The issues raised in an investigation into Toshiba’s 2020 annual meeting should frighten activists betting on big profits in Japan.
An Investigation Into Toshiba
Yesterday’s report, prepared by a trio of lawyers appointed by shareholders, said Toshiba had worked with the Ministry of Economy, Trade, and Industry (METI) and prime minister’s office to block one activist’s proposals and influence the voting of two other shareholders, and that its audit committee had failed to act as a check on management. The company, which complied with the investigation and paid for its conduct, said it would “carefully review this investigation report and plans to announce its comments… at a later date.”
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Going into 2020, Toshiba was a compelling and complicated activist proposition. Five activists were on the stock register, and in 2019 it reconstituted its board with seven new nominees after conversations with shareholders. But investor demands continued, including for buybacks, better compliance, and improved performance, and last year Effissimo Capital Management and 3D Investment Partners separately nominated directors.
Those nominees ended up receiving between 32% and 44% of the vote on July 31. Neither dissident voted for each other’s candidates, Effissimo because it was informed that to do so would be a breach of its covenant not to influence matters of national security while invested in Toshiba, and 3D on being warned that it could be ensnared in regulatory troubles by association with Effissimo.
A third shareholder, the Harvard University endowment, was unhappy that its attempts to engage with Toshiba were ignored for three months. It was allegedly told five days before the meeting that there were “certain risks” to voting for the dissident proposals by a METI adviser, anonymized in the report but identifiable through references to (since deleted) Twitter posts and press reports as Hiromichi Mizuno, who also held a position at Harvard Business School. Though the report confirmed that Harvard found his approach to be extremely inappropriate, it did not find that Mizuno used intimidating language.
Frustrating The Activists
A running theme of the report is that Toshiba conspired to frustrate the activists, and that government was a willing partner. “Toshiba, so to speak in unison with METI, devised a plan to prevent Effissimo from exercising its shareholder proposal right…, devised a plan to unfairly influence the content of 3D’s exercise of voting rights, and effectively asked [Mizuno] to negotiate with [Harvard] to change its voting behavior to include the option of not exercising any of its voting rights,” the report concluded.
The company also encouraged METI to “beat them for a while,” meaning Effissimo, which the ministry did. It second-guessed the activist, encouraged it unsuccessfully to settle for minor governance changes, and chided the fund for approaching Toshiba directors without clearance. Approval for the nominations came just a day before the deadline.
Of bigger potential controversy is the involvement of Prime Minister Yoshihide Suga, who supposedly said in regards to the activists that the government could use the Foreign Exchange and Foreign Trade Act to “get them” a few days before the annual meeting. He has denied the allegation but the implication could hamper attempts to attract more foreign investors into Japan.
There are some cold comforts. Toshiba’s CEO clearly overestimated how far METI would go to block the activist campaigns and the company was not blamed for problems with the vote counting. The report cannot be said to have proved that Effissimo or 3D would have won the election, although it presents a strong case for a rematch.
A Company Vulnerable To Activism
Moreover, Toshiba is a unique company in unusual circumstances. Some of those factors made it vulnerable to activism – a compliance scandal in 2017 relegated it to the second tier of the Tokyo Stock Exchange and raised questions about its governance, while a big equity issuance changed the percentage of shares held by foreign investors from 38% to 73%. However, it remains a strategically important company on account of its nuclear businesses and came to be seen as a key partner of government during the coronavirus pandemic. It is scheduled to be upgraded to the first tier of the stock exchange later this year.
But the upshot of the report is that government’s denial that the Foreign Exchange and Foreign Trade Act would be used to hamper shareholder democracy now looks a little hollower. Toshiba has been talked of as a potential takeover candidate for a private equity firm and tried to strike a deal with CVC earlier this year. That would close the book, and perhaps leave everyone better off financially, but not answer questions about the outlook for activists.
A new shareholder election would be more satisfying, although the battlefield has changed. Toshiba’s then-CEO, Nobuaki Kurumatani, has since departed. Harvard’s shares have been hoovered up by 3D, and Effissimo may feel its rather cryptic intentions have been satisfied by the sunlight shone on Toshiba’s internal machinations.
