Guest contribution: In defense of Toshiba's activists' actions

Rebuttal -- Toshiba insiders respond to the previous guest contribution "Toshiba and the hidden costs of activism"

The previous post on “Toshiba and the hidden costs of activism” — a guest contribution by my friend and global value investor Andrew McDermott — generated an unusually large number of comments sent to my private email. Friends and former colleagues from the ‘skin in the game’ Japan investor, Japan top-executive, and Japan policy making community were quick to offer a wide variety of strong opinions and personal insights.

Fortunately, some of the Toshiba insiders agreed to have their comments published, with my promise of guarding their anonymity. Please see below a different perspective on what actually happened at Toshiba, compiled & edited by Japan Optimist. This is followed by a response from Andrew. Enjoy.

Rebuttal :

Toshiba insiders respond to “Toshiba and the hidden costs of activism”

“Toshiba and the hidden costs of activism” is filled with factual inaccuracies as to amount to a hit piece that questions the motives and integrity of shareholders, some very dedicated executives, and board members of Toshiba. The overarching tone of the article is that the activists took control of the board which is completely untrue.

The author may have valid "what if" scenarios had Toshiba chosen a different path or had it been enabled to invest differently; but several false statements position the entire article as something surmised by an uniformed outsider with an axe to grind.

Let’s begin with the basic and most blatant inaccuracies:

• The activists never gained control of the board (in fact not a single activist proposal on new board members was ever approved by shareholders) - all external board members were completely independent up until the 2022 appointments of Elliott and Farallon.

• There was never a board agenda to ensure the auction to private equity buyers until April of 2022 after the company split was rejected by shareholders.

• Activists did not place six activist friendly directors on the board -  I am not even sure what this implies - but it sure seems to imply a lack of independence which is insulting.

• The activist never attempted to oust Chairman Nagayama - who is a wholly ethical and great business leader who was voted out following a one year term that coincided with shareholders dis-satisfaction with the Company's Audit Committee internal investigation of the undue influence of shareholders' votes which has been documented in great detail

• The activists most certainly never, ever forced the resignation of George Olcott or Ms Watahiki. Both were approved at the AGM and they both resigned on their own choice. Why tarnish these two fine professionals by falsely stating the activists forced their resignations?

These are blatant falsehoods that slander the good work done by independent directors who all joined after the Toshiba problems began and guided the Company to a best possible resolution. To unfairly slander professionals is uncalled for, and these three people in particular are highly respected professionals who deserve better.

Lastly, the addition of Elliott and Farallon to the board occurred after the Company had publicly announced a comprehensive market check and both of these investors were very professional  and extremely helpful in ensuring trust and transparency to all investors about the auction process.

The entire premise that activists took over Toshiba with minimal capital and then appointed board members with a goal of dismantling or selling Toshiba is just a completely false premise.

End of the rebuttal.

Response from Andrew McDermott

Within a couple of hours after first publishing this post, Andrew McDermott responded with the following:

To Jesper’s interested (and interesting) readers:

I welcome dialogue and am happy to be corrected.  I invite the writer(s) to join in a public forum in hopes that my own education would also help others.  Perhaps we might find more common ground than he or she expects.  One point of common ground that I do want to highlight is our shared admiration for the wisdom and courage of Ms. Watahiki, Mr. Olcott and Mr. Nagayama.  I have known George Olcott for nearly twenty years and was directly involved in his recruitment as a board member in one of the first “activist” campaingns in Japan.    I do not know Ms. Watahiki or Mr. Nagayama, but I respect what they have done in their work as directors.

This is not the forum for a tit-for-tat rebuttal of the rest of the post, but I would point interested readers to the public comments made by Mr. Olcott to the FT on his resignation (June 27, 2021, subtitled: “Activist investors forced departure of popular board leader”)  as well as to the public remarks made by Ms. Watahiki on her resignation (Reuters, June 28, 2022). Relevant quotes are attached below.  Regarding Mr. Nagayama, I would welcome clarification of the writer’s statement that the "activist did not attempt to oust Mr. Nagayama." If the activist shareholders were in fact supportive of Mr. Nagayama’s continuation as leader of Toshiba, then I stand corrected.  The public record (and the statements of both George Olcott and Ambassador John Roos) should probably be corrected as well. It seems obvious from reports at the time that the campaign to oust Mr. Nagayama was led by the activists. Indeed, it seems to be mathematically impossible for Mr. Nagayama to have been ousted without their votes and even more unlikely that a director like George would misunderstand their role. But perhaps there is more to the story.

Sincerely,

Andrew

From the FT here
In exclusive remarks made to the Financial Times following his sudden resignation on Friday, George Olcott expressed strong misgivings about the vote to oust Osamu Nagayama — a man he described as one of the few Japanese business leaders able to oversee a turnround on the scale now required by Toshiba. “Removing him as chair only serves to prolong instability and uncertainty in addition to depriving the board of an outstanding leader. I cannot understand how this development represents a good outcome for the company or any of its stakeholders,” said Olcott, a former investment banker at SG Warburg who sits on the boards of several Japanese companies.

From Reuters here

Watahiki, a former high court judge, had objected to appointing the candidates put forward by Elliott Management and Farallon Capital Management, saying the pair's presence on the board would skew it toward activist investors.

End of Andrew’s response.

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Japan Optimist has some skin in the activist game, and I firmly believe both the “outsiders” and the “insiders” voices deserve to be heard. This is imperative since “activist” or “engagement” campaigns are poised to become an increasingly important force in Japanese capital markets. Each campaign will have its own narrative and specific impact; but at the macro level what is at stake is not just how Japan distributes wealth, but also how Japan allocates resources, how Japan incentivizes stakeholders, and how Japan creates future prosperity. Clearly, finance-first corporate control cannot be the optimal way forward for a top-tier nation.

The amount of private emails I received from both Japan and overseas confirm in more ways than I had imagined that the case of Toshiba uncovers the best and the worst of both, traditional Japan-style corporate governance and US-style shareholder capitalism.

The case of Toshiba touches a deep sensitivities and triggers strong opinions. It is as if the soul of Japanese capitalism were at stake. All I know for sure is that the case is far from settled.

Thank you for reading. As always, comments welcome — many cheers from freezing Tokyo ;-j