DOES CORPORATE GOVERNANCE MATTER?

447

Blackwell Publishing Ltd.Oxford, UK

CORGCorporate Governance: An International
Review0964-8410Blackwell Publishing Ltd. 2005
May 2005133447457DOES CORPORATE GOVERNANCE
MATTER?CORPORATE GOVERNANCE

Does Corporate Governance Matter?

Why the Corporate Performance of
Toyota and Canon is Superior to GM
and Xerox
Masaru Yoshimori*

In this exploratory comparative study of Toyota/GM and Canon/Xerox, the author purports to
explain why the 10-year performance of Toyota and Canon, despite their traditional Japanese
primacy on job security, large board size and absence of non-executive directors, is superior
to that of their US rivals. The author compares the key stakeholder and the board structure as
well as corporate values, culture and strategy of the sample firms and concludes that higher
performance is possible without resorting to US-style corporate governance, and proposes that
corporate values, culture and strategy are equally vital ingredients of corporate success.

Keywords: Corporate governance, corporate performance, values, culture, strategy,

stakeholders, Board, outside directors, Toyota, GM, Canon, Xerox

Introduction December 2003 marked a new high for four

hy have Toyota and Canon, despite
W their traditional Japanese corporate
governance systems, dismissed by foreign
investors and students of corporate gover-
nance as ineffective, delivered corporate per-
formance that is superior to GM and Xerox
over the last 10 years? Is there any link
between governance and performance? Does
corporate governance matter?
This paper is designed to explore the
hypotheses that:
1. Corporate governance alone does not
assure sustained corporate performance.
2. Values, culture and strategy play an equally
or perhaps more important role in corpo-
rate performance.
Toyota and Canon are two of the most
successful Japanese firms, and continuously
improved their performance even under
Japan’s business downturn in the 1990s.
Toyota’s quarterly earnings for September–
consecutive years since 2000, while the Big
Three US automakers stagnated. Canon also
renewed its earnings record for a three-year
stretch in the same period.
Yet both firms are also well known in Japan
for their hostile stance towards the wholesale
introduction of the US corporate governance
model, and their CEOs champion their Japa-
nese management styles. Both have upheld job
security as the primary responsibility of the
CEO. Both have a large board size by US
standards with no outside directors or board
committees in the US sense. Neither has the
intention of introducing the US-style board
structure outlined in the revised Commercial
Code of April 2003. This Code allows large
firms to adopt the US-inspired “company with
the board committees”, with mandatory
*Address for correspondence:
installation of an Audit Committee, Nominat- Professor at University of the
ing Committee and Compensation Commit- Air (The Open University of
tee, each with a majority of outside directors. Japan), Mihamaku Wakaba
2-11, Chiba, 261-8586 Japan.
As of May 2004, 86 per cent of member firms Fax: +81 48 625 0250; E-mail:
in the Japan Corporate Auditors Association yoshimo@u-air.ac.jp

