Pay, Power and Pol­i­tics:

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HE RAPID FALL FROM GRACE of Nis­san chair­man Car­los Ghosn is re­ver­ber­at­ing through­out the au­to­mo­tive in­dus­try and casts a shadow over the fu­ture of the Re­nault-Nis­san-Mit­subishi al­liance, the largest au­to­mo­tive group in the world that he cre­ated and led.

THE RAPID FALL FROM GRACE of Nis­san chair­man Car­los Ghosn is re­ver­ber­at­ing through­out the au­to­mo­tive in­dus­try and casts a shadow over the fu­ture of the Re­naultNis­san-Mit­subishi al­liance, the largest au­to­mo­tive group in the world that he cre­ated and led. It also sets up a stand­off be­tween Ja­panese and French au­thor­i­ties.

Last week, Ghosn was ar­rested in Ja­pan for al­legedly un­der­re­port­ing his pay and us­ing com­pany as­sets for per­sonal pur­poses. He was ousted from Nis­san while Mit­subishi said it would do the same, ac­cord­ing to The Wall Street Jour­nal. Mean­while, French au­thor­i­ties said they are wait­ing to see ev­i­dence of the ex­ec­u­tive’s al­leged im­pro­pri­eties. Ghosn is a French cit­i­zen and the French gov­ern­ment holds a 15% stake in Re­nault, which owns 43% of Nis­san. Nis­san has a 15% non-vot­ing stake in Re­nault and owns 34% of Mit­subishi.

Ghosn is an in­dus­try icon who led the turn­around at both Nis­san and Re­nault. In an in­dus­try that has seen failed merg­ers such as Daim­ler-Chrysler, he is cred­ited with suc­cess­fully manag­ing the au­to­mo­tive al­liance, which by some mea­sures be­came the world’s largest seller of ve­hi­cles in 2017, for the first time. With Ghosn’s fu­ture in doubt, a key les­son for cor­po­ra­tions is the risk of con­cen­trat­ing too much power in a sin­gle ex­ec­u­tive.

Wharton man­age­ment pro­fes­sor John Paul MacDuffie said he was “shocked and amazed” by the down­fall of Ghosn. MacDuffie is the direc­tor of the Pro­gram on Ve­hi­cle and Mo­bil­ity In­no­va­tion at Wharton’s Mack In­sti­tute for In­no­va­tion Man­age­ment. “I know some of the ten­sions in the al­liance but also many of its strengths,” he said. “None of that gave me any in­kling of this per­sonal scan­dal [in­volv­ing] Ghosn.”

MacDuffie hap­pened to ar­rive in Ja­pan the night be­fore Ghosn’s ar­rest, and got a ring­side view of the un­usu­ally strong im­pact it had on Nis­san. In a news con­fer­ence after the ar­rest, Nis­san’s CEO, a pro­tégé of Ghosn, was “un­usu­ally per­sonal and can­did for a Ja­panese se­nior ex­ec­u­tive, talk­ing about his shock and sor­row and anger over that,” MacDuffie re­called.

Richard Dasher, direc­tor of the U.S.-Asia Tech­nol­ogy Man­age­ment Cen­ter at Stan­ford Univer­sity, sug­gested that Ghosn per­haps had trou­ble brew­ing for him for a while. He de­scribed Ghosn as “an au­to­cratic leader” in the style of a Steve Jobs at Ap­ple, and that “[he] was not par­tic­u­larly liked, although he had to be re­spected.”

“This looks a lit­tle bit like a setup job by the new lead­er­ship in Nis­san,” added Dasher. “It sounds like they got him on some­thing. Ex­ec­u­tive com­pen­sa­tion pack­ages are very com­pli­cated.” But he noted that Ghosn has not been ac­cused of a brazen act like tak­ing un­eth­i­cal cash pay­ments. “It seems that this had to do with the com­pany buy­ing four lux­ury over­seas prop­er­ties and pro­vid­ing them for the use of Mr. Ghosn. And he did not count what the com­pany paid for these prop­er­ties as part of his own in­come, which they are re­quired to state.”

Many peo­ple view Ghosn “as one of the sav­iors of the auto in­dus­try” and the ac­cu­sa­tions against him are up­set­ting, ac­cord­ing to Tim Hub­bard, as­sis­tant pro­fes­sor of man­age­ment the Univer­sity of Notre Dame’s Men­doza Col­lege of Busi­ness. “When news like this hap­pens where it’s a per­sonal is­sue at a com­pany, it’s very dis­ap­point­ing,” he said. “It’s one of those sit­u­a­tions where you hope if a CEO or a chair­man is go­ing to lose their job, it’s over a per­for­mance is­sue, and that it’s not over some­thing where they’ve cho­sen to ben­e­fit per­son­ally from the firm in a way that is il­le­gal to the point that the Ja­panese of­fi­cials have ar­rested him.”

