Disgruntled Toshiba Corp. shareholders voted Friday to remove its board chairman and another director responsible for oversight, in another blow to the Japanese industrial conglomerate engulfed by a governance scandal.

The rare rejection of board members at a general shareholders' meeting adds a new twist to the turmoil at Toshiba, seen by the government as critical to national security but facing mounting pressure from foreign activist investors.

People head to a shareholders' meeting of Toshiba Corp. in Tokyo on June 25, 2021. (Kyodo)

An independent probe had found Toshiba colluded with the government in pressuring foreign activist investors in the run-up to a general shareholders meeting last year over their proposal to appoint outside directors.

The two candidate directors voted out were board chairman Osamu Nagayama, who had defied calls from some investors to step down and instead vowed to rebuild the board, and Nobuyuki Kobayashi, who was a member of Toshiba's audit committee which found no issue with how last year's general shareholders meeting was held.

Nagayama's pledge as board chairman on Friday to carry out a "swift, objective, transparent and thorough" probe failed to win over shareholders at the last minute, abruptly ending his tenure only about a year after he joined the firm as an outside director.

Toshiba CEO Satoshi Tsunakawa did not reveal the breakdown of the vote, saying only that the two failed to secure support from a majority of shareholders. He secured his own reappointment, along with eight other nominees who were also approved.

Tsunakawa replaced Nagayama, currently honorary chairman of Chugai Pharmaceutical Co., as board chairman. But outside director George Olcott, a new addition to the board, offered to resign only after gaining shareholder approval as he had second thoughts about the new post, according to the company.

Tsunakawa sought to assuage concerns raised by participants at the meeting that lasted two and a half hours, vowing to win back shareholder trust and improve Toshiba's corporate climate -- a challenge for the conglomerate hit by an accounting scandal in 2015.

One shareholder described the latest findings of the investigation as "staggering" and another criticized Toshiba for its failure to identify the problem. There was also criticism that the firm failed to learn lessons from the accounting debacle five years ago, which involved falsified earnings reports to pad profits.

"We take a serious view of the fact that there were moves to block the exercising of the rights of shareholders (last year)," Tsunakawa said.

Toshiba is scrambling to repair its reputation after an investigation by independent lawyers found that the company sought help from Japan's industry ministry to fend off overseas investors ahead of an annual shareholders' meeting in July 2020.

Those investors included top shareholder Effissimo Capital Management Pte. Ltd.

The probe, commissioned by some of Toshiba's overseas investors, exposed governance issues at Toshiba and raised questions about how much the government should be allowed to interfere with private companies in the name of protecting national security.

Fearing foreign activist investors would gain influence over the board last year, Toshiba attempted to take advantage of a Japanese law allowing the government to monitor overseas shareholders for national security reasons, according to the lawyers' investigation.

Toshiba is a Japanese household name with its business portfolio spanning nuclear power, defense equipment and semiconductors.

Toshiba's recent face-off with activist shareholders comes in the wake of its acceptance of foreign funds to resolve its financial hardships following the bankruptcy of a U.S. nuclear plant unit in 2017. Around 50 percent of Toshiba shareholders are overseas investors.

In a rare development less than two weeks ahead of the shareholders' meeting, Toshiba dropped two nominees who sat on its audit committee from its original slate of 13 directors pending approval.

Nonetheless, some foreign investors were apparently not satisfied. Singapore-based 3D Investment Partners Pte. Ltd. reportedly demanded Nagayama resign immediately and Norges Bank Investment Management, which manages the Norwegian government pension fund, voted against him.

U.S. proxy advisory firms Institutional Shareholder Services Inc. and Glass Lewis recommended that Nagayama not be reappointed, along with Kobayashi. Former U.S. Ambassador to Japan John Roos had thrown his support behind Nagayama after both served as outside directors at Sony Corp.

Singapore-based Effissimo, which has a stake of around 10 percent, has slammed Toshiba over its reluctance to hold the board accountable for the scandal that revealed "dysfunctional" governance.

"We hope that (Toshiba) will strive to develop businesses and technologies that are important to ensure our country's security," the Ministry of Economy, Trade and Industry said in a statement after the meeting of shareholders. The ministry has ruled out the possibility of conducting its own investigation into the alleged collusion with Toshiba.

The roughly 120-page investigation report released on June 10 states that former Toshiba CEO Nobuaki Kurumatani is believed to have explained Toshiba's situation regarding foreign investors last year to Chief Cabinet Secretary Yoshihide Suga, now the Japanese prime minister, in a breakfast meeting.

Kurumatani stepped down in April after a buyout plan by British private equity firm CVC Capital Partners apparently caused friction within the management. Nagayama has laid the blame on Kurumatani who took a "confrontational" approach to shareholders.


Related coverage:

Toshiba's largest shareholder Effissimo demands stronger governance

Toshiba board chair admits governance issues over gov't collusion

Panel concludes Toshiba's 2020 shareholders' meeting not held fairly