Opportunity and deception: how Toshiba got lost


Toshiba’s board remains in a state of disarray over calls from activist investors to sell the company. In March, shareholders rejected a final offer to save the company by splitting it up. How was a big business reduced to this?

I’ve been covering Toshiba since news of the accounting scandal broke in 2015. The accounting scandal was followed by the bankruptcy of Toshiba’s US nuclear reactor subsidiary, Westinghouse, and revelations that Toshiba was engaged in questionable relationships with bureaucrats from the Ministry of Economy, Trade and Industry aimed at suppressing shareholder activists. Now Toshiba is facing fresh furor over a proposed spin-off from the company amid demands from major shareholders to sell the company to private buyers. At the root of all these problems is a culture of deception and opportunism among Toshiba executives.

See: Toshiba’s ongoing struggle to avoid bankruptcy

Let’s first look at the nature of the deception that took place last year causing so much chaos at Toshiba, and then look back at the chain of deception that began with accounting fraud and continued through the bankruptcy of Westinghouse. Although it had several opportunities to mend, Toshiba instead plummeted to new lows, never confronting the root cause of its problems. How did it happen?

Drop triggered by takeover item

On April 7, 2021, the Nikkei published an article in its online and print editions which indicated that a UK-based fund had offered to take over Toshiba. According to the article, the fund proposed to buy all the shares of the company, thus privatizing it. In response, Toshiba CEO Kurumatani Nobuaki released a statement that morning indicating that the company was considering the proposal. And so began Toshiba’s year of disappointment. Three years had passed since the appointment of Kurumatani, a man who resigned from his position as vice-president of Sumitomo Mitsui Banking Corporation to chair the Japanese subsidiary of the British fund mentioned in the Nikkei article, to Toshiba’s board of directors on a mission to turn the company around. While Kurumatani was recruited by Toshiba based on his experience with investment funds, he proved unable to establish good relationships with activist investors and had a difficult time on the Toshiba board. .

It was actually Toshiba that persuaded the big foreign fund to become a major shareholder. After nuclear subsidiary Westinghouse went bankrupt, Toshiba suffered losses of more than 1 trillion yen, bringing it to the brink of insolvency. The capital injection enabled Toshiba to raise 600 billion yen, aligning its liabilities with its assets. Prior to the capital injection, Toshiba had 4.2 billion shares outstanding. By issuing an additional 2.2 billion shares, the company increased its number of outstanding shares by more than 50% in an aggressive move. The capital issue was bought by 60 investment funds, including “vulture funds” after short-term profit, and activist investors known to lobby boards to improve performance. These investors wanted to earn enough profit to justify their risk and investment.

At that time, Toshiba was in the process of selling off its semiconductor division, but the sale was taking longer than expected. It was then that a foreign stockbroker proposed a scheme that would see Toshiba receive a large capital injection, which the executives jumped on. This decision would haunt Toshiba. Activist investors demanded that the company liquidate all it could and quickly share the proceeds with shareholders, such as by paying a dividend. In order to ensure the full attention of the directors, during the general meeting of shareholders, the investors also proposed their own candidates to sit on the board. Behind the scenes, however, Kurumatani and the rest of the council used their ties to METI bureaucrats to suppress the fund’s demands. The relationship between the board and the investors became even more adversarial, to the point that it was proving difficult to re-elect Kurumatani as CEO at the general meeting of shareholders. The board headed by Kurumatani was at an impasse.

It was then that Toshiba was approached by the British fund mentioned in the Nikkei article. While the proposal was for a “half-baked” buyout with no cash collateral, it explicitly promised to maintain the current management roster. Kurumatani’s entourage seeing it as a sign that he would sell Toshiba to the investment fund he worked for, opposition was guaranteed.

