* The editorial board would like to give a special thank you to Takata’s whistle-blower – Mark Lillie – for checking for inaccuracies in this post *
Takata Kabushiki Gaisha (Takata Corp) was a company established in 1933 by the Takada family which manufactured automotive parts such as seatbelts, airbag systems, child restraint systems, and so on. The company was extended out of Japan and created subsidiaries in Europe and the Americas. TK Holdings Inc, the US Takata Branch which is at the scandal origin was created in 1989.
An overview of Takata’s scandal
The scandal, which eventually led to the collapse of the company, began in 2007 when Honda reported three incidents related to the use of Takata’s airbags. Subsequently, it emerged that at least 22 deaths and hundreds of injuries worldwide were caused by Takata inflators. The problem with that product was that they could explode, unleashing dangerous splinters of metal inside the affected vehicles.
The reasons behind the failures of Takata’s safety pieces of equipment can be traced back to the 1990s. In fact, although Takata Corp was successful in the US in the 1980s in supplying seatbelts, when the airbag business began in the 1990s, the company faced challenges that at that period of time were common to all manufacturers. The issue was that, due to the fact the US regulation required the airbag to properly restrain a fully grown man who was not wearing his seatbelt, using the technology of the day the deployment of the airbag was too forceful when restraining smaller sized women and children. For this reason, the first versions of airbags supplied to carmakers caused injuries. After those incidents, Takata introduced into the market new types of airbags that used Tetrazole based propellants but, due to the company’s refusal to follow standard industry safety practices, in 1997 a series of inflators explosions occurred and curtailed the production. As a result, the company had to purchase inflators from rivals and lift them to car manufacturers across the US, which had a major impact on the profitability of Takata’s business activities in the US. Because of these additional costs, Takata’s executives pressured their researchers in the US to develop a propellant based on ammonium nitrate which is a cheaper compound but also risky compound. The problem with that propellant, which is designed to ignite and burn so that the gasses from the burning fill the “air” bag, was that, due to normal environmental conditions or manufacturing defects, it could burn too quickly and create excess pressure inside the metal container. As a result of the excess pressure, the metal container would rupture explosively ejecting sharp and dangerous shards of metal into the interior of the vehicles with disastrous consequences for the passengers.
Notwithstanding the inherent danger, Takata’s executives chose to use the ammonium nitrate in their airbag inflators. This, even if a patent application filed by Takata in June 1995, expressed concern about the use of the compound that is vulnerable to temperature change and can explode violently under excessive pressure.
Despite the concern of potential dangers, in the late 1990s, Takata offered to supply its airbags to General Motors, who asked its airbag supplier — the Swedish-American company Autoliv —to match the cheaper design or risk losing the automaker’s business. When Autoliv’s scientists studied the Takata airbag, they found that it relied on the dangerously unstable compound in its inflater, communicated it to General Motors and refused to comply with the request. However, General Motors decided to buy Takata’s airbags irrespective of the inherent risks related to their usage. As of 2001 Takata started to supply also other automakers, with the consequence that more than 100 million of its airbags were installed in cars in the United States.
Takata scandal has highlighted the crucial role that whistleblowing plays in unveiling corporate misconduct and the importance of the establishment of awarding systems from government agencies. In this case, whistle-blowers Mark Lillie and another two men who remain anonymous, all former employees of Takata, provided crucial assistance under the Motor Vehicle Safety Whistle-blower Act 2015 unveiling the corporate misconducts. The whistleblowers were represented by Mary Inman and other attorneys of the international law firm Constantine Cannon.
After the first accident with a Honda driver in Alabama in 2004, the whistle-blowers revealed that secret tests had been made during summer 2004 in the company’s American headquarters and, from them, it had clearly emerged the potential danger for the life of the passengers of those airbags. The tests were made under the supervision of Takata’s vice president for engineering but the authority under whose it was operated was not known. The results were discounted by Takata executives and technicians were ordered to destroy the testing data including computer backups and videos.
