Friday’s downfall of the chairman of Toshiba Corp.’s board may turn out to be some of the best economic news Japan has had in years. It would be hard to exaggerate the significance of the ouster of Osamu Nagayama, a chieftain at the top of a 145-year Japan Inc. icon, who was pushed out by activist investors.
For many years, and especially the last 10, Japanese leaders pledged to clean up the fossilized business practices 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. and the radiation crisis at a nuclear-power plant run by Tokyo Electric Power Co. Years of poor safety procedures at TEPCO planted the seeds of the Fukushima crisis.
A year later, in 2012, Shinzo Abe won the premiership on pledges to retool an economy losing ground to China. A key piece was getting Japan’s biggest companies to internationalize their operations and their thinking. That meant hiring more outside directors and welcoming women into the executive suite.
It has been a slow, painful slog. Today, for example, not a single Nikkei 225 Average-listed company is run by a Japanese woman. As of March, eight-plus years after former Prime Minister Abe purported to champion “womenomics,” 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 pulled a stunt that set the stage for Nagayama’s exit. Back then, shareholder activists wanted to add outside board members to inject some fresh thinking into decision making.
At the center of the push was Singapore-based Effissimo Capital Management, Toshiba’s biggest shareholder. Losing that vote didn’t quite pass the smell test for activists. They objected to the opacity surrounding the voting process and accusations that Toshiba had colluded with government officials. And ordered an investigation.
The ultimate 139-page report by three independent lawyers was released earlier this month, and it found that Effissimo was not being paranoid. Turns out, Toshiba officials even met with Abe’s chief cabinet secretary, Yoshihide Suga, the current prime minister (Suga’s team denies any involvement in the dustup).
Four Toshiba board members called the report “surprising, disappointing, and in some areas, deeply disturbing.” That prompted Nagayama to say the board “sincerely accepted” the findings and would boost transparency and rebuild trust.
Judging by Nagayama’s departure from office, it seems his sentiments were too little, too late. Yet this rare public airing of how Japan Inc. makes the proverbial sausage is a moment for hope. Could this be an aberration? Sure, but it’s notable that executives’ efforts to circle the proverbial wagons with government bureaucrats backfired here.
The harder it becomes for Japan’s biggest and oldest names to pretend it’s 1981, not 2021, the better off Asia’s second economy will be. And Suga’s team would be wise to lean into this milestone of sorts. Why not highlight this as a promising sign that Japan is at long last raising its competitive game?
“Given Toshiba’s stature as a blue-chip company and the seniority of the government officials and management involved, the vote is a message from domestic investors that malfeasance and shareholder oppression is a matter of the past and will no longer be tolerated,” researcher Justin Tang at United First Partners told Bloomberg. “This result is a sign of a paradigm shift in Japan and will only embolden activist investors whether foreign or domestic.”
Let’s hope so. Sadly, Abe’s nearly eight years in power proved to be big on bold talk of change—small on results. And long-term investors were never quite impressed.
Since 2012, there have been few headline-making acquisition attempts for Japan’s biggest corporate jewels, many of which are cash rich. A key reason: the stubborn prevalence of takeover defenses and cross-shareholdings. This holds Japan back. Executives who don’t fear sudden bids from abroad are complacent ones.
Toshiba’s travails in recent years tell the story. Let’s hope that Toshiba’s board, by showing it can indeed change its stripes, will inspire average shareholders and activist investors alike to demand change at the highest levels across sectors. The future of Japan’s economy may depend on it.
Again, good economic news in Japan is hard to come by. Its Covid-19 reopening process keeps getting delayed by new infection surges. Public opinion is strongly against holding the Tokyo Olympics next month, fearing a super-spreader disaster. Even if Japan can pull off a stripped-down Games, the tourism boom it wanted to end deflation once and for all is falling flat.
Events at Toshiba, though, are indeed reason for optimism. That is, if Japan Inc. leans into its lessons more than it circles the wagons.