TOKYO (Reuters) - A simmering boardroom battle at toilet maker Lixil Group has emerged as a test case for whether minority shareholders can improve corporate governance in Japan, the man at the center of the tussle told Reuters.

FILE PHOTO: The logo of Lixil Group Corp. is displayed at the company headquarters in Tokyo September 26, 2013. REUTERS/Issei Kato/File Photo

Kinya Seto, whose abrupt resignation as Lixil’s CEO in 2018 prompted a revolt by minority shareholders, said the company is controlled by an old guard of management “kingmakers” who prioritize their interests over shareholders’.

“In Japan even fairly big companies have these kingmakers who are in power for a decade or two and even the chief executive can’t oppose them,” Seto said.

“Their opinions do not necessarily represent shareholders’ opinions. Companies may prioritize kingmakers’ opinions and as a result Japanese companies do not function properly.”

The current CEO and chairman of Lixil’s board, Yoichiro Ushioda, hails from one of the company’s founding families. His prompt appointment after Seto’s departure had raised concerns about corporate governance and led to calls for him to resign.

Ushioda bowed to investor pressure and said last week he would step down in May - but not before publicly putting the blame on Seto for Lixil’s bleak financial performance.

Activist investors have been gaining momentum in Japan and have complained about what they see as poor performance as well as returns from cash-hoarding firms, with Prime Minister Shinzo Abe advocating strengthening corporate governance.

But companies are often able to ignore minority investors given the longstanding practice of cross-shareholding, where firms hold stakes in each other to cement business ties.

“If the governance of Japanese companies changes, then corporate management will improve,” said Seto, who remains a director at Lixil and is seeking to take back the CEO post.

He and another director have said they will propose a new slate of board members.

“I need to win. If I fail, that becomes a bad example of Japanese corporate governance,” Seto told Reuters this week.

KINGMAKER

Lixil was created in 2011 through a merger of five Japanese building materials and housing firms, including Tostem and Inax. It is well known in Japan for its high-tech, luxury toilets, while its overseas brands include American Standard and Grohe.

It has been roiled by the boardroom drama, which has been unusually fractious by the standards of corporate Japan, since Seto’s resignation in October.

According to a report from a group of independent lawyers commissioned by Lixil, Ushioda last year “engaged in behavior giving the false impression that Mr Seto had a concrete and clear intention to resign as CEO”.

The February report also cites a company director as saying: “No one could object to Mr. Ushioda, a member of a founding family, saying he will become CEO”.

Ushioda, when announcing his resignation, said he was doing so to take responsibility for previously appointing Seto.

“The appointment of Seto as CEO was my biggest mistake,” Ushioda told a news conference, saying Seto was responsible for the loss at Lixil’s Italian subsidiary, which forced the company to warn of a full-year net loss.

Seto, in turn, has accused Ushioda of being a “kingmaker” who wields power from the sidelines of companies and ultimately damages them. Ushioda’s willingness to stay on as adviser points to his desire to hold sway over the company, Seto added.

A Lixil spokesman, however, pointed out that Ushioda had said he would resign from the board and management.

“Lixil has been and will try to strengthen corporate governance in order to boost corporate value sustainably.”