In a show of shareholder strength that's unprecedented at a major Japanese company, investors voted here on Friday to oust the chairman of electronics maker Toshiba TOSYY, one of Japan's most-storied brands.
Toshiba has suffered through a string of scandals that started with Toshiba cooking its books to inflate profits, progressed to a US$6 billion writedown of its nuclear business, and most recently involved alleged collusion between the company's top management and the very top levels of Japan's government to quash dissident minority shareholders.
Today's annual general meeting was called to present the company's accounts for the fiscal year through March. Board elections are normally a formality in Japan, but not this time, a portent of greater shareholder control over the way that "Japan Inc." is run.
Besides the chairman of the board, another director, Nobuyuki Kobayashi, also lost his seat. Early last week, Toshiba had removed another two board candidates from the slate of directors up for election as it was faced with a declaration that activists now on the board would not support them. The company also said executives linked to damning emails are retiring.
Toshiba announced today's verdict in a terse investor-relations statement. "The company recognizes the seriousness of the rejection of some candidates for Directors" was its only concession to the vote, which shakes to its core the company's ability to manage itself via its executive ranks.
Toshiba Chairman Osamu Nagayama, who previously served as chairman of Sony (SONY) , is a bit of a fall guy. He has only been in his position for a year, called in to turn Toshiba around, so he wasn't around for the vast majority of the shenanigans. However, he was in charge of steering the board at a time when Toshiba's management decided no independent investigation into events at the company was warranted.
It was, and after an extraordinary Extraordinary General Meeting, the expatriate Japanese activist investors at Effissimo Capital Management won a shareholder vote in March to insist that the investigation occurred. It was the first shareholder-proposed initiative to pass at a major Japanese company, as I explained then.
The 139-page report delivered by three lawyers, which you can find here, shows that Toshiba's management cozily agreed with members of the Japanese government to jointly fight activist shareholders. They decided that Japan's Ministry of Economy, Trade and Industry should "beat up" activists led by Singapore-based Effissimo, which is Toshiba's largest shareholder.
The report states that then-CEO Nobuaki Kurumatani had a business breakfast with the then-No. 2 official in Japan, Yoshihide Suga, who is now prime minister. Suga told the CEO that he recommended "aggressive" action to target dissident shareholders and said "we can get them" by using the Japanese law that governs overseas investors, the Foreign Exchange and Foreign Trade Act. Suga and Kurumatani deny this happened, although there are records indicating a meeting did occur; the lawyers who uncovered the claims say assertions by Kurumatani, who has since resigned, "cannot be trusted."
Other senior Toshiba officials prepared reports to present to Suga and took them to the "hilltop," or the prime minister's office, where Suga worked. Suga and Toshiba management discussed how to "catch them" and "push hard" to target the Singapore funds as overseas investors, the report states.
The scandal has now come full circle. The thing Toshiba and government officials were trying to prevent was the election of activists to Toshiba's board. Effissimo proposed three nominees for the board at last year's annual general meeting, including Effissimo co-founder Yoichiro Imai. They were not elected thanks in part to government intimidation of overseas investors.
It's a winding path that's hard to follow. It's also likely to be occurring at other Japanese companies. Toshiba's case is unusual and is coming to light because activist investors own one-third of the company's shares and therefore have much greater power than at most big Japanese corporations.
There are six activist funds among Toshiba's top 10 investors. Often run by Japanese expatriates using Singapore as a friendly jurisdiction to make unpopular power-play investments back in Japan, they bought much of the stock in 2017 when a cash-strapped Toshiba issued shares at ¥2,628 to raise capital.
They took a gamble when Toshiba faced its hardest times, even extinction. Now they are being richly rewarded, with Toshiba shares up 83% from that price and doubling from their pandemic-induced lows in March 2020 to close on Friday at ¥4,815. They were down 0.6% Friday but were briefly up after the vote results and have gained 67% during this tumultuous year.
Toshiba dates back almost 150 years, to 1875, when it was established as the first Japanese company making equipment for the telegraph system as well as switches and other early telecom gear.
Its recent history has been checkered. In 2015, it confessed that it had made up US$1.2 billion in profits over the previous seven years. That led to it being demoted in 2017 from Section 1 of the Tokyo Stock Exchange, which essentially includes all significant companies in Japan, down to Section 2, normally home to mid-caps and promising startups. The company came within a whisker of being delisted entirely when its accountants refused to sign off on its accounts.
Those numbers were complicated because also in 2017 Toshiba took a US$6.2 billion hit to earnings after shocking losses at the Westinghouse Electric nuclear power business it had acquired in the United States. The Westinghouse unit went bust, then was sold to Brookfield (BBU) for US$4.6 billion, less than the US$5.6 billion Toshiba paid for it in 2006.
Its recent struggles amount to corporate intrigue as investors pushed for better management. It's clear that management attempted to pretend to accommodate activist investors by using government intimidation, then suggesting the formation of a token compliance committee that undoubtedly would have been hamstrung from the start.
If today's vote proves a watershed event, it may be to encourage better corporate governance that gives shareholders more of a voice. It would help if Japanese management as well as plenty of members of parliament didn't persist in the view that "management always knows best," resulting in an antagonistic attitude toward any shareholders who suggest change.
Toshiba makes nuclear reactors and supplies parts for Japanese submarines. It is also one of the companies cleaning up the nuclear disaster at the Fukushima Daiichi power station, a Tokyo Electric Power Co. TKECY plant that melted down and exploded in 2011. So Toshiba does have strategic importance to Japan.
However, the collusion between Japanese government figures and Toshiba management clearly violates all propriety. The Harvard University endowment says a Japanese government adviser called it to warn the fund that it could be investigated if it didn't vote according to management's wishes.
In an interview with Reuters this week, the adviser to Japan's industry ministry, Hiromichi Mizuno, says he was going to start a fellowship at Harvard. Mizuno, who is also a director at Tesla TSLA, called the Harvard endowment, having served as an intermediary with it and Toshiba before, to explain the risks involved in its vote and "to give enough information" about how things work in Japan.
You don't need to be a genius about how things work in Japan to take a warning from a government adviser about "risks" if you vote alongside activists as a threat. Another Singapore fund, 3D Investment Partners, says the ministry itself contacted it to warn about voting with Effissimo, suggesting that "if you are barbecuing next to your neighbor when there is a big fire, it may not be enough." The implication was that the ministry was about to launch enforcement action against Effissimo and any other investors who sided with it.
Harvard abstained from voting and has sold its Toshiba stake to 3D Investment Partners, which is now the company's second-largest shareholder.
Where Toshiba goes from here is up in the air. Its management ranks are shaken and its board in disarray. We can only hope that new management and board members are enlightened that activist investors are not "the enemy" and instead are valuable stakeholders. Given Toshiba's past problems, they may very well have insight into how it can be better run.