© Blackwell Publishing Ltd 2005. 9600 Garsington Road, Oxford,

OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Volume 13 Number 3 May 2005
448
(2004) expressed no intention of adopting this
structure.1 In addition, Canon even announced
that the Sarbanes-Oxley Act was unnecessarily
strict, and that it was studying the possibility
of delisting from the NYSE if the Act was
applied to non-US quoted firms.2
This raises the fundamental question of
whether corporate governance really assures
sustainable corporate profitability and there-
fore higher returns for the shareholders, the
central goal of corporate governance in the
United States. Corporate governance revolves
around the answer to the following questions:
1. Who holds sovereign power in the firm? –
The Sovereign.
2. Which stakeholder makes the crucial con-
tribution to the maximisation of value for
the sovereign? – The Key Stakeholder.
3. Who monitors the CEO to evaluate their
performance in achieving the above goal? –
The Monitoring Mechanism.
4. How should the CEO be rewarded or sanc-
tioned for their performance? – The Incen-
tive System for the CEO.
This paper assumes that the customer is
the sovereign power in a market economy.
Various stakeholders are seen as being crucial
to the extent that they have a decisive impact
on customer satisfaction, because neither
other stakeholders nor businesses can exist
without the customer. On this basis, stake-
holders become entitled to a primary claim on
benefits from the corporation (Freeman, 1984,
1994). This paper thus defines corporate gov-
ernance in terms of the key stakeholder and
related mechanisms for monitoring the CEO.
US corporate governance is understood as
having shareholders as the central stake-
holder, and monitoring within the US board
structure involves a relatively small board, a
dominant number of outside directors, and
institutionalisation of board committees
(Monks and Minow, 2004). In contrast, Japa-
nese corporate governance is understood as
having employees as a central stakeholder,
with a large board, a small minority of outside
directors if any, and rarely board committees.
This paper examines the cases of Toyota and
GM as well as Canon and Xerox in this light.
For the purpose of this paper, these companies
may be regarded as broadly representative of
Japan and the US in terms of the key stake-
holder and the board structure. The paired
examples are also deemed roughly compar-
able in the product and business portfolio,
although Canon is more diversified with 69
per cent of revenue derived from office equip-
ment whereas Xerox earns more from copiers.
The case comparisons suggest that corporate
governance as a system of external controls is,
Volume 13 Number 3 May 2005
CORPORATE GOVERNANCE
by itself, not sufficient to assure good perfor-
mance. Rather, corporate values, corporate
culture and strategy are additional factors
necessary to achieve sustained profitability
(George, 2001).
Corporate performance
Toyota and GM
Toyota was ranked 11th in Fortune’s 2003 list
of the globally Most Admired Companies, the
highest ranked among carmakers, while GM
ranked 48th.3 Table 1 shows that Toyota’s aver-
age annual performance is largely superior to
GM for both 10-year and 5-year periods. GM
has better results only for 5-year return on
equity. However, the higher ROE value for
GM may be explained by its higher proportion
of debt relative to equity, which may reflect the
firm’s strategy of maintaining a high ROE, a
financial indicator important to investors.4
Toyota’s consolidated sales for the 2004
April–September half-year period increased
by 9.7 per cent, and the number of vehicles
sold worldwide rose to 7.5 million, overtaking
Ford for the second consecutive year and
ranking 2nd after GM.5 Reflecting this result,
Toyota’s market capitalisation of 11,480 billion
Yen is larger than DaimlerChrysler’s 4,270,
GM’s 2,584 and Ford’s 2,143 billion Yen com-
bined, as of early December 2003.6 Moody’s
Investors Services gave Toyota’s bond issues
an Aaa rating in 2003, while GM and Ford
were rated Bbb.
Canon and Xerox
Table 2 shows that Canon’s long-term corpo-
rate performance exceeds Xerox. As of the 3rd
quarter of 2004, Canon exceeded its record
revenue and net income for the last six con-
secutive years and expects to end fiscal 2004
with an 8.5 per cent increase in consolidated
sales, and a 22.96 per cent growth in net prof-
its.7 By contrast, Xerox lost US$370 million in
fiscal 2000 and 2001 and became heavily
indebted. The share price plummeted from a
1999 high of US$64 to US$4 in 2000, and secu-
rities analysts speculated about the possibility
of filing for Chapter 11.8 Xerox’s poor perfor-
mance was aggravated by the US$10 million
penalty it had to pay in 2002 after the SEC
judged its accounting method of rental reve-
nue for copiers to be inappropriate. After
a series of restructuring programmes, includ-
ing the partial sale of US$13 billion of its inter-
ests in the Japanese joint venture Fuji-Xerox
and the removal of the CEO, Xerox started on
a profitable track in 2002. For the fiscal 2004,
© Blackwell Publishing Ltd 2005
DOES CORPORATE GOVERNANCE MATTER? 449

Table 1: Comparative performance – Toyota vs GM

CORPORATE PERFORMANCE
TOYOTA GM
10 -YEAR ANNUAL
AVERAGE %
P/E RATIO 32.7 12.8
RETURN/SALES 3.2 2.5
RETURN/EQUITY 6.8 2.7
RETURN/ASSETS 3.2 1.8
5 -YEAR ANNUAL
AVERAGE %
SALES GROWTH 6.6 4.2
EARNIGS/SHARE 15.8 –5.6
PRE-TAXE PROFIT 7.2 2.7
RETURN/SALES 3.9 1.8
RETURN/EQUITY 8.2 17.1
RETURN/ASSETS 3.5 1.0
FOR THE 10 ACCOUNTING YEARS 1993–2002, EACH ENDING MARCH FOR TOYOTA, DEC. FOR GM
Based on www.jp.moneycentral.msn.com/investor/invsub/results/compare.asp
Media General Financial Services, Standard & Poor, Thomson Financial, Nomura Research Institute

Table 2: Comparative performance – Canon vs Xerox

CORPORATE PERFORMANCE
CANON XEROX
10 -YEAR ANNUAL
AVERAGE %
P/E RATIO 30.0 21.9
RETURN/SALES 3.7 3.4
RETURN/EQUITY 9.1 1.2
RETURN/ASSETS 4.6 1.6

5 -YEAR ANNUAL
AVERAGE %
SALES GROWTH 1.3 –4.4
EARNIGS/SHARE 9.9 –
PRE-TAXE PROFIT 8.7 3.7
RETURN/SALES 4.7 1.8
RETURN/EQUITY 10.6 9.5
RETURN/ASSETS 5.4 1.1
FOR THE 10 ACCOUNTING YEARS 1993–2002, EACH ENDING DEC. FOR CANON AND GM
Based on www.jp.moneycentral.msn.com/investor/invsub/results/compare.asp
Media General Financial Services, Standard & Poor, Thomson Financial, Nomura Research Institute

