How Ghosn may have hid­den $70 mil­lion from Nis­san

The Myanmar Times - - International Business -

HOW could one of the world’s most vis­i­ble em­ploy­ees go about hid­ing $70 mil­lion worth of salary and ben­e­fits paid to him by one of the world’s big­gest com­pa­nies, with­out the com­pany know­ing it?

Two weeks af­ter Tokyo pros­e­cu­tors ar­rested Car­los Ghosn for al­legedly un­der-re­port­ing his com­pen­sa­tion, that ques­tion is still unan­swered. What is cer­tain is that Nis­san Mo­tor Co.’s own cor­po­rate gov­er­nance rules gave un­usual powers to its for­mer chair­man, a busi­ness celebrity who was given ex­tra­or­di­nary def­er­ence for hav­ing once rescued the au­tomaker from fi­nan­cial ruin. Those powers in­cluded near-to­tal say over how much -- and how -- he was paid, ac­cord­ing to Nis­san’s own in­ter­nal rules.

Sev­eral peo­ple fa­mil­iar with the pros­e­cu­tors’ in­ves­ti­ga­tion now say the probe ap­pears to hinge on a rel­a­tively ar­cane point of ac­count­ing -- whether re­tire­ment pay­ments were prop­erly booked. Whether or not Ghosn broke Ja­pan’s se­cu­ri­ties law by feed­ing the wrong num­bers to Nis­san’s board and its ac­coun­tants (at this point, the al­le­ga­tions are un­proven), cor­po­rate gov­er­nance ex­pert Jamie Allen says the deeper ques­tion is how any­one could have got­ten away with some­thing like that.

“It all comes back to a lack of in­ter­nal con­trols,” said Allen, head of the Hong Kong-based Asian Cor­po­rate Gov­er­nance As­so­ci­a­tion. “If the board gen­uinely didn’t know that the dis­clo­sure of his re­mu­ner­a­tion was in­ac­cu­rate, that doesn’t say much for gov­er­nance. And if they did know, they should take col­lec­tive re­spon­si­bil­ity for the fail­ure.”

Fights over pay have been a con­stant for Ghosn al­most since the mo­ment he took over in 1999 as chief op­er­at­ing of­fi­cer of the then-troubled Ja­panese au­tomaker. Early on, he caught flack for re­ward­ing Nis­san’s se­nior man­agers for per­for­mance in­stead of se­nior­ity.

Later, in 2010, when Ja­pan’s new rules on dis­clo­sure of ex­ec­u­tive com­pen­sa­tion outed him as the coun­try’s top-paid boss, he caught flack again. The $10 mil­lion he re­port­edly made that year might not have been out of line by West­ern stan­dards, but it ran­kled in Ja­pan where the brash Franco-Brazil­ian ex­ec­u­tive was seen to be tak­ing home six times what Toy­ota’s chair­man made.

It now ap­pears that even those num­bers were un­der­stated. Ghosn’s salary had ac­tu­ally been much higher be­fore pub­lic dis­clo­sure was re­quired; to min­i­mize crit­i­cism, a plan was de­vised to de­fer about half his an­nual pay un­til af­ter re­tire­ment, keep­ing the num­bers off the books, ac­cord­ing to peo­ple fa­mil­iar with the in­ves­ti­ga­tion.

Ghosn has de­nied any rules were bro­ken around de­ferred com­pen­sa­tion, peo­ple with di­rect knowl­edge of the case have said. His de­fense is that the amount of such pay wasn’t cer­tain, and there­fore it was ap­pro­pri­ate to omit it from se­cu­ri­ties fil­ings, they said. Ghosn hasn’t had an op­por­tu­nity to re­spond in pub­lic be­cause he’s held in de­ten­tion, where Ja­panese law al­lows peo­ple to be kept for weeks with­out be­ing charged.

Pros­e­cu­tors were alerted to Ghosn’s al­leged wrong­do­ing af­ter a whistle­blow­ing tip from in­side Nis­san. The tim­ing prompted some an­a­lysts to say the scan­dal may have been man­u­fac­tured in or­der to block a merger that Ghosn was ad­vo­cat­ing be­tween Nis­san and its part­ner, Re­nault.

