Case Study Of Toyotas Vehicle Recall Management Essay

This study focuses on the risk of reputational damage from a crisis situation and uses the Toyota recall crisis as a case study. The study examines Toyota’s actions – as relates to preserving its reputation – as more than 8 million of its motor vehicles are recalled from 2009-2010. In order to do this, Toyota’s actions are benchmarked against critical risk factors identified in the Roads to Ruin report conducted by Cass Business School for Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC).

The findings from the case revealed that a serious breakdown in Toyota’s culture and a violation of its clearly stated principles of quality and customer-focus were the root causes of its reputational decline. Upon closer examination of the Toyota case, we find that the Toyota crisis escalated majorly because the company seemed to have no plan whatsoever to prepare for a crisis of the magnitude it faced and hence failed to protect its reputation. The case goes on to highlight various risk management that can be incorporated by businesses, managers and CEOs to preserve their reputation in crisis situations and avoid common pitfalls that lead to reputational decline.

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Executive summary

This paper explores the subject of corporate reputation and the risk a crisis situation poses to a company’s reputation. The main objective of this study is to extract risk management lessons from a crisis situation that can be used by managers and CEOs to avoid reputational decline in similar circumstances. The paper is structured as a case study that focuses on Toyota Motor Corporation as it faced the greatest threat to its reputation – the recall of its vehicles in 2009. It explores key factors that made Toyota vulnerable during the recall and explores the effects of the recall on Toyota’s reputation.

In order to determine the underlying risk factors that exacerbated the crisis, Toyota is benchmarked against critical risk factors identified in the ‘Roads to Ruin’ report – a research report on risk management by Cass Business School for AIRMIC. The report was chosen because it provides a rich source of lessons about risk, risk analysis and risk management by detailing over one hundred specific ‘lessons about risk’ from different case studies of companies in reputation-damaging crisis situations.

Upon closer examination of the details of the Toyota case, we find that Toyota’s reputation was damaged because the company seemed to have no plan whatsoever to prepare for a crisis of the magnitude it faced and hence failed to protect its reputation. Amongst other reasons for Toyota’s reputational decline were these factors: management were not communicating effectively with stakeholders during the crisis; decision making was centred in Japan where the company was head-quartered making the crisis response very slow. We also find that Toyota shelved its corporate values which made it a symbol for quality in its quest for growth.

In order to understand the Toyota crisis, the paper starts off with a brief introduction of Toyota Motor Corporation, highlighting its businesses and its reputation before the recall crisis. A timeline of the recall is also included to provide an overview of the flow of events during the period under review. Literature on corporate reputation, its importance and ownership is reviewed in the second part of this study whilst chapter three sets out the methodology employed in this study. Chapter four and five represent the crux of this work – examining Toyota’s actions in more detail. The research work ends with important recommendations for managers for preserving reputation in a crisis situation.

Table of Contents

CHAPTER 1: Introduction

“Glass, China, and reputation are easily cracked, and never well mended.” -Benjamin Franklin.

A few years ago, if we talked about companies with good reputations, the Japanese carmaker Toyota might have been mentioned. 2008 in particular was a good year for Toyota; Toyota was arguably one of the top brands worldwide, scoring high points for reliability and product quality on various reputational studies. It was the 6th top brand in the world according to interbrand’s ‘Top 100 brands in the world’ list and was highly reputed for its reliability, customer-focus, and world-class quality. By the 27th of February, 2009, Toyota had moved up to third place on the “World’s Most Admired” list, behind only Apple and Berkshire Hathaway. The company had the coveted ‘AAA’ rating from Fitch and customers and car-enthusiasts alike had come to equate Toyota with quality. Even the company’s philosophies, visions and advertising campaigns were unequivocal in stressing its commitment to quality

However as Toyota recalled vehicle after vehicle in 2009, its pristine reputation for quality was badly damaged. Toyota literally drove into a reputational crisis like it had never seen before; the crisis was exceptionally damaging to the company’s reputation as it struck its perceived core competence – safety and quality.

Company Background

TOYOTA MOTOR CORPORATION is a Japan-based company mainly engaged in the automobile and financial business. The Company operates through three business divisions. The Automobile segment is engaged in the design, manufacture and sale of car products including passenger cars, minivans and trucks, as well as the related parts and accessories. The Finance segment is involved in the provision of financial services related to the sale of the Company’s products, as well as the leasing of vehicles and equipment. The “Others” segment is involved in the design, manufacture and sale of housings, as well as information and communication business.

For its automotive operations – which is the focus of this study- Toyota produces and sells passenger cars, minivans and commercial vehicles, such as trucks. Toyota’s vehicles can be classified into two categories: conventional engine vehicles and hybrid vehicles. Toyota’s product line-up includes subcompact and compact cars, mini-vehicles, mid-size, luxury, sports and specialty cars, recreational & sport-utility vehicles, pickup trucks, minivans, trucks and buses. The Company’s subcompact and compact cars include the four-door Corolla sedan and the Yaris.

In North America, Europe and Japan, Toyota’s luxury line-up consists primarily of vehicles and other luxury sport-utility vehicles sold under the Lexus brand name. Toyota sport-utility vehicles available in North America also include the Sequoia, the 4Runner, the RAV4, the Highlander, the FJ Cruiser and the Land Cruiser, and pickup trucks available are the Tacoma and Tundra. Toyota also sells the Century limousine in Japan. Toyota’s product line-up includes trucks (including vans) up to a gross vehicle weight of five tons and micro-buses, which are sold in Japan and in overseas markets. Trucks and buses are also manufactured and sold by Hino, a subsidiary of Toyota. Hino’s product line-up includes large trucks with a gross vehicle weight of over 11 tons, medium trucks with a gross vehicle weight of between five and 11 tons, and small trucks with a gross vehicle weight of up to five tons.

More than its cars, Toyota is well known for its ‘TOYOTA WAY’ – a set of principles and behaviours that underlie the Toyota Motor Corporation’s managerial approach and production system. These principles have been taught in various business schools and adapted in various organisations. The principles are summarised in the figure below:

Figure : The Toyota way (Source: Hispage TONOway)

1.2 The Recall Crisis

Toyota’s recall fiasco took a disastrous turn on the 28th of August 2009 in San Diego, California. According to news reports, Mark Saylor and his wife, daughter and brother-in-law (Chris Lastrella) were killed when their Lexus, on loan from a dealer, careened out of control at more than 100mph, collided with another vehicle, and crashed into a ravine, setting the car ablaze.

