Lessons from the Toshiba Scandal

A Corporate Governance Perspective

Abstract

The most significant, long-running corporate governance scandal in the history of Japan may finally be coming to a head. Toshiba has been a shocking case due to its prominence in the Japanese business establishment and its past emphasis on corporate governance. Its problems started with a decision to invest heavily in the nuclear power business in the U.S.; a decision that created significant losses that went unreported. These problems came to light in 2015 when it was discovered that Toshiba had padded its profits by $1.2 billion (150 billion yen) over the prior seven years. Toshiba nevertheless proceeded to double down on its nuclear strategy by a disastrous purchase of a nuclear plant construction company. Losses made Toshiba desperate for new financing, and it sold a large volume of shares to some 60 foreign funds, including well-known activist investors. This led to years of clashes between Toshiba’s traditional management, who wished to preserve Toshiba as a public company, and the activists who wished to sell the company to private investors. New problems arose despite corporate governance reforms and Toshiba’s proposals to split the company into separate entities were rejected by shareholders. Under mounting pressure, the company is now considering proposals from private equity funds regarding strategic alternatives, including sale of the company. Ten potential bidders were initially selected, but no deal has materialized to date. The following four lessons regarding corporate governance can be derived from Toshiba’s troubles: (1) No company, regardless of its prominence, is immune from corporate governance failures, as traditional Japanese companies encounter difficulties in rapidly changing markets, (2) the actual functioning of the board and management is far more consequential than a company’s formal corporate governance structure, as companies are forced into more drastic actions in response to this new business environment, (3) Japanese management can no longer afford to ignore or fail to deal fairly with activist shareholders, as activists may now garner the support of traditional institutional investors by pursuing the interests of all shareholders, and (4) the age of the conglomerate is over in Japan, as investors demand that companies focus on their core capabilities. All of the above lessons arguably reflect global trends that have now reached Japan. As Japanese businesses continue to internationalize due to their home country’s aging population and shrinking market, we can expect more traditional companies to experience similar troubles in adapting to a rapidly changing business and corporate governance environment. In that sense, although at first glance the Toshiba case may seem an extreme and unlikely one, it may also be a harbinger of a continuing trend that raises the “penalty” for Japanese companies that display poor management and corporate governance.