Oh not a beauty

John M Green draws some lessons from Toyota’s head-on collision with regulators.

At great cost, carmaker Toyota snubbed its own warning – that objects can be closer than rearview mirrors suggest.

Once, Toyota enjoyed an enviable reputation for quality and safety. In 2009, Fortune magazine lauded it as the world’s third most admired company. But a mere two years later it had crashed, from third to 33rd.

What turbo-charged its fall from grace was a frantic phone call in August 2009 to US emergency number 911.

A Californian family test-driving a Toyota called in as the car inexplicably ripped them up the freeway at almost 200 k.p.h.

“We’re in a Lexus ... and our accelerator is stuck ...  there’s no brakes ... We’re approaching the intersection ... Hold on ... Hold on and pray ... Pray.” 

The heart-wrenching call ended with the sound of the crash – a crash that killed everyone in the car.

The recording of the call, replayed on news programs all over America, was a lightning rod for complaints that Toyota was downplaying “sudden unintended acceleration” – that is the risk that in some vehicles the gas pedals would stay down after drivers lifted their foot.

Five years on, the aftermath still haunts Toyota. A few weeks ago, US authorities hurled a massive criminal penalty at Toyota – not “just” for millions, not even tens nor hundreds of millions, but an eye-watering US$1.2 billion.

That’s not all. Last year, Toyota settled a class action for US$1.6 billion. And in 2010, when the US Transportation Secretary accused Toyota of being “safety deaf”, its market value plummeted US$30 billion, around 25 per cent.

Toyota has also borne the costs of 10 million vehicle recalls and US$2 billion in lost sales. Far more grim, it’s been blamed for a reported 37 deaths and countless injuries. 

Any company, even great ones, can suffer design flaws with unintended safety consequences, no matter how good its systems, design or quality culture. Toyota’s criminal prosecution wasn’t for defects. It was for brushing them under the carpet.

In October 2009, Toyota issued a written design change to rectify one of the two causes of unintended acceleration. But, to hide the ongoing issue from its regulator, it cancelled the change – orally – two weeks later and told employees not to put anything about it in writing.

A month later, Toyota announced a recall for “floor-mat entrapment”, saying: “We’re very, very confident we have addressed the issue.”

But Toyota faced continued scrutiny and criticism, and on 23 December publicly denied it was minimising public awareness.

“We are confident,” a spokesperson said, “that the measures we have adopted address the root cause.”

Yet Toyota’s measures hadn’t done that. Best-selling models, Corolla, Venza and Highlander, also had the floor-mat entrapment design flaw, yet they hadn’t been recalled. Further, Toyota hadn’t made any recall for a second cause, “sticky pedal”.

In January 2010, after meeting its regulator, one Toyota employee exclaimed: “Idiots! Someone will go to jail if lies are repeatedly told. I can’t support this.”

In February that year, Toyota’s global CEO was hauled before the US Congress. He apologised, admitting: “We pursued growth over the speed at which we were able to develop our people and our organisation.”

When announcing its US$1.2 billion penalty this year, the FBI’s verdict was more ugly, “Toyota put sales over safety, and profits over principle.”

What can company directors learn from this? There are many aspects, but let’s peer into two —remuneration and culture.

Toyota’s tight grip on driving market share and cutting costs was reflected in its compensation structure: push sales and costs so hard that they’re seen as streets ahead of safety and quality, and it’s hardly surprising if the “lesser” objectives suffer.

Putting a risk lens over remuneration structures and key performance indicators is not new, but Toyota is an example of a very sophisticated company doing it poorly.

A company’s culture can also be a risk counterweight, but Toyota’s seems to have amplified it. If revealing defects could bring great shame on a company, and on employees themselves, they’re more likely to bury them. Plus, challenging superiors in a hierarchical structure can be very difficult.

This isn’t just a Toyota issue. Its US rival, General Motors, is facing accusations of its own “culture of cover-ups”, over a faulty ignition switch linked to 17 deaths. And at home, the inquiry into the failed government pink batts program heard one public servant claim he didn’t tell Prime Minister Kevin Rudd that the program couldn’t be safely delivered by Rudd’s deadline because of “a culture among public servants not to dispute a decision that had already been made”.

Culture matters. CEOs will often tell a board how good the company’s culture is. But how does the board verify that? Is testing the culture on the risk agenda?

Toyota has not been cruising since that 911 call. Its 2014 Fortune ranking is up a little, now the 25th most admired company.

It’s a long way back to the top, but the ugly sight looming in Toyota’s rearview mirror has made it highly motivated to get there. Have you checked your mirror?