Toyota's Corporate Governance

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1. Introduction and Company Overview
2008 was a crucial year for Toyota Motor Corporation (Toyota) since this was the year Toyota overtook it’s greatest competitor’s, General Motors, position as the world’s largest carmaker, selling 8.9 million cars to GM’s 8.35 million (Welch, 2009). Toyota was the bright star of the Japanese economic miracle and synonym for concepts like “Lean manufacturing”, business culture and production quality. All this changed as Toyota faced problems with unintended acceleration of its cars, which has throw the company into an even worse situation then the one caused by the global Financial Crisis. In February 2010 Toyota reported a 16 percent drop in January U.S. sales with the lowest market share since January 2006, pushing its share price in Tokyo down 5.7 percent. In February the company announced a recall of nearly 500.000 additional cars, summing up recalls to at least 7.6 million cars across five continents (Kitamura and Ohnsman, 2010 and Reuters, 2010). The recent events have drawn focus to Toyota’s management as some evidence reveals that the management has failed to address potentially quality problems. Critics have raised questions whether the absence of independent directors on Toyota’s board has marked the board culture in Toyota with secrecy. The aim of this paper is thus to identify the Corporate Governance (CG) mechanisms in Toyota and evaluate them in terms of the recent events and to assess whether the CG policy has had an influence on Toyota’s performance. Hence, I ask: Is the Japanese CG regime the foundation stone for the crisis in Toyota?

2. Company Performance, Key Financial Figures and Capital Structure Toyota has throughout the latest years been highly affected by the global Financial Crisis and the company’s problems with unintended acceleration of its cars. This resulted in a negative outcome for 2009 for the first time in Toyota’s history. This has lead to a deep fall in the company’s stock price that has more than halved since its peek in 2007. Currently, the stock is traded at a level around 3.625 to 3.640 Yen per share (Yahoo Finance), equivalent to a market capitalisation of 12.533.470 million Yen (Reuters). The result in 2010 after the 3rd quarter appears to be a weak plus, while revenues has dropped with additional 19,6 percent (see appendix A). If you look at the company’s current P/E after tax estimate for 2010, you currently pay approximately 38 times for next years profit (see appendix B). This is a very high price for a company in the automobile industry. This suggests that the market expects a sharp increase in earnings from Toyota in the coming years. In the discounted FCF calculation in appendix A I estimated a stock price at approximately 3.728 Yen, which means, that I would recommend buying Toyota shares at the current price. In addition to this it should be clarified that the calculations can be biased by time limitations and the lack of access to information in this assignment. From the calculation I would like to highlight, that the WACC and g (growth rate) has an enormous influence on the valuation. This is why I examine the WACC in the following.

Toyota’s capital structure, based on an 8-year average (2002-2009), is 36.4 percent equity financed and 63.6 percent debt financed. This makes the D/E ratio 1.7472 (see appendix B). Toyota’s average interest rate on the debt is calculated to be 3.79 percent before tax and 2.37 percent after tax. The extremely low after tax interest rate makes Toyota’s WACC 5.44 percent, which is very low (see appendix B). By having a D/E ratio at 1.7472 Toyota achieves a very significant tax shield. A fairly high debt ratio suggests a high risk, but this does not seem to be reflected in the β of Toyota. The reason for this can be, that Toyota has been, and still is, very liquid. Furthermore Toyota is regarded as a strong company, which the numbers from the FCF valuation also indicates. The WACC can be expected to...
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