Toshiba released an investigation report by an outside lawyer that the management of the general meeting in July 2020 was not fair. Some major shareholders have increasingly criticized this and at this month's 2021 annual meeting they fired the chairman. Photo: AFP / Yoshikazu Okunishi / The Yomiuri Shimbun

The phrase “Japan Inc” – referring to the close relationship between the country’s trade ministry and its hand-picked corporate winners – fell out of favor after the economic downturn of the 1990s.

Helping to date the term were structural and legal reforms to revitalize Japan’s flagging economy. The reforms purported to decouple corporations from policymakers, strengthen corporate governance as well as shareholder rights, and build companies capable of competing internationally in the 21st century.

Yet despite more than two decades of reform, in the latest corporate governance scandal we have seen a major corporation running to the Ministry of Economy, Trade and Industry (METI) for help when under pressure, just as of old.

Toshiba Corporation is a major conglomerate that dates back to 1875. These days known for its computer, electronics and infrastructure work, it has long been regarded as an innovator in electronics.

Logo of Toshiba Corporation at headquarters in Tokyo. Photo: AFP / Yoshikazu Okunishi / The Yomiuri Shimbun

During the 1970s and 1980s when Japan Inc held sway, Toshiba as a matter of course had close relationships with the bureaucrats guiding Japanese economic development.

Finding that those close relationships are still being exploited today is an unpleasant surprise for observers who had bought into the reform narrative.

The roots of the recent Toshiba scandal go back to 2015. That year, Toshiba was embroiled in an accounting fraud that forced it to acknowledge substantial liabilities.

By 2017, Toshiba’s liabilities exceeded 275.7 billion yen, resulting in a downgrading of its Tokyo Stock Exchange listing. To raise sufficient capital to avoid being delisted, Toshiba decided to issue 600 billion yen worth of new shares.

Many foreign investors bought Toshiba shares at that time, with the result that, as of May 2020, foreign investors held a more than 60% majority of shareholder voting rights in the company.

Toshiba was happy to take money from those foreign investors. But it has found them more demanding and difficult to satisfy than Japanese investors, who are traditionally more docile and generally satisfied to defer to executive decisions.

In early 2020, yet another financial fraud was revealed, this one involving a Toshiba subsidiary. A number of substantial foreign investors – notably including a couple of Singaporean funds, Effissimo Capital Management and 3D Investment Partners, as well as Harvard University endowment manager Harvard Management Company – contacted the company.

The investors thought they were entitled to receive an explanation and to register concerns about the board’s inattentiveness to Toshiba’s share price. But the company initially ignored them.

The shareholders were persistent, and Toshiba’s executives finally agreed to conduct an internal investigation. Now perceived as a whitewash, that investigation concluded there had been no misconduct on the part of the company.

The concerned shareholders, unsatisfied with that result, proceeded to nominate their own candidates for the election of directors that would be held during the July 2020 annual general shareholders’ meeting.

For Toshiba, as for many other large, older Japanese corporations, proactive shareholders evoke memories of sokaiya, racketeers who purchased just enough shares in companies to extort money from them with the threat of disrupting shareholders’ meetings.

Former corporate extortionist Ryuichi Koike leaves prison in December, 1997, after nearly seven months of detention. He pleaded guilty to receiving $97 million worth of payoffs from Japan’s Big Four brokerages and a major commercial bank. Photo: AFP / JIJI PRESS

The Sokaiya were a problem in the 20th century. Changes to the law have made the work unattractive even to gangsters. Yet, their specter lives on in the antipathy toward outspoken shareholders still held by many corporate executives.

Toshiba’s executives, deciding to take steps to silence the troublesome foreign shareholders, turned to METI for help.  

According to a report released on June 10 this year that gave the results of a truly independent investigation of Toshiba’s 2020 actions, corporate executives began contacting METI officials early in 2020 and continued the contacts right up to that year’s annual meeting.