Figure : Inset is a picture of the vehicle after the accident (Source: PowayPatch)

The family’s high-speed tragedy was captured via a 911 call; the fear in the caller – Chris Lastrella’s voice was apparent as he said ‘there are no brakes… we need to pray’ and finally, their high-pitched screams as the car crashed.

Over the next six months following this incident, Toyota would issue three separate recalls related to vehicle speed control for over 8 million vehicles; costing the company hundreds of millions of dollars in sales and immeasurable reputational damage. As the crisis intensified, Toyota became the target of adverse media attention with criticisms coming from various stakeholders for its actions during this period, and for its delay in identifying the fault and recalling the affected vehicles.

1.3 Timeline

This section provides a chronological flow of the events leading up to and surrounding the recall crisis

2000 A cost cutting exercise called “Construction of Cost Competitiveness for the 21st Century” is launched by Toyota with the aim of reducing the cost of 180 car parts by 30% and saving $10 billion by 2005.

31-12-04 Toyota’s vehicles accounted for about 20% of all unintended acceleration complaints filed with National Highway Traffic Safety Administration (NHTSA), up from 4 percent in 2000.

26-09-07 First “floor mat” recall in US of 55,000 vehicles to correct possible driver’s floor mat causing accelerator pedal entrapment.

28-08-09 Off-duty California Highway Patrol officer Mark Saylor is traveling on Highway 125 in Santee, California (northeast of San Diego), with three family members, when the 2009 Lexus ES350 he is driving suddenly accelerates out of control, hits another car, tumbles down an embankment and catches fire. While the car is careening down the highway at speeds estimated to exceed 100 mph, his brother-in-law calls 911 and reports that the car has “no brakes.” All four are killed in the ensuing crash.

14-09-09 Preliminary reports from Toyota and local authorities indicate that the Lexus, which had been on loan from Bob Baker Lexus of San Diego, where Saylor’s personal Lexus vehicle was being serviced, may have had the wrong floor mats installed, interfering with the gas pedal.

29-09-09 Toyota announces it is recalling the floor mats on 4.2 million Toyota and Lexus vehicles.

2-10-09 Newly installed Toyota CEO Akio Toyoda publically apologizes to the Saylor family members killed in the accident and to every customer affected by the recall.

30-10-09 Toyota begins sending letters to owners notifying them of an unspecified upcoming recall to fix the unintended acceleration issue. In the letters Toyota says “no defect exists.”

2-11-09 NHTSA takes the highly unusual step of publicly rebuking Toyota, calling a company press release re-iterating the statements made in the 30 October letter to owners “inaccurate” and “misleading,” noting that the floor mat recall was an “interim” measure and that it “does not correct the underlying defect.” Toyota publicly apologizes.

02-11-09 Second “floor mat” recall in US of 3.8 million Toyota and Lexus vehicles to correct possible driver’s floor mat causing accelerator pedal entrapment.

25-11-09 Second recall of 3.8 million vehicles amended to additionally reconfigure accelerator pedal.

26-12-09 A Toyota Avalon crashes into a lake in Texas after accelerating out of control. All four occupants die. Floor mats are ruled out as a cause because they are found in the trunk of the car.

21-01-10 Toyota recalls another 2.3 million Toyota-brand vehicles because of a problem with the gas pedal. Toyota says “a rare set of conditions which may cause the accelerator pedal to become harder to depress, slower to return or, in the worst case, stuck in a partially depressed position.” The company says the new recall is unrelated to the floor mat recall, but also announces 1.7 million Toyota vehicles would be affected by both recalls.

26-Jan-10 Toyota stops selling eight models in the US after being sanctioned by the NHTSA to halt selling vehicles with acknowledged defects. Toyota does not say why it has waited five days to stop sales after announcing the recall.

29-Jan-10 Recall extended to 1.8 million Toyotas in Europe and China.

02-Feb-10 U.S. Transportation Secretary Ray LaHood sharply criticizes Toyota’s response to the accelerator pedal concerns, telling the Associated press that Toyota may be “a little safety deaf” and that “while Toyota is taking responsible action now, it unfortunately took an enormous effort to get to this point.”

09-Feb-10 Recall of 437,000 Prius vehicles and other hybrid vehicles worldwide to correct possible faulty hybrid anti-lock brake software

23-Feb-10 Public hearings of various committees of the U.S. House of Representative regarding the Toyota safety issue. At the hearing, Toyoda publicly apologizes before Congress and pledges renewed commitment to quality and safety from Toyota.

24-Feb-10 Akio Toyoda, president and CEO of Toyota, issues the following statement at the congressional hearing:

“Toyota has, for the past few years, been expanding its business rapidly. Quite frankly, I fear the pace at which we have grown may have been too quick. I would like to point out here that Toyota’s priority has traditionally been the following: First; Safety, Second; Quality, and Third; Volume. These priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before, and our basic stance to listen to customers’ voices to make better products has weakened somewhat. We pursued growth over the speed at which we were able to develop our people and our organization, and we should sincerely be mindful of that. I regret that this has resulted in the safety issues described in the recalls we face today, and I am deeply sorry for any accidents that Toyota drivers have experienced. Especially, I would like to extend my condolences to the members of the Saylor family, for the accident in San Diego. I would like to send my prayers again, and I will do everything in my power to ensure that such a tragedy never happens again.”

1.4 Aims and Objectives

The Toyota case study is an insightful one as it involves the review of management response in a crisis situation that involved major loss of lives and regulatory action. By focusing on Toyota’s management response, the aim of this study is to provide useful recommendations for preserving corporate reputation in a crisis situation. The work will focus on Toyota’s response, its crisis management and the effect of the crisis on the company’s reputation. In so doing, the author aims to extract essential risk management lessons from the case.

The objectives of this study are to:

Trace the underlying cause of the crisis using the risk factors identified in the Roads to Ruin Report by Cass Business School for AIRMIC.

