According to one bleak Japanese adage, you should expect rain tomorrow and assume people are thieves. The Tokyo Stock Exchange, as a granter of corporate respectability and gatekeeper of shareholder capitalism, may not have done enough of either.
In the past, those deficiencies have rankled but not cost the TSE’s reputation as dearly as they might. The bourse, via its parent the Japan Exchange Group (JPX), has somehow weathered the various scandals, misdeeds and governance horrors of its listed members. But Toshiba may change that.
On Wednesday, the Japanese industrial icon acknowledged it had received an approach from private equity group CVC. People close to the situation said that the move, though still in its infancy, could lead to the formation of a bidding consortium and a $20bn-plus leveraged buyout, possibly involving its current management. According to bankers, other private equity groups have also slid non-binding offers across Toshiba’s table in recent months, mostly suggesting some form of management buyout.
Set aside the journey that Japan has taken to reach a point where a foreign fund can contemplate a supposedly unsolicited offer on this scale for a company once impregnably protected by national pride (it would be Japan’s biggest ever leveraged buyout). If the deal is finalised — and the CVC move feels more like the start of a process than its conclusion — the transformative blow will be to the TSE, which will see one of its biggest household names taken private. Humiliations do not come much bigger.
Consider the chain of events that led to CVC’s proposal, starting with the revelations in 2015 that Toshiba had been systematically falsifying its books since 2008. At the end of 2016, the group’s woes deepened. Its Westinghouse US nuclear business, for which it paid generously a decade earlier, was forced into bankruptcy leaving it with a $6.3bn writedown. That forced a fire-sale of its prized memory chip business and an emergency $5.4bn share issuance that stuffed the company’s shareholder register with activists. When it was revealed that there had been unusual conduct around Toshiba’s 2020 annual meeting, its largest shareholder called for an extraordinary shareholder meeting last month, defeating Toshiba management and forcing it to launch an independent investigation.
Throughout all of this, the TSE has possessed the tools with which to punish Toshiba’s wrongdoing. Both the corporate fraud and the financial crisis created situations between 2016 and 2018 in which Toshiba was unable to meet deadlines to submit improvement reports or unqualified accounts. Under its own rules, the TSE could have delisted Toshiba or demoted it to its second section for five years. Instead, deadlines were repeatedly extended and, more brazenly, in 2019 listing rules changed to allow Toshiba an early readmission to the first section.
The sum effect of all this has been to make the TSE look like a supplicant to Toshiba’s interests, rather than a protector of shareholders. Its multiple contortions to spare Toshiba are embarrassing enough. But if the company now ends up delisting through choice and convenience, the bourse’s shame will be many times worse.
For Toshiba, going private would solve many problems, not least the instant removal of the activists whose demands for transparency, clearer strategy and higher returns on equity have been so relentless. Once private, the results of the independent investigation that shareholders fought for last month may never see the light of day. If Toshiba delists, the message will be that governance issues, corporate realignments and potential scandal are all best handled out of the glare of investor scrutiny.
The TSE’s placations of Toshiba were based around an unspoken pact that neither it, nor the company, nor Japan in general could possibly afford for such a cornerstone corporate name to be unlisted. If Toshiba breaks its side of that bargain, the TSE will have allowed its credibility to be undermined by a company that, at certain times, offered grounds to heed old adages.