Air-punching shareholders teach Toshiba a lesson

By lunchtime last Thursday, my phone was bubbling with texts from Toshiba’s effervescent register of investors. Minutes earlier on March 18, they had triumphed in what would, not so long ago, have been a fantasy showdown with the conglomerate’s management, winning a shareholder-proposed motion for the first time at a major Japanese firm. 

The tone of celebration after shareholders humbled Toshiba into convening an independent panel to investigate voting irregularities at last year’s AGM ranged from circumspect to air-punching. But everyone (Japanese, and foreign, large and small) agreed that a balance long tilted towards companies had been tipped the other way and that rights had, at last, been righteously asserted. 

The significance of this happening at a household name like Toshiba is huge, as is the fact that heavyweight global funds — Norges Bank, California Public Employees’ Retirement System and others — voted with the activist. A vulnerability of management thinking has been exposed, not just for this troubled industrial icon, but for much of corporate Japan and, according to some texters that day, for other equity markets in the region. We have sent a message, fizzed one, “about who actually owns a listed company in Asia”.

The extraordinary — and still unresolved — doings at Toshiba highlight a visibly changing environment. Trackers of long-term trends in shareholder activism noted a year ago how sharply campaigning had increased in Asia, rising from a 5 per cent share of global activity in 2013 to 13 per cent in 2020 as South Korean and Singaporean companies became targets. Hong Kong, despite its size as a market, is still a minnow in activism. Japan rose to become the world’s second-largest market for activist events after the US last year, according to the brokerage CLSA. The resumption after the pandemic lull has good momentum, noted the research firm Activist Insight in its latest survey, after falling less in Asia than elsewhere.

Among the attractions, say activists who have initiated campaigns in the region, is that companies have the flabbiness you would expect from the long-term unthreatened. They also tend to be less well mentally fortified against shareholder stridency than companies in the US or UK. Another is the tailwind of the ESG investment boom and the legitimised lexicon of criticism it provides. And there has been the surprisingly potent framework of rights that shareholders in Japanese companies have long possessed but, for complex reasons, felt unable to exercise until now.

That is spreading, not least because the large Asian government pension funds are more heavily invested in their domestic stock markets. South Korea’s National Assembly recently passed an amendment to the commercial code that significantly strengthens minority shareholder rights, and which Nomura analysts predicted would encourage activists to seek to sway management policy more aggressively. 

But the Toshiba episode transcends this. The company’s peculiar vulnerability to activism is the result of its desperation to remain listed at all costs. In 2015, Toshiba was caught in a major accounting fraud, followed by a debilitating collapse of its US nuclear business and the financial crisis. It was demoted from the first section of the Tokyo Stock Exchange and was on the brink of a full delisting until Goldman Sachs stepped in with an emergency $5.4bn issuance of new shares. The price of that deal (in addition to the fees exacted by Goldman) was a redrawn shareholder register with a hard credo that listed companies belong and are answerable to their owners. 

Companies in Japan, South Korea, Hong Kong and elsewhere in the region have been given leave to forget the pungency of this purist version of shareholder capitalism. This has been thanks to large blocs of docile investors, networks of cross shareholdings, or a comfort that some soft-focus local version of shareholder capitalism applies. 

Toshiba could very easily have given its largest shareholder, Effissimo, the independent investigation it asked for without the humiliation of an extraordinary general meeting, a failed anti-activist campaign by Goldman Sachs and a vote that unified activists and the traditionally more laissez-faire investors against management. But, in its heart, this is a company that cannot abide the idea of being pushed around by its owners. For most of its existence, Toshiba would have got away with that, but it badly misjudged the times, costing it dear. Its intransigence has granted the most visible ever success to an exercise of shareholder rights, inadvertently drawing a road map that investors across Asia may now choose to follow.

leo.lewis@ft.com