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Corporate Governance and Managerial Reform in Japan$

D. Hugh Whittaker and Simon Deakin

Print publication date: 2009

Print ISBN-13: 9780199563630

Published to Oxford Scholarship Online: February 2010

DOI: 10.1093/acprof:oso/9780199563630.001.0001

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Management Innovation at Toshiba: The Introduction of the Company with Committees System

Management Innovation at Toshiba: The Introduction of the Company with Committees System

Chapter:
(p.254) 9 Management Innovation at Toshiba: The Introduction of the Company with Committees System
Source:
Corporate Governance and Managerial Reform in Japan
Author(s):

Hisayoshi Fuwa

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199563630.003.0009

Abstract and Keywords

In this chapter, Hisayoshi Fuwa shows how corporate governance and management innovation were closely linked in Toshiba Corporation. Drawing on first‐hand experience, he shows that introduction of the company with committees system in 2003 was preceded by the introduction of a “management officer” system in 1998, which sought to separate supervision from management execution, and to speed up decision making. Furthermore, it helped to nurture a greater effort among the management officers. This gave Toshiba confidence in operating a management system in which supervision and execution were separate, and enabled the smooth introduction of the company with committees system. The result was improved speed and flexibility of management, which facilitated innovation. Toshiba focused on key businesses that can sustain future growth and profitability, faster innovation, and corporate social responsibility‐based management at the core of its business. Achieving this requires generating value for all stakeholders, and balancing their interests.

Keywords:   Japan, corporate governance, management innovation, board of directors, company with committees system, Toshiba Corporation

Introduction

This chapter considers how a Japanese high-tech company, Toshiba Corporation (subsequently “Toshiba”), established a scheme to improve its corporate governance with an emphasis on its management organization structure. It also considers how, as a direct result of this, Toshiba embarked on a program of management innovation with a view to becoming a much more open company, better equipped to operate as an international business.

The two issues of corporate governance and management innovation are closely related to one another. By transforming its corporate governance, and by linking this directly to management innovation, Toshiba metamorphosed and at the same time reinforced the visibility and message of the Toshiba brand in order to become more attuned to its stakeholders. Even before these developments, Toshiba had already established its key management policies, in readiness for these changes to its corporate governance and management style. This chapter considers this process of management innovation and the resulting new direction in a characteristically Japanese management system. First, however, I will provide a brief profile of the company.

(p.255) One of Japan's leading high technology corporations, Toshiba is a diversified manufacturer and marketer of advanced electronic and electrical products. Toshiba products delivered worldwide range from information and communications equipment and systems, Internet-based solutions and services, through electronic components and materials, power systems, industrial and social infrastructure systems, and household appliances.

Toshiba's early history has two roots. One comes from the establishment of Tanaka Seizo-sho (Tanaka Engineering Works), Japan's first manufacturer of telegraphic equipment, founded in 1875. The founder, Hisashige Tanaka (1799–1881), was well known for his inventions, which included mechanical dolls and a perpetual clock. Under the name Shibaura Seisaku-sho (Shibaura Engineering Works) his company became one of Japan's largest manufacturers of heavy electrical apparatus. Hakunetsu-sha & Co., Ltd. was Toshiba's second early root. Founded in 1890, it was Japan's first plant for electric incandescent lamps. In 1899, the company was renamed Tokyo Denki (Tokyo Electric Co.). In 1939, these two companies merged to start an integrated electronic and electrical equipment manufacturer, Tokyo Shibaura Denki (Tokyo Shibaura Electric Co., Ltd.). The company was soon popularly known as “Toshiba,” which became its official name in 1978.

Toshiba expected sales of ¥6.7 trillion for the financial year to March 2009. As of March 31 2008, Toshiba reported total assets of ¥5.9 trillion, with shareholder equity of ¥1.0 trillion. It had about 375,000 shareholders and 197,000 employees among its stakeholders.

Changes to Toshiba's Corporate Governance Scheme

In June 2003, Toshiba reorganized its structure of management and corporate governance and became a company with committees. It introduced a new scheme with a revised board of directors and three committees, in accordance with options permitted by the 2002 revision to Japan's Commercial Code (effective from April 2003). The operation of the new structure is shown in Figure 9.1.

