Dear Toshiba shareholders,
At the 181st General Shareholders’ Meeting of Toshiba Corporation (“Toshiba” or the “Company”), we are making a shareholder proposal seeking the election of two independent directors, Allen Chu and Yuya Shimizu. We have been engaging constructively with Toshiba over the past 3.5 years, and our proposal is intended to elicit the views of all shareholders with respect to creating better corporate governance that focuses on value. As a shareholder that has weathered difficulties with the Company since 2016, we are partly responsible for the corporate governance issue the Company is facing today, and we have been neglecting the issues by giving Toshiba the benefit of the doubt up until now. We believe it is up to us as shareholders to break the cycle of mistrust. The two candidates we are proposing both have a track record as operators who have compounded capital, and they are experts in capital discipline and decision-making involving resource allocation. They are strongly committed to transforming management, and we believe they will catalyze a holistic review of how the Company is run and a shift of management priorities toward value compounding.
Background to proposal
For the past several decades, Toshiba has set short-sighted accounting metrics, such as sales and operating profits, as KPIs. With lesser capital discipline, Toshiba has destroyed value by repeatedly making poor capital allocations. Toshiba has all the ingredients, potential, and even social responsibility to become one of Asia's leading infrastructure service companies, but that requires the Company to confront and learn from past mistakes and reinforce its capital discipline. It is essential to establish KPIs oriented toward capital and value, buttressed by appropriate corporate governance to supervise the pursuit of these KPIs.
As a large shareholder, we have shared our concerns with the current management team on various occasions. We appreciate the constructive discussions so far, and we feel we do share the same views on the long-term creation of corporate value and expansion of total shareholder return (TSR).
Value vs Price
Although the Company seems genuinely interested in pursuing TSR, there also seems to exist an unbridged gap in how we understand value. As we see it, the current management perceives the market capitalization of the Company as “value.” We are afraid that they are confusing price with value and are more focused on how to “look” great rather than on how to “be” great. With that in mind, corporate actions by Toshiba over the past two years started to make more sense to us. Unfortunately, the current management has not learned why the Company has destroyed value in the past. They continue to implement only superficial measures addressing the share price to obtain short-term market approval. If they continue in this vein, we are concerned that they will continue to destroy value for years to come by repeating past mistakes. We are not satisfied with appeasing corporate actions to reactively meet the demands of some shareholders. Rather, we are seeking to introduce robust capital discipline that will lead to the compounding of value and an enhanced decision-making process around it. Specifically, Toshiba should target maximization of value (not price) and set ROI to be the most important KPI. Any resource allocation decision should be determined based on ROI.
Discipline vs Tactics
A ¥700 billion share buy-back conducted for approximately one year from 2018 did not give confidence to the market around the Company’s capital policy. The market did not interpret the buy-back as better governance, but rather as a reactive action to gather support among some of the shareholders (the Company had committed to buying back company shares at an unforeseeable share price far into the future). This announcement came just two weeks before the Ordinary General Meeting of Shareholders. The fact that the Company announced a buy-back five months into the future from the announcement did not provide any comfort to the market that the Company was making decisions based on ROI or creating value. Since the announcement came just before the Shareholders’ Meeting, the market took it as a one-off corporate action whose main purpose was to gain the shareholders' approval for the agenda of the Ordinary General Meeting of Shareholders.
Whether the buy-back turns out to be a good investment remains to be seen, and will depend on how the Company stewards value in the future. Still, the perception that the management decision behind the buy-back was made without a value-orientated process or discipline has produced skepticism in the markets and disappointment among the shareholders, as seen in the share price performance.
With an awareness of the disconnect around how resource allocation should be decided, last year we considered making a shareholder proposal at the Ordinary General Meeting of Shareholders for the election of directors. However, the company submitted a much greater board restructuring at the time, including a similar proposal for the election of independent directors (including Ms. Ayako Hirota Weissman & Mr. George Raymond Zage III), so ultimately we decided not to proceed with a proposal of our own. We were then full of optimism that the Company was trying to voluntarily address and learn from past mistakes. Looking back at the corporate actions and stock performance of the past year, we cannot help but doubt the effectiveness of the current Board even after such a large change. The TSR that they set as their management target is below the average of similar companies, suggesting that the discount to intrinsic value is only increasing.
The current management team is still targeting absolute operating profit and profit margins as their most important KPIs, both of which are unrelated to capital or value. There is unfortunately no sign that Toshiba today is a better steward of capital than in the past. It’s been an underwhelming year to say the least. Our optimism has been tested by the inertia of the Company. It is now clear to us that the board change last year was not reflective of how the Company wanted to be governed but indicative of how the Company wanted to be perceived to be governed. We imagine it was already an uphill battle for those four newly elected foreign independent directors to effect any real change to the Company when the Company handpicked those four directors and did not truly sign up for change.
