After begging people to avoid a potential Covid-19 cluster and to log in from home, only 100 of the most determined investors are expected to make it to Tokyo’s Bellesalle conference centre on Thursday for Toshiba’s extraordinary general meeting. Yet few events in Japanese corporate history will be so widely watched, so closely dissected and have the potential to set a critical precedent for the rest of the Japanese stock market.

The event, billed as a showdown between one of the country’s most identifiable companies and a global cast of fund managers, is acting as a full-body MRI scan for the health of Japan’s capital markets after five years of claimed progress on governance. The outcome, say investors, will not only determine how many problems the patient has, but also how many are curable.

Separate proposals to be voted on at the EGM — one to investigate the conduct of the 2020 shareholders’ meeting amid allegations of a “dark arts” campaign against activist investors; and a second to scrutinise the company’s investment strategy — threaten to undermine Toshiba’s board and send a message across corporate Japan that shareholder rights are supreme.

Put forward by two of the company’s largest shareholders, if the proposals are voted through — and they appear to be gaining momentum with the second-largest US public pension fund disclosing support for them last week — they could topple Toshiba chief executive Nobuaki Kurumatani.

Toshiba chief executive Nobuaki Kurumatani, centre, took measures to raise his approval rating after activists pushed for him to step down at the company’s annual shareholders meeting last year © Bloomberg

More importantly, say experts, such an outcome would reverberate across Japan Inc, signalling that investors’ ability to demand EGMs and use them to hold managements to account could now become part of mainstream investing.

For Japan and Toshiba’s position as an industrial powerhouse, the stakes could not be higher: the investor revolt centres on the conduct of a household name, a cornerstone of the corporate establishment with a critical role in the decommissioning of the stricken Fukushima nuclear plant hit by the 2011 earthquake. It is a company tacitly considered in government circles to be “too Japanese to fail”.

Nicholas Benes, one of the authors of Japan’s 2015 governance code which is set to be overhauled in April, says the EGM is a watershed for a stock market now more than one-third held by overseas investors, and increasingly the target of both domestic and foreign activists. Until now, activists have claimed a steadily rising number of smaller Japanese corporate scalps: were they to claim a clear victory over Toshiba, the floodgates could open, say analysts.

But the outcome is finely balanced. Tipped one way, investors will reveal what are, despite decades of disuse, some of the strongest shareholder rights in the world. Tipped the other, says Benes, and the market may find itself forever trapped in the archaic, opaque and shareholder-unfriendly norms of “old Japan”.

Stacked bar showing % of common shares outstanding, based on latest company filings

No Japanese company has ever been forced to convene two EGMs in the same year, let alone had to co-ordinate two simultaneous demands and host them on the same day — a double flourish of shareholder power long treated as the “nuclear option” in engagement between investors and management.

“The EGM itself is groundbreaking,” says Hidetaka Kawakita, a corporate governance expert at Kyoto University. “And if the shareholder proposal passes, it will send even bigger shockwaves across Japan. Beyond Toshiba, it will strengthen calls for independent investigations into incidents at other companies.” 

Lost votes and lots of questions

The story of how Toshiba — which once sat among the 20 most valuable companies in the world — got to the point where it is facing a showdown with one of Asia’s most secretive investment groups is a mixture of epic management miscalculations, hubris and government involvement. It stretches from a $1.3bn accounting fraud, to what investors have viewed as a Goldman Sachs-advised “dark arts” campaign to influence shareholders, and the forced sale to private equity of Toshiba’s most treasured asset.

Thursday’s revolt is built around two separate demands for EGMs from different investors. Though relatively easily triggered under Japanese corporate law, EGMs are viewed by investors as a last resort and with genuine terror by managements. Effissimo, the Singapore-based activist fund and largest shareholder in Toshiba with a stake of 9.9 per cent, has called on the conglomerate to appoint an independent committee to investigate whether the company’s annual shareholders meeting in July 2020 was subject to “unprecedented shareholder suppression”.

Toshiba’s headquarters in Tokyo. On Thursday, the city will host the company’s extraordinary general meeting, one of the most widely watched events in Japanese corporate history © REUTERS

Kurumatani took extensive measures to avoid his approval rating among shareholders falling below 50 per cent as a variety of activists pushed for him to step down as chief executive at the meeting. Those measures included hiring Goldman Sachs to advise on how best to persuade shareholders to vote in line with management, according to people with knowledge of the discussions.