Evaluate the impact of the incident on the ratings, profitability and reputation of the company.

Evaluate the actions of the CEO, highlighting what he did well and what he did not do so well.

Outline the main consequences of the crisis for shareholders and other stakeholders

Outline the key risk management lessons to be learnt.

Every reputational crisis is different and there is no panacea for a reputational crisis but this research work seeks to provide a valuable tool for protecting and managing reputational risk when a crisis occurs.

In order to fulfil the objectives listed above, the following research questions will be answered:

What made Toyota particularly vulnerable during the recall crisis?

How did the recall crisis and its ensuing consequences affect the financial position and reputation of the company?

How was the recall handled?

How could it have been better handled?

What lessons can be learnt such that a future crisis is managed better?

What was the impact of failing to meet its stakeholder’s expectations on Toyota’s reputation?

CHAPTER 2: Literature Review

O wad some Power the giftie gie us

To see oursels as ithers see us!

It wad frae monie a blunder free us,

An’ foolish notion

Robert Burns

Every individual, every company, every organisation – be it a large multi-national or a small food kiosk by the corner- have one thing in common; a reputation. Over time, ‘every contact, every media mention, every rumour, every leak, every piece of gossip (whether true or not) will play its part in forming an overall impression of an organisation’s standing’. This built up reputation not only has a significant impact on share price; but also influences the strength of the brand and determines its competitive advantage amongst its peers. As Bill Margaritis puts it: ‘a strong corporate reputation is a life preserver in a crisis and a tailwind when you have an opportunity’

2.1 Corporate Reputation: An Overview

In recent years, the idea of reputation as a strong business asset has received increased recognition in management literature. Series of publications have appeared dealing with the benefits of positive corporate reputations, risks to reputation, and reputational risk management. This increased interest grew out of a realization that an organization’s reputation is a major determinant for its short run and long run success and differential advantage in any business environment. Furthermore, the last decade has seen many of the world’s most admired companies descend from their once lofty positions. In light of all these, it is not a surprise that corporate reputation has started to feature prominently on Swiss Re’s and Aon’s study of the top ten risks identified by corporate executives. This emphasises the point that management and other stakeholders have started to see the importance of corporate reputation and the various factors that make up the reputation of their firm.

Fomburn (1996) defines reputation as the ‘overall estimation in which a company is held by its constituents’ which can be formed based on ‘the net perception of a company’s ability to meet the expectation of all its stakeholders’. This perception will usually be based on both the organisation’s actions and inactions such that ‘everything an organisation does, and does not do, has a direct impact on their reputation’ Dolphin (2004). Other authors, such as Bromley (2001) emphasize the differing nature of reputation and describe reputation as ‘the distribution of opinions about a person or organisation’

A more balanced view of corporate reputation according to (Warwick, 1992) is the view that corporate reputation is in itself an aggregate evaluation made by stakeholders of how well a company is meeting stakeholder’s expectations based on its past behaviour. (Atkins, et al., 2006), also address corporate reputation and reputational risk from this perspective and define reputational risk as the ‘threat to a company’s reputation resulting from a failure to meet stakeholder’s reasonable expectations of an organisation’s performance or behaviour’. ‘Corporate reputation should (also) be considered in terms of its historical context, i.e. a corporation’s track record. A company’s standing in the community and in the marketplace all help shape its reputation’ Fomburn (1996).

A ‘reputation is much more than brand image, and includes factors such as trust in the organisation’s integrity and how it will conduct itself in the future, both at the corporate level and through the actions of its management and staff.’ . (Atkins, et al., 2006). It is also an important form of corporate capital that determines to a large extent the company’s worth, quite simply, it is ‘an index of a company’s worth or value’ (Bromley, 2000). In determining corporate value, most authors have come to agree that a reputation is an indicator of a company’s future performance. ‘A favourable reputation is powerful enough to convince the undecided to choose a certain product or service and dissuade existing customers from moving to a competitor; whereas a damaged reputation can be irreparable and in extreme cases, lead to a company’s down fall’ (O’Rourke, 2004). ‘In order to build a favourable reputation, four attributes need to be developed: credibility, trustworthiness, reliability and responsibility’.

Reputation is in itself intangible, untouchable and most times immeasurable. ‘Reputation often can’t be quantified, compared against hard benchmarks or analysed in the same way as financial or other numerical data. Its management requires softer skills such as sound judgement, an ability to anticipate future trends and requirements, understand stakeholder concerns, listen carefully, consider dispassionately and respond constructively.’ (Rayner, 2003). A ‘good’ corporate reputation can take many long years to build; it can be destroyed in an instant through an ill-considered ‘off-the-record’ remark, a lapse in personal behaviour, an ethical blunder in the supply chain or an inadequate response to a crisis. In the words of Warren Buffet who is considered the most successful investor of the 20th century ‘it takes twenty years to build a reputation and five minutes to destroy it’.

An area where authors share different views is as regards ‘ownership of reputational risk’. The first school of thought argues that one person or a group of people be appointed with the sole responsibility of preserving the company’s reputation. It is probably due to the inefficiencies of some CEOs over the years in safeguarding reputation that some authors argue that a reputation officer or a reputation department be charged with the responsibility of handling and sustaining the corporate reputation. Others have criticised this view for various reasons, the main one been that, appointing a chief reputational office tends to remove the awareness of the importance of safeguarding corporate reputation from the Board of Directors and other top executives.

Another school of thought is the one which states that every member of the organisation is responsible/accountable for the corporate reputation. As good as this argument might sound (it does make some sense for everyone in the organisation to be aware of maintaining the organisation’s good name), the loophole is in the danger that this leaves the accountability for corporate reputation as everyone’s task which in most times equals no one’s task.

The third school of thought argues that the responsibility for corporate reputation should rest on the CEO. According to this school, various studies have shown that CEO’s understand the importance of a good reputation and hence should safeguard it. However, studies have also shown that few CEOs put any structure in place to safeguard the reputational asset of the organisation. It is disappointing to note that many CEO’s who are supposed to be the custodians of the company’s reputation have actually been the villains responsible for tarnishing the company’s reputation. (This was certainly the case with AIG’s Hank Greenberg).

