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Nissan's Ghosn crisis

Ghosn scandal unmasks Nissan's lack of governance

Automaker had few outside directors with management experience, say experts

Nissan Motor Chairman Carlos Ghosn. The automaker reportedly had not been adhering to Japan's corporate governance code.   © Reuters

TOKYO -- Nissan Motor Chairman Carlos Ghosn apparently began receiving unreported income around the time Japan mandated the disclosure of executive remuneration in 2010 -- and as the executive faced heavy criticism over his pay.

The allegations of financial misconduct that led to Ghosn's arrest on Monday have their roots in the Japanese automaker's corporate governance -- or the lack of it -- experts say.

Ghosn is accused of underreporting compensation beginning in 2011, a year after Japan's Financial Services Agency required listed companies to disclose executive salaries topping 100 million yen ($880,000 at current rates). Though Ghosn's disclosed salary totaled 4.98 billion yen, or $44.2 million, over the next five years, he received around $88 million, sources say.

Shareholders at subsequent annual meetings continued to raise issues, even over his disclosed pay, saying that Nissan could have averted some of its layoffs if Ghosn's salary were trimmed. But Ghosn's disclosed salaries remained high by Japanese standards, often referencing global industry standards.

Under these circumstances, "The misstatement of income constitutes betrayal of shareholders," said Toshiaki Yamaguchi, an attorney with compliance issue expertise.

Ghosn is also under fire for having the company purchase or rent expensive housing for his use -- a beachfront condominium in Rio de Janeiro, a luxury home in Beirut, as well as residences in Paris and Amsterdam.

Brazil and Lebanon are two countries where Ghosn spent his childhood, but Beirut, for instance, has little to do with the alliance's operations.

Despite being one of the first Japanese companies to bring in a host of foreign board members, Nissan was among a handful that did not adhere to Japan's 2015 corporate governance code, which called for at least two outside directors, said Zuhair Khan, an equity analyst at investment bank Jefferies.

"Until recently, Nissan had only one outside director, a former Renault executive who was probably not really independent," Khan said. "Only 11 companies out of the Topix 500 fell into that category, and Nissan was one of them."

The new code calls on independent directors to perform roles such as "monitoring of the management" and "monitoring of conflicts of interest between the company and the management or controlling shareholders."

Under criticism, Nissan added two more outside directors in 2018, but neither hold corporate management or accounting backgrounds. Keiko Ihara is a race car driver, and Masakazu Toyoda is a former Ministry of Economy, Trade and Industry bureaucrat.

Nissan did not create board committees led by outside directors to oversee nominations or compensation, as many other companies do. Instead, those issues were handled by the chairman of the board, Ghosn.

Toshiaki Oguchi, head of Governance for Owners Japan, a governance lobby group, says "the governance structure at Nissan to check a leader with strong powers was insufficient."

Khan also said that Nissan board members, except for Ghosn, owned few of their company's shares. The median shareholder alignment at the automaker was around 39 million yen, or $345,000.

"At Toyota Motor, most board members owned around $2.8 million worth of their own shares. At Suzuki Motor it was $1.9 million, and at Honda Motor it was $1.1 million," Khan said, quoting 2018 figures. "Broad share ownership by all directors is more important than large ownership by a single individual. Scandal-hit companies in Japan tend to have low share ownership by board members."

Ghosn's arrest was made possible by the cooperation of a non-Japanese Nissan executive who agreed to a plea bargain with prosecutors, sources say.

A secret internal investigation at Nissan determined that houses were being purchased overseas for the chairman's use through a Dutch subsidiary led by the non-Japanese executive. The internal investigators handed over to prosecutors email exchanges between Ghosn and the executive that are considered evidence of the mishandling of funds. The executive agreed to cooperate, likely to receive lighter charges.

Plea bargaining was introduced in Japan just this June. This would be the second use of the tactic, after a Mitsubishi Hitachi Power Systems case regarding suspected bribery of Thai government officials.

Nissan Representative Director Greg Kelly, who also was arrested on Monday, was known as Ghosn's right-hand man. He was accused of running the CEO's office and held strong influence over leadership appointments and compensation decisions. 

But Yamaguchi suspects that others were involved. "It's impossible for just the two of them to make up logical explanations to shareholders," the attorney said.

Allegations against Ghosn center on the misuse of funds, particularly the housing purchases. Usually, such cases would be prosecuted as breach of trust under corporate law, or embezzlement under criminal law.

But prosecutors instead charged Ghosn with misstatement under Japan's financial instruments and exchange law, on the basis that the misused assets should have been included in Nissan's corporate securities reports. Prosecutors may have pursued this course because it would be difficult to prove the amount of damage incurred and whether it was done knowingly, as the alleged misconduct involved an overseas subsidiary.

"If this leads to improved corporate governance, then the investigation team is on the right track," Tatsuo Uemura, a Waseda University professor versed in corporate and financial instruments law, said regarding the unusual case.

Nikkei Asian Review chief desk editor Ken Moriyasu contributed to this report.

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