The fall of the chairman of the board of Toshiba Corp. might turn out to be some of the best economic news Japan has seen in years. It would be hard to overstate the significance of the ousting of Osamu Nagayama, a 145-year-old top chief of a Japan Inc. icon, who was kicked out by activist investors.
For many years, and especially the past 10, Japanese leaders have been committed to cleaning up the fossilized business practices that are holding back the entire economy. 2011 was quite a year for corporate scandals in Japan, from the $ 1.7 billion fraud drama at Olympus Corp. radiation crisis at a nuclear power plant operated by Tokyo Electric Power Co. Years of poor safety procedures at TEPCO sowed the seeds Fukushima crisis.
A year later, in 2012, Shinzo Abe won the post of prime minister on promises to retool a faltering economy against China. A key element has been to get the biggest Japanese companies to internationalize their operations and their thinking. This meant hiring more outside directors and welcoming women into the executive suite.
It has been a slow and painful task. Today, for example, not a single company listed on the Nikkei 225 Average is headed by a Japanese woman. In March, more than eight years after former Prime Minister Abe claimed to be defending “femmenomia,” women held only 8% of board seats.
Then came Toshiba to remind global investors how little had really changed. First with the 2017 accounting fiasco. And then again in July 2020, when the board made a move that set the stage for Nagayama’s exit. At the time, activist shareholders wanted to add outside members to the board to inject new thinking into decision-making.
At the center of the push was Singapore-based Effissimo Capital Management, Toshiba’s largest shareholder. The loss of this vote did not quite pass the smell test for activists. They opposed the opacity surrounding the voting process and accusations that Toshiba colluded with government officials. And ordered an investigation.
The final 139-page report by three independent lawyers was released earlier this month and revealed Effissimo was not paranoid. As it turns out, Toshiba officials even met with Abe’s chief secretary to cabinet, Yoshihide Suga, the current prime minister (Suga’s team denies any involvement in the dusting).
Four Toshiba board members called the report “surprising, disappointing and, in some areas, deeply disturbing.” This prompted Nagayama to say that the board of directors “sincerely accepted”Conclusions and would enhance transparency and restore confidence.
Judging by Nagayama’s departure from office, it seems his feelings were too weak, too late. Still, this rare public broadcast of how Japan Inc. makes the proverbial sausage is a moment of hope. Could this be an aberration? Sure, but it should be noted that the leadership’s efforts to surround the proverbial wagons with government bureaucrats have turned against us.
The harder it becomes for Japan’s biggest and oldest names to pretend it’s 1981, not 2021, the better off Asia’s second-largest economy. And Suga’s team would be wise to look into that milestone in some way. Why not highlight this as a promising sign that Japan is finally raising its level of competitiveness?
“Given Toshiba’s stature as a blue chip company and the seniority of the government and management officials involved, the vote is a message from domestic investors that the embezzlement and oppression of shareholders belongs to the past and will no longer be tolerated, ”said researcher Justin. Tang of United First Partners told Bloomberg. “This result is a sign of a paradigm shift in Japan and will only embolden activist investors, both foreign and domestic.”
Let’s hope so. Sadly, Abe’s nearly eight years in power have proven to be rich in bold rhetoric of change and modest in results. And long-term investors have never been overly impressed.
Since 2012, there have been few acquisition attempts that have made headlines for Japan’s biggest corporate gems, many of which are cash-rich. A key reason: the stubborn prevalence of defenses against takeover bids and cross-shareholdings. This is holding back Japan. Executives who are not afraid of sudden offers from abroad are complacent.
Toshiba’s setbacks in recent years tell the story. Hopefully, Toshiba’s board of directors, by showing that it can indeed change colors, will inspire average shareholders and activist investors to demand change at the highest level across all industries. The future of the Japanese economy could depend on it.
Again, it is difficult to get good economic news in Japan. Its process of reopening Covid-19 continues to be delayed by further outbreaks of infection. Public opinion is strongly opposed to holding the Tokyo Olympics next month, fearing a full-scale disaster. Even if Japan manages to organize a simplified Games, the tourism boom it wanted to end deflation once and for all is collapsing.
Events at Toshiba, however, are indeed cause for optimism. That is, if Japan Inc. looks at its lessons more than it goes around the wagons.