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Toshiba in turmoil

Toshiba shareholders oust board chairman

Nagayama rejection at annual meeting seen as test of Japan corporate governance

Toshiba's annual general meeting was seen as a test of corporate governance.   © Reuters

TOKYO -- Toshiba shareholders have voted to remove board chairman Osamu Nagayama at an annual general meeting that was seen as a test of corporate governance in Japan.

The company's investors also removed a member of Toshiba's audit committee as the Japanese conglomerate faced shareholders for the first time since the release of an independent probe into governance at the company.

The ousting of a board chairman by investors is a rarity in Japan, and Nagayama's removal is a win for investors who had expressed discontent over his nomination. It signals shareholders' strong concern over the probe's findings and loss of trust in the board.

Toshiba promised to respond with further changes. "The company recognizes the seriousness of the rejection of some candidates for directors," it said in a statement after the meeting.

The investigation, released on June 10, found that Toshiba executives colluded with Japan's trade ministry to pressure shareholders over their votes at last year's general meeting. Toshiba wanted to curb the influence of activist investors.

The report's publication sparked calls for a major shake-up of the board of one of Japan's best-known companies, one that plays a key role in nuclear power and other strategic industries.

Osamu Nagayama pictured at a news conference on June 14. His removal as Toshiba's board chairman is a win for investors who were unhappy at his nomination. (File photo by Reuters)

The independent probe, conducted by three lawyers, details how Toshiba allegedly coordinated with officials from the Ministry of Economy, Trade and Industry to try to block activist shareholders from submitting proposals and exercising their voting rights.

At the heart of the probe was Toshiba's largest shareholder, Effissimo Capital Management. The Singapore-based activist fund had proposed the independent investigation after questioning the voting results at last year's AGM.

After being authorized at an emergency general meeting in March, the lawyers concluded that Toshiba's AGM last July was "not fairly managed."

Toshiba responded by removing two of its directors from its list of board nominees for this year's AGM and by vowing to reconstitute and diversify the board to include more foreign representatives.

However, shareholders were still critical of Toshiba's nomination process and its revised board candidates, which still included Nagayama and Nobuyuki Kobayashi, an audit committee member who had taken part in a previous investigation of last year's AGM that found no problems.

Kobayashi was voted down along with Nagayama at Friday's meeting. In total, 11 board member nominees faced shareholder votes.

Influential shareholder advisers such as ISS and Glass Lewis had recommended against reappointing Nagayama, the former CEO of Chugai Pharmaceutical. Effissimo called the conglomerate's board "ineffective," while shareholders like 3D Investment Partners and Norges Bank Investment Management had expressed opposition to Nagayama's reappointment.

3D said after the meeting: "We hope that today's AGM marks the beginning of a new era at Toshiba -- one that will be marked by a focus on value creation, transparency to all stakeholders and a renewed commitment to building trust with shareholders."

3D said it was "optimistic about the future and Toshiba's potential".

During the general meeting, one investor at the venue questioned Nagayama's responsibility for failing to apply the lessons of past scandals and asked of Nagayama: "Is he somebody that can provide guidance to correct what has been revealed?"

President and CEO Satoshi Tsunakawa, who apologized for Toshiba's governance failures, expressed confidence in Nagayama.

"The board chairman," Tsunakawa said, "immediately took action after the probe by removing two candidates from today's slate of nominees and [calling] for the formulation of measures to prevent any recurrence."

Nagayama's removal is likely to cause further confusion at Toshiba, which must now find a new board chair to lead the company's governance improvement.

Toshiba's annual general meeting in Tokyo on June 25. Around half the company's shares are owned by foreign investors.   © Reuters

"Details of changes in directors and officers, including the composition of each committee and the details of the executive officers, will be announced based on the results of the resolution at [a board meeting]," Toshiba said in a statement following the annual meeting.

"I think changing the board members will lead to confusion and is not a positive outcome," one fund manager in Tokyo said. "I don't think changing the board will magically improve Toshiba's governance. It is more about how the company plans to instill governance in its organization and be transparent."

Toshiba has been plagued with governance failures for years, starting with a case of accounting fraud in 2015. After the company raised 600 billion yen ($5.4 billion) from as many as 60 foreign investors in 2017 it faced increasing demands from activist shareholders to enhance governance.

Currently, around half of Toshiba's shares are owned by foreign investors.

In recent years, significant issues around corporate governance have been raised in Japan. Before Toshiba's probe, Nissan Motor was embroiled in a scandal surrounding former Chairman Carlos Ghosn.

However, Jamie Allen, founding secretary-general of the Asian Corporate Governance Association, said: "Toshiba's issue has to be balanced against the improvements that have been made in corporate governance in Japan."

Japan adopted its corporate governance code in 2015. It was updated this month to add provisions on human rights and encourage the promotion of women and foreign employees.

"Clearly there is still room for improvement," Allen said. "But to say that the whole of Japan or the whole of Japanese corporate governance is bad because of Toshiba is overly simplistic."

Shares in Toshiba were trading down 1.9% around 10 a.m. when the general meeting began. They jumped up 1.7% after Nagayama's removal was announced before closing down 0.6%.

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