The board of directors now consists of fourteen directors, of whom seven are nonexecutives. These nonexecutive directors comprise:

  • – Four outside directors

  • – The chairman of the board of directors

  • (p.256)
    Management Innovation at Toshiba: The Introduction of the Company with Committees System

    Figure 9.1. Structure of supervision under Toshiba's corporate governance from 2003

  • – Two internally appointed directors who are audit committee members

There are three committees next to the board, which are

  • – The Nomination Committee

  • – The Compensation Committee

  • – The Audit Committee

Each of the three committees has a majority of outside directors, and the Nomination Committee and the Compensation Committee are both chaired by outside directors. The Nomination Committee is customarily responsible for appointment and dismissal of directors, but at Toshiba the Nomination Committee is endowed with greater authority to appoint and dismiss the president and members of the committees. The outside directors receive prior explanations on matters to be resolved at board meetings from the staff in charge of the relevant business areas. They also attend the monthly liaison conferences of executive officers in order to oversee Toshiba's management.

The executive officers comprise an empowered executive layer immediately beneath the board of directors, responsible for normal business management. The general scope of their authority and responsibility, and the (p.257) duties of individual executive officers, are clearly stated in organization manuals. This process of clarification means not only that the executive officers know the extent and limits of their authority, but also that the board of directors has a clear idea of what it is supposed to supervise and is able to create an internal check system to oversee the entire company.

Lead-Up to the New Structure for Management Execution and Supervision

Prior to the introduction of the company with committees system in 2003, Toshiba had already adopted a system of “Managing Officers” in 1998. Managing Officers (essentially with the same functions as the later “executive officers”1) were constituted as the highest of the hierarchical positions for employees, but were not members of the board of directors. The board of directors required Managing Officers to fully understand the company's corporate responsibility and corporate governance policies and to fulfill their duties in their own operations in accordance with these.

Thus, Managing Officers at that time were on a different level from the board of directors, the supervising authority, but their status was the highest among employees. Managing Officers were responsible for day-to-day operations in an assigned field, and were given the primary authority in management execution, with powers of delegation. These officers controlled management execution, and took responsibility for activities delegated to subordinate managers. Specifically, Managing Officers were responsible to the board of directors for controlling activities such as sales, bringing new products to market, and directing research and development by foreseeing future market changes.

Most Managing Officers would probably have become directors under the old system. As Managing Officers, however, they were now able to focus on specific responsibilities in their specialized fields, such as being in charge of a semiconductor company, or responsible for formulating divisional management strategy. They no longer needed to express opinions on a wide range of general management issues as members of the board of directors, in situations where their judgment tended anyway to be focused on narrower considerations. Effectively, they became free from the strain (p.258) of trying to separate their positions as directors from their parallel executive positions within the company organization.

This change greatly accelerated management decision making and the issuing of prompt and effective instructions. Secondly, it enabled the company to appoint a much larger number of Managing Officers than directors, whose appointment required the approval of shareholders, and gave Managing Officers substantial responsibility for management. Thirdly, it played an important role in changing the company's culture regarding management organization. When employees who had been in charge of their fields were appointed Managing Officers, they usually made even greater efforts than before to cultivate a manager's viewpoint and style of judgment. They saw themselves not as ordinary employees, but as persons with responsibility, and the possibility of promotion to “Higher Managing Officer” and then “Director.”

Experience following this change gave Toshiba confidence in operating a management system in which execution of management was independent of supervision. This enabled Toshiba to shift smoothly to a company with committees structure in which execution of managerial decisions is clearly demarcated from supervision, which rests with the board. Toshiba's transition to the new system was smooth, since most senior managers had a better knowledge than those in other companies about the responsibility and authority given to the new position of executive officer, and also about the mission and authority of the board of directors that stood above the executive officers as the supervising authority.

Improved Speed and Flexibility of Management

Toshiba adopted the company with committees system in order to improve its speed and flexibility of management, to reinforce the supervision of management, and to increase transparency. All of these should improve management efficiency, but they are also intended to improve the efficiency of the whole organization. They will only be considered successful if they translate into a revitalization of Toshiba's businesses and stakeholder relationships. Thus they should be seen in the context of major efforts by Toshiba's senior management to bring about a much wider transformation.

