Shareholders have won a landmark victory in Tokyo. A shareholder-proposed initiative has passed at an Extraordinary General Meeting of one of Japan's most-famous brands: Toshiba (TOSBF) .
It is the first time a shareholder-driven proposal has been approved at a company that's part of "Japan Inc.", its vast conglomerates, according to Reuters. In fact, it is only the fourth time in history that such a vote has passed at all, even among obscure companies.
The vote had been called by the Singapore-based activist investors at Effissimo Capital Management. With a 9.9% holding, the investment manager is Toshiba's largest shareholder.
The outcome, decided by a sheer majority of the shareholder votes cast, will require Toshiba's management to appoint independent investigators to look into last year's Annual General Meeting. The issue is whether shareholders were put under undue pressure to vote in line with management's wishes when it came to appointing directors.
Several major shareholders say they were contacted by the trade ministry or government advisers and told to vote a certain way, according to Reuters. The news agency says that the Harvard University endowment fund was told by a Japanese government adviser that it could be subject to a regulatory probe if it didn't follow management's recommendations at the AGM last July.
The Harvard endowment abstained from voting as a result. It later learnt there was no basis for any kind of government probe, according to the Reuters sources.
Three lawyers approved at the EGM will now look into those allegations for three months. They will present their findings at this year's AGM, which will take place this July.
Toshiba's management had fiercely contested this vote, citing a string of reasons the shareholder proposal should not pass. Management put together a 32-slide PDF proposal outlining its position that there is "no validity or reasonable grounds" to further investigate the vote.
Its line of thinking runs rings around your head. According to management, there's no point in wasting time and money, and disrupting Toshiba's operations, because there's no material or information that has been discovered already that can give you the conclusion that further investigation is required.
Case closed! We're telling you there's no suspicious information about what we've been up to, so you don't have to worry your little head about looking for anything. No wonder Japanese courts boast a 99% conviction rate.
Effissimo issued a short statement about its victory, saying the independent investigators will have a "broad mandate" to examine the circumstances surrounding the 2020 AGM, and whether it was held fairly.
The most-pointed language from the activist investor will come as a shock to Japan Inc. The statement notes that the decision to appoint investigators was made "by the Company's ultimate decision-making body, the general meeting of shareholders," which will come as news to most Japanese large companies.
Japanese corporations have been run to a different set of priorities than companies in the West. They are managed with the interests of four major stakeholders in mind.
First in importance come the customers. Second are the employees, particularly the management. Third come the creditors and banks. Fourth and last come the shareholders, basically an inconvenience that should feel lucky to be getting dividend profits, which companies are loath to give out anyway. Maximizing profits and maintaining dividends has been viewed as crass, with maintaining employment and business relationships considered more important.
Well, the management are taking the orders rather than giving them right now. They have a "legal obligation" to cooperate with the investigation, in Effissimo's words, "to resolve unanswered questions to restore shareholder confidence."
Toshiba management had perversely filed in Tokyo court to get a meetings inspector appointed for this EGM. But they only did that as a countersuit because Effissimo and private-wealth managers Suntera had already done the same.
The Toshiba management, now under intense pressure to resign, has conceded defeat. Current CEO Nobuaki Kurumatani, an ex-banker, has only been in his post since 2018, after previous management orchestrated an enormous accounting fraud, then oversaw a meltdown in the company's business building nuclear power stations.
"Toshiba sincerely accepts the shareholders' holistic opinion," the company said in a statement announcing the outcome of the vote. "We will sincerely cooperate in the investigation with the investigators elected under Proposal No. 1, and will strive to ensure further transparency in our operation."
A second shareholder proposal from San Francisco-based hedge fund Farallon Capital Management did not pass. Farallon, Toshiba's second-largest investor, requested changes to Toshiba's articles of incorporation, to make management elucidate its strategy on mergers & acquisitions. It required a higher standard, to change the company's charter.
Effissimo revealed in the runup to the vote that CalPERS, CalSTRS and the State Board of Administration of Florida - respectively, the largest, second-largest and fifth-largest public pension funds in the United States - had decided to side with Effissimo in the vote. Proxy advisers Institutional Shareholder Services (ISS) and Glass Lewis also said shareholders should throw their weight behind Effissimo's proposal.
The Singapore activists say they're not simply taking on management to antagonize them. They cite a line from a white paper from the U.N. Principles for Responsible Investment, that a vote in favor of a shareholder resolution "should not be seen as a criticism of the company overall," and is instead "an avenue to provide feedback on a particular issue in line with an investor's voting principles."
However, Toshiba's reappointment to the First Section of the Tokyo Stock Exchange causes a clutch of exchange-traded funds and other passive index-tracking investors to buy into the stock. They lack individual power due to their incremental holdings, but collectively need representation of their interests.
"We hope that our proposal, based on the basic premise that the most fundamental shareholders' right, the right to vote, must be upheld in Japan, resonates with these passive investors, including the largest index fund managers," Effissimo explains.
After a long wait, Toshiba on January 29 rejoined the First Section of the TSE, which includes all the large Japanese companies, 2,032 of them. Companies must have a market capitalization of at least US$46 million, and other low barriers such as minimum revenue of US$13 million and minimum profit of US$1 million. It had been relegated after failing to provide earnings results on time.
Toshiba came close to being delisted after its accountant refused to sign off on its accounts. In 2015, it admitted to a US$1.2 billion coverup that overstated profits for seven years. Then in 2017, it took a US$6.2 billion hit to earnings after shocking losses at its Westinghouse nuclear-plant operation in the United States.
Under former Prime Minister Shinzo Abe, the three arrows of "Abenomics" include a third arrow of structural reform. It's the hardest arrow to land, with the government able on its own to let fly the other two: monetary quantitative easing, and greater fiscal stimulus through government spending.
One reform initiative has been to improve corporate governance. Institutional shareholders such as large Japanese pension funds never used to challenge management, and often didn't vote at all at shareholder meetings. If they did, their vote was a rubber stamp for what management had told investors they wanted to do.
The government needs help to encourage reform, at a political, social and corporate level. That involves not only corporate-governance reforms but also a softening of the country's hard-core anti-immigration stance to allow foreign workers to support the shrinking population, and tax and welfare incentives to encourage, for instance, more women to enter and remain in the workforce.
Abe's successor, current Prime Minister Yoshihide Suga, has promised to continue those policies. Suga lacks the charisma of his predecessor, although he is a smart political operative who likes to get his business done behind the scenes.
At last year's vote, Effissimo proposed adding five new nominees to the Toshiba board, including Effissimo's co-founder, Yoichiro Imai. They failed to get elected by a narrow margin.
Shareholder-driven proposals hardly ever come to a vote at Japanese AGMs. An extraordinary general meeting is, well, extraordinary. At this 70-minute EGM, several retail investors among the 100-odd in attendance appeared confused as to what was going on, according to the Financial Times.
"What really happened?" one retail investor asked the FT. "If there was actually undue pressure, it should be investigated, but if Effissimo is talking up something that never happened, it is wasted costs."
What happened is what an independent investigation will decide, of course. We don't simply have to take management's word for it, or accept a predetermined outcome that has already decided what occurred.