Mark Lillie, who was an engineering manager of Takata US branch by the international law firm Constantine Cannon, alerted the US Department of Justice and the Federal Bureau of Investigation, and Department of Transportation’s National Highway Traffic Safety Administration and the U.S. Senate after countless effort to warn Takata’s executives about the dangerousness of the compound. He supplied evidence such as emails, designs, witness lists, and other crucial information to the authorities that proved Takata knew by 1999 that the airbags could be deadly. The other whistle-blowers provided proof of falsified data, subverted testing procedure and concealed reports Takata’s airbags were prone to failure.
The three whistle-blowers have shared an award of $1.7 million, under the Motor Vehicle Safety Whistle-blower Act 2015, for having provided crucial information to authorities in prosecuting Takata and bringing justice and compensation to the victims. The Act provides for monetary rewards for insiders in the auto industry reporting serious safety violations. This awarding system allows employees or contractors, who report serious safety violation of federal vehicle safety laws, to receive between 10% and 30% of any monetary sanction above $1 million recovered by the government based on the information given by whistle-blowers.
The company misconduct was publicly reported and a defect investigation by the federal agency National Highway Traffic Safety Administration was conducted in 2015 after Takata failure to answer the inaccurate information provided to US auto safety regulators. Takata was ordered to pay $14,000 per day for insufficient response to the defect investigation. It was only after six deaths that Takata admitted that some inflators might be faulty and agreed to pay penalties of up to $200 million and recall millions of defective inflators. In 2016 more deaths were attributed to Takata by Federal Auto Safety Regulators and a panel concluded that Takata must revamp its quality control processes for its vehicle products. In January 2017, the US Department of Justice charged three executives of the company with wire fraud and conspiracy.
Takata agreed to plead guilty to wire fraud and to pay 1 billion in penalties including the restitution of $975 million and a fine of $25 million. Takata had also agreed to conduct strict internal controls, maintain a compliance monitor for a three-year period and collaborate completely with the continuing inquiry of the department. Hugely affected by the vast recall of airbags, the company filed for bankruptcy protection in June 2017 and the viable activities were sold to Key Safety Systems (KSS), which is a Chinese owned American rival company.
KSS, a commission of injured driver, an unsecured creditors committee, and automakers reached an agreement establishing a trust to pay compensation for those injured or killed by the airbags and the waiver of certain claims against the company by car manufacturers. Takata could not bear the full cost of the recall and the crisis and sold all assets to KSS.
This was the end of Takata Corporation.
The reason behind the Takata collapse
The collapse of Takata is essentially the dramatic result of corporate irresponsible behaviors based on profit maximization, the decision to aggressively fight to gain additional market shares at all cost, and senior management that did not understand the technology that they were producing. The key decision was the one taken by the executives of Takata’s US subsidiary, who ordered their researchers to develop a propellant using nitrate ammonium and avoid more expensive but safer compounds. Hence, by ignoring the well-known inherent dangers of such a propellant, the executives intentionally accepted the risk to produce airbag inflators that could cause serious wounds of even kill the drivers and the other passengers in the vehicles where they were installed. The order was not only in total contradiction of the director’s duties which are expected to be fulfilled in good faith and reasonably in the best interest of the company but it also demonstrated a criminally relevant disregard for other people’s health and safety. Such irresponsible behavior was then reiterated when the Takata’s executives decided to falsify the corporate research data, adopting fraudulent conduct that has also a specific relevance under criminal law.
Takata’s basic corporate social responsibility failures
The gravity of Takata’s irresponsible behavior appears even more serious if we take into consideration what it should be its “original social responsibility“.
The sole purpose of the production of airbag inflators is to avoid injuries and death in traffic collisions or other accidents involving vehicles. As a result, Takata had a specific duty or care consisting of ensuring a higher level of people safety in the automotive industry. With its irresponsible corporate decisions, which totally contradicted the implicit promises of assuring safety and creating a safer driving environment, Takata fundamentally betrayed its original social responsibility demonstrating an immoral and merely profit-driven corporate attitude.
