robotics, and also the consumers of agricultural biotechnology. Toyota’s organizational structure Toyota Motors have adopted a relatively flat organizational structure – to its advantage and detriment. The organizational structure has been beneficial, by encouraging creativity and innovation, but it has also been blamed as being dysfunctional, especially after the company was hit by safety issues. The main weaknesses of the structure that were major decisions are made from the company’s headquarters in Japan (Vertabedian and Bensinger, 2014). Organizational structure Source: (Vertabedian and Bensinger, 2014) Toyota’s financial performance The company’s financial position has been improving over the years; the revenues increased by 33 percent between 2004 and 2008. More recently, the company’s revenues and sales have been increasing, reaching the highs of 20, 419 billion Yen, up from the 2012 figure of 18.583 billion yen (TMC, 2013). The increment marked an increment of more than 18 percent. The business of the company covers its various segments, including financial and automotive among other areas of operation. However, the automotive division is the lead generator of revenues; the division accounted for about 90 percent of total revenues during 2013. During 2013, the sales of vehicles were affected by a number of factors, including economic constraints, political and social forces, including the pressure arising from the recall of vehicles (TMC, 2013). IDENTIFICATION AND ANALYSIS OF CORPORATE GOVERNANCE STANDARDS Corporate governance practices, standards and requirements Toyota Motors views the growth of corporate governance and value in the long-term, as a major area of priority for its management. Toyota Motors holds the belief that pursuing the value of corporate governance will enable it to establish stable growth in the short and the long-term. The company hopes to realize that, through the development of positive networks and relationships with the various clusters of stakeholders, including customers, business partners, employees, shareholders and neighbourhoods. The value of the company’s corporate governance practices and structures is evident from the guiding principles that form the basis of the company’s mission and vision; the guiding principles also form the basis of the company’s business policies. More importantly, the company’s CSR policy was put into place, with the aim of increasing its ability to attain sustainable development. The CSR policy framework of the company is an interpretation of the company’s organization of relationships with the various stakeholder groups. Toyota motors has also put into place, a variety of the systems needed to revamp the company’s competitiveness as a globally-operating enterprise. The company continually works on enhancing the stability of trust and corporate value among the members of its society, through meeting its CSR responsibilities, in accordance to its fundamental philosophy. The company works on the fulfilment of its corporate governance, in accordance to the belief that sustaining and enhancing the efficiency of its management and maintaining the transparency of its corporate role is of great importance. In an attempt to keep up with the demands of corporate governance, the company holds board meetings on a monthly basis, where critical managerial matters are addressed and the execution of directorate roles is evaluated. In order to complement the work of the board members, the company also employs outside directors, and the issues addressed include management policies, corporate vision, investments and managerial policies. The issues related to quality, human resources, technologies and procurement and production are explored at the meetings of the respective company divisions/ functions. The company has however, put into place committees for deliberating on more critical areas, including CSR, export controls and the company’s environment. In order to deliver on its corporate governance role, the company utilizes the services of a supervisory and audit model. The full-time supervisory and audit members to the board, together with outside members attend directors meetings, in order to review the work of directors. Further, the supervisory and audit meetings of the board are used as platforms for exploring and reporting the work of directors. Through collaborating with the audit function of the company, and also independent corporate governance auditors, the company reviews the efficiency and the legality of its management. Corporate governance key result areas in relation to company practices and policies The key results and strides made in corporate governance include that the company has initiated a dedicated management model, so as to improve the promptness of decision-making and quickening the company’s operations, in respect to the realization of the company’s global strategy. The second key result area in the company’s policies and practices in respect to corporate governance include that it has established internal councils and committees for the monitoring of corporate and managerial activities, in accordance to the needs of the various stakeholder groups, with the aim of increasing social performance and transparency. The company’s management system was established in 2003, and boards of directors hold the peak positions, and associate officers are responsible for the operationalization of functions and strategies. The effectiveness of the model is evident from the fact that it allows the management of the company, to engage on-site operationalization in the decision-making processes, through the implementation of the decisions of the management. There is also the key result area of the effective administration of the company’s basic approach to internal controls. In respect to this area, the company has developed and adopted the basic model for internal controls (fundamental model). The model allows