When he became President and CEO of Toshiba in 2005, Atsutoshi Nishida expressed his desire to change Toshiba's management to increase flexibility and make the company more attuned to all its stakeholders. His (p.259) goal as president was “to create a lively, more clearly defined Toshiba Group that channels ceaseless innovation into achieving sustained growth with profit across Toshiba businesses.” As an important aspect of this, he committed himself to reinforcing the visibility and message of Toshiba's corporate brand, both externally and internally. To these ends, in 2006, Toshiba announced a new brand tag line: “TOSHIBA Leading Innovation.” Three elements of the initiatives are as follows.

A Toshiba for Tomorrow

First, Toshiba's operations span electronic devices and components, digital products, infrastructure systems, and home appliances but particular emphasis has been placed on promoting capital investments and channelling significant resources into specific key businesses that will sustain further growth and add to profitability. This can be seen in the investments in new semiconductor facilities, particularly for NAND flash memory, and the drive for leadership in the AV market through products such as next-generation TVs. Toshiba acquired the nuclear power systems manufacturer Westinghouse, which has significant expertise in nuclear power generation and nuclear fuel, and a worldwide market presence. This business has an important role to play in taking Toshiba's energy systems business to the global level.

Multiplier Effect of Innovations

Second, Toshiba is aiming for much faster growth than before. To do this, it needs wide-ranging innovation in its ways of doing business. Mr Nishida introduced a new program known internally as “i cube” to Toshiba and its group, which aims to promote innovation in development, manufacturing, and sales, generating a multiplier effect by applying these advances throughout the company and the group's operations. The objective is to take the company beyond conventional methods of incremental improvements. The “i cube” program aims to empower each business unit to develop its capabilities to the full, and bring a “sense of urgency” to their work and to the development of business processes.

CSR-Based Management

Third, Toshiba's approach also requires that management is grounded in CSR (corporate social responsibility), at the core of its business. This (p.260) approach prioritizes respect for life, safety, and legal compliance in all activities, and regards CSR as an integral part of the activities of every business unit and employee. Mr Nishida has also stated that he wants the company to earn the trust of its stakeholders, and the wider community, through outreach programs and voluntary activities. Protection of the global environment is particularly important. The “Toshiba Environmental Vision 2010” initiative and its voluntary environmental action plan are intended to double Toshiba Group's overall eco-efficiency by fiscal 2010.

To Whom does the Company Belong?

One of the basic issues of corporate governance discussed in Japanese companies, as in other countries, is “To whom does the company belong?” or “Who are the company's stakeholders?” Toshiba's stance on these basic issues was clarified in its proposal to its shareholders' meeting in 2006, for countermeasures to any large-scale acquisitions of the company's shares (the “Plan”). Based on shareholders' approval for the basic concept at the Ordinary General Shareholders' Meeting held in June 2006, the Plan was introduced “for the purpose of protection and enhancement of the corporate value of the company and the common interests of shareholders.” It seeks to protect and enhance the corporate value of Toshiba and its group and the common interests of its shareholders by explicitly setting out the procedures to be followed when a large-scale acquisition of the company's shares is made, ensuring that shareholders are provided with necessary and adequate information and sufficient time to make appropriate decisions, and securing the opportunity for the board of directors to negotiate with the acquirer.

More specifically, if an acquirer starts or plans to start an acquisition or a takeover bid that would result in the acquirer holding 20 percent or more of Toshiba's total outstanding shares, the Plan will require the acquirer to provide any pertinent information in advance to the board of directors. The board will then establish a Special Committee that will, at its discretion, obtain advice from outside experts, evaluate and consider the details of the acquisition, disclose to Toshiba's shareholders the necessary information regarding the acquisition, as well as any alternative proposal prepared by Toshiba's CEO, and then negotiate with the acquirer. If the acquirer does not comply with the procedures under the Plan, or if the Special Committee decides that the acquisition would damage Toshiba's corporate value or the common interests of its shareholders, the Special Committee will recommend to the board that it implement (p.261) countermeasures, such as a gratis allotment of stock acquisition rights (Shinkabu yoyakuken no musho wariate), a condition of which will be that they cannot be exercised by acquirers or the like, in order to protect the corporate value of Toshiba and the common interests of its shareholders.

