Opportunity and deception: how Toshiba lost its way


Toshiba’s board of directors remains in a state of disarray amid calls from activist investors for the corporation to be sold. In March, shareholders rejected a last-minute offer to save the company by breaking it up. How did a large corporation once come down to this?

I have 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 involved in shady dealings with government bureaucrats. Ministry of Economy, Commerce and Industry aimed at repressing activist shareholders. Now Toshiba is facing a new furor over a proposal to break up the corporation 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 convenience among Toshiba executives.

See: Toshiba’s ongoing fight to avoid bankruptcy

Let’s first look at the nature of the deception that has taken place over the past year, causing so much chaos at Toshiba, and then review the chain of deception that began with the accounting fraud and continued through to the Westinghouse bankruptcy. Despite having several opportunities to do good, Toshiba has proceeded to slide to new lows, never confronting the root cause of its problems. How did this come about?

Drop Triggered by Acquisition Item

On April 7, 2021, the Nikkei published a story in its online and print editions saying that a UK-based fund had proposed to take over Toshiba. According to the article, the fund proposed to buy all the shares of the company, thus taking it private. In response, Toshiba CEO Kurumatani Nobuaki issued a statement that morning saying the company was considering the proposal. And so began the year of Toshiba’s hoax. Three years had passed since the appointment of Kurumatani, a man who resigned from the position of vice president of Sumitomo Mitsui Banking Corporation to chair the Japanese subsidiary of the British fund mentioned in the Nikkei article, to the Toshiba board on a mission to turn the company around. Although Kurumatani was recruited to Toshiba based on his experience with hedge funds, he proved incapable of building rapport with activist investors and had a difficult time on the Toshiba board.

In reality, it was Toshiba that persuaded the largest foreign fund to become a major shareholder. After the bankruptcy of the nuclear subsidiary Westinghouse, Toshiba had suffered losses of more than 1 trillion yen, which brought it to the brink of insolvency. The capital injection allowed Toshiba to raise ¥600 billion, bringing its liabilities in line with its assets. Before the capital injection, Toshiba had 4.2 billion shares outstanding. By issuing an additional 2.2 billion shares, the company increased its number of shares outstanding by more than 50% in an aggressive move. The equity issue was bought by 60 investment funds, including so-called “vulture funds” seeking short-term gains, and activist investors known for lobbying boards to improve performance. These investors wanted to make enough profit to justify their risk and investment.

At the time, Toshiba was in the process of selling its semiconductor division, but the sale was taking longer than expected. That’s when a foreign stockbroker proposed a scheme that would see Toshiba receive a major injection of capital, which executives jumped on. This decision would come to haunt Toshiba. Activist investors demanded that the company liquidate as much as it could and quickly share the profits with shareholders, for example by paying a dividend. To ensure the full attention of the directors, at the general meeting of shareholders, the investors also nominated their own candidates to serve on the board of directors. Behind the scenes, however, Kurumatani and the rest of the board used their ties to METI bureaucrats to suppress the fund’s demands. The relationship between the board and the investors became even more antagonistic, to the point that it seemed difficult to reappoint Kurumatani to the position of CEO at the general meeting of shareholders. The Kurumatani-led junta had reached an impasse.

It was then that Toshiba was contacted by the British fund mentioned in the Nikkei Article. While the proposal was for a “partial” purchase without cash backing, it explicitly promised to maintain the current management slate. With those around Kurumatani seeing this as a sign that he would sell Toshiba to the investment fund he used to work for, opposition was guaranteed.

a lost year

At this point, Toshiba’s situation became more tumultuous. With the takeover proposal now up in the air, Kurumatani was forced to resign as chairman of the board, effectively losing his job. This was the only time one got the feeling that Toshiba had a working government. However, this did not last long. When the new chairman rejected the fund’s proposal, which he said “couldn’t even be described as a ‘proposal,’” it provoked a backlash from activist shareholders, who hoped to sell their holdings for a premium. This was immediately followed by the publication of the results of a legal investigation, carried out on the recommendation of activist investors, which exposed the murky relationship between METI and Toshiba’s board of directors. At the June shareholders’ meeting, which took place amid chaos, a proposal to reappoint previously ousted outside directors was removed from the agenda on the grounds that they had ignored the cozy relationship with METI. A proposal to reappoint the chairman was also rejected, and all directors who did not win the approval of activist investors were sacked. This brought a board from what should have been 13 directors to just 8.

After Kurumatani’s departure, Tsunakawa Satoshi returned as CEO. Tsunakawa had originally been appointed to the position of CEO before the accounting scandal broke in an attempt to rebuild the corporation’s reputation. However, his response to Westinghouse’s bankruptcy crisis led to his being branded indecisive, and he was relegated to chairman of the board, a position that does not come with the authority to represent the company. When Tsunakawa returned as CEO, it was as if the hands of a clock had turned back. Toshiba has said Tsunakawa’s appointment is temporary, pending the release of the mid-term management plan in the fall.

What Toshiba really should have done after Kurumantani’s departure was to strengthen its executive function. He should have selected 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 say what needed to be said to activist investors and who could be trusted even in the face of opposition. However, Toshiba was not in a position to rebuild top management from him. Behind the scenes, activist investors had urged Toshiba to sell, to put all of its shares up for auction and sell them to the highest bidder.

Selling Toshiba was something Tsunakawa’s team wanted to avoid at all costs, so they were quick to accept the proposal to split the company. While the proposal initially called for a division into three parts, this was not well received and the proposal was therefore 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 big capital increase. When the proposed division of the company was rejected at an extraordinary meeting of shareholders, Toshiba went back to square one.

The culture of deception dates back to accounting fraud

Looking back over the last year, I am horrified to realize how much time Toshiba has lost. People are right to criticize Kurumatani’s behavior. However, does the fact that Kurumatani, who was an outsider, came to Toshiba from a bank mean that Toshiba staff did nothing wrong? I do not think so. After all, it was the Toshiba executives who obediently followed Kurumatani’s instructions.

Deception and expediency are ingrained in Toshiba’s culture and have been since the time of the accounting scandal. It was clear that the underlying cause of the accounting fraud was Westinghouse’s poor performance. While Toshiba stated that it would turn the page and implement measures to ensure the scandal never repeats itself, it has continued to ignore the underlying cause of Toshiba’s problems. Executives at the firm resigned over the accounting scandal in July 2015, and Westinghouse’s impending insolvency became apparent in December 2016. Toshiba spent 18 months misleading everyone that Westinghouse had no financial problems, deepening its wounds. .

In March, Tsunakawa stepped down as CEO and was replaced by Shimada Tarō. According to Toshiba, the Shimada board is also temporary. Since Shimada’s board rejected the proposal to break up 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 that is best for our various stakeholders, including shareholders.” This is interpreted to mean that Toshiba will be put out to tender and the best takeover bid will be selected. The statement came a year after the Nikkei scoop on the half-baked takeover bid for the British fund.

Toshiba must first beef up its executive function in preparation for the June shareholders’ meeting if any high-level reform proposals are to be trusted. And yet, instead of reinforcing its executive, Toshiba is currently trying to go ahead with the big sell-off with its current board in place. Whichever offer is “best” for Toshiba’s activist shareholders can be pursued. However, it remains questionable whether such a proposal will also be better for the other stakeholders.

(Originally published in Japanese. Banner photo: Shareholders addressing Toshiba’s extraordinary shareholders’ meeting on March 24, 2022 in Shinjuku, Tokyo. © Kyodo.)


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