The chief executive’s eventual approval rating, of 58 per cent, was enough for him to keep his job, but he was, say many investors, fatally weakened. In a survey of dozens of investors by Effissimo after the AGM, several said they had felt pressured to vote in a way that was “not consistent with their original intentions”.

The attention of Effissimo and other large shareholders has been drawn to a private discussion ahead of the 2020 AGM between Hiromichi Mizuno, the Tesla board member and former chief investment officer of the Government Pension Investment Fund, and the Harvard Endowment Fund which appeared to sway the fund’s voting direction

Some investors suspect Mizuno of acting on the instructions of senior figures linked to Japan’s powerful ministry of economy, trade and industry, something that is denied by officials and Mizuno. He says: “I told Harvard very clearly that I was not representing the Japanese government. I offered to give them [Harvard] a better understanding of the situation in Tokyo on a friendly basis.” 

He adds: “It’s absurd that Harvard’s voting decision and their thought process [are] being questioned by another shareholder [Effissimo, via the EGM proposal].”

Shortly after the AGM results were published one of Toshiba’s then largest shareholders, Singapore-based 3D, discovered that the votes on about 5m of its shares had not been counted in the ballot. An investigation last year looked at whether the missing votes were the result of postal error, or the complexities of a widespread practice in Japan of altering the delivery dates on votes, which prominent investors say is long overdue reform.

Support for CEO among peer companies in 2020* (%)

Toshiba concluded that in future it would encourage more of its investors to vote electronically. But the independent committee demanded by Effissimo would investigate the whole background of vote miscounting and what several of Toshiba’s largest investors described as the “dark arts” campaign advised by Goldman Sachs to sway their opinion. The investment bank declined to comment.

Another proposal, from Farallon Capital, the second-largest shareholder in Toshiba with its affiliate Chinook, demands that the management explain what the US-based hedge fund calls a “sudden and dramatic” change in investment strategy. Many of the company’s current woes, argues Farallon, are the consequence of a terrible record on large-scale mergers and acquisitions, which have seen the company invest almost $70bn over the past 20 years without any tangible increase in shareholder equity. Toshiba has argued that there was no change in strategy, calling Farallon’s demand to return all operating cash flows to shareholders over the next five years as “unrealistic”.

“The need for Toshiba management to rebuild trust with investors is self-evident,” said Farallon in a statement to the FT, “and we hope the EGM sends a message that investors expect transparency and trustworthiness.”

With both proxy advisers, the Institutional Shareholder Services and Glass Lewis, supporting the Effissimo proposal — which only needs a simple majority to pass — analysts say Toshiba faces losing the EGM battle, an outcome unheard of for a large established Japanese company.

Emergency capital raising in recent years has revealed the extent of panic within Toshiba, and the government, to avert a delisting or a full corporate failure © Toru Yamanaka/AFP/Getty

“If either of the shareholder proposals passes, it will be a huge embarrassment for Toshiba and Kurumatani will have to go,” says one of the company’s largest shareholders, who is planning to switch support to Effissimo’s proposal after initially resolving to vote against it.

Another top 10 Toshiba shareholder says: “[The Toshiba management] just think of shareholders as the enemy. The chief executive’s job is capital allocation and governance and those two things are being questioned by the two biggest shareholders.”

An influx of activists

Toshiba’s plight, say investors and academics, is not only a product of the company’s own missteps, but a crystallisation of common problems and management attitudes in corporate Japan.

“This case might be the tip of the iceberg,” says Kiichiro Kobayashi, professor of business policy at Keio Business School. “In the era of globalisation, people might think that Japanese companies globalised in the 1970s and 1980s. Products may have globalised but Japanese management never globalised. Toshiba’s case is a product of the lack of international mindset.”

Toshiba’s crisis began with a $1.3bn accounting scandal in 2015 that sparked a management shake-up but was followed in 2017 by a financial crisis triggered by the collapse of its US nuclear business — the Westinghouse unit that it had bought a decade earlier in a $5.4bn deal.

