Toshiba Investors Back Hedge Fund’s Call to Probe AGM Voting

Investors of Toshiba Corp. delivered a stern rebuke to management, passing a resolution put forward by an overseas-based hedge fund to investigate the fairness of voting at the 2020 annual shareholders’ meeting.

The proposal by Singapore-based Effissimo Capital Management, a secretive fund that is Toshiba’s largest shareholder, called for the appointment of independent investigators to probe voting at the company’s last AGM, where the fund says several investors were “unable to vote in a manner consistent with their intentions.”

The success of the motion heaps pressure on Toshiba’s board -- which has struggled to win investors’ confidence since an accounting scandal resulted in the sale of its crown-jewel memory-chip business -- and also shows progress in a government-led push for better management and greater shareholder rights.

Toshiba shares rose as much as 3.6% in Tokyo after the results of Thursday’s extraordinary shareholders’ meeting.

A separate proposal by San Francisco’s Farallon Capital Management asking management to seek shareholder approval for how it uses capital was rejected. A breakdown of the results wasn’t immediately available.

At many such meetings in Japan, management typically wins regardless thanks to the backing of the country’s institutional investors. But defeat for the board on Effissimo’s proposal puts chief executive officer Nobuaki Kurumatani, a company outsider from the banking sector appointed in the wake of the company’s tumultuous accounting scandals who barely won reelection in 2020, under pressure ahead of the next director elections to be held this summer.

Voting Irregularities

Effissimo, which was established by colleagues of the activist investor Yoshiaki Murakami, tried last year to have its co-founder Yoichiro Imai named to Toshiba’s board, along with other directors. When that proposal was rejected and management’s own slate of directors appointed instead, it was seen as a setback for activists who sought more influence at the conglomerate after years of accounting scandals and business missteps.

However, suspicion soon followed that the vote count had not been entirely above board. One shareholder with a 1.3% stake reported that its votes weren’t counted, despite being mailed several days before the deadline. In September, the Financial Times reported that Hiromichi Mizuno, the former chief investment officer of the Government Pension Investment Fund and a board member of Tesla, spoke to Harvard University’s endowment fund ahead of the vote, after which the fund abstained from voting.

In a response to Bloomberg News, Mizuno questioned why people assumed Effissimo’s proposal refers to Harvard. Effissimo’s proposal doesn’t mention Harvard by name, referring only to a “large shareholder,” though in a presentation about the EGM the fund cites media reports that mention the university.

The suspicions surrounding the voting prompted Effissimo to break years of silence and call for an extraordinary general meeting, seeking “reassurance that there has not been an assault on the integrity of shareholder voting.”

In a statement after the decision, Effissimo called on Toshiba management to cooperate with the investigation that will now be set up.

“Toshiba’s management should respect the fact that independent investigators have been appointed by the company’s ultimate decision-making body, the general meeting of shareholders, and fully cooperate to resolve unanswered questions to restore shareholder confidence,” the statement said.

Before the vote, Toshiba said it saw “no validity or reasonable grounds” to further investigate the matter by electing investigators given that its audit committee has already examined it. It said conducting an “unnecessary investigation” into the voting issue would disrupt the day-to-day operation of Toshiba and have a significant impact on the running of the company.

Capital Plans

Days after Effissimo submitted its request in December, Farallon -- another fund that usually keeps a low profile -- joined the calls for a shareholder vote, this time asking management to seek shareholder approval for how it plans to allocate capital.

The U.S. hedge fund, which is the second-largest shareholder with a 5.8% stake, said there was a “lack of trust” between shareholders and management. It accused Toshiba of reneging on commitments detailed in a 2018 plan on how it would use its funds, and expressed concern about management’s plans to deploy its capital for M&A.

Toshiba denied any major alterations to its capital allocation plans.

“No changes have been made to the policies since the formulation of the ‘Toshiba Next Plan’” in 2018, the company said in a March 16 presentation. Farallon’s proposal to return cash to shareholders if they don’t approve spending plans “will completely destroy all seeds for medium-to-long-term growth.”

Despite the proposal being rejected, Thursday’s votes send “a clear message to the Toshiba Board and executive team: shareholders expect increased transparency and accountability,” Farallon said in a statement after the decision. The best way forward for Toshiba’s share price is “to improve corporate governance and embrace true engagement with its shareholders,” the statement said.

Corporate Bellwether

Regardless of the results, the controversy has put the company, once synonymous with the global ascent of corporate Japan, back in the spotlight. It narrowly avoided delisting in 2017 after multibillion-dollar losses at its Westinghouse U.S. nuclear unit pushed liabilities beyond its level of assets, and the confrontation comes just months after it won promotion back to the Tokyo Stock Exchange’s first section.

Once the world’s second-largest memory-chip maker after Samsung Electronics Co., it was forced to sell its prized semiconductor business and take an infusion of cash from a large contingent of more vocal shareholders -- a step which eased funding concerns but also led to the increased scrutiny that came to a head on Thursday.

Proxy firms Institutional Shareholder Services and Glass Lewis both advised investors to vote for Effissimo’s proposal to appoint three individuals to investigate the vote at 2020’s meeting. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., also backed the proposal.

The proxy advisers were split on Farallon’s proposal: Glass Lewis recommended voting for it, while ISS advised against, saying it is “overly prescriptive.”

©2021 Bloomberg L.P.

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