Toyota: an Example of “Good” Corporate Governance

1.0 Introduction

Corporations the world over have been publicly criticized for improving their firm’s bottom line at any moral or social cost. Ethics essentially “refers to the issues of right, wrong, fairness and justice.” Clearly, examples such as Enron, WorldCom, and even Conrad Black tested society’s views on sound ethical business and the link to what society sees as “good” governance practices. Although the controversies involve issues matched in variety only by the types of companies, they all virtually involve some form of abuse of stakeholders trust.

These cases are not representative of the entire spectrum of today’s business environment; in fact, there are a number of companies whose competitive advantages are based on “good” corporate governance practices – namely stakeholder involvement. As a result, I have chosen to present and explore in this essay the practices of one such company: the Toyota Motor Corporation while highlighting its “good” corporate governance principles.

2.0 TOYOTA

Toyota is a global leader in automotive sales, technology and production while also retaining one of the world’s most recognizable and highly valued brands. At the heart of their success is the innovative and groundbreaking production methods made possible by the company’s recognition of the value of employee empowerment. Employee involvement is defined as “consist[ing] of a variety of systematic methods that empower employees to participate in the decisions that affect them and their relationship with the organization.”

At Toyota, the company has employed these proven techniques of co-determination to encourage employee, and supplier involvement in their decision making process, since these practices “help improve both the ability and attitude” of stakeholders. In fact, one of the guiding principles of Toyota requires the company to “foster a corporate culture that enhances individual creativity and teamwork value, while honouring (sic) mutual trust and respect between labor (sic) and management.”

2.1 Employee Involvement Toyota is renowned for utilizing autonomous work groups that constantly generate innovative results to both processes and product issues. The use of these groups defined as “teams of workers without a formal, company-appointed supervisor who decided among themselves matters traditionally handled by a supervisor.” The use of these management techniques not only fosters innovation, but improves the quality of products as well. Once this structure is combined with the “set of organised, well integrated, and continuous activities involving both managers and workers” that defines Toyota’s “Total Quality Management System,” the result is consistent recognition of vehicles with the highest initial quality by various rating associations.

2.2 Suppliers Toyota’s approach extends beyond treating employees with respect, but also looks to develop “an atmosphere of long-term trust and of a partnership based on mutual prosperity” with its suppliers, demonstrating their commitment to Total Quality Management. This commitment is partially attributable to the Japanese business practice of clients and suppliers purchasing equity positions within their respective companies, however this practice is neither the sole, nor the primary cause of this approach. More accurately, this approach is attributable to the company’s commitment to the principles of stakeholder management; the company considers the suppliers to be morally entitled to ethical treatment considering their roles as stakeholders within the corporation.

2.3 The Natural Environment This relationship with suppliers and employees has allowed Toyota to fulfill their commitment to a third stakeholder: the natural environment. Toyota developed a first mover advantage into the field of “green” vehicle technology. The relationship with their employees, who often are their customers as well, aided Toyota in recognizing the need for less environmentally harmful vehicles, and allowed them to capitalize on this opportunity by implementing the new products and processes intro their manufacturing process.

Naturally, these companies do not have Toyota as their sole customer, suppliers have begun selling these environmentally friendly products to various related companies. In turn they have begun requiring more environmentally friendly products from their own suppliers, thus Toyota’s ethical and sound business decision to protect the environment has had an effect on the entire automotive supply chain.

Toyota’s relationship with suppliers has influenced them to reduce the environmental impact of their own companies. Considering the revenue to be generated from a contract with Toyota, certain suppliers found it financially beneficial or even necessary to comply with these environmentally friendly requirements of being a Toyota supplier. Finally, these environmentally friendly initiatives set a trend for the industry now attempting to close in on the considerable advantage enjoyed by Toyota.

Competitors are now attempting to develop technologies in conjunction with their own suppliers that will benefit them and the natural environment in the long term. In addition, the American government (among others) has recently raised the minimum fuel efficiency requirements of all vehicles sold in the USA , further increasing Toyota’s competitive advantage as the large majority of their vehicles already exceed those requirements. Toyota was able to utilize both their relationships of trust and their economic power to bring about a positive change in the industry to the benefit of the natural environment – an important stakeholder for any business.