the company to tap the maximum efforts of the staffs of the company, by encouraging the autonomy of decision-making. However, the model also features a variety of checks and balances, coupled with the oversight of the directors and the management, in order to steer the corporate governance function of the company towards the best outcomes. Queries made by statutory and regulatory authorities about compliance to corporate governance Queries over Toyota’s compliance to corporate governance have become a hot topic in the past few years. The peak of the queries came after the company was challenged by regulators (administrative) and also customers, regarding the safety of their vehicles, among the vehicles sold in Japan and those sold overseas. The safety issue became overblown, mainly because Toyota disregarded the calls of customers and regulators until the critical death of the driver and the passengers of a Lexus in San Diego, due to a faulty accelerator system. The news featured in almost all news and media platforms (Hemus, 2010). More importantly, the safety issue, which is largely blamed on the corporate culture of the company, saw it go to the corridors of courts and administrative regulatory and statutory authorities, including the US department of Justice. For example, Cogan (2014) reports the US department of Justice’s declaration that Toyota had to pay USD 1.2 billion as the fine, over a criminal case that was deferred for more than three years, and was lastly dropped. The case arose from the company’s apparent cover-up of the safety glitches that led to the recall of many Toyota vehicles, especially those with sticky acceleration reins; the problem was traced to faulty floor mats (Cogan, 2014). Another oversight agency that was involved in checking the corporate governance crisis of Toyota was the NTSA (“National Highway Traffic Safety Administration”); NTSA imposed the highest fine due to the safety issues triggered by the production faults of Toyota vehicles (Aronson, 2010, p. 67). The Attorney General of the US is quoted as declaring that the company, instead of acting like a good corporate citizen and coming out in the open to accept responsibility for the faults in their vehicles, it gave faulty reports. The Attorney general added that the company, made it worse by issuing misleading reports and comments about the public and the safety issues that they had known existed, and giving the US congress misleading information (Cogan, 2014). The assistant director to the FBI is also quoted as saying that Toyota Motors disregarded the unchallengeable principle of vehicle safety, in order to make more sales and bigger profit margins. It is more unfortunate that, instead of recalling the vehicles with the problem immediately, the company continued to produce vehicles with the same safety problems, despite the fact that they had receive the knowledge that they were causing deaths. Gardner (2010) reported that, among the people that explored and dissected the corporate governance issues that led to the recall of so many Toyota vehicles, the organizational culture could be the main culprit. The system where all power and decision-making is centralized in Japan, could be the main cause of the problems. The potential effects of the dysfunctional corporate governance was evident from the fact that, all through the recall crisis, there was no company executive based in America, had the authority to make the call for a vehicle recall. The implication of the dysfunction in the company’s administration gave evidence that all executive power was exercised from the Japanese headquarters (Gardner, 2010). STUDY OF THE INTERNAL CONTROL PROCEDURES, IT MODELS, REPORTING SYSTEMS AND MANAGEMENT STRUCTURES USED BY TOYOTA MOTORS TO FOSTER COMPLIANCE WITH THE STANDARDS OF CORPORATE GOVERNANCE Toyota outlay for the administration of corporate governance The legislative system that oversees Japanese companies integrates a mixture of two models of corporate governance. The first of the models integrated into the hybrid system is the conventional model of management, which is also called the two-tier model. Under this system of governance, the supervisors and the directors of the corporate agent are appointed by its shareholders. When using this model, the boards of directors manage the corporate functions of the company in a proactive manner and the supervisors of the different functions (company auditors) review and administer oversight over the managerial aspect of the company. The second model in used under the hybrid system is the one-tier model, which is relatively newer than the traditional model. This system is largely influenced by the Anglo-American culture and style of management, where the members of the board are responsible for the oversight of the operations of the corporations, as mandated by the self-governing directors commissioned to do so (Aronson, 2012). In the case of Toyota, the two-tier (traditional) model is in use; under this model, Japanese legislation does not call for the shareholders of the company to elect company directors from outside the organization. Under this style of corporate management, the supervisors of the company are responsible for the monitoring the job performance of managers and also overseeing the corporate workings of the company. However, due to the limitation of company supervisors – arising from their lack of the authority to dismiss the managers or the directors employed by the company, it is very difficult for them to administer their oversight role. Arising from the company’s administration of corporate governance was the crisis of vehicle calls; the crisis of vehicle recalls evidenced the faults and the flaws of centralizing decision-making processes and authority. The crisis arose from the design failures of the vehicles produced by the company, and many of the vehicles found to have the design faults caused casualties and a wide range of