Chapter 4.3 Activists' Role in Bringing Value

Join us in reading Chapter 4 of the book, The Only Way to Survive for Japan, subtitled "Corporate governance is sure to save our country." This book focuses on corporate governance, and in Chapter 4.3, the author takes another look at activist investors. Rather than the bane of corporate management, should activists be viewed as playing an important role in improving short- and long-term corporate value going forward? Institutional shareholders may be the key in this real-life lesson from the Toshiba case study.

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Read Chapter 4.3, the 26th segment of the book:

Activists in the Future

On April 14, 2021, Mr Nobuaki Kurumatani, President and CEO of Toshiba, resigned. Few people felt sympathy for his resignation because CVC Capital Partners, to which Mr Kurumatani previously belonged, had suggested a takeover, which caused an increasing sense of distrust in him.

At Toshiba's extraordinary shareholders meeting held in March 2021, an activist proposed a third-party investigation into the management of the general shareholders meeting of the previous year, 2020, and it passed. Unfortunately, very few people seemed to understand it, although it was an important case in terms of corporate governance. The activist shareholder broke the ice, and the institutional investors, falling in line with the activist, worked the general shareholders' meeting. It was a typical pattern.

It had been a long time since activists had come to the public's attention. Anyone can buy shares of listed companies, as the Supreme Court of Japan has declared. No company president, no matter how great he/she is, can steer clear of activists.

However, activists are not the target of your confrontation.

Seeing the Mid- and Long-term Value

What is important about activists is that, even if small in number, they can attract the approval of institutional investors. Some people demonize activists as those who only value short-term profits and suggest dividends and stock buybacks. However, they always try to act in cooperation with institutional investors.

Especially in recent years, activists have sought to promote dialogue with companies from the standpoint of improving mid- to long-term corporate value and encouraging further business improvement. Such activists, different from conventional ones, have been increasing their presence. Dialogue must be promoted.

Recent cases show that activists' proposals and suggestions trigger efforts on the part of companies to enhance corporate value and to promote corporate restructuring. Institutional investors consider that there must be a future that can be seen only through the activists' perspectives. Companies should look forward further than activists do.

(The Asahi Shimbun dated May 2021)

Toshiba, the Ministry of Economy, Trade and Industry, and the Media

The reelection of Mr Osamu Nagayama was rejected at Toshiba's ordinary general shareholders meeting, despite that he was chairman of the board as well as head of Toshiba's nominating committee. A reasonable explanation would be that he could not win the confidence of its shareholders. The problem derives from an investigation conducted by the lawyers, which was resolved at the extraordinary shareholders' meeting held in March 2021.

This investigation was fundamentally different from the investigations that third-party committees carry out when scandals occur. It was resolved at the general shareholders meeting according to the provisions of the Companies Act and was conducted by independent investigators.

*Inside the Ministry of Economy, Trade and Industry in Kasumigaseki, Tokyo, on March 22, 2022.*

The investigation found that Toshiba exerted undue influence on its shareholders in exercising their voting rights "in full coordination with" the Ministry of Economy, Trade and Industry and, "on the basis of" the authority of the Foreign Exchange and Foreign Trade Act, in an attempt to deal with the activists. It concluded that "the ordinary general shareholders meeting of last year [2020] was, therefore, not considered to be fairly conducted."

What Went Wrong When It All Looked Right?

It happened at "the Toshiba," a company that was believed to have strengthened its governance thoroughly since its improper accounting scandal in 2015. Furthermore, at the ordinary general shareholders meeting of 2020, independent outside directors numbered 10 out of the 12 directors. Moreover, Toshiba is a company with a nominating committee, etc, and the chairman of the board was also an outside director.

But the investigation report clearly tells that what matters is not seen from the outside. For example, its audit committee had inspected the relevant communications in its own investigation since January 2021. However, it had not seen anything in them as problematic.

The report also says that some foreign directors raised concerns about the relationship with the Ministry of Economy, Trade and Industry, which was met with an attitude of distance: "Foreigners are strangers to Japan's conventional practices."

If such an attitude is tolerated, what can foreign investors rely on? Japan's stock market does not survive without foreign investors. It is time that the Ministry of Economy, Trade and Industry, which has taken a lead role in corporate governance reform, cleaned up its act. The Ministry of Economy, Trade and Industry is now facing the results of its plans and actions in the past: what goes around comes around.

The media are putting their finger on it. It should give foreign investors a logical explanation that makes sense to them. If the Ministry of Economy, Trade and Industry had acted for the national security, it should have come right out and said so dignifiedly.

(The Asahi Shimbun dated June 2021)

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