© Blackwell Publishing Ltd 2005 Volume 13 Number 3 May 2005

450
sales remained flat with about 1 per cent
increase, but net earnings grew by 8 per cent,
about one-third of Canon.
A Japan–US comparison of
corporate governance
The key stakeholder at Toyota and GM
Toyota is without doubt one of the most tradi-
tional Japanese firms in that it prioritises job
security. The key stakeholder at Toyota is
therefore its people. This stance dates back to
1949 and the early 1950s, when the firm was
at the brink of bankruptcy and had to dismiss
employees. Toyota survived thanks to the
injection of credit by the banking consortium
backed up by the Bank of Japan. Over half a
century later, Toyota has never been in deficit
nor axed employees for restructuring pur-
poses (see Wakayama and Sugimoto, 2002;
Honma, 2003).
Board Chairman Okuda describes this
principle as “market economy with a human
face”. Even during the 1990s, Toyota doggedly
defended its position against those in Japan
and elsewhere who clamoured for restructur-
ing in favour of shareholder value. Okuda
(2002) sharply criticised some of the Japanese
CEOs for shedding employees, which he dis-
missed as “a short-sighted view dominated by
stock market logic”.
In 1998, Moody’s Investors Services down-
graded the Toyota’s bond rating by one notch
because of its “lifetime employment which
does not enable Toyota to deal effectively with
significant changes in the business environ-
ment”. Okuda (1999) said he could not under-
stand why lifetime employment justified the
negative rating when even excellent US firms
such as Hewlett Packard and Boeing were
doing the same. He takes a relativist stance in
arguing that the American system is relevant
only in the American socio-economic environ-
ment, and should not be applied elsewhere as
a universal standard.
According to Okuda, Toyota’s corporate
culture is founded on “the simple belief that
people are at the centre of all economic acti-
vities”. He stresses that lifetime employment
enables the firm to accumulate employee skills
and strengthens their identification with the
destiny of their company. He emphasises that
“management with a long-term horizon is
good for the shareholders, and that respect for
human resources has by far higher universal
validity than the market principle that has
been popular only in recent years”. Okuda
(2002) concludes by affirming that manage-
ment that balances the interests of three stake-
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CORPORATE GOVERNANCE
holders, i.e. shareholders, management and
employees, will have staying power.
GM, on the other hand, epitomises the US
mainstream ideology of shareholder primacy.
Legendary GM Chairman Alfred P. Sloan once
wrote:
The measure of a business enterprise as a
business is . . . not merely growth in sales or
assets but return on the shareholders’
investment, since it is their capital that is
being risked, it is in their interests first of all
that the corporation is supposed to be run
in the private-enterprise scheme of things.
(1964, p. 245)
GM took shareholder interests seriously early
on. Sloan and Pierre Dupont were major share-
holders of GM and took an interest in share
prices. In 1923, Dupont was instrumental in
implementing one of the first stock option
plans in the United States. He sold 30 per cent
of his GM shares to the Managers Securities
Company, which was created to manage the
executive stock option plan. One of the
reasons for Dupont’s move was to “create a
partnership relationship” with management.
Dupont was convinced that this incentive
scheme for the executives would increase
dividends and the stock price of GM, resulting
in increased value for Dupont’s remaining
stake (Sloan, 1964, p. 481).
Shareholder primacy was reemphasised in
1993 by Chairman Smale in his letter to share-
holders. “Your Board of Directors”, he wrote,
“is responsible to you, the shareholders”.
Today the mission of the GM Board of Direc-
tors is to represent “the owners’ interest in
perpetuating a successful business”. The
Board is also to be responsible to “GM’s cus-
tomers, employees, suppliers and to the com-
munities where it operates – all of whom are
essential to a successful business”.9 But this
statement makes clear that non-shareholder
interests are considered as a means of serving
the interests of the shareholders.
The key stakeholder at Canon and Xerox
Canon shares the same concept of the corpo-
ration as Toyota. Indeed, Canon has never laid
off employees in its entire history. Since 1950,
Canon introduced the Tripartite Profit Sharing
System, whereby one-third of profits go to
labour, one-third to the shareholders and the
balance to the management. The system is
largely in place today. CEO Mitarai (2002a)
believes that a firm is only as good as its
employees, hence he puts them before the
shareholders. Mitarai says that lifetime
employment offers higher returns on invest-
ment in employee education and training, in-
© Blackwell Publishing Ltd 2005
DOES CORPORATE GOVERNANCE MATTER?
house accumulation of employee and manage-
ment expertise, and trust and solidarity
among people through long-term working
relationships and a common destiny. Such a
working environment, in Mitarai’s view, fos-
ters self-discipline and a sense of mission to
improve corporate performance – thus being
the basis of good corporate governance in the
Japanese socio-cultural context.
The pitfall of lifetime employment is, for
Mitarai, the remuneration and promotion
based solely on seniority, because it does not
take into account individual differences in job
performance. This will result in dulled work
incentives of high achievers, lead to cosy
relations among employees and may thus
even induce unethical and illegal behaviour.
