Toyota to face governance challenge at shareholder meeting

Toyota faces an unprecedented challenge at its annual shareholder meeting on Wednesday, with some pension funds voting against chairperson Akio Toyoda on governance issues, while seeking more disclosures on the Japanese automaker's climate lobbying.

The world's top carmaker has become a target in recent years for activists and green investors who say it has been slow to roll out battery electric vehicles (EVs). Now, some investors have taken aim at the independence of its board.

The two largest US public pension funds — California's CalPERS and CalSTRS — as well as New York City's pension system and other asset managers have said they are voting against Toyoda.

Two prominent US proxy advisers have flagged concern about Toyota's board independence.

The step comes as companies across Japan face more pressure from investors, especially on environmental, social and governance (ESG) issues. Shareholders have made a record number of proposals at annual meetings this year.

Governance code revisions make clear that boards are to provide oversight, not just advice, but some Japanese companies "seem reluctant to accept the conclusion" and still regard boards as advisory, said Kentaro Shibata, a lawyer and corporate governance expert.

In some ways Toyota is an unlikely target, having long set Japan's enviable standard for quality and innovation. It has also done well for investors, returning 62% over the past five years, including dividends, vs a 57% return in the Nikkei 225.

Its shares got another boost after the company unveiled big plans on Tuesday for new battery technology and EV innovation.

The strong financial performance has meant concerns about board independence have largely been shrugged off, said Kazunori Suzuki of Waseda Business School.

"The question is, which is better, a company with perfect governance and bad earnings or one with a governance framework that is imperfect, but has strong earnings?"

Toyoda, who took over as chair in April after more than a decade as CEO of the company his grandfather founded, is unlikely to lose his seat.

He enjoys strong support from individual investors and the many suppliers and Toyota group companies among its shareholders.

Last year he was re-elected to the board with 96% support.

"Based on our principles of corporate governance, we don't think someone should go directly from being chief executive to being the chair of a company. It's a matter of the independence of the chair," said Anders Schelde, chief investment officer of Denmark's AkademikerPension, a shareholder.

"That, combined with the global climate issue, makes us vote against Mr Toyoda."

The carmaker says Toyoda was nominated to the board for his ability to drive the transformation from manufacturing to providing a range of mobility services.

It said its board meets Tokyo Stock Exchange governance standards for independent oversight.

Toyota is taking a multi-path approach towards clean cars that includes hybrids and fuel cells, with standard EVs.

It said this strategy is better for reducing carbon emissions and more practical, since customer needs, EV infrastructure and clean energy supplies differ by country.

Engagement

AkademikerPension has engaged with Toyota regarding EV strategy for two-and-a-half years. This year it and two other European asset managers submitted a proposal for greater disclosure by Toyota about lobbying around climate change.

The carmaker's board has recommended shareholders vote against the resolution.

A Toyota spokesperson said the company believed it had the support of the proposing shareholders for its multi-pathway strategy.

Schelde said he agreed there could be markets where hybrids may have a bigger role to play.

Toyota views the shareholder proposal as an opportunity to eliminate misunderstanding about its strategy, which is also in shareholders' interests, the spokesperson added.

Last month, proxy adviser Institutional Shareholders Services (ISS) said it viewed three of Toyota's four outside directors as not independent, citing ties to groups such as the International Paralympic Committee, a Toyota mobility partner and Sumitomo Mitsui Financial Group, its main bank.

Toyota does not disclose the size of its business ties with board nominees' organisations, preventing shareholders from assessing the "materiality" of those relationships, ISS said.

The company's transactions with those organisations are not material, the carmaker said.

Many Japanese companies classify some board members as independent despite existing or past affiliations with the company.

Japan's non-binding Corporate Governance Code says boards should set up and disclose their independence standards, which Toyota does not appear to have done, said Nicholas Benes, a governance expert at the Board Director Training Institute of Japan.

The carmaker appears to have decided that certain candidates are independent without any yardstick, Benes said.

Rival carmakers Nissan and Honda have detailed independence guidelines for their directors.

These include limiting their firms' transactions with the company and excluding people who conduct business for the company's major creditors.

Speaking before Tuesday's announcement, Schelde said there were also causes for optimism.

"They have a lot of potential if they make the right changes. And that's also why we remain invested."