One important reason why CEOs should be responsible for reputational risk rests on the fact that when people think of a company, they are usually thinking of the CEO, with his actions/inactions invariably contributing to the reputation of the organisation. As Dr Leslie Gaines-Row pointed out in an interview, failure to maintain a good reputation should rest squarely on the shoulders of the CEO because in her own words:

‘CEOs increasingly find themselves in the spotlight during crises and are without question a strategic player in reputation recovery. Their success in managing reputational difficulties is one of the determining factors in whether stakeholders retain confidence in the company and believe that reputation will eventually be restored. For this reason, failure to maintain a good reputation rests squarely on the CEO’s shoulders. … (Studies show) that nearly 60 percent of the blame is attributed to the CEO when crisis strikes. As the company’s public face during times of crisis, and the company’s chief reputation officer, the CEO should remain visible, and communicate honestly, transparently and proactively. CEOs must also present themselves to stakeholders, whether it is customers, financial analysts or employees, consistently with the company’s vision, code of conduct and values. By taking responsibility, acting quickly and compassionately, listening carefully, and establishing clear priorities, the CEO can set an example for reputation recovery for the entire organization.’

‘Reputation is the most important asset entrusted to a CEO’ (Schreiber, 2011). Not all CEOs recognize that, but a growing number do. In a 2009 global study, AON Insurance asked 551 CEOs to rank the relative importance of 31 risk factors. Reputation was ranked No. 6. In past AON studies before the current financial crisis, reputation was the top-ranked CEO risk factor. But, what is troubling is that two-thirds of the respondents had no “formal reputation risk plan” in place, and that figure has not changed substantially’.

2.2 Effects of a Favourable Corporate Reputation

Strong reputations act as cushions in case of a crisis and have the ability to protect a company from harm caused by a crisis. ‘A favourable prior reputation protects the organisation’s reputation during a crisis in two aspects: it gives the organisation the benefit of doubt, which means that if a consumer holds a general favourable view of the company, the consumer might assign the company less crisis responsibility which in turn result in less reputational damage from the crisis; secondly, it acts as a shield, which serves as a part of the larger psychological phenomenon of expectancy confirmation, emphasizing that stakeholders will focus on the positive aspects of the organisation and ignore the recent negative information created by the crisis (Coombs and Holladay). In these ways, a good prior reputation perceived by consumers has the potential to reduce attributed crisis responsibility and dismiss the impact of the crisis. Strong, trustworthy reputations will usually always mean greater resilience in crisis situations. ‘The occasional lapse of a reputationally strong company is likely to be regarded as a one-off aberration, because it has a solid track record and its values and business ethos are clearly understood’ the reaction will most probably be a shrug and a ‘that’s not like them’ rather than a ‘there they go again’ (Rayner, 2003).

A typical case is that of oil companies who were ranked rather low in public opinion. In cases where oil companies have faced major crisis, consumers have been less sympathetic with these corporate group. The BP case and the Exxon Vladez case are typical examples. A study in the late 1990s of the performance of US companies during the 1987 stock market crash found out that the shares of the ten most admired companies dropped less and recovered faster, while the shares of the ten least admired companies plunged three times as far – a very strong indication that having a good corporate reputation can pay real dividends.

Various authors have identified several benefits of a good corporate reputation:

(Atkins, et al., 2006) state that a good reputation is ‘highly valuable and can benefit a company enormously. Potentially, it can result in:

Banks being willing to supply loans on more favourable rates and terms:

Good employees being attracted to work for the organisation, and their services being retained

Investors being more likely to place their capital in the firm;

Improvement in sales

Maintenance and enhancement of market share

Public perception of the organisation as an asset to the society in which it operates

(John & Croft, 2003), identify similar benefits:

Securing profits and future cash flows

Attracting new business partners

Securing investment

Attracting new customers – word-of-mouth

In¬‚uencing political and legal affairs

Human capital: retaining good staff and attracting the best employees

Allowing easier entry to new markets and brand extensions

Enabling successful mergers and acquisitions

Helping to reinforce relationships with suppliers and distributors and other direct stakeholders

Enhancing relationships with NGOs or corporate activists that potentially could be aligned against you

2.3 Area of Further Research

One area of interest for future research work identified while carrying out this research work is on handling reputation risks from social networking sites and other online media sources – the so called web 2.0. Web 2.0 allows users to interact and collaborate with each other in a social media dialogue and the mediums include social media sites like Facebook, blogs, twitter and other mediums which allow people to freely air their opinions. This area is important because in recent times, a lot of companies have had their reputation damaged through web 2.0 mediums. What makes web 2.0 dangerous is that response time is very limited; the most time an organisation has to squelch rumours or avoid a reputational disaster is 24 hours. It would be immensely helpful if further research is done into helping companies and various organisations cope with the risks from these mediums.

CHAPTER 3: Data Collection and Research Methodology

3.1 Data Collection

Data has been collected from a wide range of secondary sources; newspaper articles, academic journals and online resources. This study was also based on documents from five categories of media: (i) print newspapers, (ii) online editions of print newspapers, (iii) the Associated Press newswire, (iv) Blogs, and (v) Internet forums.

3.2 Methodology

The research is tailored as a case study. This method gives a multi-perspective approach, incorporating the views of direct stakeholders, indirect stakeholders and the interactions between these two groups.

This case study will be based mainly on secondary data. The paper will comprise the collection of secondary data from a broad variety of sources such as business academic journals, books, reports, newspapers and internet articles on the Toyota vehicle recall crisis. All information will be taken from the public domain and the author has put into consideration the possibility of errors in press reports and other sources.

The research will use various underlying risk classifications identified in the ‘Roads to Ruin’ report by Cass Business School for AIRMIC to trace the underlying cause of the crisis. The ‘Roads to Ruin’ report is a highly valuable guide for this research as it investigates the origins and impacts of over twenty major corporate crises of the last decade. The report was chosen because it provides a rich source of lessons about risk, risk analysis and risk management detailing over one hundred specific ‘lessons about risk’. This will be particularly helpful as I develop my recommendations on this subject. A crisis communication framework developed by (Lukaszewski, January/February 1999) would also be used to analyse Toyota’s crisis response.

