Risk management lessons from recalls

That Toyota is a super brand is not in doubt. However, Toyota has of late dominated news headlines around the world for the wrong reasons.

The car maker recently announced it was recalling up to 1.8 million cars across Europe, including more than 200,000 in the UK due to a faulty accelerator pedal.

It has also recalled 2.3 million cars in the US in the past four months for the same problem.

Other reports indicate the company also recalled about five million vehicles in the US for a different problem - where the accelerator pedal gets trapped under the floor mat.

Imagine driving a car that all of a sudden starts accelerating uncontrollably.

The massive car recall is expected to cost the company $2 billion (more than Sh140 billion) in lost output and sales.

This is obviously a substantial percentage of Kenya’s annual budget estimates.

But what has not been aptly estimated is the loss due to the reputation-at-risk. It is so huge, you don’t want to imagine.

Companies struggle to classify, let alone measure—reputational risk.

Risk managers are usually divided on whether reputational risk is an issue to be handled on its own or merely a consequence of other risks.

Where there is a culture of well-structured risk management the latter opinion is more popular.

Reputation is a very expensive and highly vulnerable corporate asset.

Indeed if you ask me, reputation is one of the most important corporate assets, and also one of the most difficult to look after.

Ask Tiger Woods, the world famous (or is it infamous) golfer or better even John Terry, the celebrated Chelsea footballer.

It takes a “small” scandal to bring a giant tumbling down, and once the people are convinced you’re not worth it- trust me you have lost it.

By the way, John Terry has even lost his captaincy armband for the England national team. In reality, the cost of Toyota’s “errors” is starting to be felt.

Kazutaka Oshima, CEO of influential Rakuten Investment Management in Japan, was quoted saying, “The best thing not to do now is not to hold Toyota shares.”

That’s dangerous. If you trace in the annals of history, you will notice many companies’ pace to downfall is catapulted by the ‘winds from the stock market.’

However, no one should rush to dismiss Toyota as- a gone case. Toyota has been generating in excess of $200 - 300 billion in annual revenue, although it posted a $4.3 billion loss in 2009, in 2007 and 2008 the company made $13.9 billion and $17.1 billion, respectively - definitely enough to suck up a $2.3 billion charge on the bottom line.

While you can not entirely write off such a huge company, there are definitely enough lessons to be learnt even if Toyota emerges successful from the crisis.

First, aggressive unchecked growth can create unmanageable risks.

Some analysts believe the urge to upstage General Motors as world number one car manufacturer may have made Toyota drop its guard as far as quality control and risk management were concerned.

Exponential growth without corresponding growth and tightening of controls may become a company’s Achilles’ heel.

Second, it is always good to be as near the ground as possible. Get the facts quickly and manage your risks (complaints) assertively.

Third, although the chief-guardian of company’s reputation may be the CEO; it should also be everybody’s business- from the receptionist to the very top. Good communication is paramount in repairing reputational damage.

That’s why Warren Buffet once said, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks”

But above all and most important- accept responsibility. No passing the buck. That’s why Toyota has committed to recalling all those faulty automobiles.

Mr Kihuro is a risk management practitioner at Panafrican Housing Financial institution, Shelter Afrique, headquartered in Nairobi. jkihuro@yahoo.com