Learning from Toyota’s Troubles: The Debate on Board Oversight, Board Structure, and Director Independence in Japan
Abstract
Toyota’s response to its current troubles is striking because it has continued a rather narrow emphasis on manufacturing quality and production issues in the face of a fullfledged crisis. Conspicuously absent in the discussion of Toyota’s problems to date is the role of governance institutions, particularly the role of Toyota’s board of directors. The structure and functions of a typical Japanese corporate board may serve to reinforce the penchant for corporate secrecy in Japan and other factors which are often cited as a cause of Toyota’s problems.
This Article considers the potential significance of Toyota’s troubles for Japanese corporate governance by examining two issues. First, it looks at the relevant fiduciary duty of Toyota’s directors, i.e., the general duty of oversight set forth in case law in the Daiwa Bank shareholder derivative litigation (2000) and the related subsequent statutory duty to establish a system of internal controls provided in the Companies Act (2005). Potential director liability would depend on the filing of a shareholders derivative suit and the discovery of facts which show director’s negligence in devising, implementing, and monitoring specific measures to carry out the board’s existing overall policy on internal controls.
Second, it considers the Toyota case in light of the ongoing debate in Japan during the last decade between competing board structures: the traditional company auditor (kansa-yaku) structure with no required outside directors and the newer alternative board committee structure with a required majority of outside directors. The potential role of independent directors remains controversial and is currently the hottest topic in Japanese corporate governance. The recent failures of Toyota, a highly successful champion of the traditional Japanese governance system, might help make Japan more receptive to calls by international and domestic institutional investors to take measures to increase board independence.
