Why is Toyota’s governance being criticised?

The short version is the company’s board and chair have a track record that is less than pleasing to important investors. The long version is more complex.

Like many of the world’s biggest companies, Toyota has been caught in the path of activist investors. 

Activists commonly buy enough stake in a company for their demands to be listened to, and while these demands can concern anything about the company’s strategy, activists making current headlines across the world nearly always focus on ESG (environment, social and governance). 

In general, they want a company to act with more integrity and concern for the planet and its people while remaining financially viable. 

This is the kind of activism we are seeing at Toyota.

The key players are: 

• Akio Toyoda – grandson of Toyota’s founder and current chair of the board. He was also president of the Toyota Group for 13 years but left the role earlier in 2023 amid persistent criticism. He said, “never did I experience a calm and peaceful year”.
• Glass Lewis – an American proxy advisor urging shareholders to vote against Toyoda’s reelection as chair of the board. 
• AkademikerPension – A Danish pension fund which has submitted a proposal for more disclosure on Toyota’s climate lobbying efforts. 
• ISS – another proxy advisor, urging that shareholders support AkademikerPenion’s proposals.

Glass Lewis’ pressure is because it doesn’t think Toyota’s board is independent enough.

Generally, boards of companies this size will have a certain amount of independent/non-executive directors – valued for their critical thinking and lack of personal bias in decision-making.  

If companies themselves don’t have a minimum threshold for independent directors, the investors who back them might.

This is the primary concern of AkademikerPension’s submission.

While Toyota, like most other big companies, has committed to disclosing a certain amount of information on how it will help tackle climate change, activists say it isn’t enough. 

It mirrors a similar battle being fought by the oil giant Shell.

This is the primary concern of AkademikerPension’s submission.

While Toyota, like most other big companies, has committed to disclosing a certain amount of information on how it will help tackle climate change, activists say it isn’t enough.

It mirrors a similar battle being fought by the oil giant Shell.

The pressure on Toyota is a fine example of activist investor standards. 

Increasingly, funds such as those above are implementing their own rules for investing, guided for the most part by ESG principles. 

For example, in this case, Glass Lewis has a minimum number of independent directors it wants to see on a board (one third of all directors). It will kick up a fuss if it doesn’t get its wish. This is now the strategy of many major investment bodies. 

Meanwhile, it’s interesting to note that Glass Lewis has decided not to back the resolution on climate disclosures. From this, we can see how busy the activist landscape is at once and how many companies are pulled in in many different directions.

June is “meeting month” in Japan. The Financial Times estimates that four fifths of major Japanese companies hold shareholder events in the space of two weeks. 

This is where the standoff between Toyoda, Toyota, and the multiple activists will occur. Given Toyoda’s turbulent thirteen years as president, we should expect this meeting to pass off quietly.