Daihatsu Scandal

A scandal caused by Daihatsu, a subsidiary of Toyota, which primarily sells compact cars has become a significant social issue in Japan.

Automakers must pass safety tests and receive certification from the government each time they develop a new vehicle model. Daihatsu, in order to pass these tests, had been engaging in fraudulent activities for many years. Daihatsu’s misconduct included various actions, such as adding timers to inflate airbags, and it affected numerous car models.

As a result of the government’s revocation of approvals for several Daihatsu models, they could not be sold, and Toyota suffered a great deal of damage. Compliance violations have also occurred at other Toyota subsidiaries, raising suspicions that there are deficiencies in Toyota’s compliance system.If this were to happen in the U.S., Toyota directors would be subject to shareholder lawsuits and would be held accountable for noncompliance (so-called caremark case).

In Japan, however, it is difficult to hold the directors of a parent company liable for the misconduct of its subsidiary due to the ambiguity of the concept of compliance between parent and subsidiary companies.
Although there is a system of multiplex shareholder lawsuit in which a shareholder of the parent company can sue directly against a director of the subsidiary, its requirements are very strict and not applicable to Daihatsu’s case.

Toyota has replaced Daihatsu’s senior management and expressed its commitment to work to regain society’s trust in the company. However, the issue is one of automobile safety, the company’s mission critical, and Toyota’s such a response alone is not sufficient. Unless Toyota’s corporate culture is changed, there is a risk that similar scandals will be repeated.

Japan should clarify the obligation of parent company directors to establish a compliance system in parent-subsidiary companies and relax the requirements for multiplex shareholder lawsuit in order to maintain the credibility of made-in-Japan products.

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