The executives sought advice on how to “protect ourselves from activists” and “eliminate or control undesirable organizations and institutions,” the report said. It appears the executives wanted METI to invoke national security concerns under the Foreign Exchange and Foreign Trade Law as a means to silence the shareholders and push them to cooperate.

A curious example of the executives’ retro thinking is that an internal Toshiba email actually referred to METI as MITI (Ministry of International Trade and Industry), the 20th century name for the ministry.

Even then-chief cabinet secretary, now Prime Minister Yoshihide Suga is believed to have been in the loop. In any case, METI was receptive. Perhaps that related to the substantial number of government infrastructure contracts Toshiba has – or perhaps METI, too, was nostalgic for the trade ministry’s 1970s-80s swagger.

Japanese Prime Minister Yoshihide Suga was in the loop when he was cabinet secretary. Photo: AFP / Koji Ito / The Yomiuri Shimbun

In fact, the strategy was effective. At least one major shareholder was convinced by METI to withdraw one of the shareholder proposals before the 2020 shareholders’ meeting, while another was hesitant to exercise voting rights for fear of METI sanction.

The independent report concluded that the collusion between METI and the Toshiba executives was potentially illegal and resulted in unfair management of the 2020 general meeting. METI, of course, insists there has been no wrongdoing.

The entire incident reveals that – in spite of the reorganization of Japan’s regulatory structure and substantial reforms of the Corporations Law during Japan’s lost decades, before and after the turn of the century – both bureaucrats in METI and executives of at least one major Japanese corporation still engage in late 2oth century practices that Japan purports to have abandoned. Indeed, Japan Inc still exists.

Some implications of this have the potential to set back Japan’s program to reposition itself on the world economic stage.

For many outsiders, learning that Toshiba’s executives were successful in appealing to METI to exercise its influence has been cause to reexamine the prosecution of Carlos Ghosn – questioning whether the then corporate chairman’s arrest at the behest of Nissan executives was in fact based on the same strategy: Enlist the government to do the dirty work.

The most visible government organization allied with Nissan in the Ghosn case has been the Tokyo Public Prosecutors’ Office. However, former top-level METI bureaucrat Masakazu Toyoda – filling a post-retirement job as Nissan outside director – has been the “brains” behind the corporate coup, Ghosn and co-author Philippe Riès allege in their recent Paris-published book Le Temps de la Verite (Time for the Truth).

Nissan Motor’s chair of the board of directors, Yasushi Kimura (left), and chair of nomination committee, Masakazu Toyoda, hold a press conference to announce the company’s new CEO at its headquarters in Yokohama on October 8, 2019. Photo: AFP / Behrouz Mehri

Beyond excessive government-corporate closeness, a lesser known but perhaps deeper systemic flaw in the surviving version of Japan Inc is the disconnect or lack of cooperation between Japan’s government ministries – due to what students of governance call “siloization,” translating into isolation from one another.

The Ministry of Finance and the Financial Services Agency have been steadily working to position Tokyo as a regional financial center and Japan as a sound market with robust governance and business practices where overseas investors can thrive.

METI, on the other hand, seems to have taken a very different view, seeing overseas investors as dangerous disruptors whose voices should not be heard even if they are financing business endeavors.

There is reason to hope that Japan’s corporate governance reforms will prevail in the end. At Toshiba’s 2021 annual general shareholders’ meeting last Friday, Board chairman Osamu Nagayama failed to win re-election – a clear indication of shareholder displeasure with the conduct of Toshiba executives as revealed by the June 10 report.

Toshiba had earlier withdrawn the candidacy of two directors in an attempt to avoid such an embarrassment. Perhaps now Toshiba’s executives understand better the need for robust governance and satisfied shareholders.

Vicki L. Beyer is a professor of law in the Business Law Department of Tokyo’s Hitotsubashi University Graduate School of Law, teaching corporate governance and employment law. A lawyer admitted to practice in the American state of Washington, she spent 17 years as an in-house lawyer with an American multinational. She also serves as kanji (standing auditor) of the Foreign Correspondents’ Club of Japan.