The strong shareholder rebuke on Friday of Toshiba Corp.'s plan to retain two outside directors in charge of overseeing management is set to deepen the woes of the industrial conglomerate tarnished by its alleged collusion with the government.

Toshiba has spent years since its 2015 accounting scandal trying to enhance corporate governance. Introducing directors from outside the company and the appointment of board chairman Osamu Nagayama, a former outside director at Sony Corp. and currently honorary chairman of Chugai Pharmaceutical Co., were part of its efforts.

The shareholder revolt, led by foreign activist investors, against the approval of Nagayama as chairman and another external director has added to the tumult at Toshiba over the past few months, marked by the abrupt departure of former CEO Nobuaki Kurumatani in a management spat over a buyout offer by a British equity fund.

Some market observers said the rejection at Friday's annual shareholders' meeting was a good sign of emerging shareholder activism in Japan, while others saw Toshiba at a crossroads over whether its management will truly get back on its feet or plunge into further turmoil.

Some experts even fear that the latest governance scandal at Toshiba may pour cold water on Japan's drive to promote good corporate governance and draw more foreign investors.

"Isn't it possible to create an organization that has a fail-safe mechanism? I need to hear how you plan to make one," a shareholder asked Toshiba CEO Satoshi Tsunakawa during the meeting.

An independent investigation by lawyers concluded two weeks before the shareholders' meeting that Toshiba had colluded with Japan's industry ministry to prevent foreign activist shareholders from influencing the board.

At a general shareholders' meeting last year, major shareholder Effissimo Capital Management Pte. Ltd. submitted a proposal to send three outside directors to Toshiba but it was voted down.

Nagayama was brought in in July last year but failed to unearth the collusion, according to Toshiba shareholders. Before the independent investigation launched at the urging of activist foreign investors, Toshiba's audit committee had no issue with how the 2020 shareholders' meeting was conducted.

"It's a good development for the Japanese stock market because the voices of shareholders were heard," said a senior executive of a major Japanese brokerage. "On the face of it, there are many companies that have governance systems but are in reality old-fashioned inside."

Of the 11 nominees presented to shareholders Friday, the number of independent directors was nine, including Nagayama and another rejected candidate, Nobuyuki Kobayashi, a member of the audit committee.

Among Japanese companies listed on the First Section of the Tokyo Stock Exchange, 6.4 percent had independent directors who accounted for at least a third of their boards in 2014. But the figure rose to 58.7 percent in 2020, according to data from the Tokyo bourse operator.

Japan's revised corporate governance code now calls for outside directors to constitute a third or more of the directors at major companies. At least two external directors were required before.

"Toshiba wasn't prepared for what would come after accepting foreign funds" said Shoichi Tsumuraya, a professor at Hitotsubashi University. "Foreign investors in particular normally wait for companies to change from within with the help of outside directors, but the latest case indicates that the board was dysfunctional."

"It used to be the case that backing activist investors wasn't an option for domestic institutional investors. But there seem to be more domestic players who are ready to endorse activist proposals if they are good," Tsumuraya added.

The growing presence of overseas investors, who now account for about half of Toshiba's shareholders, has added pressure on the conglomerate.

Toshiba is seen as a company critical to national security and it sought to use a law that allows the government to keep in check foreign shareholders at such companies, according to the independent probe. Its businesses include nuclear power and defense equipment.

Toshiba CEO Tsunakawa, who took the post after Kurumatani resigned in April, said he will pursue "proactive" dialogue with shareholders to regain trust.

Hours after the shareholders' meeting ended, Toshiba shares finished Friday down 0.62 percent at 4,815 yen.

"It's a reminder that companies need to work harder to put themselves in the shoes of shareholders," said Makoto Sengoku, senior equity market analyst at Tokai Tokyo Research Institute.

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Toshiba shareholders vote out board chairman over governance scandal