Faced with findings that its management colluded with top Japanese government officials to suppress dissident shareholders, Toshiba TOSYY is apologizing to investors and removing members of its board and executive team.
The Japanese government so far denies the explosive findings of an independent inquiry into shareholder manipulation at Toshiba. But the allegations go all the way to the top and current Japanese Prime Minister Yoshihide Suga.
Toshiba will remove two members from its board, the electronics maker says, while other executives will retire. It is another step in the right direction, with a long path yet to travel in the bid to rehabilitate the electronics maker.
Minority shareholders in Japan typically have little say in how the companies they co-own are run, so the evolving outcome at Toshiba is remarkable and unique and may be a sign that power is transitioning away from the C-suite and to investors.
The actions are also being rewarded in Tokyo trade. Toshiba T:6502 shares rose 2.7% on Monday, continuing an upward path that has seen them rise 65% since the start of the year.
Toshiba will hold its Annual General Meeting (AGM) on June 25. The board held an emergency meeting on Sunday and voted to remove two of its members, Junji Ota and Takashi Yamauchi, from consideration for re-election.
They were on an initial roster of would-be directors nominated on May 14. Two executives, senior vice president Masayasu Toyohara and managing director Masaharu Kamo, will retire as executive officers, with the lineup of company committees also changing. That's after damning findings about how the executives acted.
Four members of the Toshiba board, all non-Japanese independent directors, released a statement on Friday that they no longer supported the list of nominees put forward for election at the coming AGM. After these changes, Toshiba said in a statement that there's now no objection from those four to the newly proposed roster of directors.
Findings of collusion
Sunday's move comes after the company was confronted with the results of an independent investigation led by three lawyers. Delivered on Thursday, it concludes Toshiba colluded with the Japanese government to manipulate voting at the AGM in 2020 to suit management and disadvantage activist shareholders demanding change. The 139-page report on the investigation's conclusions can be found here.
The report finds that Toshiba requested help from Japan's Ministry of Economy, Trade and Industry "to counter the activists" at the AGM in July 2020, "exerted undue influence" on shareholders to prevent them voting with the outside investors and "worked in unison" with the ministry "to deal with shareholders."
The Japanese ministry contacted one investor, fund manager 3D Investment Partners, and warned the fund not to vote alongside fellow Singapore-based activist fund Effissimo Capital Management, stating that "if you are barbecuing next to your neighbor when there is a big fire, it may not be enough." The suggestion was that the ministry would launch enforcement action against Effissimo and its allies. Like Effissimo, 3D uses Singapore as a base to invest into Japan.
Toshiba also asked the ministry's executive adviser to contact the Harvard University endowment on its behalf, to conclude negotiations that are "normally considered extremely difficult to be settled," and change the fund's voting. The Harvard endowment abstained from the board vote, fearing it would be subject to a regulatory probe if it didn't follow management's wishes. It later learned there was no basis for any probe.
The independent report uncovered damning communications including an email from Toyohara to Kamo, the executives now being forced into retirement. The email said the contact from government officials to dissident shareholders had been "more effective than expected" and that Toshiba management should let the Japanese ministry "beat them for a while" before getting the government ministry to propose setting up a compliance committee. Toshiba's CEO would then follow up by contacting Effissimo to suggest forming a compliance committee with an Effissimo director candidate as a member, a "final offer" to "try and bring the curtain down."
The Harvard endowment fund in March sold its 4.7% Toshiba stake to 3D Investment Partners, making 3D Toshiba's second-largest shareholder, with a 7.2% holding. There are six activist funds that now rank among Toshiba's 10 largest investors. Collectively, they own around one-third of the company. Many of them bought shares during a 2017 raising of capital at ¥2,628 per share.
Denials by key figures
Toshiba's CEO, the former banker Nobuaki Kurumatani, stepped down in April before he was forced out. The investigation report details how Kurumatani met personally over breakfast with Yoshihide Suga, who was the No. 2 official in government at the time and is now Japan's prime minister, ahead of the AGM to explain the situation.
Kurumatani implicitly admitted attending the breakfast, the report says, but later denied it, comments that "cannot be trusted," the lawyers leading the investigation conclude. Suga recommended "aggressive" action and said "we can get them" by using the Foreign Exchange and Foreign Trade Act.
Suga also denies this happened. "I know nothing of this," Suga said when asked by reporters in Tokyo about his comments outlined in the report. "There was no such thing."
Japan's trade minister, Hiroshi Kajiyama, also denies asking a government adviser to contact Toshiba. Kajiyama insists the Toshiba report didn't come to definitive conclusions about what happened. The trade industry said via an official that it's possible "fact-checking will bring out a background story that is different" from the report, as quoted in the Asahi Shimbun newspaper. "It may make more sense for Toshiba to hunt for the truth and explain."
Toshiba's management had earlier fiercely tried to prevent an independent investigation by saying its own internal investigation had shown there were no issues to investigate. Its circular logic seemed to have nothing to do with getting at the truth and everything to do with preventing a proper investigation.
Kurumatani stepped down because his former employer, CVC Capital Partners, had lodged a US$20 billion takeover bid for Toshiba, a "friendly" but supposedly unsolicited offer that definitely had the sniff of a backroom deal about it. It was thought to offer a premium of 30% over the share price before the deal became public knowledge, but would also have kept a cozy management in place and shielded them from outside investors.
Interest in Toshiba
Private equity players including Brookfield Asset Management (BAM) and KKR & Co. (KKR) are both thought to be circling Toshiba with an eye on a potential bid. Any offer would likely constitute Japan's largest-ever leveraged buyout. But there has been no progress on that front since April.
The CVC bid was thought to price Toshiba at ¥5,000 per share. U.S. hedge fund Farallon Capital Management, another major Toshiba shareholder, encouraged the company to consider other offers. Toshiba stock closed on Monday at ¥4,770.
The venerable conglomerate, founded in 1875 to make telegraph equipment and switching systems, is under unusually heavy pressure from shareholders. It has the Japanese-born, Singapore-based activist investors at Effissimo Capital Management as the company's largest shareholder, with a 9.9% stake. Effissimo broke ground in March by proposing and then winning a vote in March to force the independent investigation.
It was the first time a shareholder-driven proposal has been approved at a major Japanese corporation, known collectively as "Japan Inc.," and the fourth time in history when you include smaller, more obscure companies.
Effissimo was founded in 2006 by the Japanese value investors Yoichiro Imai, Takashi Kousaka and Hisaaki Sato, former traders for Japan's most famous activist investor, Yoshiaki Murakami. The Singapore fund had nominated Imai and two other candidates to the Toshiba board, but they were not elected in a vote that was clearly manipulated to achieve that end.
