Several trust banks are preparing to sue the Japanese conglomerate Toshiba (TOSYY) , after it admitted in 2015 to lying about its profits for years. It's a new hassle facing the beleaguered company, which is also facing a billion-dollar writedown from its business building nuclear power plants.
Toshiba's shares fell 3.7% on Monday and are down 11.6% now since the start of the year. Chairman Shigenori Shiga is due to step down to take responsibility for the nuclear fiasco, according to the Nikkei business daily. It said late last year that the nuclear construction operation, recently bought by its Westinghouse subsidiary, had huge cost overruns.
Toshiba is the latest in a long string of Japanese companies to admit its corporate governance has been terrible. Its woes are instrumental of the problems facing "Japan Inc.," which is being pushed to reform the way its companies are run under Prime Minister Shinzo Abe's program of Abenomics.
Since the end of Japan's boom era in the early 1990s, Japanese banks, insurers, customers and clients have owned massive cross-holdings of shares in Japan's biggest companies. This has led to banks trickling out loans to flailing companies and discouraged any push for reform in the clubby system of corporate boards, few of which did anything to represent external shareholders.
In a break from that tradition, Mitsubishi UFJ Trust and Banking, the trust arm of Mitsubishi UFJ Financial Group (MTU) , said on Monday that it is prepping to file to claim back ¥1 billion ($8.7 million) in damages in the name of the pension funds that are its clients. Two years ago, Toshiba confessed that it had been inflating its profits since as far back as 2008.
Sumitomo Mitsui Trust Bank, part of the Sumitomo Mitsui Financial Group (SMFG) , and Mizuho Trust & Banking, a subsidiary of Mizuho Financial Group (MFG) , are also readying claims for damages, according to Reuters, citing confidential sources "with direct knowledge of the matter."
Last October, Toshiba said 45 international inventors had filed a suit seeking ¥16.7 billion in damages, on top of ¥15.3 billion ($130 million) in suits filed by 15 plaintiffs within Japan.
The company said on Friday that it would sell a minority stake of up to 20% in its money-spinning memory-chip business to raise cash. It also said its overseas nuclear division, which has caused the company to take a loss that Japanese media peg at $6 billion, is also under review.
Its woes illustrate the challenge facing foreign investors, now the largest holders of Japanese equities with about 30% of all holdings, when trying to push Japanese companies to improve how they are run.
Japan's Financial Services Agency, which regulates banks, introduced a stewardship code in February 2014 that as of the middle of last year had drawn signatures from 212 companies. A Corporate Governance Code came next, in March 2015, and by the end of that year 2,500 companies had submitted reports outlining their compliance with it, 78% of them saying they complied with 90% or more of the principles.
One key requirement is the introduction of at least two independent directors. In all, 94% of the 317 constituents of the MSCI Japan Index had done so by last August, MSCI ESG Research notes in its report Measuring the Sustainability of Abenomics. But since the average board has almost 11 members, their influence "does not bring Japanese boards significantly closer to gaining an independent majority," the report states.
There's little in the way of external chairmanship or directors, or gender diversity, on many key committees, MSCI ESG says. Cross-holdings remain common, and Japanese companies are often able to introduce poison-pill defenses that deter hostile takeovers or investors, although there has been a rise of activist funds in Japan.
Only 8% of Japanese companies have truly independent boards, the report finds, compared with 88% of the MSCI Kokusai index, which tracks companies in developed markets, excluding Japan. Only 25% of the board members for companies in the MSCI Japan Index are independent, whereas the figure is 67% for companies in the Kokusai index.
Only 4% of the members of compensation committees in Japan are fully independent, in contrast to 75% of those committees for developed-world companies outside Japan. Less than half of the independent directors in Japan have "C-suite" experience, many of them being academics or in government.
When Japanese companies do run off track, they run well off track. Only 45% of the controversies faced by Japanese companies have occurred within its own borders -- almost one quarter (23%) occurred in the United States. Consumers are often the victims, with customer-related scandals the cause of two-thirds (67% to be exact) of problems.
Other major consumer scandals involved Takata (TKTDY) ; it saw 11 people die and 180 injured in the United States before the company was forced to recall defective airbags on 120 million cars worldwide, some 42 million of them in the United States -- the largest safety recall in U.S. history.
In 2012, Olympus (OCPNY) faced 11 deaths and more than 350 sick patients with infections after its endoscopes harbored dangerous bacteria, even after cleaning. In all, $250 million in lawsuits and penalties resulted. To add insult to injury, it admitted in 2011 that it had concealed $1.67 billion in investment losses dating back to the 1990s, a scandal unveiled by whistle-blowing CEO Michael Woodford, who got fired over the incident.
Hitachi (HTHIY) was in 2013-14 caught fixing prices on its starter motors, fuel-injection systems and ignition coils, drawing $250 million in fines and penalties.
Car maker Mitsubishi Motors (MMTOF) took a $2 billion loss in the quarter ending September 2016 after it lied about fuel efficiency on eight models of its vehicles, something that had been going on for a quarter of a century. It's a repeat offender -- it confessed in 2004 that it had covered up defects over brakes, fuel leaks and clutches as far back as 1977.
If you're in search of well-run Japanese companies, look to Sumitomo Chemical (SOMMY) , which scored a AAA rating from ESG, up from AA in 2014 and A the year before that. A rung down but still drawing A ratings are clothing-store Uniqlo parent Fast Retailing (FRCOY) , home- and office-security company Secom (SOMLY) , drug maker Shionogi & Co. (SGIOY) , and the insurer Tokio Marine Holdings (TKOMY) .
Toshiba would do well to follow their example. Its waywardness is not only affecting its profits and reputation, but also its ability to raise capital.
The Tokyo Stock Exchange has placed Toshiba on its "watch list," which means it can't raise money by issuing new stock. In March, it will have to furnish the exchange with a report on how it has improved its internal controls.