CHAPTER 4 Review of the Recall Crisis

In this chapter, the author shall in line with the research objectives, test the effectiveness of Toyota’s reputational risk response to seven key risk areas identified in the Roads to Ruin report and in so doing trace the deeper cause of the crisis.

According to the report, these key risks areas include:

Board skill and Non-Executive Directors (NED) control risks -risks arising from the limitations on board competence and the ability of NEDs to effectively monitor and if necessary, control the executives.

Board risk blindness – the failure of boards to engage with important risks, including risks to reputation and licence to operate’ to the same degree that they engage with reward and opportunity

Poor leadership on ethos and culture.

Defective communication – risks arising from the defective flow of important information within the organisation, including to board-equivalent levels.

Risks arising from excessive complexity

Risks arising from inappropriate incentives – whether explicit or implicit.

Risk ‘glass’ ceilings – arising from the inability of risk management and internal audit teams to report on risks originating from higher levels of their organisation’s hierarchy.

Primary risks

Secondary risks

Toyota checklist

Board skill and NED control

The risk posed by a board and NEDS who are not in effective control of the business

The risk that neither leaders nor NEDS as a whole have the skills necessary to understand and run or, in case of NEDS, independently oversee the business.

the risk that NEDs are blinded by charismatic leaders

A1 and A2:There was a wide cultural disconnect between the Board in Japan and the American market. The American market clearly had a different culture from the familiar Japanese culture and demanded a different response. The board appeared to overlook this difference and the effectiveness of the board in dealing with the recall was compromised by this lack of understanding of the American market. Hence, the board failed to ask all the right questions and to understand

and evaluate the adequacy of answers they received.

Board risk blindness

the risk that the board fails to identify and guard against threats to the organisation’s reputation and ‘licence to operate’

the risk of failing to question the foundation of success

risk can emanate from anyone inside or outside

the organisation, including its top management

the risk of failure to strategically set and control appetite

Risk of failure to recognise change in the risk environment.

risks from deficient crisis strategy

B1: The management’s crisis response was more reactive than proactive showing that the board failed to prioritise the safeguarding of Toyota’s reputation for safety and quality. Toyota’s board’s initial inactions showed that it failed to appreciate how

the company’s reputational capital could be compromised

by its handling of the crisis. Toyota’s board seemed to have given no thought

to dealing with a safety/quality issue, nor had it devised a strategy to deal with this type of problem even though its annual report showed that it recognised the risk of such occurrence.

B2: Perhaps if Toyota had not been blinded by its success in 2008 and taken a critical review of its processes and performance, questioned its success, it may have discovered the gradual breakdown in its safety and quality processes.

The fact that Toyota’s vehicles accounted for about 20% of all unintended acceleration complaints filed with the NHTSA should have raised red flags on the effectiveness of its quality controls.

B3: Top management’s perceived indifference and defective communication strategy was also a major risk factor- there was no public apology to the Saylor family from Akio Toyoda until the 2ndof October 2009, one full month after the accident. Akio Toyoda should have been more assertive in his role as Toyota’s ultimate spokesperson to protect his company’s reputation.

B4: Growth is a tricky issue; CEOs have to understand that organisational growth can lead to decline and in some cases, even death, hence the term ‘grow and die’. CEOs need to understand that the complexity that growth brings is itself a source of risk. Toyota’s growth strategy to be the number one carmaker in America, outrunning General Motors and Volkswagen played a part in its inattention to safety and quality. Toyota became so blinded by growth that it failed to safeguard and preserve its reputation for quality, safety and customers focus.

B5: A huge reputational risk emanated from the board’s failure to recognise the highly litigious and demanding American business environment.

B6: Even when the recall was announced, Toyota had no solution at hand to fix the problems. There was no information available on how or when Toyota was going to deal with the issue. The company would have benefited immensely if it had a recall crisis strategy beforehand. Frequent crisis simulation drills to prepare for this kind of event and other contingency plans should have been put in place to help Toyota deal with a recall. (especially as this is a frequent occurrence in the automobile industry)

Secondly, Toyota’s crisis response was too ‘Toyota-focused’ and merely reactive. The company showed no control over the press, and did not respond to the negative news releases it got every day. Everyone seemed to have something to say about the crisis except Toyota. There was too much focus on getting it right, getting to the root of the problem and very little customer-focus. There was too little focus on what information customers would want to hear and on safety measures to protect customers.

Toyota clearly forgot that the ‘Customer is always King’ and hence failed to meet the expectations of this important stakeholder group.

Inadequate leadership on ethos and culture

the risks that boards have not set and universally applied on adequate and coherent business and moral compass

the risk of failure by boards to create, and embed, throughout their organisation, a coherent strategy on safety that covers both physical and organisational safety

the risk of failing to ensure that the business’s moral compass and safety strategy are also implemented throughout its supply chain

the risk of perceived double standards

C1 and C2: Although Toyota is reputed for its strong company ethos and culture, the company admitted to having shelved its ethos and culture in light of its growth strategy. Toyota failed to implement its guiding principles during the recall crisis. For instance Toyota’s  genchi genbutsu, or “go and see”which demands that management find out for themselves the root cause of the problem was ignored. Akio Toyoda sat in Japan for too long and failed to go and seewhat was happening in America. Another Toyota principle nemawashi; “implement decisions rapidly” was also set aside, decision making was slow, implementation was even slower. Toyota failed to understand that in crisis situations, reputations decline or improve by the seconds. Hence the need to move quickly to defend reputation.

C3:Toyota which was known for its ability to selectively choose and monitor its suppliers fell short in this particular case. The ‘sticky’ pedals responsible for the unintended acceleration in its vehicles were manufactured by its supplier CTS. However, true to its culture, Toyota accepted responsibility and avoided the finger-pointing game.

C4:Toyota had always been perceived as a company that put customer safety first. Its response to the crisis greatly disputed Toyota’s claim of commitment to safety.

