The inflammatory Toshiba report may finally change corporate Japan

For the past 17 weeks, Japan’s hit Sunday night show has dramatised the life of Eiichi Shibusawa — face of the new Y10,000 note and “father of Japanese capitalism”. The show still has months to run, but we already know how it ends: Japan emerging from the 19th century with a unique, ethically and socially superior brand of stakeholder capitalism whose qualities resonate powerfully in the present day.

It is a cosy mythology, which Toshiba, via its epic machinations with the government to suppress shareholder rights, may have just pulverised.

Perhaps the thorniest challenge in the 147-page report on Toshiba published last week by an independent panel of investigators looking into last year’s annual shareholder meeting, is working out who comes off worst. The choice includes Toshiba’s management, the Ministry of Economy, Trade and Industry (METI), the superstar former investment head of Japan’s $1.6tn pension fund Hiromichi Mizuno, potentially Prime Minister Yoshihide Suga and, critically, Japan’s global image as an investment destination. Nobuaki Kurumatani, who resigned as Toshiba’s chief executive in April, probably edges it.

Beyond that, the really awkward question is whether the past six years of sloganeering and apparent reform, during which Japan has sought to convince the world of its commitment to governance and stewardship, have been the sham that pessimists always feared it was beneath the superficial signs of progress.

The villain-rich document eviscerates a collaboration between the government and Toshiba management in which both parties seem to view vocal and activist shareholders as a foe. Toshiba’s 2020 AGM, it concludes, was not fairly run. The collusion was focused on leaning on particular large shareholders to change their opposition to a knife-edge AGM vote on which Kurumatani’s survival hinged. One executive, it alleges, called on the trade ministry to “beat up” large activist shareholders on its behalf. Another highlighted the way in which foreign funds were “scared” of the Japanese authorities and implied this could be weaponised against them.

The report suggests that certain METI officials believed that leverage over foreign activists was available through the Foreign Exchange and Foreign Trade Act — a law whose revision in 2019 the FT warned could have that effect. A subsequent letter to the FT from the vice minister of finance for international affairs reassured readers that activists are welcome to engage with Japanese companies to increase corporate value.

The investigation, which only happened because shareholders forced it upon the company, is damning in a way that Japanese reports rarely are: dishonesty, subterfuge and hypocrisy emerge as the culprit where normally incompetence, groupthink and unquestioning hierarchical structures are blamed. In an unprecedented move, four Toshiba board members released a statement describing the report as “surprising, disappointing and, in some areas, deeply disturbing”.

As the four noted, the report’s detailed exposure of wrongdoing makes an especially painful contrast with Toshiba’s original internal investigation of the matter — a whitewash that has been made to look like a masterclass in the sidelining of shareholder interests and contempt for corporate governance.

For all this, the report is a document whose blast radius depends on the beholder. For those who see its findings as specific to one extraordinary corporate situation, and who already thought that Toshiba was an irredeemable governance horror story, the air is dense with smoking guns. To those who have long suspected that METI is predisposed to interference and even conspiracy, it does little to allay concerns that the ministry would act similarly with other Japanese companies if it felt the need. It is not hard to imagine Carlos Ghosn, who has long alleged that METI is among the conspiracists precipitating his 2018 arrest, using this report to fortify that conviction.

But again the strong temptation is to view the whole affair as revealing of a broader truth: that the fundamental attitudes of corporate Japan, and the government officials most directly engaged with it, have in a great many cases budged only minimally in the direction of greater care for shareholders.

That conclusion, for all of its negativity, may ultimately be a useful thing if, as one of Toshiba’s largest shareholders said, the report and its inflammatory nature now becomes the catalyst for real change. The risk around Toshiba’s long stretch of misery, which began with an accounting scandal in 2015 and brought the company to the brink of collapse a few years later, has always been that it would be treated as an eye-popping outlier rather than as sitting on the same poor governance spectrum as much of corporate Japan.

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