safety issues (Aronson, 2010, p. 67). During the start of 2010, the company had recalled more than six million of the vehicles it had sold previously in America alone, and an extra 2 million vehicles in other markets. The effects of the massive recall included a series of critical issues, including a stagnant growth, the escalation of the recall crisis, a reduction in corporate credibility, and the imposition of the highest fines in history. Following the crisis, the CEO of the company, Mr. Toyoda recommended a number of measures, aimed at correcting and improving the public image of the company. The strategies proposed included addressing customer complaints in a proactive manner, developing and maintaining effective models of information sharing internally, and improving the communication of the company with the various oversight authorities (Aronson, 2010, p. 69). Unfortunately, like an external auditor pointed out, there were more corporate governance issues that needed to be addressed – which were not corrected. One of the issues is related to the function of the company’s board. The emphasis of the issue is that, in the case Toyota was an American-owned company, the blame and the focus of correcting issues would have been on the corporate governance structure of the company. For example, one issue would be, whether the directors sitting on the board had performed their role of monitoring the corporate functions effectively. There would also be questions related to whether the internal alert and communication system and information communication, together with the systems of decision-making had failed. Further, there would be questions over, whether the removal of the senior management of the company could improve the administration of corporate governance, in order to avoid a crisis of the same nature in the future (Aronson, 2010, p. 70). The indicators evident from the control procedures of Toyota motors The crisis of Toyota revealed that the corporations using the traditional framework of management had a serious problem in the area of information communication and sharing internally. The crisis also demonstrated the ineffectiveness of the internal control system, the IT system in use and the reporting framework of the company – because it worked in a one-directional style. More importantly, it is possible to trace the crisis and failure to the directives of Japanese corporate legislation. Japanese directs that for companies with supervisors, the board of is responsible for establishing the control system (internal) needed to check that company managers work in accordance to the articles of company incorporation and the law (Aronson 2003, p. 11). The crisis gives the evidence needed to prove that the company’s internal review function (department) which is the one supposed to check the internal control of the organization was not operating optimally. This is the position, because if it were reporting to the company’s board directly, it would have effectively relayed the information about the production flaws of vehicles to the supervisors (Aronson, 2010, p. 77). The same situation was made manifest by the 2009 incidence, where the failures of the internal control function. During the particular case, the products of the company were found to have major technical errors, among those circulated within the EU; the effects of the internal control system failure included that the information was not communicated to the US oversight authority, until four months later. The failure gives further evidence of the communication gaps that affect the company. In summary, these indicators show that having employees who are knowledgeable and specialized in corporate functions does not guarantee effective internal relaying of information. The processes to implement in the place of Toyota’s corporate governance and communication system The inefficiency of Toyota’s corporate governance led to massive recalls, public disclosure and open apologies, and all these did more harm to the company than the accident had done (Hemus, 2010). The effects of the series of events led to the loss of market share, sales and customer and investor confidence in the company. The company’s interventions to the recall crisis started in September of 2009, starting with the recall of more than 3.8 million vehicles. However, the reaction and the response of the company, including that it challenged the cases of fatalities, leading to the imposition of a hefty fine by NTSA, it is evident that the company did not address the crisis sufficiently. In the next section, this paper will provide a set of processes that could be implemented in the place of the systems used by Toyota, in order to correct the issue. The recommendations offered are aimed at reforming the Toyota motors company, and the strategies proposed are those that will help to get the business back on track: Firstly, the company should launch a campaign for reversing the lost credibility of the vehicles of the company, which was the Toyota way that used to identify the company. This strategy can be employed by launching a company-wide (global) campaign aimed at improving the production models of the company, in order to ensure that the company will not have any product defects or vehicle recalls found in the short-term. By doing that, the company will eliminate the speculation related to loss of the company’s credibility. Secondly, the company should develop a new safety system, where they will integrate the already-in-the-market accident-evasion technologies. This strategy is very important, because it will keep the company at par with its competitors, who have already offered the safety features on their vehicles for years. Thirdly, the company should restructure its administrative teams, for example, by reducing the number of directors from the original number, to a lesser number, in order to make the board more manageable and effective. Further, the