Defective communication

The risk that information does not flow freely in all directions – up and sideways as well as down – from the very bottom to the very top of the organisation.

risks in a culture that does not listen or learn from experience

D1: One thing quite evident in this case, is the defective flow of information between the American arm and the Japanese headquarters. Toyota was too centralized -too much power was concentrated in Japan – to allow a quick response to the problem in its American region.

In spite of Toyota’s tremendous growth around the world, core engineering and design, postproduction engineering, quality and safety remained centralized in Japan. This centralisation meant that decisions such as the recall of vehicles could only be made in Japan; hence the US executives hands’ were tied in making any recall decisions.

In cases of product safety where there appears to be a defect, it is always better to make a quick recall decision to enforce the company’s commitment to safety and quality, Toyota stalled in this regard.

Secondly, there was a huge gap in the understanding of local conditions and the urgency of the situation. In Akio Toyoda’s words, “There was a gap between the time that our U.S. colleagues realized that this was an urgent situation and the time we realized here in Japan that there was an urgent situation going on in the U.S. it took three months for us to recognise that this had turned into a crisis.”

Toyota had to learn that whatever reputational strategies are employed by an organisation must be tailored to fit the culture of the particular business environment it operates. To be successful, companies must learn to play to many audiences.

Risks from organisational complexity and change, including acquisitions

E:In his speech before congress, Akio Toyoda admitted that the fast pace of growth and the ensuing complexity was one of the chief causes of the recall. In his words, “quite frankly, I fear that the pace at which we have grown may have been too quick …. safety, quality, volume … these priorities became confused and we are not able to stop, think and make improvements as much as we are able to before and our basic stance to listen to customer voice to make better products has weakened somewhat, we pursued growth over the speed at which we were able to develop our people and our organisation.”

Risks from incentives, whether explicit or implicit

Risks’Glass ceiling’

4.1Review of Toyota’s communication’s strategy

In any reputational-damaging situation, communication plays a major role. We examine Toyota’s communication strategy in the following table using a communication framework developed by (Lukaszewski, January/February 1999):

Urgent Reputation Preserving Responses

Toyota’s Damaging Responses

Correct Approaches

Candor:

Open Outward recognition through promptly verbalized public acknowledgement that a problem exists; that people or groups of people, the environment, or the public trust is affected; and that something will be done to remediate the situation.

Toyota insisted that ‘our cars are perfect. We are sure nothing is wrong’. In a crisis situation such as Toyota’s where there was loss of human lives, people would much rather see Candor and sympathy than a defensive stance of the quality of products and services.

The company appeared to be absent during the crisis, merely reacting to the sway and toss of the media and its news releases. Management failed to understand that misinformation and fear is hard to erase once it starts circulating through the media.

No one seemed to be answering the questions about what was going on and the company appeared very reluctant to talk about the situation. Akio Toyoda’s initial reluctance to appear before congress also disputed the company’s willingness to stand up and answer questions about their cars.

Even though Toyota is reputed as a very quiet and private company, it should have made its efforts to help the affected families more public.

“It’s our fault.”

“It shouldn’t have happened.”

“We are helping the families through these terrible times.”

“We will relentlessly examine every aspect of our business to find out what happened, to fix it, talk about it, and see that it will not happen again.”

Stand up and answer the questions.

Act to find the cause.

Explanation(no matter how silly, stupid, or embarrassing the problem causing error was):

Promptly and briefly explain why the problem occurred and the known underlying reasons or behaviors that led to the situation (even if there is only partial early information).

Talk about what was learned from the situation and how it will influence the organization’s future behavior.

Unconditionally commit to regularly report additional information until it is all out, or until no public interest remains.

Although Toyota was working hard behind the scenes to fix the problem, it appeared as though the company was not doing anything because it was not communicating its efforts to its stakeholders.

Created conflict -especially through its recall notification letter (“We don’t know what the cause is, but Toyota cars are safe, there is nothing wrong with our cars, but we are recalling them because we were asked to) leading to public confusion.

The company through its inactions put itself in a position to be perceived as a victim, its supplier as the perpetrator, the government and media as persecutors.

Initially refused to admit that it was not prepared for what could easily be recognized as a critical vulnerability to customer safety.

Took a stance that implied a “We can’t act until we have all the facts”.

Did not stop the sale of cars until the NHTSA ordered it to do so eight days after it issued the first recall.

Find the truth.

Take conclusive action: stop the sale of the cars.

Talk about the victims and their families.

Act like a neighbour.

Commit to the obvious, e.g., we weren’t ready for this.

Keep focused on solving the local problem.

Release information constantly to inform and assure stakeholders.

Immediately correct erroneous information with more current, more accurate information.

Declaration:

A public commitment and discussion of specific, positive steps to be taken conclusively address the issues and resolve the situation.

Waited too long to make a declaration.

Initially failed to conduct serious, credible, independent external investigation.

Toyota’s failure to communicate created a void that made people believe it wasn’t doing anything, when the company was actually working behind the scenes to set things right.

Should have recalled vehicles as soon as the accident occurred and the safety of its vehicles were in question.

Media response was more Toyota-focused instead of customer-focused.

Talk from the victims’point of view.

Minimize the technical “stuff.”

Be explicit about doing whatever it takes for the victims.

Avoid disingenuous phrases:

“. . . these things happen, unfortunately . . .”

“. . . we didn’t want to cause panic. . .”

“. . . the media sensationalize everything . . .”

Contrition:

The continuing verbalization of regret, empathy, sympathy, even embarrassment. Take appropriate responsibility for having allowed the situation to occur in the first place, whether by omission, commission, accident, or negligence.

Toyota continuously verbalized its regret, empathy, sympathy, and embarrassment. The Toyota CEO, Akio Toyoda took full responsibility for having allowed the situation to occur.

•Talk and act like someone that you care about has been hurt.

• Meet with families.

• Let employees speak for the company.

• Involve employees with each victim family.

• Use empathetic language.

• Express unconditional sympathy.

Consultation:

Promptly ask for help and counsel from victims, government, and the community of origin – even from opponents.

Directly involve and request the participation of those most directly affected to help develop more permanent solutions, more acceptable behaviors, and to design principles and approaches that will preclude similar problems from occurring.

Never asked for input from the victims.

Did not appear to ask suppliers to participate or contribute to the resolution of the problem.