Canon’s remedy is meritocracy in human
resources management, which Mitarai defines
as offering equal opportunities to every
employee regardless of gender, educational
background and job category. As proof of the
effectiveness of their efforts to foster talent,
Mitarai points out that Canon is second to
IBM in terms of the cumulative number of
patents granted in the United States in the
past 10 years, which generated a record
royalty income of ¥2.4 billion or US$20 million
in 2001.
The key stakeholder for Xerox is share-
holders, as in the case of GM. The firm’s Cor-
porate Governance Guidelines stipulate that
the Board is to represent the interests of the
shareholders. The company experienced a
serious downturn in 2000 and 2001, and had
to resort to severe job cuts. In January 2001, the
company announced it was slashing 5,200
jobs, or 5 per cent of the workforce, followed
by another cut of 2,000 jobs worldwide in the
third quarter, followed by still another of 4,000
in the fourth quarter.10
Board structure in comparison:
Toyota and GM
According to the survey of 2,103 listed firms
conducted by the Tokyo Stock Exchange, 54
per cent of those responding now have a board
size smaller than 10.11 Until 2003, Toyota had
58 board members, or almost five times as
many as GM, and three times as many as
DaimlerChrysler. Typical of a traditional Japa-
nese firm, Toyota had seven different titles for
the directors, indicating fine gradations of
a presumed hierarchical order of authority,
responsibility and seniority.12 Six statutory
auditors were supposed to monitor the board.
Toyota’s board was and still is undoubtedly
one of the largest among the listed companies
in Japan, where the trend is toward a reduced
board size.
© Blackwell Publishing Ltd 2005
451
In June 2003, Toyota halved the board size
from 58 to 27. The company explained that the
move was motivated by a need for the board
to concentrate on speedy strategic decision-
making. The former directors are now execu-
tive officers responsible for specific business
areas and staff functions. Toyota’s decision is
apparently inspired by the board reform initi-
ated by Sony in 1997 to separate the executive
function from the board so it can concentrate
on oversight and group-level strategic deci-
sion-making function.13 The Toyota board is
now divided into two groups of directors, one
for corporate-level strategic decision-making,
and the other for operating decisions on divi-
sional management. Toyota explains that the
presence of directors with line responsibility
makes it possible for strategic decisions to be
made in full recognition of the specific needs
and capabilities of each operating unit. Thus
they integrate both strategic decision-making
and its implementation in functional depart-
ments and business units.
Toyota draws a line at the US and German
system where decisions and their implemen-
tation are more strictly separated between the
board and the CEO. From Toyota’s perspec-
tive, the strict separation of strategic decision-
making and its implementation may lead to
strategies that might not be feasible for the
business divisions, undermining their com-
petitive edge. This may be one of the mani-
festations of Toyota’s traditional emphasis on
frontline activities.
Toyota believes that the absence of outside
directors is more than compensated for by
the presence of the Statutory Auditors, par-
ticularly independent outside auditors. For
large firms such as Toyota, the Commercial
Code provides, effective 2005, for a minimum
three Statutory Auditors, of which a majority
must be outside auditors who have never been
employed by the company. Toyota increased
the number from the minimum of three to
seven, of which four are outside auditors and
the remaining three internal auditors. The out-
side auditors may be independent in the legal
sense, but no information on their personal
profiles is disclosed by Toyota on the Internet.
It should be stressed that in 1996 Toyota set
up an International Advisory Board of about
10 experts on politics, economics, and the
environment and business, who meet twice
every year. These advisors, who are not iden-
tified on the home page, are supposed to give
advice to top management on broad issues.
The International Advisory Board may be
regarded as a surrogate for outside directors,
but its disciplinary role is questionable. The
board, therefore, should not be equated with a
governance organ in the sense defined earlier.
Volume 13 Number 3 May 2005
452
In the United States, GM has been con-
sidered as the pioneer in board reforms ever
since the board ousted CEO Robert Stempel in
1992 for the huge 1991–1992 losses. The board-
room coup has permanently changed GM and
the nation’s rules of corporate governance.14 It
was widely reported that CalPERS and other
institutional shareholders were instrumental
in getting GM’s outside directors, headed by
John G. Smale, retired Chairman of Proctor &
Gamble, to press for Stempel’s resignation.
Smale was named Board Chairman in 1992,
and initiated the formulation of GM’s Corpo-
rate Governance Guidelines in 1994, which
was last revised in 2004.
Smale received the Independent Director
Award by CalPERS in 2000 for his “leading
role in the GM Board reform”. GM now exem-
plifies the US emphasis on transparency in
corporate governance. The Guidelines were
praised by the largest US public pension fund
as “a leading benchmark against which all
other governance structures are judged”, stat-
ing that nearly all major companies in America
have followed GM’s lead.15
In radical contrast to Toyota, the 11-member
GM board has only one inside director,
Richard Wagoner, Chairman and CEO, while
the remaining 10 directors are all outsiders.16
From the perspective of institutional investors,
