Hedge funds, the real work on Toshiba starts now

AFTER a scathing, tell-all report laid bare allegations of collusion with top government officials, Toshiba Corp's shareholders took the bold and unexpected step of removing the chairman of the board. They should not stop there.

On Friday, shareholders rejected chairman Osamu Nagayama's reappointment, along with that of another director, at the company's annual general meeting. The move is nothing short of revolutionary for the staid and storied Japanese company.

But even with Mr Nagayama gone, hoping for better corporate governance will be a fool's errand. While the hedge funds that have been actively pushing for change at Toshiba prevailed, it is time for shareholders, including the likes of BlackRock, to get involved too, and ensure this victory pays off.

Earlier this month, an independent report, commissioned by the company's largest shareholder, detailed how Toshiba allegedly worked with the government to pressure its investors in a bid to influence board selection during a July 2020 meeting.

The findings cast a shadow over the country's commitment to corporate governance reforms over the past few years.

While Toshiba has apologised since the publication and vowed to improve governance, a couple of lingering issues show how deeply rooted its problems remain.

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First, the latest report stood in contrast to an internal investigation in February that found no evidence the company was involved in any effort to suppress shareholders.

True, that internal probe was conducted under the previous chairman, Nobuaki Kurumatani, who resigned in March and was named throughout the most recent findings. But board members have not changed drastically since then. Mr Nagayama's departure should be seen as a first step, not a final one.

Second, if Toshiba really wanted to chart a new course it would have replaced the old guard - completely and earlier. One of the longest-serving members of the board is company insider and current chief executive officer (CEO) Satoshi Tsunakawa.

He was first thrust into the role of CEO in 2016 after an accounting scandal the previous year, when he was a vice-president.

He attempted to restructure the company and helped orchestrate a capital raising in 2017 to avoid a delisting, after which he was made president and chief operating officer.

When his successor as CEO suddenly resigned in March, Mr Tsunakawa was quickly elevated back to his current position. The reflex to resort to an old timer in a moment of distress raised questions about the rigour of Toshiba's selection process.

Since the independent report was published, the company has said it will accelerate its search for a successor to Mr Tsunakawa. Toshiba, and its shareholders, deserve more than remnants of the past.

Friday's outcome accords with the latest recommendations of proxy advisers Glass Lewis & Co and Institutional Shareholder Services.

On June 10, after listing factors that "demonstrate continuing and disconcerting lack of candor with... investors," Glass Lewis said it considered the company's "penchant for the taciturn falls substantially short of any reasonable standard of transparency, particularly given decidedly troubled history".

Ultimately, the more than century-old company needs a thoroughly fresh start and real governance. That may be achieved by kicking off a fair privatisation process that also benefits existing shareholders, or by instituting a new management team and board with better priorities. A new chairman could help those efforts, but cannot act alone.

Until we see more widespread upheaval at the highest levels of management, expect more of the same. So far, Toshiba has shown a tendency to drag its feet. Shareholders need to keep pushing and hold the firm to its latest promises.

If hedge funds and deep-pocketed minority investors want more than another few years of unwinding a troubled past, they should quickly realise that the fight has just begun. BLOOMBERG