• Bloomberg, Reuters

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Toshiba Corp. shareholders voted on Thursday in favor of an independent investigation into allegations that investors were pressured ahead of last year's annual general meeting — a landmark win for corporate governance in Japan.

The vote marks only the fourth time that a shareholder motion has won approval in Japan and the first at a major company that is a household name, albeit one sullied by a string of scandals.

"This result shines a very public spotlight on the likelihood that EGMs, which in Japan can be called by a shareholder that has owned only 3% for 6 months, will probably be used more by activists," said Nicholas Benes, a corporate governance expert and representative director of the Board Director Training Institute of Japan.

The proposal from Effissimo Capital Management, an activist investor and Toshiba's biggest shareholder, was backed by proxy advisers and required a simple majority of votes at Thursday's extraordinary general meeting to pass.

A separate proposal by San Francisco’s Farallon Capital Management asking management to seek shareholder approval for how it uses capital was rejected at the meeting.

The success of the Effissimo motion will heap pressure on Toshiba’s board — which has struggled to win investors’ confidence since an accounting scandal resulted in the sale of its crown-jewel memory-chip business — and also show progress in a government-led push for better management and greater shareholder rights.

Effissimo, the secretive fund founded by former colleagues of Japanese activist investor Yoshiaki Murakami, has been Toshiba’s largest shareholder since 2017. It called for a probe into voting at the company’s AGM in 2020, where Effissimo says several investors were "unable to vote in a manner consistent with their intentions.”

At many shareholders meetings in Japan, management typically wins regardless thanks to the backing of the country’s institutional investors. But despite shareholders rejecting one motion, defeat for the board on Effissimo’s proposal puts chief executive officer Nobuaki Kurumatani, a company outsider from the banking sector appointed in the wake of the company’s tumultuous accounting scandals who barely won re-election in 2020, under pressure ahead of the next election to be held in the summer.

Voting irregularities

Effissimo tried last year to have its co-founder Yoichiro Imai named to Toshiba’s board, along with other directors. When that proposal was rejected and management’s own slate of directors appointed instead, it was seen as a setback for activists who sought more influence at the conglomerate after years of accounting scandals and business missteps.

However, suspicion soon followed that the vote count had not been entirely above board. One shareholder with a 1.3% stake reported that its votes weren’t counted, despite being mailed several days before the deadline. In September, the Financial Times reported that Hiromichi Mizuno, the former chief investment officer of the Government Pension Investment Fund and a board member of Tesla, spoke to Harvard University’s endowment fund ahead of the vote, after which the fund abstained from voting.

In a response to Bloomberg News, Mizuno questioned why people assumed Effissimo’s proposal refers to Harvard. Effissimo’s proposal doesn’t mention Harvard by name, referring only to a "large shareholder,” though in a presentation about the EGM the fund cites media reports which mention the university.

A representative for Effissimo didn’t immediately respond to a request for comment before the vote.

The suspicions surrounding the voting prompted Effissimo to break years of silence and call for an extraordinary general meeting, seeking "reassurance that there has not been an assault on the integrity of shareholder voting.”

"Failure to perform a thorough and independent investigation will set a harmful precedent for Toshiba and Japan as a whole,” the hedge fund said in its presentation on Wednesday. "Only an independent investigation will help restore confidence in Toshiba.”

Before the vote, Toshiba said it sees "no validity or reasonable grounds” to further investigate the matter by electing investigators given that its audit committee has already examined it. It said conducting an "unnecessary investigation” into the voting issue would disrupt the day-to-day operation of Toshiba and have a significant impact on the running of the company.

Capital plans

Days after Effissimo submitted its request in December, Farallon — another fund that usually keeps a low profile — joined the calls for a shareholder vote, this time asking management to seek shareholder approval for how it plans to allocate capital.

The U.S. hedge fund, which is the second-largest shareholder with a 5.8% stake, said there was a "lack of trust” between shareholders and management. It accused Toshiba of reneging on commitments detailed in a 2018 plan on how it would use its funds, and expressed concern about management’s plans to deploy its capital for M&A.

"We want the company to reach its potential and the key is rebuilding trust with shareholders and the market,” a representative for Farallon said by email.

Toshiba denied any major alterations to its capital allocation plans.

"No changes have been made to the policies since the formulation of the ‘Toshiba Next Plan’” in 2018, the company said in a March 16 presentation. Farallon’s proposal to return cash to shareholders if they don’t approve spending plans "will completely destroy all seeds for medium-to-long-term growth.”

Farallon’s motion was rejected by shareholders.

Corporate bellwether

Regardless of the results, the controversy has put the company, once synonymous with the global ascent of corporate Japan, back in the spotlight. It narrowly avoided delisting in 2017 after multibillion-dollar losses at its Westinghouse U.S. nuclear unit pushed liabilities beyond its level of assets, and the confrontation comes just months after it won promotion back to the Tokyo Stock Exchange’s first section.

Once the world’s second-largest memory chipmaker after Samsung Electronics Co., it was forced to sell its prized semiconductor business and take an infusion of cash from a large contingent of more vocal shareholders — a step which eased funding concerns but also led to the increased scrutiny that came to a head on Thursday.

Proxy firms Institutional Shareholder Services and Glass Lewis both advised investors to vote for Effissimo’s proposal to appoint three individuals to investigate the vote at 2020’s meeting. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., also backed the proposal.

The proxy advisers were split on Farallon’s proposal: Glass Lewis recommended voting for it, while ISS advised against, saying it is "overly prescriptive.” Still, the firm said the proposal’s presence on the ballot should further signal to management of "the urgent need to address the deteriorating trust of its shareholder base.”

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