Here, we can clearly see Toshiba's views regarding the question “to whom does the company belong?” Toshiba respects its existing stakeholders, including customers, shareholders and investors, employees, local communities, and suppliers. In all its activities, encompassing development, production, sales, after-sales service, and all other aspects, Toshiba seeks communication and engagement with its stakeholders, in order to respect their concerns, satisfy their needs, and respond to their aspirations, not least through clear and timely explanations. Toshiba itself is a balance of all these interests, generating value for them all, and the purpose of the Plan is to protect that balance.

Internal Control Systems: Ensuring the Function of the Board

Toshiba considers that corporate governance can be effectively implemented only when there exists the right scheme of internal controls, basic policies known to all, and standards of conduct for day-to-day operations. This means striving to ensure compliance with laws and regulations, social norms and ethics, and internal rules throughout Toshiba's worldwide operations. In practice, Toshiba's people are requested to accord the highest priority to human life and safety, and to observe regulatory compliance in everything they do, while promoting business activities through fair competition and serving the interests of customers to the best of their ability.

Already in 1990, Toshiba had established the Toshiba Group Standards of Conduct to govern business activities within the Toshiba Group. Every year since then, priority themes for compliance have been set in the light of business circumstances, and actively promoted. By implementing a Plan-Do-Check-Act (PDCA) cycle of self-assessment, not only at Toshiba itself but also at group companies worldwide, a follow-up process has been put in place to promote efforts to ensure compliance.

Mr Nishida's guiding principle – “Be truthful in thought, word and deed” – means striving to express what one really thinks in truthful words, putting those words into action, and then taking responsibility for those actions. By adhering to this principle and diffusing it throughout the Toshiba Group, Toshiba and its group companies are resolved to fulfill their responsibility to their stakeholders.

(p.262) In response to the Financial Instruments and Exchange Law (sometimes known as “J-Sox”), promulgated in 2006 (which required formalization of internal control systems), Toshiba's board of directors further formalized its basic policies on the internal control system in April 2006. Group companies in Japan were requested to adopt the same basic policies on internal control systems by resolutions of their respective boards of directors, in order to reinforce internal control systems throughout the Toshiba Group. These measures were taken to ensure the integrity of corporate governance at the group level, and to ensure that the various companies' boards are functioning properly. They are supported in this by Toshiba, through establishment of prototype models of basic policies and rules covering internal control systems.

Additionally, in 2007, Toshiba set compliance with antitrust legislation worldwide and the prevention of bribery overseas as priority themes. It established new guidelines and strict mechanisms for ensuring compliance, including education, monitoring, and measures designed to preclude violations.

Risk-Compliance Management Systems Implemented Below Board Level

Toshiba's Risk-Compliance Committee is chaired by the Chief Risk-Compliance Management Officer (CRO), one of the senior class of executive officers. It acts in cooperation with the divisions concerned to determine and implement measures to deal with major risks, and prevent recurrence of any problems identified. Failure to respond appropriately to large-scale disasters, such as earthquakes, typhoons, floods, etc., could result in long-term closure of operations, resulting in a great financial loss and a large impact on stakeholders. In addition to measures to ensure the safety of employees and their families, support recovery of devastated areas, and maintain business sites and factories in the event of natural or other disasters, Toshiba established a Business Continuity Plan (BCP) in 2006. This covers those businesses that have large social and economic impacts in order to minimize any interruption in the supply of products and services. Furthermore, Toshiba introduced a whistle-blower system in 2000, the “Risk Hotline,” whereby employees can report their concerns or seek advice via the intranet or phone, so that internal risk information is rapidly obtained and any breach of compliance is either prevented or nipped in the bud.

(p.263) The Supervisory Function of the Board in Relation to Corporate Strategy and Decision Making

Effective implementation of the supervisory function of the board of directors was demonstrated in the course of certain strategic decision-making processes in 2006, when Toshiba moved to change its business portfolio. Instead of providing a comprehensive evaluation of the company's management systems, a concrete example will serve to show how the system helped (a) to achieve the strategic objectives of management; (b) to clarify the responsibility for execution in accordance with the strategic objectives; and (c) to foster strong leadership at the executive management level.

