Toshiba and the art of governmental hypocrisy

English original of column published on July 16th by Nikkei Business. Additional material added in brackets

As anyone who has ever served on a company board of directors knows, the term “corporate governance” is quite a problematic concept. As an independent director on a corporate board you bear great legal responsibility but hold quite narrow powers, and you are constantly aware of how dependent you are on executives of the company itself for the quality, timeliness and relevance of the information you receive. [Those over whom you are supposedly ‘governing’ can in effect mark their own homework. And since you are also supposed to be supporting and occasionally guiding the company’s business strategy, you have an incentive to believe what they tell you.]

For that reason, we should all feel some sympathy for the directors of Toshiba for their experience of now being caught in the crossfire between shareholders, corporate executives and the Japanese Government. Some sympathy is appropriate, because these roles are very difficult ones, especially in a time of scandal and conflict. The independent directors are not the people running the company, even though their role is called “governance”.

But we should not feel complete sympathy, because the limited powers that independent directors and the chairman hold are nevertheless quite relevant for the sort of situation the company and its board found itself in during 2020 and 2021. And we should have no sympathy whatsoever for the Japanese Government and for the bureaucrats at the Ministry of Economy, Trade and Industry for their actions in this tawdry and damaging affair. For this affair is actually about national governance as well as corporate governance.

Let us in fact start with METI and the Japanese Government, for their roles in this are the simplest to describe and the hardest to justify. Their behaviour, as exposed by the independent investigation by three external lawyers, should basically be described as hypocrisy and a total disregard for their true public responsibilities.

The reason for making this harsh judgement is not only the behaviour revealed by the report but also the basic situation concerning Toshiba Corporation. Public policy towards Toshiba could have been quite open and straightforward. Many advanced countries, including in Western Europe and North America, are quite open about taking special powers concerning companies whose operations are considered vital for national security. 

In virtually all these countries, Toshiba would qualify easily for such special controls and treatment. The company’s roles in the nuclear industry and in a number of key technologies [especially semiconductor manufacturing equipment] would push it to the top of any national strategic list. It is common to debate what companies should truly be listed, but few would argue with Toshiba’s presence.

But what those other countries also know is that although imposing special controls may bring strategic and security benefits, it comes with costs, particularly the fact that the controls may make it harder or more expensive to raise private capital. Here is where the Japanese Government’s hypocrisy came in. Toshiba was clearly viewed as strategic. But the firm in 2017 needed $5.4 billion in capital to save it from bankruptcy [following a previous massive accounting fraud and big losses in its US nuclear assets] and the government was unwilling to provide any of it. [Activist shareholders, mainly overseas-based, were the only ones who stepped up with the cash.] So, as we learned from the independent report, METI pretended that it was not imposing special controls but actually sought to do so in secret, by helping to manipulate shareholder votes and to bully shareholders into supporting management.

This kind of hypocrisy, of saying one thing but acting quite differently, is highly damaging to Japan’s reputation as a place to invest capital. Investors often argue loudly against special national security controls in all countries, but if controls are going to be imposed investors certainly prefer them to be imposed clearly and transparently. 

In fact, transparency was supposed to be the prime objective and even the achievement of the reforms made to corporate governance under the Abe administration over the past decade. The Toshiba case has violated that objective in a dramatic manner through highly untransparent actions. Yet the key violation here is not so much a corporate violation as a violation by METI and the Japanese Government, the exact entities that were supposed to be overseeing this improved corporate governance. Or perhaps the fairest way to describe this is that the violation took place through collusion or collaboration between the Government and corporate executives.

The true sins of corporate governance by the board of directors lay in their failure to investigate and expose what had happened at and before the 2020 AGM in a prompt, open and urgent manner, once it became clear that manipulation or malpractice had occurred. In that way, the chairman and the independent directors did fail to use the powers that they hold to order and supervise investigations. They committed the greatest sin of corporate governance: they showed themselves to be governed by the company and its wishes, rather than truly acting as governors on behalf of shareholders and other stakeholders.

That is certainly a serious sin, and the chairman and directors deserve to have been removed from their posts, as happened on June 25th. Shareholders have a vote over those office-holders and were right to exercise it, but sadly they do not have a direct vote over the METI officials and political figures who committed the much greater sin. In learning from the Toshiba affair, it is important to keep these sins in proper perspective: the biggest sin was the political and governmental one of hypocrisy and of trying to control national security in secret and on the cheap.