Financial management has emerged as a tool that helps improve the structure and quality of business globally. In principle, the main purpose of financial management is to ensure there is a clear pattern of cash flow management, which entails funds acquisition, raising, and allocating financial capital, taking into consideration the trade-offs between risk and return. At the corporate level, the organization would always have certain responsibilities. They include; increasing the wealth of stockholders, maximizing profit, maximizing managerial reward, developing behavioral goals, and finally increasing social responsibility (Lasher, 2007).
Many international firms outside the US have a type of ownership structure different from those within the country. For example in West Europe and Asia, many firms have not put their stocks for public trading, the banks are less regulated, and are thus in a position to privately finance the companies as they wish (Joher, 2006). For example, Toyota, a Japanese automaker is a multinational company that has unique financial management. The company’s country of origin has supported its growth, with the region’s corporate ownership being completely different from that of other countries like the United States. This paper will discuss Toyota Company, a Japanese multinational automaker, concerning debt, dividend policy, managerial ownership, among many issues.
Managerial Ownership structure
Studies have suggested that many publicly traded companies outside the United States and the UK have developed structural ownership where a few stockholders have large ownership stakes. In some cases, one shareholder could be controlling the entire company, defining it in his or her interest. Many of the managers in such firms invest much of their capital in these firms, thus allowing them to own a significant amount of company shares.
Although Toyota has undergone several evolutions in the recent past, the ownership structure has not been different in many ways. The issues of corporate governance in Japan have played a significant role in structure management, especially the managerial ownership of the company. Japanese managers have traditionally enjoyed autonomy, especially when it comes to the ability to own a substantial amount of shares in various group firms (Bathala, Moon & Rao, 1994). In the management of its finances, Toyota has various shareholding groups, predominantly Japanese whose interest goes beyond the wider interests of fringe shareholders. Japan has had only two traditional frameworks of institutional management to improve management autonomy (Bathala, Moon & Rao, 1994). The country has also had an internal labor market with rank hierarchy- what others would describe as overlapping managerial structure and the main bank monitoring system (Bathala, Moon & Rao, 1994). This system is considered to have facilitated improved performances concerning improvements commitments on the side of management.
In this arrangement, the managers of Toyota have been regarded as working towards developing success to enable them to move up the company’s hierarchy, and they are oriented to develop a far-sighted view by the employees as a whole, under the lifetime employment system (Huntzinger, 2007). The banks play a significant role through the development of long-term good customer relationships with the firms. Several arguments have been spanned that banks have continuously increased efficient conduit between ultimate savers and investors at Toyota, and more importantly, the development of efficient essential corporate governance (Huntzinger, 2007).
The system is based on both the lender-borrower relationships and shareholder connections between banks and firms. The firm is therefore under scrutiny by the bank, which has the authority to discipline the former. In some incidences, a bank officer would intervene in management and even go ahead and play an important role in the restructuring of the firms. According to Fan (2004), the nexus between banks and firms via loans, shareholding, and personnel is regarded as a factor that mitigated the agency problems of corporate management, thus leading to an enhancement of efficient management of banks client firms such as Toyota. Some analysts have also argued that Toyota’s bank relationship reduced the company’s costs of external funds, including bank credit. Unlike firms in the US and UK whose shares are held by diffuse entities, shares of companies in East Asia, Japan for this case, are held tightly by few groups or family members (Joher, 2006).
Financial Management: Debt
The ability of banks to control the financial operations of Toyota has had its impact on the global automaker. The relationship has helped the company to reduce the costs of external funds, which include bank credit. Studies have shown that this kind of relationship has helped Toyota to effectively avoid unnecessary liquidation of the company, especially during the last few major financial distresses (Joher, 2006; Lopez-Iturriaga & Rodriguez-Sanz, 2006). In this aspect, the amount of debt does not have any bearing on the disciplinary impact of main bank relationships, but instead, the main bank relationship tended to mitigate the disciplinary effect of debt because banks actively intervened earlier before the global financial crisis. Other than this kind of mitigation effect, the main bank continuously monitors Toyota’s management, a style that may be regarded as having exerted a similar disciplinary influence on the management of Japanese firms (Lopez-Iturriaga & Rodriguez-Sanz, 2006). This kind of management could be equated to the United States’ capital market influence on the corporate governance of US firms.
However, some analysts have argued that the bank-firm relationship among Japanese firms has not gone down well with the corporate governance of multinationals like Toyota. In other words, it is observed that the main bank relationship has significant negative effects on corporate performance, due to issues related to bank loans. The argument is that the banks tend to charge more interest on loans, thus “extract rents from client firms in exchange for access to capital, whilst also putting pressure on client firms to take high capital intensity and low growth investment policies” (Baker, 2009, p.311).
