Japanese companies weren’t good at dealing with activist shareholders, but Toshiba seems to have fought a few notches by colluding with the government to fend off activist influence.
This time, the industry giant may have gone too far, and the scandal raised important questions about corporate governance.
Currently, Friday’s annual shareholders meeting will be a confrontation between Toshiba’s board of directors, which is promoting the maintenance of chairman Osamu Nagayama, and investors who want him.
Concerns about corporate governance are nothing new to the company.
Toshiba has vowed to renew its governance in response to the shocking accounting error in 2015. From 2009 to 2014, Toshiba made a series of improper accounting entries with a profit of 152 billion yen ($ 1.3 billion). Investigations revealed that the company’s executives, including three former presidents, were involved in the operation and had no internal system in place to thwart them.
Analysts said the recent scandal ended up with Toshiba appointing a CEO from outside and ensuring that the majority of the board consists of outside directors to enhance management oversight. He emphasizes the failure to reform governance.
Yoshiharu Izumi, Senior Analyst at SBI SECURITIES, said: Considering that the root of Toshiba’s internal problems goes back more than 10 years, “it is unrealistic to solve it in just a year or two.”
In 2018, Mr. Nobuaki Kurumatani, a former banker of Sumitomo Mitsui Banking Corporation, vowed to “pour his soul into governance reform” and became the CEO hired from outside the company for the first time in nearly 50 years.
However, Kurumatani “could not radically change or strengthen Toshiba,” Izumi said.
According to a recent report compiled by an independent lawyer, Kurutani himself was deeply involved in Toshiba and the government’s attempt to shake the voting behavior of foreign investors at the July 2020 Annual Shareholders’ Meeting.
The Corporate Governance Code of Japan states that “Companies should take appropriate steps to fully secure the rights of shareholders and create an environment in which shareholders can exercise their rights appropriately and effectively.”
Kurumatani suddenly resigned in April after a preliminary takeover offer from CVC Capital Partners called for conflicts of interest. Kuriya was the chief of Asia at CVC before assuming the post of president of Toshiba, but he said that it is a move to secure his position because he has lost the support of both investors and Toshiba employees. Speculation has increased. Mr. Kuriya emphasized that he resigned because he was involved in Toshiba’s rehabilitation.
Toshiba was once regarded as a model for corporate governance. In 2003, the company moved to a committee-based governance system. This is believed to have strengthened management oversight. This is a rare move for Japanese companies.
However, the 2015 accounting scandal revealed that Toshiba has been profitable since 2009, so it’s just a façade.
From there, Toshiba’s business experienced a period of financial difficulty.
In 2017, Westinghouse Electric Corporation, a nuclear power plant in the United States at the time, faced a catastrophe with problems. The conglomerate had to sell many businesses, including medical and chip units, and raised 600 billion yen through foreign investors. This brought together activist investors, such as Effissimo Capital Management, who were not satisfied with Toshiba’s performance.
Kurumatani and other executives sought help from the Ministry of Economy, Trade and Industry for the apparent purpose of fending off their pressure.
According to a report by an independent lawyer, Toshiba’s shareholders’ meeting held in July last year was not held fairly because Toshiba and the Ministry of Economy, Trade and Industry tried to improperly influence foreign investors.
Singapore-based Efficimo Capital Management has made its own proposal to candidates for board, saying that Toshiba, which operates nuclear and defense-related businesses, is an important company, and that Japanese regulators may intervene. It is said that he tried to persuade him not to do so. International security. The report also said an advisor to the Ministry of Economy, Trade and Industry had contacted Harvard University’s fund to influence the vote.
However, Industry Minister Hiroshi Kajiyama told reporters that the ministry was not cheating and that the report contained many false facts.
Mr. Kajiyama said, “It is natural to be interested in the technology and industry that are indispensable to the country, so naturally the staff of the department that supervises such industry is stipulated by the Foreign Exchange and Foreign Trade Law (company). Stay in touch. “
However, Toshiba has virtually admitted that it is included in the report and said it plans to investigate further.
“This is a very embarrassing case from an international perspective …. Toshiba is one of Japan’s leading companies, and the idea of engaging in such an act undermines confidence in Japan’s corporate governance.” Said Takaaki Wakasugi, director of the Japan Corporate Governance Institute.
Foreign investors are often referred to as “activists” and get a lot of attention when they are in conflict with Japanese companies, he said, but they do so to improve the company’s performance.
“They are critical because Japanese companies are doing something wrong. If they do it right, they won’t care,” Wakasugi said.
Further turmoil is expected at Toshiba’s annual shareholders meeting on Friday as a new scandal burns. The focus is on whether shareholders will approve other board candidates proposed by current chairman Nagayama and Toshiba, with some shareholders blocking attempts to collude with the government. The board sees responsibility for not being able to do so.
Toshiba’s second-largest shareholder, 3D Investment Partners, reportedly demanded that Nagayama resign earlier this month.
Institutional Shareholder Services Inc., a US-based corporate governance consultancy, has advised shareholders to reject the proposal for Toshiba to reappoint its four directors and Nagayama as chairman, according to media reports.
Citing two anonymous sources familiar with the matter, Reuters reported that Nagayama was likely to secure a reappointment by a small margin.
Nagayama said he wants to fulfill his responsibilities by helping the company overcome difficult times.
Mr. Izumi of SBI SECURITIES said that even if Toshiba successfully overcomes the conflict with investors on Friday, it will continue to take a difficult path, and the biggest challenge is to formulate a medium-term business plan that the company will announce in October. I said that.
“Toshiba needs to come up with a plan that can convince both employees and investors,” he said.
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