Another dismal Takata’s corporate social responsibility failure can be identified in the lack of sincere corporate apologies or sympathy for the victims and their families. It is emblematic that in the website published after the scandal Takata merely apologized for the “widespread concern and the inconvenience caused” as a result of their inflators…
The fundamental role played by whistle-blowers
All the issues raised by the scandal above might have been avoided or reduced with improvement in the way the business was conducted but also in how the company was organized. However, the Takata scandal has clearly demonstrated for the umpteenth time, relying on not mandatory corporate governance and corporate social responsibility measures cannot prevent corporations to act in an irresponsible way causing great hurt to our society.
At the same time, from the scandal, it has clearly emerged the crucial role that whistle-blowers play in our society. All the Takata’s employees that had the courage to reveal the corporate misconducts and cooperate with the authorities have to be considered as heroes of our time. Thanks to their ethical decisions, which were taken notwithstanding the uncertainty of the outcomes and the risk of retaliation, many lives were surely saved and the business operations of a deeply immoral corporate environment were finally put to an end. We have not only to be thankful to whistle-blowers but also do our best to protect and support them.
Disclaimer
The views, opinions, and positions expressed within all posts are those of the author alone and do not represent those of the Corporate Social Responsibility and Business Ethics Blog or of its editors. The blog makes no representations as to the accuracy, completeness, and validity of any statements made on this site and will not be liable for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with the author.
Dear Celia,
Firstly, it was a pleasure hearing about your experience with this blog a couple of weeks ago during one of the Corporate Crime classes. You sparked my interest in reading your work, and I am glad I did. Also, thank you to Mr Lillie and the other whistleblowers, who put their ethical duty above any fear of retaliation.
The story of Takata is a great but unfortunate example of life-threatening decisions that are being made without any decision-making skills, without any ethics and without any care for the consumers.
The fact that more than 1.4 million driver’s side inflators in the US are being recalled by Takata because they either could not inflate properly and fulfil their core duty of protecting the passengers in a crash or they could explode and hurl shrapnel is an extremely grave consequence of a major failure in corporate governance.
I completely agree with you on the fact that the main cause of Takata’s bankruptcy is the irresponsible struggle in maximizing profits. I also believe that money lay at the core of many bad corporate governance decisions, as well as having a competitive advantage. I would like to know whether you would agree with me that the Takata scandal resembles the more recent Boeing scandal, which I believe was also caused by a corporate attitude that was heavily driven by making profits and by obtaining any competitive advantage against fierce rivals such as Airbus.
Dear Bianca,
Thank you very much, I’m happy to hear that I had raised your interest for reading my work. This article is one of my favorite achievement and I’m thankful to Constantino Grasso, Mark Lillie but also Mary Inman and all the Blog team for having helped me to achieve this. I hope the blog will spark your interest to investigate and like me write something about this ill corporate world.
I agree with when you say that generally money lay at the core of bad corporate governance and yes, I also agree with that Takata Scandal resembles the Boeing Scandal. As Takata, Boeing shows that a human and industrial disasters happen generally in the pursuit of profit and competition. They aimed to use bigger engine different than older version but making cost savings on pilot training but also on many things such as fuel.
In my opinion, it was maybe possible to make saving on fuel but unbelievable to neglect pilot training. For example, the plane was equipped with the “manoeuvring characteristics augmentation system which was unknown by pilots. This system is not automatically activated in aircraft, but it is reputed to be activated untimely and take time to be deactivated. This system was faulty on both the Indonesian flight and the Ethiopian flight. I think there are many entities that may be liable, first the company of course that clearly wanted to save time and money and increase their profits at the same time. However, something that differs from Takata Scandal is that the Federal Aviation Authority should also have its responsibility in this disaster. It allowed Boeing to certify the system. This implies a detailed process that needs to be followed by a letter with verification of every minuscule screw of the aircraft. So Why we discovered that the certified 737 MAX was faulty? Why the FAA agreed to accept the 737? How could the FAA all the faulty system was left on aircraft after the first crash? What steps were taken after the first flight by the FAA? Do we need now to doubt on all FAA certifications? Does the FAA had an interest in certifying 737 MAX?
I invite you to read excerpt of exchanges between employees discussing the danger of 737 MAX : https://www.theguardian.com/business/2020/jan/10/737-max-scandal-the-internal-boeing-messages-and-emails
Dear Célia,
Thank you for this insighful post. It is well written, well done. Thank you also to Mr Mark Lillie and the other whistleblowers for their courage and thoughts towards fellow citizens.
