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Toyota’s woes a symptom of Japanese corporate governance

A recent article from The Economist has highlighted another real-world connection between firm performance and governance structures.

Commenting on the massive accelerator safety recall and how the Toyota management has handled itself, the Economist points out that the problems it faces: “highlight broader failings in Japanese corporate governance that make large companies particularly vulnerable to mishandling a crisis in this way. Such firms typically have a rigid system of seniority and hierarchy in which people are reluctant to pass bad news up the chain, thus keeping information from those who need to hear it in a misguided effort to protect them from losing face. In many firms, including Toyota, family ties make challenging the boss all but impossible. Any attempt to short-circuit the hierarchy is deemed an act of disloyalty and a violation of the traditional consensual corporate culture. Groupthink becomes entrenched because there is so little mobility between companies: hiring from outside is thought to disrupt a firm’s internal harmony, and an executive willing to move will be stained as a disloyal “job-hopper”. This further hinders firms’ ability to take bold, decisive action. The preference for harmony crowds out alternative viewpoints.”

Whether Japan will use the Toyota crisis as an opportunity to reflect on its governance practices remains to be seen. After all, no one country or model of governance has come out of the past crisis with flying colours not least the the US auto sector  –  so who are Europe/USA to preach?

As the LA Times pointed out in its own very detailed analysis of the company’s handling of the situation: “Toyota has used its structure to fend off lawsuits, forcing attorneys to file repeated requests for information to subsidiaries, said John P. Kristensen, an attorney in a suit against the company. You don’t need an MBA to know that Toyota’s American subsidiaries were intentionally created to keep them in the dark. The system was set up intentionally to work like this.”

Both consumers and shareholders have been damaged but “the Toyota system” – it’s only reasonable for investors to expect that Japan will be encouraged to more forward with governance reforms which focusses on a more transparent approach to board accountability. If the Tokyo Stock Exchange doesn’t force the debate, expect the Class Action Lawyer community to step in.

Links

The Economist >>

LA Times >>

What do you think?