reduction of the directors should be complemented by the reorganization of the company’s departments, especially those responsible for CSR and corporate planning and governance. The fourth strategy should touch on the issue of communication, and the process should entail the establishment of a global task force, which will be based and working regionally, under the leadership of the company’s president. The task-force should be dedicated at quality optimization, networked regionally; capacitated to promote communication, foster the autonomy and responsibility of regions, and incorporate outside experts in the change plans. The fifth strategy should be that of forming advisory teams for reviewing the company’s product quality. The teams should comprise of external experts, so as to avoid the risk of biasness in the reviewing process. The sixth strategy should be that of taking full responsibility for the liability caused by the company’s cars; one example could include that of offering corporate penance to the victims of the accidents caused by the faults. The fifth strategy is that the company should be willing to work in harmony with national regulators, in order to pursue the common goal of improving the safety of automobiles. THE STEPS TO TAKE IN REVIEWING AND MONITORING INTERNAL CONTROL PROCEDURES AND ORGANIZATIONAL PROCESSES Step 1: The assessment of the risks or variety of risks that the control procedure is supposed to modify. Doing this helps the organization to review and monitor the right variables, in an optimal way. Step 2: Checking that the operational and strategic decision-making of the organization are supported by effective risk management, through the institution of effective controls. Step 3: Check for aggregate/ combinations of risks, in order to reduce the risk of failing to meet the objectives of the processes and procedures. Step 4: The exploration of the risks to be controlled, including their characteristics like causes, in order to enforce the controls that can modify and prevent the risks in question. One example of risk is production defects. Step 5: Starting or stopping the activities that give rise to high levels of risk, in pursuing more productivity and credibility for the company. Step 6: Check that the controls enforced are cost-effective for the company. Step 7: Continually review and check the delicate balance between the risks anticipated and the controls to be used to counter the risks. ANALYSING COMPLIANCE FAILURES AND THE CHANGES TO MAKE The process of analysing for compliance failures and near misses would entail the analysis of organizational practices, in order to check whether they meet performance and obligation thresholds. Secondly, the process would entail querying compliance using the framework of the standards set by regulatory and statutory authorities, in order to check the internal procedures of the company and areas of governance weaknesses. The third aspect of the process would be assessing the organization and the contents of compliance reports, processes and benchmarks, in accordance to oversight policies. The fourth aspect is checking internal control processes, on whether they meet corporate governance thresholds, in accordance to corporate governance requirements (Ellsworth, 2002). The fifth aspect is the evaluation of IT systems, checking for their effectiveness and use in collecting the data needed for compliance. The changes to be made after the analysis for compliance include adjusting management practices and processes, in order to ensure that they aid corporate governance. It is important to develop the plans for reporting, in order to guarantee the satisfaction of requirements within the set duration. Thirdly, it will be important to asses the achievement indicators, in order to increase the corporate governance thresholds of the company (Aronson, 2010). Reference List Aronson, B., 2010. Learning from Toyota's Troubles: The Debate on Board Oversight, Board Structure and Director Independence in Japan. Journal of Japanese Law, 15(30), p. 76- 77. Aronson, B., 2003. Reconsidering The Importance Of Law In Japanese Corporate Governance: Evidence From The Daiwa Bank Shareholder Derivative Case. Cornell International Law Journal, 36, p. 26, 51. Ellsworth, R., 2002. Leading with Purpose: The New Corporate Realities. Stanford, CA: Stanford University Press. Aronson, B., 2012. The Olympus Scandal and Corporate Governance Reform: Can Japan Find a Middle Ground between the Board Monitoring Model and Management Model? UCLA Pacific Basin Law Journal, 30(1), p. 95-96. Hemus, J., 2010. Accelerating towards crisis: a PR view of Toyota's recall. [Online] The Guardian. Available at: http://www.theguardian.com/business/2010/feb/09/pr-view-toyota-reputation- management [Accessed 09 Sep 2010] Cogan, J., 2014. Toyota pays $1.2 billion to escape prosecution for defect deaths and injuries. [Online] WSWS. Available at: http://www.wsws.org/en/articles/2014/03/21/toya-m21.html [Accessed 09 Sep 2010] Gardner, G., 2010. Recall puts Toyota’s culture in spotlight: Top-down automaker has lost several key U.S. executives since 2006. [Online] Chicago Tribune. Available at: http://articles.chicagotribune.com/2010-03-18/news/sc-autos-0321-toyota-culture- 20100318_1_toyota-executive-japanese-automaker-pulte-homes [Accessed 09 Sep 2010] TMC., 2013. Annual Report 2013: Selected Financial Summary (U.S GAAP). [Online] Toyota Global. Available at: http://www.toyota-global.com/investors/ir_library/annual/pdf/2013/p42_123.pdf [Accessed 09 Sep 2010] Vertabedian, R. and Bensinger, K., 2014. Toyota's fractured structure may be at root of safety problems. [Online] Los Angeles Times. Available at: http://articles.latimes.com/2010/feb/23/business/la-fi-toyota23-2010feb23 [Accessed 09 Sep 2010] Yan, S., 2014. Toyota recalls 6.4 million cars worldwide. [Online] CNN. Available at: http://money.cnn.com/2014/04/09/autos/toyota-recall/ [Accessed 09 Sep 2010] Read More