Toyota should have partnered with the regulator instead of appearing to be at loggerheadswith the NHTSA.

Announce an unassailable panel of independent experts to study, recommend, and report publicly.

Let government agencies do the talking, while you concentrate on solving the problem.

Help victims speak out and make suggestions.

6.   Commitment:

Publicly set organizational goals at zero. Zero errors.

Zero defects.

Zero dumb decisions.

Zero problems.

Publicly promise that to the best of the organization’s ability similar situations will never occur or reoccur.

Kept on selling cars even after announcing a recall.

Committed to ensuring no future mistakes, increased customer-focus, safety and quality.

Establish a permanent, broadly representative advisory group to assure the public of the company’s intentions on an on-going basis

7. Restitution:

• Find a way to quickly pay the price.

• Make or require restitution.

• Go beyond community and victim expectations and what would be required under normal circumstances to remediate the problem.

• Adverse situations remediated quickly cost far less and are controversial for much shorter periods of time.

Toyota agreed to pay the NHTSA fine, even though it was the maximum fine allowable and the company promptly settled with the affected families after the court set the settlement.

Toyota dealers were given financial support to cushion the effects of the recall on their productivity.

4.2 Review of CEO – Akio Toyoda’s actions.

As stated earlier,

‘CEOs increasingly find themselves in the spotlight during crises and are without question a strategic player in reputation recovery. Their success in managing reputational difficulties is one of the determining factors in whether stakeholders retain confidence in the company and believe that reputation will eventually be restored. … As the company’s public face during times of crisis, and the company’s chief reputation officer, the CEO should remain visible, and communicate honestly, transparently and proactively… taking responsibility, acting quickly and compassionately, listening carefully, and establishing clear priorities ..’

Akio Toyoda failed to fulfil the characteristics listed above at the critical stage of the crisis. Where he should have been visible, he was noticeably absent and failed to defend his organisation assertively. His slow response in addressing the public particularly after the tragic death of the Saylor family in San Diego was perceived as a lack of ability to lead, indecisiveness and unpreparedness. His major fault lay in his failure to recognise the urgency and importance of the situation and this lead to significant reputational damage for Toyota.

The situation was aggravated when Toyota executives were called before Congress and Akio Toyoda initially refused the invitation to appear before Congress. Toyoda already had a reputation of being media averse and his unavailability during the initial stage of the crisis escalated this view of him, and feed the perception that the media projected of him; that of been incapable to lead at a very crucial time in the company’s existence. From his statements, it appeared that Akio Toyoda did not understand that his presence was expected and this was interpreted as indifference on his part and disrespect to the Congress and the public at large. The public wanted to hear from and be reassured by him, yet he failed to see the invitation as an opportunity to rebuild public trust in Toyota. A major problem that was identified in Liker and Ogden’s book “Toyota under Fire” (2011) was the gap in understanding and communication between the regions and headquarters. The Cultural misunderstandings compounded the President’s initial response because the Japanese way of leadership is more subtle and less aggressive than what is expected in the United States.

Furthermore, Akio Toyoda and his board members did not seem to have any crisis management strategy planned out and came across as incapable as the crisis unravelled. He did not set up a crisis management team in the affected regions to report to him round the clock and monitor the situation, nor did he seem to realise that he needed an effective communication strategy to reassure global stakeholders and inform them of developments as they unfolded. This suggested that he did not understand the public’s expectation of daily or hourly updates to ease uncertainty about Toyota’s cars.

Although Akio Toyoda’s response to the crisis was not immediate, he did respond in earnest. His repeated public admissions of falling short of expected standards, apologies, admission of personal responsibility and efforts to resolve the issues was a useful step in alleviating the fear of various stakeholders. His apologies were backed by actions showing commitment to solve the problem by seeking input from outside experts, setting up and personally overseeing a quality improvement task force. The President addressed the shortcoming of not listening to customers and respecting their concerns and perspectives by going back to the basics to develop its staff and properly embed the Toyota culture into the organisation. According to him, this was what brought the company its 50 years of fame, reverence and recognition before the distraction of growth amongst other factors made it lose its underlying principles. As he got to grips with the seriousness of the crisis, he went ahead to set up an internal committee called “Special Committee for Global Quality” to improve the quality inspection process, augment customer research and increase communication with regional authorities amongst other things. He engaged support from recognised external quality experts; creating an external panel to review all of Toyota’s quality processes, provide feedback and flag out areas for quality practice improvement.

He also created a chief quality officer role in every region to oversee quality related issues before and after production; this was to encourage self-reliance, autonomy, decentralise quality control and bring Toyota closer to its customers. The chief quality officers act as representatives of each region in the global quality committee. This also positions them to disseminate information or issues discovered among the various regions, thus enabling a stronger flow of information.

The most significant consequence of the recall crisis for senior management was a change in attitude towards their regional operations. As a result, on March 30 2010, a “Special Committee for Global Quality” chaired by Akio Toyoda announced a six-point plan, namely:

Improve the quality inspection process;

Enhance customer research by establishing customer information research offices in each region to collect information faster;

Establish an “automotive centre of quality excellence” in key regions to further develop quality professionals;

Engage support from outside experts by creating an external quality review panel.

Increase communication with regional authorities;

Improve regional autonomy, listen carefully to each and every customer, and improve quality based on that.

Although there’s a lot to criticise about Akio’s response, we find that he upheld Toyota’s philosophy of accepting responsibility. He accepted all responsibility for his company’s actions and did not apportion blame to customers, staff, suppliers or dealers, during the crisis.

Consequences of the Crisis

Toyota formerly the world’s largest automaker slipped into third place behind General motors and Volkswagen. As the crisis intensified, significant market share was lost to competitors GM and others who quickly set up incentives to attract Toyota’s customers.

As seen from the table below, vehicle sales reduced by 13% from 2008

Market share in the U.S.A. market fell as vehicle sales were reduced drastically.

Source: Yahoo Finance

Toyota’s UK market share tumbled. It fell all the way from 18.3% in 2009 to 12.9% in 2011.

Source: Yahoo Finance

Over 9 million Toyota vehicles were recalled worldwide.