However, I believe that the company mainly lacked critical thinking instead of the issue possibly resting with how the company was organised, the way business was conducted and their ability to make decisions. The executives made surfaced decisions and failed to think of the matter beyond what they could see, as well as the long term impact. Their main focus was what they could do to regain profit and stay in competition, which was that of purchasing cheaper and dangerous products, that has affected them in the long run.
What I’d like to know from this piece, is regarding the Motor Vehicle Safety Whistle-blower Act 2015 that you mentioned. Does the Legislation provide any criteria that whistleblowers must meet? Is the length of the whistleblower’s knowledge about the company’s behaviour relevant?
Dear Ivy,
Thank you for your comment and your interesting questions.
Regarding the first part of the Motor Vehicle Safety Whistleblower Act, the secretary of transportation is authorized to pay awards to whistleblowers only when they provide the original information about automotive safety violations. Then the second part of the Act, article (a)(1) explain that a whistleblower can be an employee or contractor of a motor vehicle manufacturer, part supplier, or dealership who provide voluntarily to the secretary of transportation original information relating to any motor vehicle defect, noncompliance or any violation or alleged violation which is like to cause unreasonable risk of death or serious physical injury. According to art (a) (6), the original information must be derived from the independent knowledge or analysis of an individual, not known to the secretary from any other source, unless the individual is the original source of the information and must not be exclusively derived from an allegation made in a judicial or administrative action, in a governmental report, a hearing, an audit, or an investigation, or from the news media unless the individual again is a source of the information.
Regarding the length of whistleblower’s knowledge about the company behaviour, even though the Act is in effect since 2015, whistleblowers can receive awards even if the safety violation reported occurred before the Act.
I hope having answered your questions.
Dear Celia,
Thank you for this very interesting Article. I am from Nigeria, and the Takata scandal seems to be the order of the day in my country. Companies adopting cheaper procedures in goods and services delivery in total disregard for the negative impacts on human life is the reality we face in Nigeria. Without the intention to be unpatriotic and “bad mouth” my country, I say again that the Takata scandal is the norm in Nigeria.
As a result of efforts to ensure safer means of production, we have in Nigeria, the NAFDAC, which means the National Agency for Food and Drug Administration and Control, and the SON, Standards Organisation of Nigeria. But in spite of the efforts of these organisations, some companies like Takata did, still lower their standards of production in order to maximize profits, thus leading to avoidable deaths and adverse health implications.
In carrying out their functions, NAFDAC and the SON often seals off such companies, and even confiscate fake goods, and destroy fake goods that are worth millions of Naira (the Nigerian Currency) each year. In spite of these, some of these companies still find a way to produce fake and substandard goods.
An example of a substandard drug that resulted in deaths of many children is the “my pikin teething syrup”. It was a paracetamol based drug, used for relieving sore gums in babies, while they developed teeth. It was found to have been contaminated with diethylene glycol, which was an engine coolant used to produce the drug inorder to lessen cost of production and maximize profits like Takata did. The result was that it caused kidney failure in the babies it was administered to. Unfortunately, many deaths had occured before the government found out that the deaths were caused by the drug, which was subsequently banned.
Hi Celia, thank you for your response!
Dear Margaret,
Unfortunately, “health fraudsters” are increasing in African countries. In Ghana for example, where I am originally from, there are traders that sell all forms of medicines, from traditional to orthodox, that allegedly heal cancer, stroke, running stomach, sexual health and many other sicknesses, to innocent people on the street.
However, we cannot talk about African countries without covering its economic aspect. These fraudsters do whatever they do because of unemployment, since its rate is high in Africa, as such, will do anything to put money in their pockets and it is of no wonder that there is a biblical saying that goes “the love of money is the root of all evil”.
With the Takata issue however, we can realise that sometimes it is not a matter of unemployment or poverty but greed, as those that have money wants more of it because they think what they have is not enough. Regrettably, when money is involved, as humans, we easily forget all our morals and ethics.