In a bid to shore up its balance sheet, Toshiba issued $5.3bn of new shares at the end of 2017. The move left it comfortably recapitalised but introduced a large number of activist funds on to its shareholder register including Effissimo and 3D. Earlier that year Toshiba had sold off — for $18bn — its prized memory chip business to a consortium led by private equity firm Bain Capital as it faced the risk of its shares being delisted from the Tokyo Stock Exchange.

“It seems like the company put priority on keeping its listed status. It was probably afraid of tarnishing its history as a blue-chip company by getting delisted,” Kawakita says. “If the company had been able to reset itself back then, it would have been able to revamp its corporate culture and transform itself into a new Toshiba.”

The efforts to scramble out of its financial crisis came at a considerable cost to Kurumatani — the former banker brought in as chief executive in 2018 with an explicit mission to turn round a company stripped of its chip, medical and nuclear businesses. To raise the $5.3bn share issuance quickly, Toshiba engaged Goldman Sachs to close the deal in short order — a feat that, while impressive — and lucrative for the bankers — created one of the most aggressive activist shareholder registers in the country.

Toshiba energy systems showcase a melted fuel probe to be used at the tsunami-hit Fukushima site © Mari Yamaguchi/AP

Shareholders flex their muscles

Effissimo’s investment in Toshiba first came to light in the spring of 2017 but it was only three years later that the fund’s battle with the company’s management broke out into the open. By then it had built up its stake to 15 per cent, and proposed putting its co-founder, Yoichiro Imai, on the board of the 145-year-old conglomerate. The allegations of voting irregularities at the AGM emerged soon after Effissimo’s proposal was narrowly rejected.

Long before its clash with Toshiba, Effissimo had been an opaque and mystifying presence in Japan, viewed with both scepticism and apprehension by company executives as well as investors. Founded in 2006, the multibillion-dollar fund is run by former colleagues of Yoshiaki Murakami, the country’s most notorious shareholder activist who was convicted of insider trading in the mid-2000s.

It has kept a low profile. But some companies targeted have noted similarities in the strategies of both Effissimo and Murakami to force change by buying large stakes in cash-rich Japanese companies.

Annotated share price chart for Toshiba (¥)

Even critics of Effissimo admit, however, that its campaign against Toshiba has clear distinctions from its previous fights with Japan Inc. At the heart of its EGM proposal are questions about the handling of shareholder votes, a concern that is widely shared by other investors in Toshiba both foreign and domestic.

“If our proposal fails, it will likely create a very bad precedent for Toshiba and Japan as a whole,” says Effissimo, breaking its usual media silence to make a direct statement to the FT. “Conversely, if our proposal succeeds, it will be a landmark case where shareholders upheld their fundamental rights and demonstrated that the board must be accountable.”

Both ISS and Glass Lewis questioned the findings of a review conducted by Toshiba’s audit committee last year, which found no direct evidence that the company was involved in “any undue intervention” in the AGM. Toshiba responded by saying there was no “reasonable grounds” to carry out an additional investigation.

The Toshiba management reappointed Goldman Sachs in December to run its campaign to convince investors to oppose the Farallon and Effissimo proposals. Investors have described meetings with Toshiba — and in one case Goldman’s top M&A banker in Japan — in which it became clear that Toshiba was fearful of losing on the Effissimo proposal in particular.

Some say the company’s plight is not only a product of its own missteps, but of the common problems and management attitudes in corporate Japan © Eugene Hoshiko/AP

“The sense of pride and entitlement [with Toshiba management] is extraordinary,” says one of the company’s 20 largest shareholders who plans to vote for Effissimo. “Effissimo makes a good point: there’s never a good reason not to have an independent committee.”

Other investors are consulting their internal investment committees to decide how to vote. At least two told the FT they would back the Effissimo proposal because of the important message it would send to the rest of corporate Japan. The California State Teachers’ Retirement System disclosed last week that it would vote in favour of the proposals.

“The tragedy of the Toshiba scandals, and the arrogance of the response of its management, is that it’s a distraction from the fact that the majority of Japanese companies are making strong efforts to increase transparency and communication with investors,” says Alicia Ogawa, an expert on governance at Columbia Business School’s Centre on Japanese Economy and Business, who adds that it would have reflected well on Toshiba to undertake the proposed independent investigation voluntarily.

“One can only hope that it [the investigation] will happen as a result of the EGM, and that it will repair some of the bruises to Japan’s reputation as a free and fair capital market, where shareholder rights are inviolate,” she adds.



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