the only room for improvement is the CEO–
Chairman duality. They claim that this rep-
resents excessive concentration of power in
one person, and so checks and balances over
the CEO–Chairman are undermined.
Board structure at Canon and Xerox
Canon is one of the few Japanese companies
that have increased board size from 21 to 31 in
April 2003 in contrast to the general trend of
the majority of Japanese firms. As there is no
Board Chairman, Mitarai is assumed to hold
the Chairmanship function. He acts as the
Chairman of the four Committees: the Man-
agement Strategy Committee, the New Busi-
ness Development Committee, the Business
Ethics Committee and the Internal Control
Committee. These are not Board Committees
but are created outside. Mitarai insists that
these Committees have the advantage of
involving directors in cross-functional issues,
enhancing their broader vision. The rationale
is allegedly to allow more directors who have
hands-on experience in their respective busi-
ness and functional areas to make board dis-
cussions more relevant to reality, and to arrive
at speedy and judicious decisions. Mitarai has
no intention of introducing outside directors
on the grounds that inside directors, who
have proven themselves through continuous
Volume 13 Number 3 May 2005
CORPORATE GOVERNANCE
assessment and strong identification with
Canon throughout their careers of over 25
years, are more effective than outside directors
from the governance perspective.
In 2003, Xerox, in an apparent response to
the criticisms of its 15-member board size and
the dominance of the 10 inside directors,
reduced the number of directors to 13, and
inside directors to one, if the Chairman of
Xerox Japan is counted as an outside director.
Thus the incumbent CEO is the only inside
director. Xerox can now pass as one of the
exemplary US corporations by the standards
of most institutional investors because the
firm separated Chairman and CEO jobs. In
addition, all four Audit, Compensation, Cor-
porate Governance and Finance Committees
are now staffed exclusively with outside direc-
tors. In the same vein as GM’s Corporate Gov-
ernance Guidelines, Xerox provides detailed
rules relative to the roles of directors, selection
of the board chairman, board size, board in-
dependence, board membership criteria and
retirement age etc.
Values and culture
Toyota and GM
Toyota is well known for its deep-seated
values and culture, shared by management
and employees alike. Most reports of Toyota’s
core values and culture are based on piece-
meal information written by outsiders. For
this reason, I will concentrate exclusively on
the remarks and statements made by Toyota
managers themselves who have only recently
begun to speak in public seminars and writ-
ings (see Inoue, 2003a, 2003b; Honma, 2003).
“Toyota is traditionally a company that does
not talk about itself and one is trained here to
speak through performance, not through the
mouth”, says one of Toyota’s statutory audi-
tors (Inoue, 2003a). This rare revelation by a
high-ranking insider crystallises Toyota’s core
value and culture.
True, Toyota has its three-point corporate
vision and seven-point formal written mission
statement. But this is not so different from
most Japanese firms. Thus the formal state-
ment does not say much about Toyota. A look
at Toyota’s home page reveals that informa-
tion on corporate governance is practically
non-existent. Toyota’s apathy to transparency
resembles that of German and French family
businesses such as BMW and Peugeot.
According to Honma (2003) of the Toyota
Institute, an in-house training organisation,
the Toyota Way consists of two pillars: con-
tinuous improvement and respect for people.
The former comprises three components: chal-
© Blackwell Publishing Ltd 2005
DOES CORPORATE GOVERNANCE MATTER?
lenge, Kaizen and Genchi Genbutsu, while the
latter refers to care for people and emphasis
on teamwork (Honma 2003). The following
are descriptions of these and other value com-
ponents (Inoue, 2003a, 2003b).
The customer-first principle
“Customer first, dealers second, maker third”
was the slogan created by the first CEO of
Toyota Auto Sales Corp. Suppliers and sub-
contractors are respected, as Toyota shares
gains from process innovation and resulting
cost reduction with them. A greater commu-
nity of interests through quasi-vertical integra-
tion is perpetuated by equity participation,
directorships, socialisation at the top and rank
and file levels, thus forming long-term busi-
ness relations.
Close to the site (Genchi Genbutsu Shugi)
The “Close to the site” principle leads to a
consistent and down-to-earth approach to
problem identification and incremental im-
provement on the production sites. Close con-
tact is stressed for people at all levels with the
frontline, rather than over-reliance on theories
or bookish solutions. On-the-job training (OJT)
is thus the preferred method of training at
Toyota. An unwritten rule is that engineers
must go through three years of “making their
hands dirty” at the production site before they
can work on the drawing board.
People-based automation
Toyota has a people-oriented concept of the
corporation or “capitalism with a human
face”, as mentioned earlier. Specifically, Toyota
strives to “train people before making pro-
ducts”. Training and coaching of the first-line
operators, as well as identification of causes of
problems without holding individuals respon-
sible, are other facets of this principle.
The three C’s – creativity, challenge, courage
This precept encourages product and process
innovation, as outlined by the current hono-
rary Chairman Toyoda when he was CEO. It
stems directly from the innovative spirit of
the founder Sakichi Toyoda who, in 1897,
