Photographer: Akio Kon/Bloomberg

A confrontation that has pitted one of Japans corporate giants against two overseas-based hedge funds will come to a head on Thursday, when shareholders of

Toshiba Corp. gather for an unprecedented vote that could test the countrys commitment to better corporate governance.

Shareholders of the conglomerate will convene for a mostly virtual extraordinary meeting to vote on two separate proposals brought by Singapore-based

Effissimo Capital Management and San Franciscos

Farallon Capital Management. The motions respectively call for a probe into the fairness of voting at the last shareholders meeting in July, and ask management to seek shareholder approval for how it uses capital.

The outcome of the votes could help determine not just the long-term fate of Toshibas board — which has struggled to win investors confidence since an accounting scandal resulted in the sale of its crown-jewel memory-chip business — but also show how far a push for better management and greater shareholder rights has really progressed in the country.

Effissimo, the secretive fund founded by former colleagues of Japanese activist investor Yoshiaki Murakami, has been Toshibas largest shareholder since 2017. Its motion calls for a probe into voting at the companys AGM in 2020, where Effissimo says several investors were unable to vote in a manner consistent with their intentions.

At many shareholders meetings in Japan, management typically wins regardless thanks to the backing of the countrys institutional investors. But with just 57% of shareholders at the last meeting approving the reelection of chief executive officer Nobuaki Kurumatani, support for management is far from certain. Defeat for the board could put Kurumatani, a company outsider from the banking sector appointed in the wake of the companys tumultuous accounting scandals, under pressure ahead of the next election to be held in the summer.

Toshiba is such an emblematic name, said Nicholas Benes, head of the Board Director Training Institute of Japan. If the vote fails, I wouldnt blame investors — foreign investors in particular — if they thought after that, that the old Japan is back in business the way it was before.

Voting Irregularities

Effissimo tried last year to have its co-founder Yoichiro Imai named to Toshibas board, along with other directors. When that proposal was

rejected and managements 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 werent 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 Universitys endowment fund ahead of the vote, after which the fund abstained from voting.

In a response to Bloomberg News, Mizuno questioned why people assumed Effissimos proposal refers to Harvard. Effissimos proposal doesnt mention Harvard by name, referring only to a large shareholder, though in a

presentation about the EGM the fund cites media reports which mention the university.

A representative for Effissimo didnt immediately respond to a request for comment.

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.

Failure to perform a thorough and independent investigation will set a harmful precedent for Toshiba and Japan as a whole, the hedge fund said in its presentation on Wednesday. Only an independent investigation will help restore confidence in Toshiba.

Toshiba said it sees 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 managements plans to deploy its capital for M&A.

We want the company to reach its potential and the key is rebuilding trust with shareholders and the market, a representative for Farallon said by email.

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. Farallons proposal to return cash to shareholders if they dont approve spending plans will completely destroy all seeds for medium-to-long-term growth.

The controversy has been a fresh blow for the company, once synonymous with the global ascent of corporate Japan. 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 Exchanges first section.

Once the worlds 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 set to come to a head on Thursday.

Corporate Bellwether

Proxy firms Institutional Shareholder Services and Glass Lewis are both

advising investors to vote for Effissimos proposal to appoint three individuals to investigate the vote at 2020s meeting. The California Public Employees Retirement System, the largest public pension fund in the U.S., said its also

backing the proposal.

The proxy advisers were split on Farallons proposal: Glass Lewis recommends voting for it, while ISS advises against it, saying it is overly prescriptive. Still, the firm said the proposals presence on the ballot should further signal to management of the urgent need to address the deteriorating trust of its shareholder base.

The outcome of the votes will reveal how deeply the stewardship code has sunk into the system in Japan, according to Benes. While a number of companies have taken steps to improve corporate governance, Toshiba will be a bellwether for whether corporate Japan is indeed moving in the right direction, he said.

Toshiba has likely behaved badly in the past, regarding operations as well as their use of political pressure for manipulating the voting of shareholders, and may get pushback from those same investors, said Jamie Rosenwald, the co-founder of Dalton Investments, a $2.9 billion U.S. money manager that actively invests in Japanese stocks. But I fear that most shareholders have Toshiba fatigue at this point.

There is little doubt that management must rebuild investor trust, Takeyuki Ishida, head of Japan research at ISS, wrote in a report. One could argue that if investor mistrust is so pervasive, shareholders might be better served by voting out management at the next AGM.

With assistance by Tom Redmond

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