A lost year

At this point, Toshiba’s situation became more tumultuous. With the takeover proposal now in the air, Kurumatani was forced to step down as chairman of the board, thereby losing his job. It was the only time we felt that Toshiba had functional governance. This however did not last long. When the new chairman rejected the fund’s proposal, which he said “couldn’t even be called a ‘proposal,'” it provoked a backlash from activist shareholders, who hoped to sell their holdings for a premium. This was immediately followed by the release of the findings of a judicial inquiry, carried out on the recommendation of activist investors, which revealed the troubled relationship between METI and Toshiba’s board. At June’s chaotic shareholders’ meeting, a proposal to reappoint previously dismissed outside directors was removed from the agenda on the grounds that they had ignored the relationship intimate with the METI. A proposal to reappoint the chairman was also rejected, and any directors who did not meet with the approval of activist investors were fired. This reduced a board of what should have been 13 directors to just 8.

After Kurumatani’s departure, Tsunakawa Satoshi returned as CEO. Tsunakawa had originally been appointed as CEO before the accounting scandal broke in an effort to rebuild the company’s reputation. However, his response to Westinghouse’s bankruptcy crisis led him to be branded undecided and he was relegated to chairman of the board, a position that does not grant him the power to represent the company. . When Tsunakawa returned as CEO, it was as if the hands of a clock had been wound up. Toshiba said Tsunakawa’s appointment was temporary, pending release of the mid-term management plan in the fall.

What Toshiba should have done after Kurumantani left was to strengthen its executive function. He should have chosen a new leader, worked with Tsunakawa to come up with a management plan, and had Tsunakawa leave quickly. Toshiba also needed outside directors who could speak up to investors who were activist and trustworthy even in the face of opposition. However, Toshiba was unable to rebuild its top management. Behind the scenes, activist investors had been urging Toshiba to sell, put all its shares up for auction and sell them to the highest bidder.

Selling Toshiba was something the Tsunakawa team wanted to avoid at all costs, so they jumped at the proposal to split up the company. While the proposal initially called for a three-way split, this was not well received and so the proposal was revised to create two new companies. And so, instead of doing what it should have done, Toshiba accepted the proposal out of desperation, as it had done with the huge capital raise. When the company’s proposed split was defeated at a special meeting of shareholders, Toshiba was back to square one.

The culture of deception dates back to accounting fraud

Looking back on the past year, I am dismayed to realize how much time Toshiba has wasted. People are right to criticize Kurumatani’s conduct. However, does the fact that Kurumatani, who was a foreigner, came to Toshiba from a bank mean that Toshiba staff themselves did nothing wrong? I do not believe. After all, it was Toshiba executives who dutifully followed Kurumatani’s instructions.

Deceit and opportunism have been ingrained in Toshiba’s culture, and have been since the days of the accounting scandal. It was clear that the underlying cause of the accounting fraud was Westinghouse’s poor performance. While Toshiba said it would move on and implement measures to ensure the scandal never happened again, it continued to ignore the underlying cause of its problems. Company executives resigned following the July 2015 accounting scandal and Westinghouse’s impending insolvency became apparent in December 2016. Toshiba spent 18 months fooling everyone into saying Westinghouse had no financial problems , which aggravated his injuries.

In March, Tsunakawa resigned as CEO and was to be replaced by Shimada Tarō. According to Toshiba, Shimada’s board is also temporary. Shimada’s board of directors having rejected the proposal to split the company, Toshiba is now preparing a new reform proposal.

Then, on April 7, Toshiba’s eight directors said in a statement that they would “identify the privatization offer best suited to our various stakeholders, including shareholders.” This is interpreted to mean that Toshiba will be put out to tender and the best buyout offer will be selected. The declaration came one year to the day after the Nikkei scoop on the half-baked takeover of the British fund.

Toshiba must first strengthen its executive function in view of the general meeting of shareholders in June, if any reform proposal at the highest level is to be trusted. And yet, rather than bolster its executive, Toshiba is currently trying to go through with the big sale with its current board in place. The “best” offer for activist Toshiba shareholders can indeed be pursued. However, it is debatable whether this proposal will also be the best for other stakeholders.

(Originally published in Japanese. Banner Photo: Shareholders attend the Toshiba Extraordinary General Meeting of Shareholders on March 24, 2022 in Shinjuku, Tokyo. © Kyodo.)


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