MacDuffie, Dasher and Hub­bard dis­cussed the take­aways from the Ghosn scan­dal on the Knowl­[email protected] Wharton ra­dio show on Sir­iusXM. (Lis­ten to the pod­cast at the top of this page.)

A Coup or Mis­con­duct?

Ghosn earned com­pen­sa­tion of $8.4 mil­lion from Re­nault and $6.5 mil­lion from Nis­san in fis­cal 2017, ac­cord­ing to CNBC, not count­ing pay from Mit­subishi. How­ever, he al­legedly re­ported to the Tokyo Stock Ex­change only about half the roughly $89 mil­lion in his com­pen­sa­tion over five years, ac­cord­ing to a Reuters re­port.

Trans­parency over pay is crit­i­cal, es­pe­cially for an ex­ec­u­tive of Ghosn’s stand­ing, ac­cord­ing to Hub­bard. “This is one of those cases where we re­ally ex­pect the board of di­rec­tors and the pub­lic to know ex­actly what a chief ex­ec­u­tive of­fi­cer is be­ing paid,” he said. “And when there’s a dis­crep­ancy of this amount, it’s [be­cause] there wasn’t this trans­parency.”

Ac­cord­ing to Hub­bard, that ap­par­ent short­com­ing in trans­parency oc­curred against a back­drop of dis­com­fort in France and Ja­pan over CEO pay. “He made more four times more than Toy­ota’s CEO and so he was al­ready mak­ing a lot of money,” Hub­bard said. “In this case, he was able to make more and hide that in the [reg­u­la­tory fil­ings] and keep it out of the pub­lic eye.” Ghosn’s case rep­re­sents “an un­usual sit­u­a­tion, be­cause he has to bal­ance the cor­po­rate gov­er­nance re­quire­ments and the ex­pec­ta­tions of Ja­panese com­pa­nies, at the same time as [those of ] French com­pa­nies.”

How­ever, be­cause of Ghosn’s suc­cess in manag­ing the Re­nault-Nis­san-Mit­subishi al­liance, “I’m sure that his de­mands for high pay were prob­a­bly ac­cepted pretty quickly,” MacDuffie said. Dasher added that although Ghosn’s pay “is rather high, it’s com­pa­ra­ble” to what Mary Barra, chair­man at Gen­eral Mo­tors, and Jim Hack­ett, CEO of Ford Mo­tors earned last year (re­port­edly $22 mil­lion and $16.3 mil­lion in 2017, re­spec­tively).

Ac­cord­ing to MacDuffie, much of the grudg­ing over Ghosn’s pay was be­cause of “the un­usual gov­er­nance ar­range­ments where he is the sin­gle per­son at the apex of all three of those com­pa­nies, and there­fore claim­ing CEO-level pay from all three of those com­pa­nies.” He at­trib­uted that fac­tor to hav­ing “pushed the ten­sion” over his pay to a high level. “The ten­sion would still be there in the ab­sence of the al­leged per­sonal abuse of those funds. I can see why peo­ple are won­der­ing if it’s a palace coup or if there’s some­thing that’s sus­pi­cious in the tim­ing of [Ghosn’s ar­rest]. I guess we’ll learn more as the full story comes out.”

Too Much Power?

Did Ghosn have far too much con­trol at the three com­pa­nies? Ap­par­ently yes, noted MacDuffie, point­ing to a Nis­san direc­tor’s com­ments at a news con­fer­ence where “he was crit­i­cal of how much power is cen­tral­ized in one per­son” in the al­liance. Ghosn, 64, is ap­proach­ing re­tire­ment and had al­ready an­nounced his plans to exit all roles in the al­liance by 2020. “If he hadn’t emerged as such a hero from the early stages of this turn­around [at Nis­san and Re­nault], many peo­ple would have said it’s a lit­tle risky to con­cen­trate that much power in one per­son.”

“There’s too much power in this case,” added Hub­bard. “The board of di­rec­tors of each of those com­pa­nies is em­bed­ded with [Ghosn], and over 20 years he’s been in­volved in all three of these com­pa­nies — Mit­subishi Mo­tors a lit­tle bit less. But in that amount of time, he’s been able to so­lid­ify his power in re­la­tion to other di­rec­tors, and I think that’s [helped] re­move some of the mon­i­tor­ing ca­pa­bil­i­ties that we would ex­pect from a board of di­rec­tors. … Over­sight from the board of di­rec­tors is there to pre­vent these types of things from hap­pen­ing.”

Dasher saw the clash over Ghosn’s power com­ing to a head. “I’m a lit­tle con­cerned that what we’re see­ing is old style Ja­panese con­sen­sus man­age­ment try­ing to re­place or get rid of the for­eign, au­to­cratic style of man­age­ment,” he said. Based on re­marks at the Nis­san press con­fer­ence about one per­son hav­ing too much power, he added, “This makes me sus­pect that you’ve got a group of di­rec­tors and other se­nior ex­ec­u­tives who would like to go back to the way things were in Ja­pan.”