invented an automatic loom that earned him
over 100 patents in Japan and over 50 over-
seas. The loom was licensed in 1929 to Platt
Brothers, a UK company for £100,000, which
enabled Toyota to build its first automobiles.
The revenue17 from the loom business allowed
him to diversify into the automobile business
in 1933. The pursuit of ever higher quality
© Blackwell Publishing Ltd 2005
453
standards, as well as persistent effort in
achieving ambitious corporate goals, origi-
nated in the development stages of the
founder’s business. Toyota currently has a
goal of achieving a global market share of 10
per cent by 2010.
Much has been written about GM’s culture
in the 1990s, so a detailed review would be
superfluous. A GM outside director said dur-
ing the crisis period, “There was a corporate
culture that was reluctant to face up to bad
news.” Before the legendary boardroom
upheaval, GM’s was a “hidebound culture”.18
The bureaucratic mindset of GM was a result
of its hegemonic position as the price leader.
GM management became complacent and a
prisoner of the conviction that GM could
never be wrong. GM’s corporate culture came
to put a premium on conventions rather than
creativity (Keller, 1989, p. 181).
Since the boardroom coup of 1992, that
corporate culture seems to have irrevocably
changed. “A bloated bureaucracy” left by
generations of CEOs seems to be gone. By
1999, GM had significantly improved its per-
formance. Net profit margin rose from -2.2 per
cent to 3.2 per cent, and employees were
halved from 750,000 to 388,000. One of the
major problems, though, is that its US market
share has continued to slip since the beginning
of the early 1990s. Dealing with “30 years of
management mistakes” does not seem easy.19
Canon and Xerox
The fact that the first CEO of Canon was
Takeshi Mitarai, gynecologist and obstetrician,
seems to have had a profound impact on
Canon’s core values.20 The company was
founded in 1933 by a group of his friends to
make cameras that could match German pro-
ducts in quality. Mitarai took part in the
management as an auditor. During the war
the CEO was recruited by the army, and
Mitarai was solicited to take over the position
in 1942. In 1947, he publicly announced his de-
termination to overtake Leica as the bench-
mark.
Mitarai’s three-point credo constitutes
today’s corporate culture: meritocracy, health
and “new familism” or emphasis on family
welfare. Another set of three core values,
called Sanji or Three Selfs, consists of three
components: Self-initiative to take up chal-
lenging tasks, Self-control to strictly observe
the rules and to fulfil one’s duties, and Self-
awareness to reflect on one’s behaviour and
performance for further self-development.
Technological self-reliance is an important
tradition at Canon dating back to the early
1930s when the company developed the first
Volume 13 Number 3 May 2005
454
Japanese 35 mm camera without infringing
Leica’s patents. The same success was
repeated in the mid-1960s when Canon
obtained patents on its NP-system plain paper
copier by legally circumventing over 600
Xerox patents. This enabled Canon to start
marketing its NP-1100 copier in 1970. Thus
emphasis on investments in intellectual prop-
erty rights constitutes a core competence of
Canon, as mentioned earlier.
For Xerox, the first plain paper copier Model
914 launched in 1959 brought a revolution in
business document processing. Patent protec-
tion allowed Xerox a monopolistic market
share of 95 per cent of the US market. Coupled
with this product superiority was its unique
rental system which generated a gross margin
of 70 per cent. This spectacular corporate
performance, however, proved to be another
classic case of “success breeds failure”.
Complacency and conservatism were almost
inevitable consequences. Xerox fell into a
risk-averse bureaucratic culture dubbed as
“Burox”.21
Strategy
Toyota and GM
Toyota’s strategy of quasi-integration is very
different from GM’s strategy of full integra-
tion. This is perhaps one of the major differ-
ences between the two firms, and may be one
of the explanations of the superior perfor-
mance of Toyota over GM. Quasi-integration
by Toyota of its suppliers and subcontractors
was already described as minority participa-
tion, long-term business relations, close coop-
eration on process innovations, and informal
information sharing all levels of management.
Porter stresses that quasi-integration achieves
“some or many of the benefits of vertical in-
tegration without incurring all the costs”
(1980, p. 321). Major Toyota suppliers, such as
Denso and Aisin, enjoy a worldwide reputa-
tion for the quality of their car components.
Toyota’s quasi-integration has numerous
benefits. Transaction costs are reduced due to
long-term transactions. Plural suppliers may
be played against each other to foster compe-
tition and to assure stability of supply. Infor-
mation may be shared and Toyota’s expertise
in product and process innovations trans-
ferred to major suppliers and subcontractors.
Toyota may maintain centralised initiative and
control over quality and technological fit of
components with Toyota’s concept of the car
model. Quality and costs are controlled by
stratification of primary, secondary and other
suppliers and subcontractors based on the
complexity and importance of components.
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CORPORATE GOVERNANCE
Finally, greater division of labour may occur,
with Toyota specialising in core technologies,
while suppliers and subcontractors specialise
in each area of expertise (Vaghefi et al., 2001).
Unlike GM, Toyota relies on building new
factories from scratch when entering a foreign
market (Tateishi, 2003). This approach is vital
to employ people that fit into Toyota’s culture,
