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Takafumi Sato, president of Japan Exchange Regulation.
Toshiba in Turmoil

Toshiba pushed limits of TSE's rehab regime

Conglomerate averted possible delisting by a single vote

TOKYO -- Toshiba's recent escape from a Tokyo Stock Exchange watch list was far narrower than previously thought, highlighting the need for regulatory tweaks to handle particularly complex cases of wrongdoing.

Canceling the "security on alert" designation that could have ultimately cost the electronics conglomerate its spot on the bourse did not seem especially controversial. All governors at Japan Exchange Regulation "were agreed" that Toshiba "had shown substantial improvements" in corporate governance, President Takafumi Sato told reporters Oct. 11, the day before it lost the label. The final vote tally showed the governors 6 to 1 in favor -- an apparent show of support for keeping Toshiba on the TSE.

But the decision was far closer than the final tally makes it look. In discussions ahead of the vote, two of Japan Exchange Regulation's four outside governors fought lifting the alert designation, arguing for more time to gauge whether internal controls had actually improved. Had both remained opposed, the motion would have failed for lack of majority support among the outsiders.

Sato himself apparently worked to win the duo over the day of the vote, arguing that failing to decide would constitute an abandonment of the regulatory body's responsibility. One of the two was swayed -- enough to proceed.

But doubts linger. "I don't know if keeping Toshiba listed was the right decision," said one outside governor, Professor Emeritus Hidetaka Kawakita of Kyoto University. "Only time will tell."

Strategic shift

The TSE's philosophy on how to handle corporate wrongdoing has changed considerably over the past 15 years. When Seibu Holdings unit Seibu Railway and cosmetics maker Kanebo were kicked out in 2004 and 2005, punishment was seen as the best way to protect the principles of the market, and delisting was often the first response to severe infractions. But shareholders did not take kindly to the strategy. On top of a sliding stock price, delistings robbed them of the opportunity to trade their shares at all, the argument went.

The exchange now does all it can to avoid giving companies the boot, instead supporting their rehabilitation. The "securities on alert" system was introduced in 2007 as a means of enforcing regulations without imposing undue harm on shareholders, giving companies a period of time to turn themselves around under the bourse's supervision -- 18 months, under the latest rules.

While the designation limits such activities as fundraising, shareholders can continue to trade. Major companies with the resources to make improvements "hardly ever end up delisting," a former Financial Services Agency official said.

Toshiba's case was far more serious that what the system was designed to handle. The company was first placed on alert in September 2015 after years of bogus accounting came to light, putting the deadline for improvements at March 2017. The assumption was that business would improve during that time.

But evidence of faulty internal controls continued to pour out, including massive losses on American nuclear operations. By the time March came around, Toshiba was in a full-blown financial crisis.

Too big to handle

A year and a half was not nearly long enough to say whether Toshiba would or could be rehabilitated. "While the TSE says Toshiba has done the necessary minimum in terms of corporate governance, it does not say what the minimum is," a research chief at a Japanese asset management firm complained.

Yet delaying a decision for too long could draw criticism from investors. October was already seven months past the supposed deadline for improvement, and questions over what the TSE would do were fueling rampant speculation in Toshiba shares. "We had done our best to investigate," and keeping investors in suspense for too long as to whether a delisting was on the way "would have had negative impacts on the market," said Takeshi Hirano, Japan Exchange Regulation's standing governor for listed-company compliance.

Resolving this dilemma could take a fresh round of regulatory changes to account for scandals of Toshiba's magnitude. The TSE "needs a scheme for monitoring improvement after" the decision is made to keep an enterprise listed, according to Waseda University law professor Etsuro Kuronuma. Improvements designed for large-scale wrongdoing take time to become established, and periodic check-ins and progress reports for companies previously on alert could help put market players at ease.

Greater transparency is also in order. Releasing minutes from Japan Exchange Regulation's board meetings, for example, could give greater insight into the governors' thinking, helping the market predict how various scandals will turn out.

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