Toshiba: Japan activists on board for change

In Japan, extraordinary general meetings can be rather ordinary affairs. Shareholder concerns are often quickly stifled as local institutional investors back company management. Toshiba’s activist investors may have changed that tradition for good.

A fight between Toshiba and its largest shareholder has ended in defeat for the Japanese electronics group. Effissimo, the Singapore based activist fund and Toshiba’s biggest investor with a 9.9 per cent stake, has won a vote in favour of a probe into Toshiba’s conduct. The activist had rightly called for an independent investigation into alleged irregularities at the company’s annual shareholders’ meeting in July, where a large shareholder reported that its votes were not counted.

Under Japanese corporate law, investors can remove members from a company’s board. But until now, going against Japanese company management has been a costly losing battle for frustrated investors. Shareholder activism has won approval just four times in Japanese corporate history. Overseas activists have a negative reputation for attacking companies unnecessarily.

This is unhelpful. So is the fact that local institutional investors, including Japan’s pension funds, tend to side with management. That encourages other investors to do the same. The Government Pension Investment Fund, which held $414bn worth of domestic stocks at the end of last year, wields significant influence at shareholder meetings. At Toshiba, a second proposal from San Francisco’s Farallon Capital calling for the company to better explain its merger and acquisition plans was not passed. Analysts forecast relatively little free cash flow (about $300m annually this year and next), so Farallon rightly wanted more detail.

Still, Effissimo’s win sets a precedent for more activist intervention changing the way Japanese company boards deal with their concerns. Shares rose 4 per cent after the decision. That could drive other needed board changes, particularly on issues such as independence and diversity. Many Japanese board members are former employees. Over a third of the country’s boards are all-male compared with less than a tenth for big European companies.

At Toshiba, once known for innovation but now lagging behind global peers, earlier activist pressure would have been useful. Long-suffering shareholders have witnessed many governance and decision-making failures over the past decade, including an accounting scandal that led to the sale of the memory-chip business, computer-business exit and its US nuclear-services business collapse. A stronger voice for shareholders should enable them to ensure these mistakes are not repeated.