and assure cooperative labour–management
relations. One exception is NUMMI, a joint
venture company Toyota established with
GM. The greenfield strategy enabled Toyota to
avoid currency exchange rate risks, silencing
the vocal protests in the 1980s and early 1990s
by US car makers over alleged “predatory”
exports, while cementing local identity in
the market. As a result, the productivity of
Toyota’s factories in the US is almost on a par
with its productivity in Japan. GM, on the
other hand, has traditionally resorted to hori-
zontal integration through partial or total
acquisition of existing companies, such as
Suzuki, Fuji, Isuzu in Japan and Opel,
Vauxhall etc. in Europe.
Canon and Xerox
Canon’s success owes much to diversification
built around its core technologies, as well as
related product and process innovations.
Today, its traditional camera business repre-
sents only about 10 per cent of all revenue.
Until the 1950s, the company increased its
sales of cameras and X-ray cameras based on
its optical and mechanical expertise. From the
1960s, diversification efforts were intensified
into electronic calculators, movie cameras and
cameras for the middle segment of the market.
In the 1970s, Canon moved into the tele-
communications business such as fax sets.
After successfully developing the toner, the
company produced a plain paper copier and
laser-beam printer that made a significant
contribution to its growth.
Canon’s original toner is protected by such
a large number of patents that there are report-
edly no competitors in this business. These
product lines proved to be a major source of
income, as it could count on constant income
generated by the sales of the toner. This
assured Canon a global market share of 60 per
cent in laser-beam printers, including OEM
sales to Hewlett Packard. Canon likely earns
80 per cent of total profits on copiers and laser-
beam printers alone.22 However, Canon was
not always successful in diversification efforts.
Its PC, electronic typewriter and liquid crystal
display businesses were losing money. Only
after Mitarai divested the underperforming
businesses, despite resistance, did Canon
develop into a successful company.
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DOES CORPORATE GOVERNANCE MATTER?
Difficulties at Xerox started after its patents
expired in the early 1970s. Its market share
slipped down from 90 per cent in the 1960s to
13 per cent in 1982. The 1970s were a “lost
decade”23 as Xerox failed to predict the
onslaught of smaller and low-cost copiers
made in Japan. CEO Kobayashi, of the joint
venture Fuji-Xerox, consistently pressed the
US parent for the development of similar
models. Xerox USA remained uninterested in
what they considered the low end of the
market. The strategic window thus offered
was fully exploited by Japanese rivals, Canon,
Konica, Minolta, Sharp and Toshiba, who built
a dominant market position in the US. Canon
in particular was successful thanks to a new
model that was developed in 1970 without
infringing Xerox patents. In addition, Canon’s
brand visibility, established by its cameras,
helped in marketing.
In contrast to Canon, Xerox diversified itself
into unrelated businesses where it had little
expertise and experience. In 1983, Xerox
acquired a firm to move into financial services,
such as life insurance, real estate insurance
and securities brokerage. In 1998, Xerox pulled
out of this sector and had to write-off
US$1billion.
Another strategic error was made when
Xerox underestimated the commercial poten-
tial of the inkjet printer, dismissing it as a low-
cost, low-margin product. Hewlett Packard
capitalised on this technology, capturing a US
market share of 50 per cent. Xerox also has to
defend its strong position in high-end large
business copiers from Canon, who increased
its US market share from nearly 0 to 23 per
cent in 2001, while Xerox’s share only grew
from 12 to 17 per cent.24 Xerox also failed to
capitalise on other technical innovations, such
as the personal computer, mouse, laser-beam
printer and Ethernet, developed by its own
Palo Alto Research Center, This failure was
attributed to its obsession with the traditional
copier business.
Conclusion
The foregoing comparison, albeit limited to
two pairs of firms, seems to indicate that cor-
porate governance plays a relatively limited
role in long-term corporate performance.
Other factors, namely corporate mission,
ethics, culture and strategy, strike one as
equally or perhaps more important factors for
success. “External governance” may be
defined as governance based on the presence
of the majority of outside directors on the
board, small board size, discipline by the stock
market, shareholder activism by institutional
© Blackwell Publishing Ltd 2005
455
and private shareholders, monitoring by audit
firms, rating agencies, laws and rules, and
sanctions against fraudulent conduct. Mean-
while the Toyota and Canon cases suggest
that “internal governance” may also be built
around corporate values, corporate culture,
ethics and strategy.
The mainstream argument in agency theory
puts a premium on the monitoring function
and effectiveness of external governance to
prevent the opportunistic behaviour of man-
agement. The relationship between external
governance and corporate performance is only
recently beginning to be examined (see Daily
et al., 2003). According to a US study by Dalton
et al. (1998), no statistically significant relation-
ship has been found between board indepen-
dence and corporate performance. Separation
of the board chairmanship and the CEO posi-
tion is not associated with better corporate
results, nor is board independence, however it
may be defined. In fact, a larger, not smaller,