But given that there may be pushback against some of the report’s findings and the glacial pace of change in Japanese corporate governance, a theme my colleague Iuri Struta alluded to last week, other activists should continue to watch Toshiba closely.
Josh Black, Editor-in-Chief, Insightia
An Innovation In The 2020 Proxy Season
Shareholder proposals combining requests for lobbying transparency with climate change were an innovation in the 2020 proxy season but have proved an even bigger hit this year. Support for such proposals has skyrocketed from an average of 44% in 2020 to 67.5% so far this year, according to Proxy Insight Online data.
The climate lobbying proposals seek information on how corporate political spending aligns with the goals of the Paris Agreement, which the U.S. re-joined earlier this year, and four out of five proposals subject to a vote at U.S.-listed companies have received majority support. Those companies were Norfolk Southern, United Airline Holdings, Exxon Mobil, and Phillips 66.
By comparison, just one of the three proposals filed at U.S.-listed companies in 2020 was successful (at Chevron). Two fell slightly short of majority support at Delta Air Lines and United Airline Holdings.
“Corporate values are very important now, especially in relation to ESG issues,” said Bruce Freed, president, Center for Political Accountability, in an interview with Proxy Insight Online. “Investors are paying close attention to whether a company’s political spending aligns with their policies and proposed values on climate change, the environment, and other areas.”
Requests For Lobbying Transparency
The Presbyterian Church’s proposal, which asked United Airline Holdings (UAL) to disclose how its lobbying aligns with Paris Agreement goals, more than doubled in support from 31.5% in 2020 to 65.4% at its May 26 annual meeting, despite facing opposition from management.
A similar proposal, filed by Friends Fiduciary, which expressed concerns regarding Norfolk Southern's funding towards the American Coalition for Clean Coal Electricity, which “works to discredit climate science and oppose most federal climate policies,” also won 76.4% of votes in its favor at the S&P 500 railroad company’s May 13 annual meeting.
Aberdeen Standard Investments supported both climate lobbying proposals, arguing that corporate lobbying contrary to Paris Agreement goals is “effective in creating climate policy inertia and impeding the transition to net-zero carbon economies,” while Allianz Global Investors suggested such disclosure is increasingly important, “in light of the increasing risks related to climate change.”
Proposals of this kind are likely to continue to win impressive levels of support, running off the increased support lobbying proposals are receiving following the U.S. Capitol storming on January 6, as well as pressure on fund managers to ensure portfolio companies are engaging with Paris Agreement goals.
The Importance Of Paris-Aligned Lobbying
BlackRock supported requests for climate-related lobbying disclosure at Rio Tinto and Exxon Mobil’s shareholder meetings this year, in order to “signal the importance” of Paris-aligned lobbying, while noting the proposals “would not limit the board’s discretion to make decisions it deems are in the best interests of the company.”
This is a notable change in approach for the world’s largest fund manager, which supported only 1.7% of shareholder proposals seeking lobbying disclosure in 2020 and 26.3% seeking climate reporting, according to Proxy Insight Online data.
“BlackRock has been very transparent in discussing the ways in which it will evaluate companies on their approach to climate risk,” Allie Rutherford, partner at PJT Partners, told Proxy Insight Online. “This includes an intention to be more supportive of climate change-focused shareholder resolutions. Given the size of its ownership positions, this change could be significant for companies who are recipients of well-targeted climate-related proposals.”
Vanguard has similarly stepped up its engagement with climate lobbying concerns, supporting the Exxon and Rio Tinto proposals on the grounds that both companies' current lobbying efforts present “material risk” to investors. The fund manager supported no shareholder proposals seeking lobbying disclosure and just 21.7% seeking climate reporting in 2020.
Given the various external factors that have brought lobbying disclosure and climate risk to the forefront of investors’ minds this year, it is likely that climate lobbying proposals subject to a vote will continue to prevail, and issuers in carbon-intensive industries will face mounting pressure to align their corporate lobbying with Paris Agreement goals.
Rebecca Sherratt, Corporate Governance Editor, Insightia