2.4 Result This good governance practices such as the treatment of employees as partners, as opposed to subordinates, and their relationships with suppliers has allowed Toyota to develop numerous productions techniques that have become global standards and develop competitive advantages in several sectors. Furthermore, this approach to dealing with key stakeholders has allowed the corporation to grow despite the difficulties experienced by a number of its competitors – namely the American vehicle manufacturers.

While General Motors, Ford Motor, and Chrysler have all been stuck with excessive legacy costs associated with health care and unionization, Toyota has been able to coordinate with employees to avoid such burdens and concentrate on strengthening the core values that dictate their business activities.

3.0 Stakeholder Management The key to Toyota’s success has been the successful involvement of non-management stakeholders, specifically, employees and suppliers, into their decision making process. However, to understand why this approach is an example of good corporate governance ethical, it is important to outline the stakeholder approach to management. First, a stake is defined as “an interest or share in an undertaking…rang[ing] from simply an interest in an undertaking at one extreme to a legal claim of ownership at the other extreme…in between the two extremes is a right to something.” From this definition, it is clear that employees are stakeholders in the corporations that employ them, but evidently, they are not the sole stakeholders.

The corporation also has an effect on its political, social, economic, technological environment (each with their own stakeholders). The effect of the company’s actions on these stakeholders is not identical for, in fact within the stakeholder approach there are defined categories of primary and secondary stakeholders. For example, primary social stakeholders would be the shareholders and investors whereas as a secondary social stakeholder would be civic institutions. Second, after the recognition of the various levels of stakeholders and their level of involvement, the question and challenge becomes how do these companies manage these stakeholders.

In the case of Toyota, they have embraced their employees as integral parts of their success and by doing so have taken their “Stakeholder Management Capability (SMC) to the Transactional Level. At this highest level of SMC, management must take the initiative in meeting stakeholders face to face and attempting to be responsive to their needs.” For example, the importance of employees and respect attributed to employees is clearly defined in all of Toyota’s guiding principles demonstrating the recognition of the vital role played by this stakeholder group.

4.0 Utilitarianism With respect to Act Utilitarianism one looks for an act that produces the greatest benefits and minimizes the costs. Since there are no benefits when discussing moral culpability by corporations or individuals within the firm, it is primarily the costs that must be minimized. These costs relate to the significant damage that can be done to the corporation’s reputation and financial standing when participating in an act that is morally wrong. By treating stakeholders at various levels morally and ethically one is satisfying the fundamental principle of the greatest good thus qualifying the above descriptions of Toyota’s practices as good corporate governance.

5.0 CONCLUSION

Today’s business landscape is littered with examples and cases of companies who conflict with both the law, basic ethical and moral requirements, all of which are regularly viewed as bad corporate governance. The Toyota Motor Corporation is a counterexample to all the negative and damaging actions of a number of their counterparts. The incorporation of sound stakeholder management practices into their core business activities has allowed Toyota to grow into the world’s most valuable automotive company while setting a precedent of good corporate governance for other companies. By no means, is Toyota the sole company employing these practices but their combination of ethical behaviour and business success is unique, and is an excellent example of “good” corporate governance.

ENDNOTES Karakowsky, Carroll, Buchholtz, Business and Society – Ethics and Stakeholder Management. p.23; Thomson, Nelson, 2005; Das, Templer Performance Management – PH Series in Human Resources. p.128; Prentice Hall, 2003; Das, Templer Performance Management – PH Series in Human Resources. p.129; Prentice Hall, 2003; http://www.toyota.co.jp/en/vision/philosophy/

Das, Templer Performance Management – PH Series in Human Resources. p.143; Prentice Hall, 2003; Das, Templer Performance Management – PH Series in Human Resources. p.151; Prentice Hall, 2003; For example please refer to the annual JD Power and Associates Initial Quality Study: http://www.jdpower.com/corporate/news/releases/pressrelease.aspx?ID=2005069 Winfield, Hay (1997). Toyota's supply chain: changing employee relations; Bradford. Vol 19, Issue 5:457. Available from Proquest database: http:/www.proquest.umi.com/ (Accessed 26 November 2007). http://online.wsj.com/article/SB119725077328018914.html?mod=googlenews_wsj Karakowsky, Carroll, Buchholtz, Business and Society – Ethics and Stakeholder Management. p.67; Thomson, Nelson, 2005; Karakowsky, Carroll, Buchholtz, Business and Society – Ethics and Stakeholder Management. p.85; Thomson, Nelson, 2005;

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