As the highest executive within Toshiba, Mr Nishida has placed a high priority on speed in decision making. The following example demonstrates this in practice. In 2007, Toshiba withdrew from the music and recording business after nearly fifty years of involvement. When EMI, Toshiba's music joint venture partner in Japan, expressed a wish to take full control of the Japanese business, Toshiba agreed to sell. EMI was due to start procedures for a change in its own ownership structure, and offered advantageous terms in return for a speedy negotiation of the conditions. Toshiba did not miss this opportunity. In essence, it took only three days (and nights) from when the conditions were proposed for Toshiba to reach agreement. That was probably an unprecedented speed of negotiation by a Japanese company in an M&A transaction. Other examples may also be given in which prompt decisions and negotiations saved time and generated advantages, including the sale of a majority equity stake in an asset-holding company, and withdrawal from a joint manufacturing business for SED (Surface-conduction Electron-emitter Displays) with Canon.

While withdrawing from noncore activities through a chain of business transfers and share sales, Toshiba has also bought major businesses. In order to secure an advantageous positioning in the nuclear power generation sector, where it was already a leading player in manufacturing BWR (Boiling Water Reactor) plants, it bought out the competing business of Westinghouse, which manufactures plants using the alternative PWR (Pressurized Water Reactor) technology. In this case, the buyout price was approximately ¥600 billion, roughly 30 percent of Toshiba's approximate aggregate market value at that time of ¥2 trillion. Hitherto, nuclear power systems manufacturers had specialized in either BWR or PWR. No company had ever attempted to offer development, manufacture, and maintenance of both types of system.

(p.264) Japan is the only country in the world that has been the victim of a nuclear attack. Although the nuclear technology in this case is for peaceful use only, it was expected that Toshiba would face strict safety requirements from the Japanese government and public opinion. Toshiba foresaw that a major investment would be necessary for the development of processes to meet such requirements and to enhance the technology so that it could offer better reliability.

In the decision-making process for this series of divestitures and investments, Mr Nishida and his executive management on the one hand, and the board of directors on the other, took care to exercise their respective functions of management execution and supervision. They communicated closely through frequent board meetings during the period of these M&A negotiations. The board members were closely involved in each case and received reports of valuation based on business plans and the status of negotiations with the counterparties. All of these were important cases of how supervision of decision making and management execution combined to implement a strategy. They were also a demonstration of how an electronics manufacturer such as Toshiba could ensure that the governance of a Japanese company with committees functions properly.

The Reputation of Toshiba's Corporate Governance and Internal Control Systems

There are a number of indicators of the reputation Toshiba has established with regard to its corporate governance and internal control practices. Toshiba was ranked top in the JCGIndex Survey conducted by the Japan Corporate Governance Research Institute, Inc. (October 2007). In addition, Toshiba's stock was selected for the Corporate Governance Fund of the Pension Fund Association.2 Toshiba has been a fixture on the Dow Jones Sustainability Indexes (DJSI) of the world's 300 leading companies for eight consecutive years since 2000. The DJSI, compiled by Dow Jones of the United States and Sustainable Asset Management (SAM) of Switzerland, is an influential ranking system that seeks to promote socially responsible investment. DJSI assesses the sustainability performance of the world's 2,500 largest companies and selects the top 10 percent for (p.265) the index. Toshiba was also selected as one of four leading companies among thirty-nine in “Diversified Industrials” of “DJSI World 2007.”

Conclusion

Toshiba does not see its conversion to a company with committees as a sudden and radical change. It had been developing its Managing Officers system for some years before the change to the company with committees structure took place, and the new structure complemented its plans to empower executive management and make the distinction between supervision and execution more transparent. The company with committees system is often described as a “US-style” model, but Toshiba does not consider its corporate governance to be particularly American, although the concept of separating supervision from execution is clearly a common element.

What Toshiba's experience shows is that corporate governance is about much more than just the behavior of the board of directors. If it is to be effective, it needs to have a comprehensive approach that covers all considerations of board structure, the supervisory role of the board, management systems and execution, internal controls, attention to stakeholders, and CSR. Moreover, it must penetrate the thinking of the entire company, at all levels. It is often said that good corporate governance does not translate automatically into good performance. Toshiba feels that it should and is trying to ensure that it does, by combining its principles of governance with management systems innovation, leading to improved quality of execution by empowered managers under the supervision of the board.

Notes:

(1) The Japanese term is shikkoyaku (normally translated as “executive officer”), as opposed to shikkoyakuin (normally translated as “corporate executive officer”), who has the same role outside the company with committees system.

(2) The Pension Fund Association (PFA) is a major Japanese pension fund which has established a reputation for insistence on high standards of governance at companies in which it invests.