In this aspect, it was argued that the main bank always has power over Toyota, because they hold a monopoly on internal information, thus jeopardizing the investment information. Ramli (2010) analyzes the disciplinary effect of this kind of financial relationship on debt on corporate governance. They reveal that a significant governing role is played by large shareholders, who have bigger say on investment options available for the company. Not surprisingly, Toyota’s modest investment in fixed assets has led to limited resources being spent on the long-term and expensive asset investment. For example, its headquarters remain more modest as compared to other competitors, who have invested heavily in state-of-the-art assets. The analysis is that irrespective of being a multibillion-dollar company with all the ability to invest heavily on fixed assets, the company has resorted to observing the possibility of business slowing down in terms of sales, especially in its global markets. The company’s global market accounts for 90% of its sales (Ramli, 2010).
The debt-free policy by Toyota was initiated way back in 1978 when financing principles were backed by internal funds. Its profits though varied every year have continued to be the most consistent in the industry, a phenomenon attributed to good debt management. The company has focused more on the utilization of its financial resources, by maintaining most of its profits and more importantly, depreciation of expenses to fund capital procurement in the seemingly threatened industry. According to some analysts, the most success came when the company avoided external use of capital, which has highlighted how little it has relied on the outside sources of funds. The over-reliance on external funds has proved so costly for its competitors like General Motors, Chrysler, and Ford, whose debts have kept soaring annually coupled with constant losses. “debt-free financial management” has been the core value of the company since the 1980s (Huntzinger, 2007, p. 39).
Dividend policy is the rationale in which a firm determines what it will pay shareholders as dividend. It entails the amount paid and the pattern under which the changes in such amount occur over time, with the ratio of payout determined by the company shareholders.
Several factors have been attributed to Toyota’s success despite the fierce global competition. Some have queried the restricted internal control, dominated by a few stockholders. Even though it was mainly owned by major financial institutions, the present shareholding suggests that the company has adapted to the changing global business, which requires that financial diverse shareholding is affected as per the market demand. However, the large and strong shareholding remains a preserve of a few large organizations and individuals. The company’s goal was to foster a strong relationship with its supply base, based on financial support, thus giving it a higher degree of control of its collaborators. Lopez-Iturriaga & Rodriguez-Sanz (2006) observe that this kind of vision has been attempted by many companies in vain, as it is a long-term goal that requires a quicker decision-making process, something that is not possible with the highly diffuse shareholding tradition of the American motor industry.
How was this affected by the dividend policy? The dividend policy at Toyota has been unique. The source of Toyota’s finances to support its collaborators was mainly from its profits invested back to the company. This meant that the company shareholders have to endure a painful dividend cut, a policy that has run the company for years. Lasher (2007) documented the links between dividend policy and revenue growth, financial leverage, outsider shareholders’ holding, and industry factors. Many companies fear such decisions like reduction of dividends because of the “signaling and clientele effects”. According to Lasher, they are forced into doing it as a result of poor earnings or as a result of some fundamental changes in the management of the business. For example, IBM was a financial powerhouse in the 1960s but slumbered in the 1980s due to changes in the market need. Consumers shifted from mainframe to personal computers.
The company had to cut its dividend from an average of $5 to $1 in the early 1990s (Lasher, 2007, p.148). They could not eliminate the dividend, despite its dire need for more finances to change its manufacturing policies. A more pragmatic example is that of General Motors, which has found it difficult to cut dividends despite its huge losses. GM has been the world’s largest carmaker but has recently been pushed out of market shares by other competitors like Toyota. GM produced a net loss of $8.6 billion in 2005 alone; triggering many people to pressurize the largest shareholders to agree on dividend cut that would ensure the company redeems its financial status..the agreement was for the company to reduce its annual dividend by 50%, reducing the executive pay, and minimization of the pension and health care programs costs (Lasher, 2007).
Toyota on the other hand did not wait for the financial difficulty to launch their dividend cut policy. The policy of limited dividends and efforts to plow back the profit into the company became part and parcel of the company, hence the accumulative amount of revenue enough to caution it from any global financial crisis. This kind of dividend policy can sometimes be referred to as a dividend reinvestment plan. In this approach, the company keeps the dividends of the participating stockholders and instead gives them additional shares to increase their stake in the company.
Financial management as shown by the Toyota governance system is a contrast of many US and UK companies. While it is known that Japanese and other companies outside US and UK have a somewhat closed system of managing their financial resources, the diffuse stockholding of the latter’s companies shows that they are unable to accomplish prudent financial management. In other words, the governance system at Toyota has encouraged efficient internal information sharing between executives and directors, facilitating faster agreement in terms of dividends policy implementation, debt management, and managerial ownership structure. One of the most important points to note is that Toyota’s financial management has been based on production management, where the investment in the latter is done prudently through the internal management system.
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