What Toshiba’s woes say about Japanese capitalism
Editor’s note (June 25, 2021): This exhibit has been updated with the resignation of Nagayama Osamu, president of Toshiba
“I THINK THIS will be theatrical, and we fear it will be sensational, ”a senior official in the Japanese Ministry of Economy, Trade and Industry (METI) warned an activist fund last year. Investors were pushing for more outside directors to sit on the board of Toshiba, a titan of Japanese industry. In this case, it was the management of Toshiba that caused a sensation. An independent investigation released this month alleges the company worked with government officials to press shareholders ahead of its 2020 annual meeting. Fallout from the lobbying campaign has already contributed to the downfall of chief executive Kurumatani Nobuaki, and several members of the board of directors.
On June 25, shareholders of the 145-year-old conglomerate voted on a new slate of directors, forcing the resignation of well-respected chairman of the board, Nagayama Osamu (who joined after the alleged wrongdoing, but was in office when the internal investigation has been carried out). Further layoffs appear imminent. After supporting management last year, Glass Lewis and ISS, a duopoly of companies that advise investors on such matters, recommended voting against multiple directors. Given Toshiba’s poor financial performance in recent years, private equity firms are turning around. Some investors are spying on an opportunity: Toshiba’s share price has reached levels not seen since 2015. They have to hope that the company’s next act will bring better fortune to shareholders.
Once a world famous brand that made Japan’s first incandescent bulbs and invented flash memory data storage, Toshiba is now known primarily for its scandals. Following a major accounting fraud and a ruinous investment in a US nuclear power company, it nearly went bankrupt in 2017. It had to sell the prized memory chip company and issue new shares, putting the majority of the business in the hands of outsiders. investors. Effissimo Capital Management, a Singapore-based secret fund run by two longtime Japanese activist investors, has become its largest shareholder.
A subsequent accounting imbroglio at a subsidiary precipitated Effissimo’s calls for changes in management and board of directors at last year’s shareholders meeting. Management won a close vote, but counting irregularities clouded the results. After the company claimed that an internal investigation found nothing wrong, Effissimo called an extraordinary meeting of shareholders earlier this year and won the support of the independent investigation.
The case contains broader lessons about Japanese corporate governance and the protracted efforts to improve it. On the one hand, the contents of the report offer a lot of water to pessimists who believe that, despite all the rhetoric about shareholder concerns, Japan Inc remains largely unreformed. Based on interviews, emails and phone recordings, the report claims that Toshiba executives and some government officials have worked “in unison” to prevent shareholders from exercising their rights fairly. Management sees vocal funds as troublesome enemies to neutralize; a framework written about Effissimo: “We will ask METI to beat them for a while.
Government officials have cited new foreign investment regulations that give authorities the power to intervene for national security reasons, but which investors say could be enforced to thwart wealthy shareholders. The report suggests that this is in fact how the law was used, observes Ezawa Kota of Citigroup, a bank. “It’s more like combat gear against militants.”
The case had a poisonous effect on market perceptions in general. “Japan is on the verge of exhausting all the little goodwill it has with the foreign investment community,” said Alicia Ogawa, a Japanese corporate governance specialist at Columbia University in New York, who also advises an American fund in Japan.
At the same time, the fact that activists were able to produce and publish a behind-the-scenes account of a national champion’s machinations is in itself a sign of the growing weight of shareholders. And it may be a mistake to extrapolate too far from Toshiba. The firm’s involvement in nuclear energy, chip manufacturing and defense makes it particularly sensitive. METI sees to ensure the stable functioning of these companies as falling under its competence under the new regulations; Kajiyama Hiroshi, who directs METI, insists it has “done the right thing” to keep Toshiba’s strategically important businesses and technologies growing steadily. “A handful of businesses will never be fair,” says Ogawa. ■
This article appeared in the Business section of the print edition under the title “Machines et machinations”