While Japan’s corporations have long resisted the entreaties of activist shareholders, Toshiba had come under intense pressure after a series of scandals.
TOKYO — Shareholders of the scandal-plagued industrial giant Toshiba threw out the company’s board chairman on Friday, a breakthrough for foreign investors who have been pushing to make Japan’s insular corporations more transparent and accountable.
The ouster of the chairman, Osamu Nagayama, 74, followed an investigation that revealed that top Toshiba executives had worked with the Japanese government to inappropriately pressure investors who sought to shake up the company’s management.
The resulting scandal led to the resignation of the company’s chief executive and four board members. But Mr. Nagayama, who was not implicated in the investigation, had stayed on, arguing that he had a responsibility to clean up Toshiba’s governance.
In rejecting Mr. Nagayama’s appeal and ousting him a year into his tenure, shareholders scored a surprise victory in a country where corporations have long viewed efforts by investors to influence management as unwelcome meddling, even when they are aimed at improving business practices and profitability.
It is “a turning point where shareholders will increasingly hold directors accountable not simply for attending meetings, but for making sure the board is functioning effectively,” said Nicholas Benes, head of the nonprofit Board Director Training Institute of Japan.
“It is a win for both corporate governance and activists in Japan, and is likely to encourage more activists,” he added.
While shareholder interventions in business management have long been common in other wealthy countries like the United States, foreign activist investors suffered defeat after defeat in skirmishes with corporate Japan through the 2000s.
Most prominently, the American investment fund Steel Partners was dealt a string of setbacks, including years of failed attempts to push changes at the Japanese beer manufacturer Sapporo.
Since 2013, such activist efforts have skyrocketed, after then-Prime Minister Shinzo Abe began to encourage companies to take investor concerns more seriously in hopes of attracting more foreign capital, increasing corporate profits and boosting the country’s weak growth.
While shareholders have found some success in behind-the-scenes efforts to influence corporate management in Japan, the Toshiba case is a rare investor victory in such a public and direct confrontation.
“There’s been a lot of positive change in Japan in terms of governance practices, but if you then don’t have shareholders holding companies to account, a lot of that will just become superficial,” said Ali Saribas, a partner at the shareholder advisory firm SquareWell Partners.
Cases like Toshiba’s, he noted, are likely to remain unusual in the near term. The company, which has been weakened by its scandals and disastrous investments, has an unusually high percentage of foreign shareholders, who tend to be more willing to vote against management than Japanese investors.
But, he added, Mr. Nagayama’s rejection is likely to put some companies on notice.
“Japanese board members are probably looking at this event and thinking that we should engage more with our investors to not face this kind of shareholder revolt,” he said. “If there are concerns, let’s listen to them.”
Toshiba, once a crown jewel of Japanese industry, has seen its reputation dramatically diminish in recent years. While it pioneered the laptop computer and invented flash memory, it no longer has much of a presence in the consumer market, with much of its business now focused on industrial projects and infrastructure, such as nuclear power.
The company was forced out of the top tier of the Tokyo Stock Exchange in 2017, after it suffered huge losses on an investment in the American nuclear power company Westinghouse. It was forced to sell one of its most valuable businesses and issue new shares to pay down its liabilities.
Foreign investors rushed into the company, allowing them to exercise influence on a level that is rare for an old-line Japanese firm.
Disagreements over the company’s management, including the handling of an accounting scandal, put Toshiba at odds with its new investors, some of whom pushed for change on its board, including the addition of more independent directors.
Tensions rose further last year when voting irregularities at the annual general meeting led to a shareholder revolt. Some investors cast blame on Mr. Nagayama, a former chief executive and director of the pharmaceutical giant Chugai who had also served as an outside director at Sony, after an internal investigation into the irregularities glossed over problems at the company.
“Nagayama tried to position himself as an agent for change, but he’s been there for a year and a lot has happened in that year, where he did not take action,” Mr. Saribas said.
In March, Toshiba shareholders, dissatisfied with the conclusions of the internal report into the problems at the general meeting, forced the company to undertake a second independent investigation.
A proposal for new directors by the Singapore-based Effissimo Capital Management had riled Toshiba’s corporate suite, according to the independent investigation. In response, executives reached out to officials at Japan’s trade ministry to coordinate tactics intended to make the firm back off.
In conversations with Effissimo, which is Toshiba’s largest shareholder, ministry officials implied that the hedge fund could be subject to investigation under a foreign investment law that had been newly revised to counter rising concerns about Chinese influence over Japanese firms.
When that effort failed, the trade ministry sent a representative to pressure Harvard’s endowment fund, another Toshiba investor, the report said. Ultimately, Toshiba got its way, and investors approved its slate of board members. The tactics had not affected the final outcome of the election, the report concluded, but were unfair nonetheless.
At this year’s general meeting, shareholders rattled off a series of complaints about the company, ranging from accusations of harassment of employees to criticism of its long record of scandals and shoddy governance.
In addition to ousting Mr. Nagayama, who had been expected to win a new term by a thin margin, shareholders also unseated Nobuyuki Kobayashi, who had served on the board’s audit committee.
With Mr. Nagayama’s departure, Toshiba “can restart with a fresh structure,” said Masako Egawa, a professor at the Graduate School of Business Administration, Hitotsubashi University.
As for other companies, she added, it sends a message that “it’s important that they engage in careful dialogue and deepen their relationships with shareholders, whether they’re activists or not.”
Hikari Hida contributed reporting.
Ousting Toshiba Chairman, Foreign Investors Score Breakthrough in Japan - The New York Times
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