Notwithstanding these, corporations like Takata and individuals like those in Ghana and Nigeria do what they do because they know and understand consumers. Why were there so many cars with those airbags? Why were car manufacturers going for Takata airbags and not the ones from its competitors? That is because Takata’s airbags were cheaper than that of its competitors, and that is the problem of consumers. Consumers want cheap products yet with good quality but fail to realise that they cannot get both at the same time like that. Either it is cheap and defective or expensive with good quality, but people do not want to spend more and always seek for cheaper products, without thinking of the possible disadvantages. As such, the fault cannot rest only on one side, but on both sides.
Dear Margaret,
Thank you for your comment and I am happy that this article interested you.
I think, unfortunately, that what happened with Takata shows only one example among hundreds or thousands of companies around the world who are using the exact same procedures. Here the scandal settled in the US and Japan, however for me this is not an issue related to one country or if it is a developing or a developed country, but it is an issue related to our contemporary society’ values. It seems that money and profit became for some individuals and companies, the only values in our society. Companies but also consumers think about their money, how they can benefit from some goods and services by saving money at the same time. I think this is how our society works in 2020. According to this, I agree with Ivy when she said that consumers, who generally do not want to pay a lot of money, play an important role in companies’ business strategies. This is a reality; consumers want cheap products with good quality and as Ivy said this is not possible, so people seek for cheaper products regardless of the quality and disadvantages. However, even if we can blame consumers trying to save money on everything, we cannot say that they are responsible as well. It is true that If a company is created is to create a business and make profits. However, the company must be moral, ethics and think about people. They cannot think that “because consumers want cheap products, we will produce anything, and it does not matter if it can be dangerous for them. If they want safety and quality and something better for their health they need to pay more”. Even if a company produces cheap products and cheap services, consumers satisfaction, wellbeing, safety and life must be the priority. Otherwise, the company needs to be honest and say, “this is cheap because this is not the better, safer or healthier product that you can find” and not pretending of having good products and services. This is a deception and I think it is the companies’ duty of avoiding this by satisfying the consumerism society. This is how successful companies do. It is to easy to explain dangerous behaviour and poor ethics and moral by accusing consumers who are concerned with their purchasing power. Companies must take their responsibilities; nobody asked them to be created and to produce cheap products that can be dangerous. This was their own decision and not consumers’.
I found this post to be remarkably interesting as well as quite alarming. It is amazing that Takata got away with the misconduct and for as long as they did. One part that stood out to me was, “After the first accident with a Honda driver in Alabama in 2004, the whistle-blowers revealed that secret tests had been made during summer 2004 in the company’s American headquarters and, from them, it had clearly emerged the potential danger for the life of the passengers of those airbags. The tests were made under the supervision of Takata’s vice president for engineering but the authority under whose it was operated was not known. The results were discounted by Takata executives and technicians were ordered to destroy the testing data including computer backups and videos.” Shortly after this quote it was said that Takata knew the airbags could be deadly back in 1999. This is a five-year difference. If the airbags were “deadly” in 1999 why wasn’t something done immediately? Takata did not focus on any of their social responsibilities. They were supposed to supply these automobile companies with reliable airbags and protect those in cars. The purpose of an airbag is to protect the driver and passengers in the car and in this case Takata was doing the opposite. They failed to protect and ensure the safety of others and the VP failed to make ethical decisions. The test in 2004 that was top-secret, and the data was deleted should have never occurred in secret. The VP owes it to himself, society, and the company to fix what was wrong instead of ignoring the issue at hand.
Hi, Maitilynch
Thank you for your comment. You are right this is alarming especially when Takata is not the only company who play with people life because of money and who continues their misconduct as long as nobody pointed it.
Exactly, in 1999 they already know the danger, but they decided to use deadly airbags because they needed money, only to save the company. Unfortunately, for some businessmen when there is a choice between saving lives and saving the company, the company is their priority. As you said, and this what is completely ironic and incredible, they produced airbags that were supposed to protect and save lives. So, we have good reasons to believe that the company’ purpose was only making profits.