board size is conducive to better performance
(Dalton and Daily, 2000).
A crucial aspect of external governance is
the independence of outside directors. But
independence is extremely difficult to define.
Formal and verifiable requirements such as
working or business relationships with the
company they serve, for instance, do not
guarantee true independence of outside
directors in their relationship with the CEO.
Such relationships are more psychological.
Outside directors are only as good as the CEO
whom they are supposed to monitor and
advise. Through various means such as high
director remuneration or lucrative consulting
and other pecuniary compensation, a self-
interested CEO can undermine their indepen-
dence with relative ease, as the Enron case
illustrates. The fact that whistle blowing by an
insider divulged the wrongdoing at Enron and
WorldCom is indicative of the failure of out-
side directors.
Toyota and Canon seem to allocate much
more time and resources to indoctrination of
their corporate culture, as well as formulation
and implementation of viable strategies, than
to corporate governance. In both firms, the US-
style corporate governance system is practi-
cally non-existent. There is nothing special
about their values and priorities, which are not
particularly original. Most of them are not
even formalised, but rather strongly inter-
nalised and practiced daily by people in all
echelons.
We have been preoccupied over the last
decade with the external governance system
focused on outside directors. It may be high
time that we looked more closely at internal
governance mechanisms, instead of trying to
Volume 13 Number 3 May 2005
456
refine the external governance system, which
is becoming increasingly complex and oner-
ous while its contribution to corporate
performance is not conclusively proven. This
statement is not intended to dismiss external
governance but stress more reliance on in-
ternal governance.
So far most researchers have been dealing
with corporate governance issues without
relating them to the interwoven areas of cor-
porate mission, corporate culture, corporate
ethics and strategy. These areas should be inte-
grated as top management functions, and
should be studied as such in order to ensure
long-term corporate performance.
Notes
1. The revision of the Commercial Code has thus
brought the Japanese corporate governance sys-
tem substantially closer to the US model from a
legal perspective. The revision is widely held as
being the most significant one over the last 50
years. In essence, the new law provides two
options for Board structure: the US-style inno-
vative type and the conventional type.
2. Nihon Keizai Shimbun, 2 July 2002.
3. http://www.fortune.com/fortune/
globaladmired accessed 17 Nov. 2003.
4. Since ROE is calculated by dividing earnings by
equity capital, the smaller the latter relative to
debts, the higher the ROE value.
5. Nihon Keizai Shimbun, 20 Jan. 2005.
6. Nihon Keizai Shimbun, 8 Dec. 2003. Dollar–Yen
conversion is based on the exchange rate of 6
December 2003.
7. http://www.canon.com
8. BusinessWeek, 2001.
9. http://www.gm.com/company/
investor_information/corp_gov/guidelines
10. Forbes, Management Trends, 29 Jan. 2001.
11. Nihon Keizai Shimbun, 28 Jan. 2003.
12. The Company’s list is supposed to reflect a
descending order of rank as follows: one Chair-
man, two Vice Chairmen, one President and
CEO, eight Executive Vice Presidents, five
Senmu Senior Directors, 14 Jomu Directors, one
honorary Chairman who is a descendent of the
founder, and 26 rank and file directors.
13. The 27-man Board is now composed of one
honorary Chairman who is a descendent of the
founder family Toyoda, Chairman Okuda, two
Vice Chairmen, CEO Cho and seven Executive
Vice Presidents who are responsible both for
company-wide strategic decisions and for their
respective operating divisions. The remaining
14 Directors are called Executive Directors
(Senmu Torishimariyaku) and are mainly in
charge of their functional units.
14. The Detroit News, 28 May 2000.
15. See http://www.calpers.ca.gov/whatsnew/
press/2000/0427
16. These are active or retired Chairman and CEO
of corporations from various business areas.
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CORPORATE GOVERNANCE
There are five Board Committees: Audit, Direc-
tors and Corporate Governance, Executive
Compensation, Investment Funds and Public
Policy Committee. All Committees are chaired
by outsiders.
17. http://www.ies-geneve.ch/2000gt/histoire/
toyota/toyota1.html and http://www.toyota.
co.jp/en/about-toyota/history/index
18. The Detroit News, 28 May 2000.
19. BusinessWeek, 10 February 2003.
20. This part draws on Nihon Keizai Shimbun,
2001 and http://www.canon.com/history/
episode02c.html
21. BusinessWeek, 2001.
22. Weekly Toyo Keizai, 15 June 2002.
23. Xerox and Fuji Xerox, 1992, p. 8.
24. BusinessWeek, 2001.
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Masaru Yoshimori is professor of Inter-
national and Comparative Management at
Yokohama National University. Graduate
of INSEAD (MBA, 1965), Fontainebleau and
Doctor of Economics (University of Montpel-
lier I, nouveau regime, 1985), Professor Yoshi-
mori taught International Marketing and
Japanese Management during his 10-year stay
in France until 1985, at INSEAD, University of
Paris IX-Dauphine, HEC and other university
institutions. He was Senior Associate Member
of Saint Antony’s College, Oxford University
in 1992–93, DAAD Visiting Professor at Freie
Universität Berlin in 1998 and is Research
Associate since 2001 of the Center for Japan–
US Business and Economic Studies, Stern
School of Business, New York University.
Masaru Yoshimori is also a member of the
European Corporate Governance Institute.
Volume 13 Number 3 May 2005