Toshiba In Chaos After Bid to Foil Activist Shareholders
Written by tokyoclub on June 19, 2021
TOKYO — Last year, when a little-known investment firm called for some new blood on the board of the faded Japanese industrial giant Toshiba, the company’s leadership was less than receptive.
But rather than taking its case to its shareholders, Toshiba tried to foil the problem investors by making a secret request to Japan’s powerful trade ministry: “Beat them up.”
The plot backfired, and Toshiba itself has taken the beating.
Shareholders — led by Effissimo Capital Management, based in Singapore — forced the company to commission an independent investigation that revealed the underhanded tactics in vivid detail, implicating top executives, high-level bureaucrats and even the prime minister’s office. Toshiba’s chief resigned before the report was complete, and its release last week has shaken Japan’s interconnected worlds of business and government.
The clash is the most dramatic and public example yet of the challenge that a newly empowered class of activist investors is posing to Japan’s old industrial titans and the government officials who support them.
The activists have found an opening as the country has moved to free up capital markets and overhaul business practices — creating space for painful shifts like layoffs and other restructuring — in an effort to boost anemic growth in the world’s third-largest economy. The Toshiba case shows both the progress that Japan has made on that front and the resistance that endures.
Shareholders’ success in compelling the company to expose the back-room dealings, analysts said, demonstrates that the government-led changes have made it more difficult for Japan Inc. to hide behind an opaque style of business management.
But the revelations also highlight the entrenched aversion in Japan’s government offices and boardrooms to the kinds of muscular shareholder interventions in corporate management that are common, for better or worse, in other rich countries.
“The government wanted to have its cake and eat it, too,” said Nicholas Benes, a representative director of the Board Director Training Institute of Japan, a nonprofit that offers guidance on corporate governance.
Toshiba, though a much-diminished company, is still seen by the government as important to national security because of its nuclear power business and defense industry links.
That Effissimo was able to involve itself so deeply in the company’s affairs is a relatively new phenomenon in Japan. For years, politicians, companies and the public alike viewed assertive shareholders as little more than shakedown artists set on wringing profits out of their targets through financial chicanery.
But attitudes have changed substantially since 2012, when Shinzo Abe, the newly elected prime minister, pledged to pull Japan out of decades of stagnant growth by fundamentally transforming the way the country did business.
The efforts to improve profitability and increase companies’ attractiveness to foreign capital made it more difficult for them to ignore shareholders who pushed for change.
The number of public demands made by activist investors on Japanese companies skyrocketed from just 11 in 2013 to 165 in 2020, making Japan the second-largest market for such activity, according to data collected by Activist Insight, an industry news service.
The economic overhaul was intended in part to prod Japan to rethink how it sees companies and investors.
Unlike corporations in the United States, which often put a priority on shareholders’ interests, Japanese companies have tended to put them behind those of other stakeholders.
That attitude is rooted in “a different notion of what the corporation’s about,” said Steven Vogel, a professor of political economy at the University of California, Berkeley, who has written extensively on Japan.
In Japan, the view is not that a corporation is a vehicle to enrich shareholders, but that it is “a public good that is providing jobs for workers, economic growth for its community, mutual assistance for other companies,” he said, adding that “those different visions clash.”
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With that in mind, investment funds have increasingly pitched themselves to Japanese companies as partners in improving governance and accountability.
But the more vocal activist investors still have many skeptics, even in the halls of the Ministry of Economy, Trade and Industry, which has been a leader in pushing companies to be more shareholder-oriented, said Ulrike Schaede, a professor of Japanese business at the University of California, San Diego.
“It’s the spectrum that Japan is currently trying to navigate. They want the good activists, they want the companies that come in and are helpful, but at the same time, they want to defend against the vultures,” she said.
Toshiba presented particularly fertile ground for a confrontation between activist shareholders and Japan’s old guard.
A doyenne of Japanese industry, the company pioneered laptop computers and invented flash memory. But its reputation has been damaged by a series of major scandals and a disastrous investment in the American nuclear power company Westinghouse that knocked it out of the top tier of the Tokyo Stock Exchange for more than three years.
Mired in serious debt, the company was forced to sell off a valuable memory chip business and issue new shares to help pay down its liabilities. The proportion of the company held by foreign investors reached as high as 72 percent, an unusual situation for a firm of its pedigree. Effissimo soon became its largest single shareholder, with a stake approaching 10 percent.
The investment firm, which has generally kept a low profile, is intimately familiar with Japan’s hostility toward shareholder activism. The firm was founded in 2006 by former employees of Yoshiaki Murakami, a Japanese investor who became infamous for using aggressive pressure tactics to force companies to increase their profitability.
The Japanese authorities arrested him on charges of insider trading shortly before Effissimo’s founding, and he was ultimately sentenced to prison, a judgment widely perceived as a warning to those who might seek to imitate his methods.
In the years since, norms have changed. When, in early 2020, Toshiba revealed a new accounting scandal at one of its subsidiaries, Effissimo told the company that its investigation was inadequate and that it was considering a shareholder proposal to change the management.
At the annual shareholders’ meeting, Toshiba’s slate of directors prevailed. But after news reports described voting irregularities and shady tactics, Effissimo helped lead a shareholder revolt, demanding an independent investigation into the board’s election.
The investigators concluded that Toshiba had colluded with officials from the trade ministry, known as METI, to thwart Effissimo and other shareholders.
Their report describes efforts to pressure Effissimo and two other large shareholders in Toshiba, the Singapore-based 3D Investment Partners and Harvard University’s endowment fund; to protect Toshiba’s leader, Nobuaki Kurumatani; and to secure the company’s preferred slate of directors.
Toshiba, the report found, called on the METI officials to threaten the shareholders with newly amended regulations governing foreign investments in Japan, which are primarily intended as a tool for restricting Chinese investment in sensitive industries. Company executives described a good cop/bad cop strategy in which the ministry would “beat up” Effissimo and then Toshiba would offer a compromise.
Yoshihide Suga, who at the time was Mr. Abe’s chief cabinet secretary and is now prime minister, was kept apprised of the strategy, the report said, and expressed his understanding that the regulations would be used to pressure Effissimo. After opposition parties in Parliament pressed him on the issue, he denied he was aware of the plans.
The pressure tactics failed to stop Effissimo. But they succeeded, the report found, in dissuading the Harvard fund from exercising its votes. Still, the election’s outcome was unchanged.
Chaos has since engulfed Toshiba. Four directors have effectively been forced off the board, and more heads are likely to roll at the company’s annual shareholders’ meeting next week, as proxy adviser firms have urged investors to vote down the current management.
Some analysts said a true gauge of whether Japan had improved its commitment to shareholders would be whether any of the bureaucrats involved in the Toshiba case were held responsible.
METI needs to conduct an impartial investigation, said Shin Ushijima, a lawyer and president of the nonprofit Japan Corporate Governance Network, and, “if there are problematic activities, take suitable measures.”
“They must make it clear that they are taking a consistently positive and progressive stance on corporate governance,” he added.
METI’s head, Hiroshi Kajiyama, disagrees. At a news conference on Tuesday, he dismissed shareholders’ concerns and said he would look no deeper.
There is no need, he said: “The ministry did the right thing.”
Makiko Inoue contributed reporting.