MacDuffie noted that Ghosn has been crit­i­cized for not do­ing enough with suc­ces­sion plan­ning. “But I can’t think of an­other sit­u­a­tion like it in the world — to have one per­son be the chair­man of three dif­fer­ent auto com­pa­nies, and the CEO of two of them,” he said. “On the other hand, this al­liance from the start has had an un­usual form of cor­po­rate gov­er­nance, and some peo­ple think it’s the rea­son for its suc­cess — it was not a merger or an ac­qui­si­tion. At least the rhetoric has been that the [al­liance com­pa­nies] are equal par­ties to all de­ci­sions.” He added, though, that the French gov­ern­ment might have a “dis­pro­por­tion­ate in­flu­ence” on the run­ning of the al­liance be­cause of cross-hold­ings.

“Ghosn might be the glue that’s hold­ing [the al­liance] to­gether and mak­ing it work,” said Hub­bard, not­ing that each of the com­pa­nies is run in­de­pen­dently and they share mod­els and tech­nol­ogy among them, which is helped by the qual­ity of co­or­di­na­tion around the three com­pa­nies. “That might ac­tu­ally be the rea­son for [the al­liance’s] suc­cess — that there is a pow­er­ful leader who is able to take charge in each of the three. It could be that with­out him in there, there might be is­sues with the al­liance go­ing for­ward.”

Even those who want Ghosn re­moved give him grudg­ing re­spect. Mit­subishi CEO Osamu Ma­suko does not think one per­son could fill Ghosn’s roles at the three com­pa­nies. “I don’t think there is any­one else on earth like Ghosn who could run Re­nault, Nis­san and Mit- subishi,” he said, ac­cord­ing to The Guardian. Nis­san, too, has cred­ited Ghosn for its turn­around: “Mr. Ghosn was the lead ar­chi­tect of the Nis­san Re­vival Plan, which trans­formed the com­pany from near-bank­ruptcy to prof­itabil­ity within two years.” The com­pany added that un­der his lead­er­ship, it has had “higher profit mar­gins than many ri­vals and has ex­panded ge­o­graph­i­cally.”

Road Ahead

The tur­moil at Re­naultNis­san-Mit­subishi is oc­cur­ring at “a stress­ful time, but also an ex­cit­ing time for the tra­di­tional auto in­dus­try,” said MacDuffie. The in­dus­try is grap­pling with mul­ti­ple changes, from elec­tric ve­hi­cles to au­tonomous ve­hi­cles and mo­bil­ity-as-a-ser­vice (such as Uber and Lyft), and many new com­peti­tors com­ing from Sil­i­con Val­ley and else­where, he noted. “These firms are scram­bling to fig­ure out how best to deal with all of those new devel­op­ments while try­ing to run the tra­di­tional busi­ness.”

At least, the al­liance has had some suc­cess. “Frankly, they’ve been do­ing fairly well,” MacDuffie said. Nis­san is seen as a leader in both au­tonomous ve­hi­cles and elec­tric ve­hi­cles in Ja­pan and else­where in the world.” He noted that Re­nault has done well with en­gi­neer­ing “some ex­tremely fru­gal de­signs” for mar­kets in East­ern Eu­rope, In­dia, and lately for China as well.

Any changes in the way Nis­san is run after Ghosn for­mally ex­its will de­pend on how much power he ac­tu­ally wielded, said Hub­bard. For now, though, the stock mar­ket sees Ghosn re­moval as a prob­lem for Nis­san as shares plunged after the ar­rest. “If this was a tra­di­tional dis­missal, where there were is­sues with the chief ex­ec­u­tive of­fi­cer and re­mov­ing them from the com­pany was a good thing … we would have seen stock prices [rise]. It’s an ar­rest, so the down­side of the stock price made sense. But at the same time, if the change in man­age­ment was go­ing to be ben­e­fi­cial for each of the firms, we might not have seen as strong of a down­ward trend.”

Ac­cord­ing to MacDuffie, “The al­liance prob­a­bly has a lot of strengths and rea­sons to con­tinue through this cri­sis.” But the wild cards are the depth of the scan­dal and con­flicts among the French gov­ern­ment, the Re­nault board and Nis­san’s board over what each sees as the best ap­proach for­ward. He pointed to ten­sion over a pro­posal for a full merger in which Re­nault’s dom­i­nant own­er­ship stake would give it a more per­ma­nent power, and that it was strongly re­sisted by Nis­san. “The cor­po­rate gov­er­nance com­plex­i­ties here could desta­bi­lize the al­liance — which would be a shame, be­cause there’s a lot of strength there.”

Ghosn might be the glue that’s hold­ing [the al­liance] to­gether and what’s mak­ing it work

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