Shareholders oust Toshiba board chairman in major win for Japan governance

Toshiba Corp shareholders voted out its board chairman and one other director on Friday, delivering a seismic rebuke to the company after it was found to have colluded with the government in suppressing foreign investor interests.

For many, the result at the annual general meeting marks a new watershed moment for corporate governance in Japan after activist Toshiba shareholders prevailed earlier this year in securing a probe into the allegations of pressure on overseas investors.

Ousters of board members at Japanese companies, particularly household names like Toshiba, are extremely rare.

"This result is a sign of a paradigm shift in Japan and will only embolden activist investors whether foreign or domestic," said Justin Tang, head of Asian research at United First Partners in Singapore.

But supporters of now former board chairman Osamu Nagayama say his failure to win re-election will only set Toshiba further back, depriving the industrial conglomerate, which has lurched from crisis to crisis since an accounting scandal in 2015, of experienced leadership.

CEO Satoshi Tsunakawa retook the helm in April after the company's previous controversial leader left but has said he does not plan to stay for too long.

A breakdown of the vote was not immediately disclosed. The newly elected directors were meeting on Friday to discuss who will head the new board.

According to one Toshiba source, foreign investors had voted in greater numbers than in the company's previous shareholder meetings as they saw it as an important test case of corporate governance in Japan. The source was not authorised to speak to media and declined to be identified.

Just how the government will respond to the results of the AGM remains to be seen.

Toshiba, which makes defence equipment and nuclear reactors, is strategically important to the government and Trade Minister Hiroshi Kajiyama has been unapologetic about his ministry's dealings with the company, saying the policies it implemented were natural ones for the ministry to take.

"In general the hope is that corporate governance can be improved through discussions with shareholders and at the same time we work to secure the stable development of businesses and technology that are important from a national security standpoint," he told a regular news conference ahead of the AGM.

On Thursday, Akira Amari, a former economy minister and an influential lawmaker in the ruling Liberal Democratic Party, accused activist investors of focusing only on short-term profits and called for better monitoring of such investors to protect economic security. 

Shares in Toshiba closed down 0.6%. The stock has increased by around two-thirds in value this year, bolstered by a $20 billion bid for the company by private equity company CVC Capital. Although Toshiba has dismissed that bid, it has promised a strategic review.

Nagayama's ouster could help activist shareholders push the company to consider take-private offers. Since CVC's bid, event-driven hedge funds have been actively buying Toshiba shares, making the shareholder roster potentially more favourable for activists, investor sources have said.

Nagayama only joined Toshiba's board in mid-2020 after the alleged pressuring of foreign shareholders to vote in line with management's board nominees took place.

A former Chugai Pharmaceutical CEO and Sony Group Corp board director, he is well respected and both the electronics giant and former U.S. ambassador to Japan John Roos had expressed their support for him.

But his critics argued he should step down to take responsibility for the board's resistance to address the allegations.

Shareholder advisory firms Institutional Shareholder Services Inc and Glass Lewis had recommended shareholders not reappoint him, while 3D Investment Partners, Toshiba's Singapore-based No. 2 shareholder with a 7.2% stake, had called for his resignation.

3D Investment said in a statement after the result that it hoped the AGM marked the beginning of a new era at Toshiba and it looked forward to constructive, ongoing dialogue with Toshiba's board and management team.

Toshiba nominated 11 directors at the AGM, including Nagayama. Nobuyuki Kobayashi, a member of the audit committee, was also voted out.

New directors are expected to be brought in but it was not immediately clear when Toshiba plans to nominate them or hold an extraordinary general meeting to vote on their appointments.