Few Japanese companies have as storied — or, recently, as sorry — a history as Toshiba. A sprawling 145-year-old conglomerate best known for technology, it was once one of the world’s 20 most valuable companies.
But accounting scandals and the collapse of its US nuclear business led to Toshiba’s demotion from the main Tokyo Stock Exchange section and forced the issuance of $5.4bn in new shares in 2017. That brought in overseas activist investors who wanted increased accountability and higher returns at a time when the Japanese government was pushing governance reforms as a way to spur growth.
Toshiba complied, at least on paper. It appointed its first non-Japanese independent directors in nearly 80 years, and claimed in January it had tried to “transform the corporate culture”.
A damning new investigation makes clear that those promises were hollow. Rather than working with investor critics, management turned to dark arts to defeat them. When then-chief executive Nobuaki Kurumatani and other board members were facing a close re-election vote at last year’s annual general meeting, the company colluded with government officials to pressure a large shareholder — Harvard University’s endowment — not to vote against them. It also emerged that 5m votes belonging to one of the biggest shareholders, Singapore-based 3D, had not been counted.
The company set itself up for the current humiliation by turning down requests from Effissimo, another large investor, for an independent investigation into the AGM voting. Toshiba insisted that its own examination had found no wrongdoing. At an extraordinary general meeting in March, a majority of shareholders voted for an independent probe, in a rare defeat for Japanese management.
Now the resulting report has thrown Toshiba into crisis. Kurumatani was already gone, having resigned in April. The chair, Osamu Nagayama, is facing calls for his resignation. Meanwhile, private equity firms are circling: CVC made a $20bn offer in April that helped speed Kurumatani’s removal, and KKR and Brookfield are said to be intrigued.
Things cannot continue the way they are at Toshiba, both for the company and the credibility of Japan’s corporate reforms. Total returns on the country’s largest companies, the Topix core 30, badly lag behind the broader index, 44 per cent to 134 per cent over 20 years. Critics say that is because they are being run for management and the establishment rather than shareholders.
At Toshiba, the share price is finally climbing back towards where it was before the 2015 accounting scandal on hopes that activist pressure will prompt reforms — or a sale to private equity. Sunday saw four executives ousted, including one who asked the government to “beat up” Toshiba’s troublesome shareholders, and the audit committee chair who allegedly misled the board about the first internal probe. That barely scratches the surface.
Toshiba has had three financial scandals in the past six years, and the government has intervened at least twice to help management fend off investor challenges. If that’s a transformed corporate culture, what was the old one like?
Investors have another chance to show Japan what it means to put shareholders first at next week’s AGM. This year, proxy advisers ISS and Glass Lewis are recommending a vote against the chair and several other directors.
Toshiba’s shareholders should vote down the entire board. A third investigation has been promised. Once that makes clear who on the board knew what, investors should demand a new slate with clean hands. It should include the five candidates backed last year by 3D and Effissimo who were defeated by the dark arts campaign. With shareholder backing, they should have the backbone to challenge management.
The new board should then consider the private equity bids seriously. If they fall short, Toshiba needs a new chief executive who has the industrial skills to cut costs and boost profits and the confidence to stop seeking government protection. It may need to look outside Japan, as Takeda, Mitsubishi Chemical and JSR have done. “A foreign CEO can do things that other CEOs can’t,” says Alicia Ogawa, head of Columbia University’s project on Japanese corporate governance.
Fund managers rarely revolt in Japan for fear of upsetting the government and corporate pension funds. BlackRock voted against Japanese management just 6 per cent of the time last year, versus 9 per cent worldwide. In March it was the largest Toshiba shareholder to side with management on the probe issue. This is no time to be cautious.
brooke.masters@ft.com
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