The recall announcements had a direct negative effect on Toyota’s share price. Stock prices went southbound and almost one-fifth of the company’s value was wiped off the Tokyo stock exchange. Following the crisis Toyota’s share price dropped to $72 a share by February 4 2010, representing a 21 per cent drop, and by August, the share price fell to a low point of $68 a share. However, by February 2011 the share price exceeded $93 a share, the rise in share price was attributed to a report by NASA exonerating Toyota of fault for the crisis.

The recall was announced on September 29, 2009.

Pre-Crisis Stock Price: September 10, 2009 – $85.46

Post-Crisis Stock Price: October 5, 2009 – $75.07

Decrease: 12.16%

Pre-Crisis Stock Price: January 21, 2010 – $90.42

Post-Crisis Stock Price: February 2, 2010 – $71.78

Decrease: 20.61%

Note: That the decrease in share price was much higher following the second recall announcement, showing a further drop in confidence in Toyota.

Toyota lost its competitive advantage – its reputation for exceptional quality

Toyota incurred incredible costs:

Costs include the loss of potential operating income as vehicles were recalled – Toyota reported a $233 million operating loss from its North American region for 2010.

The compulsory sales suspension also caused Toyota to lose huge sales opportunity; on May 11, 2010, Toyota revealed it had lost about $800 million in sales worldwide as production was completely halted in January 2010. Toyota estimated a recall cost of about $2 billion as at February 2010 and on May 11, 2010, Toyota revealed it had spent $1.1 billion on recalling 8 million vehicles. Analysts’ including JP Morgan’s Kohei Takahashi estimated future costs to be much higher, stating that the recall would cost Toyota about $5.5 billion. This is including recall-related costs and litigation settlements as various class actions were filed against Toyota alleging death or injury due to unintended acceleration. (At least 89 class-action lawsuits were filed against the Japanese automaker). Initial costs to get each recalled vehicle repaired at the dealership stood at $20 per vehicle, 30-45 minutes repair time and hourly wage stood at $45-$50

Toyota’s sustained growth was immediately truncated.

Toyota was fined $16.4 million by the NHTSA (highest federal fine imposed by the agency)

A report by Allison Clarks on corporate reputation says when the crisis slowed down, more than 93 people had died; more than 8 million cars were recalled and production completely halted in Jan 2010.

Trust in Toyota and in its vehicles among the American clientele nearly vanished during the recall, with a few customers reported to be ‘too afraid to drive their Toyotas’

4.3 Ratings

05/02/2010 – Standard & Poor’s Ratings Services placed its ‘AA’ long-term corporate credit and senior unsecured debt ratings on Toyota Motor Corp. on CreditWatch with negative implications. The CreditWatch placements was said to reflect Standard & Poor’s increased concern over the potential negative impact on Toyota’s business risk profile of unfolding developments related to recent quality-related issues. According to Standard & Poor’s, the developments may affect the company’s reputation for quality, weakening its competitive position.

By 22/04/2010, Moody’s cut its credit rating on Toyota Motor Corp by one notch. Moody’s Investors Service lowered its senior unsecured rating on Toyota to Aa2, its third-highest ranking, from Aa1. It said the outlook was negative, leaving open the possibility of a further downgrade in the future. Moody’s predicted a long slump in profitability and potential litigation costs from the massive recall that had tarnished the Japanese automaker’s brand. According to Thomas Reuters, the ratings downgrade could make it more costly for Toyota to secure funding and service its $36 billion in outstanding debt, most of which matures between 2010 and 2012.

4/03/2011 – Toyota Motor Corp., had its long-term debt rating cut by Standard & Poor’s, which cited the company’s “weak” profitability. Toyota’s rating was reduced one step to AA-, the fourth- highest level, from AA. According to Moody, “The downgrade reflects our opinion that Toyota’s profitability is unlikely to recover in the next one to two years to a level that we view as appropriate for the rating,”

4.4 Consequences for Other Stakeholders

Customers;

The immediate consequence for Toyota’s customers was mainly economic damage. Customers lost the use of their vehicles for a substantial amount of time during periods of the recall and the resale value of their cars dropped by 4-5%. Customers were also faced with the inconvenience of taking their vehicle to the dealer to be fixed. The high volume of recall work also affected other owners trying to get dealer service appointments. As a result, some customers brought class actions against Toyota claiming damages for economic loss.

Following the recall, Toyota recognised and accepted that they had lost touch with their core value of putting the customer first. The urgency of the crisis created an opportunity to push through changes in their attitude towards their customers that would have otherwise taken years to achieve. In order to achieve this, Toyota took steps to decentralise its operations in order to communicate effectively and respond to its customers concerns. Also, the special committee on quality established “Customer First” training centres across operating regions. Another initiative taken by Toyota was to offer potential buyers zero-interest rate financing on a number of models, reduced leasing rates and free two-year enhanced maintenance. This meant enhanced interaction between the customers and dealers in the first two years. Ultimately, customers benefited from the recall by Toyota’s improved customer service, shorter user interaction cycles, targeted and efficient product design and responsive product recall.

Dealerships;

The immediate consequences of the crisis for the dealers were loss of revenue, panicked customers and logistical issues involving repairs. Dealers were reported to have lost an estimated $ 1.2 million to $ 2 million dollars a month during the crisis. Almost all dealers extended their service hours, with many of them staying open 24 hours a day during the first week of the recall. However, Toyota cushioned some of the immediate effects of the crisis by offering the dealers direct financial support and providing funds to compensate their customers. Toyota paid the interest expense on the cars the dealers had in inventory during the sales stoppage and also paid for the recall repairs. As a result of the measures taken by Toyota, no dealership closed down; however, Toyota’s reputational damage resulted in a drop in sales volumes for the dealers.

Chapter 5: Recommendations and Conclusions

5.1 Risk Management Lessons Learnt

Crisis Management Must Be Proactive

‘Crises aren’t like fine wines, they don’t improve with age.’ – Ronald J. Alsop.

In today’s world of twenty-four hours media coverage and social networking sites, news travels like wild fire making the speed of response ever more critical to preserving corporate reputation from damage. In order to prevent a media onslaught, companies must always be prepared with a crisis strategy for the