The Case of Carlos Ghosn and the Renault-Nissan-Mitsubishi Alliance: A Complete Failure of Corporate Governance

Today’s post comes from Oluwarotimi Adeniyi-Akintola, a PhD student in Aston Law School. Rotimi’s doctoral research focuses upon corporate governance forms within Nigeria. For more from Rotimi, please follow his twitter profile here and his blog page on Medium here.

As you may have heard, Carlos Ghosn, one of the most prominent figures in the automotive industry, was arrested in Tokyo on November 19, 2018. According to Japanese prosecutors, he stands accused of financial improprieties and the falsification of annual securities reports, which could result in a jail term of 10 years, a fine of 10m yen, or both. His arrest has sparked corporate crises across two continents and marks an astonishing reversal in fortune for a man many consider to be the lifeblood of the titanic Renault-Nissan-Mitsubishi (RNM) alliance. In many ways, Ghosn’s story is a demonstration of how the concentration of power in key individuals can result in a complete failure of corporate governance at even the most prominent organisations.

Having earned a reputation for returning ailing businesses to profitability through previous stints at Michelin and Renault, the legend of Carlos Ghosn really kicked off in 1999 when he was appointed as Nissan’s COO. Renault had just purchased a 36.8% stake in Nissan, thus marking the beginning of what is now known as the RNM alliance and needed someone to save Nissan from the brink of collapse. It was here that Ghosn performed his greatest magic trick. He went on a cost-cutting rampage, cutting 21,000 jobs, shutting down plants, suppliers, and introducing drastic changes to corporate-culture at Nissan. Within three years, Ghosn who was now the CEO, had halved Nissan's $19bn debt, returned the company to profitability and grown sales from below $50bn to almost $80bn. He became hugely popular in Japan after this exploit, so much that he was awarded a medal of honour by the Japanese Government, and was ranked ahead of Obama in a 2011 poll which asked the Japanese to choose their ideal Prime Minister. In the mid 2000s, his legend was cemented. Ghosn was appointed Chevalier of the Legion of Honour by the French government and subsequently made an Honorary Knight Commander of the Order of the British Empire in recognition of his achievements.

By 2009, ‘Le Cost Killer’, as he came to be known, was the simultaneous Chairman and CEO of both Nissan and Renault, and when Mitsubishi became a member of the alliance in 2016, Ghosn was immediately appointed its Chairman.

The picture being painted here is of a man with the reputation of a corporate magician, who had the entire automotive industry in awe of him and was worshiped by his loyal subjects. This same person also had near-absolute control of a car alliance which sold 10.6 million vehicles in 2017, and today accounts for more than 1 in 9 vehicles around the world. He had occupied leadership roles on the boards of the member companies for the best part of two decades, and he ran the alliance as though it were one company. He was the man. He had all the power. As the CEO of Mitsubishi recently stated, it became difficult to foresee a future for the alliance without Ghosn in the picture. In such an entrenched position, it is impossible to imagine how anyone could have possibly challenged his will and direction in the boardroom. What everyone, including people who should know better, failed to realise was that this was the ultimate nightmare scenario for the corporate governance of the three companies.

Although the issue is subject to heavy debate, the separation of the roles of the Chairman and CEO is a key component of corporate governance principles embraced by shareholder activists and other stakeholders in the UK and much of continental Europe. The bulk of the opposition emanates from the United States and France, where about 60 % and 70% of companies respectively have had one person occupying both positions according to one report, compared to fewer than 20% of companies in Britain, Germany and Japan. This principle is so strongly held, that a buffer period of at least 5 years, is often recommended before a former CEO or other person connected with the company is to be appointed as its Chairman. Term limits ranging from 5 – 10 years are also imposed in order to curb the concentration of power in one individual. Quite simply, many people believe that a company is less likely to be mismanaged if it resists domination by a single, all-powerful CEO/Chairman who is free to run the company as (s)he sees fit. The Ghosn case appears to be a perfect illustration of this situation.

The allegations against Ghosn are as follows: he collaborated with another board member, Greg Kelly, whom he instructed via email to under-report his income by about 5 billion yen ($44 million) over a five-year period; he misappropriated money allocated for other Nissan executives; using Nissan’s funds, he purchased properties in Rio De Janeiro, Beirut, Paris and Amsterdam which were rent-free and undeclared; Nissan paid his sister $1.7 million for advisory work which was never conducted; and he directly instructed a close aide by email to make a 1.5 million dollar payment to remodel his home in Lebanon. It is very important to stress at this point that these are only allegations, and that Carlos Ghosn has neither been charged nor convicted of any offences at this point in time. These relate to Nissan alone, and further allegations appear by the day.

Although the message Nissan currently projects is that this was the work of a few bad eggs, it is highly unlikely that these allegations, if true, were carried out without the knowledge of more than a few collaborators, given their scale and the length of time involved. The profile of the alleged beneficiary, Ghosn, must have a significant part in allowing and concealing these alleged improprieties. This much was admitted by Nissan’s CEO and interim Chairman, Saikawa, who stated that ‘the lesson we need to learn from the negative part of Ghosn’s rule is that too much power was concentrated in one person.’ He also suggested that there were times when Ghosn made decisions without seeking the input he should have, and called for an improvement in the company’s weak corporate governance.

Indeed, Nissan’s corporate governance structure was appalling. Ghosn, who once told investors that no CEO should exceed a term of five years, was allowed to spend nearly two decades at the helm of Nissan. In a review of governance in Japan’s largest companies in 2011, Nissan was one of very few that did not have at least two independent directors and was found to have no board committees. Without these structures, there were no checks and balances, particularly with regard to auditing, appointments, compliance, executive remuneration and other sensitive issues. Saikawa’s frank assessment of the situation at Nissan is hardly surprising when considered in this context.

The single positive thing about failures of this nature is that they usually result in the installation of stronger governance safeguards. Following Saikawa’s comments, Nissan was quick to announce a review of its corporate governance policies in a concerted effort to clean up its image. The fact that these allegations were exposed by a whistle-blower is nonetheless encouraging and serves to re-emphasise the importance of whistle-blower protections for effective corporate governance.

However, it would be remiss of me to ignore speculation that the whistleblowing was orchestrated by senior figures within Nissan who were strongly opposed to Ghosn and Renault’s plans to render the alliance irreversible by way of a merger. If true, this suggests a deeper rot in Nissan’s corporate governance arrangements, as it would mean those senior figures were happy to turn a blind eye until their personal interests were threatened.

The clear lesson to be learnt here is that incidents of Ghosn’s alleged crimes are more likely to occur when celebrated and dominant figures exist within an organisation. Whilst such dominance may arise when the positions are separated for various reasons, said dominance is almost inevitable when the same individual occupies the dual position of Chairman and CEO for a lengthy period of time, as seen in Ghosn’s case. In the words of a famous pop star, ‘no one man (or woman) should have all that power.’

Keywords – Renault; Nissan; Mitsubishi; automotive, Corporate Governance, Business, @finregmatters