Strategy & Operations » Governance » What are the implications of Carlos Ghosn’s arrest?

Six months ago Carlos Ghosn, chairman and chief executive of the companies in the Renault-Nissan-Mitsubishi Alliance, the world’s biggest car maker, was regarded as one of the world’s greatest business leaders.

But on 19 November last year his arrest on suspicion of financial crimes against Nissan shocked the international business community. He was led into a Japanese court in handcuffs and a rope around his waist, facing financial misconduct charges.

In particular these included accusations of understating his salary by tens of millions of dollars as head of Nissan, and having mis-used company funds to cover up over $40 million of personal investment losses.

It seemed extraordinary given the French-Lebanese leader’s seemingly immaculate credentials having built the Alliance and recently managing a turnaround of Nissan and taking Renault on a winning streak.

But the reputation of the super-manager is being shredded by the day, having been arrested for a fourth time and being jettisoned from the boards of the Alliance companies, whilst all the time protesting his innocence.

Professor Jim Saker, Director of the Centre for Automotive Management at the Loughborough School of Business and Economics, one of the UK’s leading experts on the sector, offers some thoughts on Ghosn’s recent performance.

“On the surface Ghosn appeared as the upholder of sound values when he was brought into Mitsubishi in 2015 to clean up the company image when it was rocked with a scandal over the false disclosure of mileage tests.

However, cracks began to appear when in 2017 the Nissan inspection issue came to light when it was discovered that unauthorised workers were certifying vehicles as part of the production process,” he says.

“For many this was excused as being a management issue lower down the organisation. Perhaps the warning signs were there when Nissan CEO Hiroto Saikawa said that the failure to uncover the scandal was ‘particularly surprising given the transparent culture encouraged by Chairman Carlos Ghosn.’

“His statement to some extent challenges the whole attitude of Ghosn who supposedly wanted things to be transparent within the company but less transparent when it came to his own personal tax and financial affairs.  Obviously, the case has still to be heard but the accusations do seem robust,” adds Prof Saker.

Corporate impact

Professor Florian Bauer of Lancaster University Management School says the issue will affect Renault and Nissan in various ways, including stock market reactions. At both companies the share price tanked in December and January, but has recovered to some degree at each.

Prof Bauer is concerned about longer-term consequences of the Ghosn arrest, especially in managing a share price recovery. “There are recent examples where managers quench fires by announcing programmes that should please shareholders but might result in long-term negative effects for the organisation,” says Prof Bauer.

He says these negative effects derive from a focus on safe pathways to short-term success and immediate profit and loss statement effects. These so-called “low hanging fruit”, “quick wins”,  often feature redundancies to reduce costs, he says.

He refers to the example of pharma giant Bayer. “Under serious pressure after the acquisition of agro group Monsanto, Bayer announced it would be further reducing the workforce and making cost savings. Whether this is done due to clear strategic considerations or to please the shareholders, in this case rather quenching fires as the share price dropped by 40%, is doubtable,” he says.

These asset-driven approaches might be in conflict with the future viability of the organisation – cutting expensive R&D costs might have a short-term positive effect but might in the long run annihilate the business model – and affect thousands of individuals, he says.

“Another aspect to consider is if the top managers in an organisation have degrees of freedom to behave in a way similar to that in which Carlos Ghosn is suspected, we might expect more misconduct at top management level in combination with weak control mechanisms.

“As upper echelons have a strong influence on organisations, such behaviour might infiltrate the organisational culture and such the behaviour of individuals. This infiltration is especially dangerous, as the negative consequences are often not visible for a long-time but these secrets are never safe under the carpet, e.g. Dieselgate or the tax fraud scheme CumEx scandal,” he adds.

Additional consequences

When allegations as serious as those against Carlos Ghosn are made, shareholders’ natural reaction is one of concern as to what will happen with regards to their investment in the company.

Minority shareholders are in a particularly vulnerable position as they have very little control of the board. In cases where a board holds firm and there is not enough support from other shareholders, of which in the case of Nissan, there are thousands, “then the director of the company is most likely to remain in post,” says James Morgan QC, a barrister at Radcliffe Chambers.

Where the law in England is concerned, there is actually shockingly little that shareholders can do when it comes to procuring the removal of the director if he/she shows no sign of being pushed out by the board (or of leaving voluntarily), says Morgan. “Given that Ghosn is angrily denouncing his detention as ‘outrageous and arbitrary’, it would have been highly unlikely that he chose to remove himself from the board.

“So what kind of powers do shareholders actually have when it comes to removing a director? While they can theoretically remove him or her by way of ordinary resolution at a meeting, in actual fact there are potential delays and impediments that make this very difficult in practice.

“In cases where a meeting is called, the company must give 28 clear days of the resolution to the members and to the director in question. The director is then entitled, at the meeting itself, to be heard on the resolution of the meeting and will then only be passed by a majority of those voting.

“It is the directors who have the power to call a meeting in the first place. Shareholders who represent at least 5% of the membership can require the directors to call a meeting, and have 21 days to do so. It is only in the case where they fail to do so that requesting members (or any of those who represent over 50% of the voting rights) can call a meeting.

“The case against Carlos Ghosn is becoming one of the most widely-publicised cases of alleged misuse of company funds for personal gain, and it is unsurprising that this has ultimately led to Ghosn’s position at Nissan being untenable.

“Ultimately the shareholders were able to oust Ghosn by collective action owing to the magnitude of the case and the reporting, but this will offer little comfort for minority shareholders who will continue to find themselves in vulnerable positions when top company directors face legal proceedings on account of misusing company funds,” says Morgan.

Lancaster University’s Prof Bauer believes that a long-term impact could be significant for the companies in the Alliance as details emerge of alleged behaviour by Ghosn.

“Suspicions like these- grounded or not- might contribute to a split in organisations where either blue-collar workers no longer trust their managers or where envy and greed, two of the seven deadly sins, become well accepted.

“Such behaviours might trigger a split in society, where a majority of people believe that a few powerful humans can act as they like. This growing disconnect becomes evident with the increasing popularity of populists or the Occupy Wall Street movement. Individual misconduct matters, and power correlates with responsibility,” he adds.

 

Download our Whitepapers
Accounting Software
Finance Process
Finance Process
FD Surveys
Finance Process
Read more
Governance
Governance
Governance

Balancing directors’ responsibilities

By Katee Dias | Goodman Derrick LLP
Governance

Be socially responsible or perish!

By Professor Collins Ntim | Southampton Business School