Dear Celia,
This was a very interesting article. I really enjoy a good business law story. I found it very interesting and appalling, honestly, that a company would knowingly put people in harm’s way just to grow their market share. The fact that they knew the airbags being filled with ammonium nitrate had a very risky consequence, yet they went along with it anyway because of how cheap it was is just wrong. To be honest, I am not sure how people think they will get away with this kind of thing. They knew that accidents would cause shards of dangerous metals to shoot out of the airbag. Did they just not think it would happen that often? What I mean is, if you know you have a dangerous product, how much market share and money is worth the inevitable downfall of your company? I also do not want to leave out General Motors on this case. GM was well aware of the risks that they took on when they decided to purchase the airbags from Takata rather than their original supplier, Autoliv. Autoliv’s scientists informed GM of the Takata and their airbags having very dangerous consequences, and they still bought from Takata anyways.
I am honestly stunned when companies do this kind of thing. Like I said before, how did they think they would get away with it? I guess that is the how reason there are $1.7 million rewards to whistle blowers, like in this case. It is quite sad that The Whistle Blower Act has to exist. Everyone goes through life, hoping they can trust one another every day. People hope they can trust the company selling them a car. They hope they can trust the company who sold the car company their airbags. Airbags are meant to save peoples’ lives, and in this case, they were sometimes doing even more harm than good. People shouldn’t have to go through life skeptical of everything, just because some company wants to make a little more money at the expense of your life.
Hi, Maitilynch
Thank you for your comment. You are right this is alarming especially when Takata is not the only company who play with people life because of money and who continues their misconduct as long as nobody pointed it.
Exactly, in 1999 they already know the danger, but they decided to use deadly airbags because they needed money, only to save the company. Unfortunately, for some businessmen when there is a choice between saving lives and saving the company, the company is their priority. As you said, and this what is completely ironic and incredible, they produced airbags that were supposed to protect and save lives. So, we have good reasons to believe that the company’ purpose was only making profits.
Dear Alex,
Thank you very much, me too I enjoy business law story. My lecturer Constantino Grasso made me love this and knows how to tell it! Maybe one day I’ll read and comment one of yours.
I think, that businessmen and people who are leading big corporates or big business think that they are unattainable. Maybe they think that money will arrange all the consequences resulting from their misconduct. Takara never imagined that this could have led to bankruptcy, maybe because of too much confidence. The problem is also that sometimes because there is a loophole in the law, because of a weak legal system, or because the company is internationally expanded, it is difficult to sanction such misconducts. Because leaders know this, they take the risk of making a dangerous decision that can bring a lot of money. A good leader needs to analyse all the risk before making a decision that can affect the company, however clearly Takata’s leaders did not analyse it seriously.
You are right, I think that Takata is not the only responsible company, General Motor which is still a big company also took this risk at the expense of people safety.
Now we have the Whistle Blower Act that will improve a little bit more the business world. I hope that the Act will more deter company’s misconduct but also will give to conscious employees the confidence to tell the truth.
Dear Celia,
My name is Rahadian Suwartono, from the Master of Law Program, Universitas Islam Indonesia (Islamic University of Indonesia). First of all, let me say how wonderful the review you have done to state the case position of the Takata Group Scandal. It is something new for me and, maybe, for some Indonesian law students like me.
I am really interested in the review of Takata’s basic corporate social responsibility failures mentioned here. I want to share about the paradigm of CSR constructed in Indonesian Law and understood by the majority of Indonesian civil society. By Indonesian law, (Law Number 40 year 2007, Government Regulation Number 47 year 2012) the concept of CSR is separated from the production and regular business activity done by corporations. CSR, as it is understood by civil society and some businesses, is an obligation to give some funds for social charity or/and empowering local communities around the production site of the corporation. In the case of PT INKA, which is a train manufacturer in Indonesia, it gave IDR 351,010,000 (around GBP 18,464) for painting murals in the small town, Madiun, where the PT INKA is located (can be read at https://www.inka.co.id/berita/774). PT INKA monopolized the production of all trains in Indonesia. To be honest, PT INKA is not a bad corporation, in fact, it is one of the government corporations. The problem is with our law.
It is really interesting that your review mentioned how Takata has failed on basic CSR when Takata ignored the purpose of their products’ benefit to society. I think this point of view should be read by Indonesia Legislators or Indonesia Business Actors.