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Toshiba in turmoil

Toshiba bows to activist pressure with board reshuffle

More outside directors seen protecting investor interests as company rebuilds

Toshiba shareholders will elect directors at a general shareholders meeting scheduled for late June.
Toshiba shareholders will elect directors at a general shareholders meeting scheduled for late June.   © Reuters

TOKYO -- Toshiba is adding more outside voices to its board in response to the growing influence of activist shareholders, putting pressure on its leadership to satisfy investors as it navigates a tricky recovery.

The Japanese conglomerate on Monday announced a slate of 12 board nominees that includes 10 outside directors, up from seven now. Four of the 10 hail from outside Japan, marking the first time since 1942 that Toshiba has named foreigners to its board. The proposal will be put to shareholders for approval at next month's general meeting.

"We will use the new directors' knowledge and motivation to solidify Toshiba's progress from crisis to growth," President Nobuaki Kurumatani said.

The list brings together experts in such areas as global expansion and mergers and acquisitions in an effort to help Toshiba balance restructuring and new growth. The non-Japanese nominees include Ayako Hirota Weissman, senior vice president at U.S. investment advisory firm Horizon Kinetics, and Jerry Black, senior adviser at Japanese retail giant Aeon.

The new appointments would replace directors brought in over the last few years to help Toshiba overcome its recent crises, including a 2015 accounting scandal and massive losses on U.S. nuclear operations. Mitsubishi Chemical Holdings Chairman Yoshimitsu Kobayashi will stay on as chairman of the board and is expected to serve in that capacity as a liaison between the new directors and Toshiba executives.

The reshuffle owes to the growing power of foreign investment funds that bought into Toshiba during its December 2017 capital increase.

New York-based King Street Capital Management, which owns more than 5% of Toshiba, sent a letter in March pushing for the nomination of new independent directors including King Street co-founder Brian Higgins. The candidates' "capital allocation, investing, M&A and turnaround expertise," among other qualities, would "maximize the chance of successfully revitalizing Toshiba," the letter said.

The fund dangled the prospect of a formal shareholder proposal on the matter if a "consensual resolution" could not be reached.

Toshiba President Nobuaki Kurumatani explains targets through fiscal 2023 at a news conference in Tokyo on May 13. (Photo by Yoichi Iwata) Toshiba President Nobuaki Kurumatani explains targets through fiscal 2023 at a news conference in Tokyo on May 13. (Photo by Yoichi Iwata)

There was initially resistance within Toshiba to the idea of appointing foreign independent directors, with one current external director saying it was "too soon" for the "conservative" company to do so.

But the conglomerate faced pressure from not only King Street, but also other overseas funds urging it to remove outside directors involved in the crises and replace them with foreign experts capable of crafting a new growth strategy.

Toshiba had worried that a formal proposal from King Street would bring the conflict out into the open and make the shareholders meeting unnecessarily dramatic. After quiet discussion with investors, Toshiba drew up its own slate of directors with more names from outside the company and some from outside Japan, letting it avoid having King Street's highly influential co-founder sit on its board.

Though Toshiba and its activist shareholders are expected to cooperate for now, the new directors could turn up the heat on Kurumatani and other executives should the company continue to struggle.

Toshiba still faces a tough operating environment. The system chip business remains in the red amid China's economic slowdown, and the company has decided to cut about 350 jobs from that segment via an early retirement program.

While the company has taken steps to shed unprofitable businesses, including bowing out of overseas nuclear power plant construction, it still has other money-losing operations to deal with. Plans to sell its liquefied natural gas business to a Chinese buyer fell through last month amid uncertainty over regulatory approvals.

Toshiba is positioning social infrastructure, such as water treatment facilities, and efficiency-boosting services using the "internet of things" and artificial intelligence as its areas of focus going forward. Yet it still lacks an earnings driver to replace its spun-off memory chip business.

In its medium-term management plan that started in April, Toshiba set an ambitious target of 400 billion yen ($3.64 billion) in group operating profit in fiscal 2023, up from just 35.4 billion yen last fiscal year. It forecasts operating profit nearly quadrupling this fiscal year to 140 billion yen, thanks to improving profit margins in every segment.

But should Toshiba's earnings fail to recover as hoped, new outside directors could argue that boosting shareholder returns would be a more productive use for the company's 1 trillion yen-plus cash hoard.

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