If Ghosn’s celebrity once helped him rally Nis­san’s troops, it may have also made mis­be­hav­ior eas­ier. In­side the com­pany, an un­ques­tion­ing cult-of-Ghosn took root, ac­cord­ing to sev­eral peo­ple fa­mil­iar with the sit­u­a­tion. By 2015, when Ja­pan in­tro­duced its cor­po­rate gov­er­nance code, it was clear even to some within the com­pany that Nis­san was an out­lier in terms of how much con­trol it gave its chair­man. “We had gov­er­nance in name only,” Nis­san Chief Ex­ec­u­tive Of­fi­cer Hiroto Saikawa told the me­dia af­ter Ghosn’s ar­rest.

“Ghosn’s team thought that the best way to en­sure gov­er­nance was to con­cen­trate power,’’ said Satoshi Egi, an ex­pert on cor­po­rate com­pli­ance at Tokyo’s NLI Re­search In­sti­tute. “It works when you have out­stand­ing lead­er­ship. And it’s risky when you don’t.’’

Zuhair Khan, an an­a­lyst at Jef­feries Inc. in Tokyo, had been warn­ing in­vestors for years that Nis­san stood out for its poor gov­er­nance. Two years af­ter Ja­pan adopted its cor­po­rate gov­er­nance code, Khan says Nis­san was the only big, Ja­panese global com­pany with a board that still didn’t have the re­quired two in­de­pen­dent di­rec­tors.

In­de­pen­dent di­rec­tors were even­tu­ally hired, but only af­ter an em­bar­rass­ing re­call scan­dal in 2017, when it was dis­cov­ered that ve­hi­cle safety in­spec­tions had been per­formed by un­qual­i­fied work­ers. The qual­i­fi­ca­tions of the new board mem­bers also raised eye­brows. One was a re­tired gov­ern­ment bu­reau­crat. The other was an ex-race­car driver and for­mer model.

“It was as if they pur­posely picked peo­ple who wouldn’t be able to ask ques­tions,” Khan said.

Ja­pan’s cor­po­rate gov­er­nance code is closer to a wish-list than a set of ac­tual reg­u­la­tions. Firms aren’t forced to com­ply, but must give share­hold­ers an ex­pla­na­tion in any in­stance where they haven’t.

One guide­line Nis­san chose not to adopt was set­ting up in­de­pen­dent ad­vi­sory com­mit­tees on ex­ec­u­tive pay. The omis­sion gave Ghosn broad power to de­cide how much he was paid. It also al­lowed him to de­ter­mine the com­pen­sa­tion of the peo­ple who were sup­posed to keep him in check.

Nis­san’s Cor­po­rate Gov­er­nance Re­port says plainly: “The chair­man of the board deter­mines the com­pen­sa­tion of each di­rec­tor’’ based on con­sul­ta­tion with the com­pany’s two other top top of­fi­cials -- one of whom was Greg Kelly, the Amer­i­can ar­rested along with Ghosn.

Em­ploy­ees in Nis­san’s fi­nance depart­ment weren’t re­spon­si­ble for ver­i­fy­ing the de­tails of C-suite salary num­bers dis­closed in an­nual se­cu­ri­ties re­ports, ac­cord­ing to one per­son fa­mil­iar with com­pany’s prac­tices. That was the board’s job, but no one dared to ask ques­tions, the per­son said.

Nis­san spokesman Ni­cholas Max­field de­clined to com­ment for this story.

Hui Chen, a com­pli­ance ex­pert and for­mer at­tor­ney at the U.S. Depart­ment of Jus­tice, says the big­ger and more com­pli­cated the com­pany, the more op­por­tu­nity for mis­be­hav­ior by top ex­ec­u­tives. Sprawl­ing busi­nesses like Nis­san may have hun­dreds of sub­sidiaries, op­er­at­ing in dozens of coun­tries, each with its own sets of books and pay­rolls -- which is why, she said, over­sight is so im­por­tant.

“The gen­eral fact pat­tern here in­di­cates that ques­tions should be asked about Nis­san’s cor­po­rate gov­er­nance and cor­po­rate cul­ture,” she said.

Photo: Bloomberg

Car­los Ghosn.

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