Shareholder uprising shakes Japan’s economy

The shareholders of the troubled traditional company Toshiba have voted out two top managers. This is an unusual escalation of a conflict in Japan’s otherwise consensus-based economy and society.

Unusual breach of harmony: A Toshiba press conference in 2018

AAt a general meeting that was lively by Japanese standards, the shareholders of the electronics conglomerate Toshiba did not re-elect the chairman of the board of directors, Osamu Nagayama, on Friday. The vote of no confidence for the manager is extremely unusual in a corporate culture that is characterized by consensus and trust.

Nagayama was no longer sustainable for the majority of shareholders after three independent lawyers uncovered the company’s seemingly close collaboration with the Ministry of Economy, Trade and Industry (Meti) earlier this month to intimidate shareholders ahead of the 2020 AGM.

Nagayama was only appointed to the board of directors as external director after these events in order to lead the traditional company into calmer waters. The 74-year-old manager, the former head of a pharmaceutical company and external director on Sony’s board of directors, is well respected in Japan’s business circles.

But shareholders resented him that Toshiba, under his supervision, had not adequately clarified the allegations made against the company by foreign hedge funds. An internal investigation report had only discovered no misconduct in the company in February. The independent investigation of the three lawyers was then forced by the shareholders in March.

In addition to Nagayama, the shareholders voted out Nobuyuki Kobayashi, who had worked on the internal investigation report as a member of the audit committee. The chairman of the committee and another member did not stand for election on Friday after the independent investigation report revealed the machinations.

Toshiba’s President and Chief Executive Officer Satoshi Tsunakawa apologized to shareholders for the poor corporate governance at the annual general meeting and sought confidence in Nagayama. The latter acted immediately after the publication of the independent investigation report, refused to allow two members of the audit committee to stand for election and demanded reforms. But that came too late for the shareholders. Tsunakawa had only resumed Toshiba’s leadership in April after his previous successor Nobuaki Kurumatani resigned.

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To the detailed view

The share price of Toshiba on the Tokyo Stock Exchange was in the early afternoon after major fluctuations with 4800 yen 0.8 percent in the red, while the Nikkei index rose about 0.7 percent. The share has gained around 63 percent in value since the beginning of the year.

The result of the vote is a signal for the shareholder democracy in Japan and marks the temporary end of a turbulent relationship between Toshiba and foreign shareholders, which the company, which had got into financial turmoil, had to take on board a few years ago. The largest shareholder with around 10 percent, the hedge fund Effissimo Capital Management, had described the work of the board of directors as ineffective. Toshiba’s second largest shareholder, hedge fund 3D Investment Partners, had called for Nagayama’s resignation before the general meeting. After Nagayama was voted out of office, 3D Investment said it was hoping for a new era at Toshiba, for added value and transparency towards shareholders.

Some analysts see the events as an opportunity for the long-established company to move forward again with radical management reform. Toshiba has never really left crisis mode in recent years. A serious accounting scandal was uncovered in 2015. This was followed by the economic collapse of the American subsidiary Westinghouse, which should strengthen Toshiba’s role in the nuclear energy business.

Toshiba got into financial difficulties and had to sell the silverware with the memory chip division. At the same time, the company raised foreign capital to avoid being thrown off the stock exchange. This started the tension between foreign hedge funds and management. At times, foreign shareholders held more than 70 percent of Toshiba, most recently it was around 50 percent.

The traditional company, whose history goes back to the 1870s, is closely linked to the Japanese government through its activities in the field of nuclear energy and through commissioned work for the Ministry of Defense. Analysts therefore ask whether the failure of corporate management is a symbol for Japan AG, which was at least formerly powerful, or a special case.