Building governance that can learn from mistakes
In 2000, Toshiba established its position as a pioneer in corporate governance in Japan by establishing a nominating committee and a remuneration committee, and in 2003 became a company that adopted the committee system. Unfortunately, as can be clearly seen—in the accounting scandal discovered in 2015 concerning restatements of previous years’ financial statements, in the significant impairment loss in Toshiba's US nuclear business, in the detection of fictitious transactions in Toshiba's consolidated subsidiary companies, and in the impairment from a number of inappropriate investments in the past—the governance system of the past did not serve to create value for the shareholders, nor did it dissuade executives from wrongdoing. On the surface, the current makeup of the Board, with its 10 independent directors, appears to be again at the forefront of Japanese corporate governance. Nevertheless, considering the mistakes that predecessors have made, and more importantly the current management’s preconceived notion of what shareholders want, we are concerned that the current governance structure is merely a façade, just like before. It has been only two years since the management change and a year since the board restructuring. It’s not yet too late for the Company to take this opportunity to transform itself into a long-term value compounder by taking advantage of the structure it has built and internalizing a commitment to real governance.
Proposing the election of 2 independent directors
At this General Shareholders’ Meeting, we propose the election of two independent directors, Allen Chu and Yuya Shimizu. These two candidates have a track record of having compounded capital in various capacities, and they are experts in capital discipline and decision-making involving resource allocation. We believe it is important to emphasize that they are candidates put forward not by a company proposal but by a shareholder proposal, and they will be trusted by shareholders. On June 22nd, the Company announced that the Board of Directors had unanimously voted against the shareholder proposals, including our shareholder proposal. This unanimous rejection reinforced our sense of a lack of corporate governance and the need for change within Toshiba, and raises serious questions on the quality and fitness of those independent directors who are deemed to represent shareholders. If this proposal is accepted by the shareholders, it would indicate a consensus that shareholders are seeking real change at Toshiba. We believe that the appointment of our proposed independent directors, and their strong commitment to transformation, will enhance capital discipline and catalyze a review of the decision-making process within Toshiba to achieve sustainable value compounding for years to come.
(19 September 1970)
Joined Donaldson, Lufkin & Jenrette Securities Corp. (New York) Investment Banking Financial, Analyst
Joined The Goldman Sachs Group, Inc., (Hong Kong), Investment Banking Division Financial Analyst
The Goldman Sachs Group, Inc., Promoted to Associate in the Principal Investment Area (Singapore)
The Goldman Sachs Group, Inc., Principal Investment Area (HK, NY, Singapore) Executive Director
Appointed external director to a total of 9 companies* (including Alibaba Group Holding Limited and SMIC (Semiconductor Manufacturing International Corporation)
Joined Citadel Investment Group (Asia) Limited (Tokyo), Portfolio Manager
Joined Tudor Capital (Singapore), Portfolio Manager
Elected Partner and Managing Director in 2007
Joined Dymon Asia Capital (Singapore), Managing Director
Left Dymon Asia Capital Singapore (Singapore)
Joined Noviscient Pte. Ltd., Partner and Chairman of the Investment Committee (current appointment)
Significant Concurrent Appointments: Board of Harvard University Association of Alumni in Singapore
*Mr. Chu does not currently serve on the board of any public companies.
Dear Toshiba Shareholders,
My name is Allen Chu, Partner and Chairman of the Investment Committee of Noviscient, a multi-strategy, quantitative investment management company.
I seek your support for my election onto the Toshiba board of directors. I would like to bring my experience as a seasoned investor of private and public companies to assist the company in its transformation journey. If elected, I would be honored to work with the Toshiba board and management team to bring a fresh perspective on further optimizing the allocation of capital with a focus on ROIC oriented KPIs to maximize medium and long-term value, building a deep culture of accountability and adopting corporate governance best practices. In addition, you have my full commitment to represent the shareholders to strive for best-in-class performance while building a healthy balance of the needs of all stakeholders.
(8 November 1971)
Joined Goldman Sachs (Japan) Ltd.
Joined Moore Strategic Value Partners, LLC
Joined AC Capital Inc. (a private equity investment business company related to Asuka Asset Management Group)
Joined Asuka Asset Management Co., Ltd.
Joined Jermyn Capital Ltd.
Joined Dalton Investments Group
Joined Dalton Advisory Co., Ltd. (new entity established pursuant to the restructuring of Dalton Investments Group)
Joined Suntelephone Co., Ltd.
Founded OTS Capital Management Ltd. (Hong Kong)
Co-founder and Senior Portfolio Manager
Founded Hibiki Path Advisors Pte. Ltd. (Singapore)
Representative Director and Chief Investment Officer (current appointment)
Dear Toshiba Shareholders,
My name is Yuya Shimizu, Founder and Chief Investment Officer of Hibiki Path Advisors, specializing in small cap value/engagement investing in Japanese Equities.
Thank you for giving me an opportunity to run for the directorship for such iconic turnaround in my country. Bringing a more dynamic capital markets in Japan by invigorating changes to individual companies have been my life-work as an investor, and, I would be excited to working together with Toshiba’s executives, and long-term shareholders, to “maximize” its long-term shareholder value. More specifically, if appointed, I would introduce value-oriented metrics such as ROI and ROIC for any capital decisions, and will not compromise my value orientation in formalizing logic and discipline into its corporate actions.