Corporate governance issues haunt Toshiba as it clashes with investors


Japanese companies have never been good at dealing with activist shareholders, but Toshiba Corp. seems to have escalated this fight by several notches by agreeing with the government to push back the influence of the activists.

This time around, the industrial giant may have gone too far, and the scandal has raised key questions about the company’s governance.

Now, an annual general meeting of shareholders on Friday is expected to be a showdown between Toshiba’s board, which is pushing to retain its chairman, Osamu Nagayama, and investors who want it.

Concerns about corporate governance are not new to the company.

Toshiba has pledged to reorganize its governance following a shocking case of accounting malpractice in 2015. From fiscal year 2009 to 2014, Toshiba made a series of inappropriate accounting entries that showed a profit of 152 billion yen ($ 1.3 billion). An investigation found that the company’s top executives, including three former presidents, were involved in the manipulation and that there was no internal system in place to stop them.

Analysts point out that the latest scandal highlights Toshiba’s failure to reform its governance after all, even though it had appointed a CEO from outside the company and ensured that a majority of its board would be composed of outside directors to strengthen management oversight.

“Toshiba’s overhaul efforts over the past three years have been fairly shallow,” said Yoshiharu Izumi, senior analyst at SBI Securities. Since the root of Toshiba’s internal problem dates back over a decade, “it’s unrealistic that it can be fixed in just a year or two.”

In 2018, former Sumitomo Mitsui banker Nobuaki Kurumatani became the first CEO hired from outside the company in nearly five decades, pledging to “inject a soul into governance reform.”

But Kurumatani was “unable to change and fundamentally strengthen Toshiba,” said Izumi.

Osamu Nagayama, Chairman of the Board of Toshiba, holds a press conference in Tokyo on June 14. | COURTESY OF TOSHIBA / VIA REUTERS

According to a recent report compiled by independent lawyers, Kurumatani himself was heavily involved in Toshiba and the government’s attempt to influence the voting behavior of foreign investors for an annual shareholders meeting in July 2020.

Japan’s Corporate Governance Code states that “enterprises shall take appropriate measures to fully guarantee the rights of shareholders and to develop an environment in which shareholders can exercise their rights appropriately and effectively.”

Kurumatani abruptly resigned in April after a preliminary takeover offer from CVC Capital Partners sparked criticism of conflict of interest. Kurumatani held the position of Chief Asia at CVC before becoming president of Toshiba, fueling speculation that it was a move to secure his position as Kurumatani was losing support from investors and Toshiba employees. Kurumatani stressed that he was resigning because he had done his part in rehabilitating Toshiba.

At one time, Toshiba was seen as a model of corporate governance. In 2003, the company switched to a system of committee-based governance, which is supposed to improve management control – a rare move for a Japanese company.

But the 2015 accounting scandal revealed that it was just a facade, as Toshiba had been tampering with its profits since fiscal 2009.

From there, Toshiba’s businesses went through a period of financial difficulty.

In 2017, it faced a debacle with Westinghouse Electric Co., its US nuclear unit at the time. The conglomerate was forced to sell a number of its businesses, including medical units and chips, to stay afloat and raise 600 billion yen from foreign investors. This brought in activist investors, like Effissimo Capital Management, who were not happy with Toshiba’s performance.

Nobuaki Kurumatani in 2018 |  KYODO
Nobuaki Kurumatani in 2018 | KYODO

In an apparent attempt to fend off their pressure, Kurumatani and other officials sought help from the Ministry of Economy, Trade and Industry.

The independent attorneys report concluded that Toshiba’s general shareholders’ meeting held in July last year was not conducted fairly because Toshiba and METI made inappropriate attempts to influence foreign investors.

The ministry reportedly tried to persuade Singapore-based Effissimo Capital Management not to make its own proposal for director candidates by hinting that the Japanese regulator could intervene, since Toshiba, which has nuclear and nuclear related activities. defense, is an important undertaking in terms of national security. The report also states that a METI adviser contacted a Harvard University endowment fund to influence its vote.

Industry Minister Hiroshi Kajiyama, however, told reporters that the ministry did not do any wrongdoing, saying the report contained a number of errors.

“It is natural to be interested in technologies and industries vital to the country, so naturally our heads of divisions overseeing these industries communicate with (the companies)” designated by the Foreign Exchange and Trade Law, Kajiyama said. .

But Toshiba did admit what was stated in the report and said it plans to further investigate.

“This is such an embarrassing incident from an international perspective. … Toshiba is one of the leading Japanese companies and the idea that it has embarked on such an act really undermines confidence in the corporate governance of Japan, ”said Takaaki Wakasugi, director of the Institute. Japanese research on corporate governance.

A group of lawyers released a report on Toshiba's meeting of shareholders on June 10 in Tokyo.  |  KYODO
A group of lawyers released a report on Toshiba’s meeting of shareholders on June 10 in Tokyo. | KYODO

While foreign investors are often referred to as “activists,” attracting attention when they come into conflict with Japanese companies, they behave as they do to increase the company’s performance, he said. declared.

“They are critical because Japanese companies are doing something wrong. If they do it right, they wouldn’t care, ”Wakasugi said.

With the new scandal stoking the flames, more turmoil is expected at Toshiba’s annual general meeting of shareholders on Friday. The focus is on whether Nagayama, the current chairman of the board, and the other director nominees proposed by Toshiba will be approved by shareholders, some of whom believe the board is responsible for failing to prevent the attempted collusion with the government.

Toshiba’s second shareholder, 3D Investment Partners, reportedly demanded Nagayama’s resignation earlier this month.

Institutional Shareholder Services Inc., a US-based corporate governance consultancy, has recommended shareholders reject Toshiba’s proposal to re-appoint four directors and Nagayama as chairman, according to media reports.

Reuters reported that Nagayama would likely win his tenure on a narrow margin, citing two anonymous sources familiar with the matter.

Nagayama said he wanted to live up to his responsibility in helping the company through a difficult time.

Izumi of SBI Securities noted that Toshiba will continue to have a difficult road even if it successfully overcomes the investor showdown on Friday, saying the biggest challenge is to draft a medium-term business plan that the company will announce. in October.

“Toshiba needs to come up with a plan that can convince both employees and investors,” he said.

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