A closer look at the scan­dal that has en­gulfed auto ti­tan Car­los Ghosn

An icon of the Mid­dle East busi­ness land­scape, Car­los Ghosn was the go- to man for re­viv­ing the for­tunes of fail­ing car­mak­ers. But his re­cent ar­rest for fi­nan­cial mis­con­duct has put him at the mercy of Ja­panese pros­e­cu­tors, with po­ten­tial jail time and mu

Gulf Business - - FRONT PAGE - By Neil King

FOR DECADES CAR­LOS GHOSN WAS UN­TOUCH­ABLE.

He was the man with the golden touch who suc­ceeded at turn­ing around fail­ing com­pa­nies’ for­tunes, earn­ing him­self the nick­name ‘Mr Fix It’, as well as global praise for his work with Miche­lin, Re­nault, Nis­san and Mit­subishi Mo­tors.

A hero in his na­tive Le­banon, where he was tipped as a po­ten­tial pres­i­dent be­fore dis­miss­ing the idea, he has long been hailed as a busi­ness icon of the Arab world – de­spite also be­ing a dual French cit­i­zen born in Brazil.

In­deed, the 64-year-old has been a reg­u­lar fea­ture near the top of the Gulf Busi­ness Arab Power List over the years, rank­ing ninth in 2018, and sev­enth a year ear­lier.

In Ja­pan, where he un­der­took some of his most sig­nif­i­cant work, he was se­ri­alised in one of the coun­try’s most fa­mous comic books. And in 2011 he came sev­enth in a poll of peo­ple the Ja­panese would like to run their coun­try; ahead of ninth-placed Barack Obama.

In No­vem­ber, how­ever, the busi­ness com­mu­nity was left in shock when Ghosn was ar­rested for and sub­se­quently charged with fi­nan­cial mis­con­duct – a move that has se­verely threat­ened the auto ex­ec­u­tive’s celebrity sta­tus and fu­ture ca­reer.

The rise and fall

Ghosn was ar­rested fol­low­ing al­le­ga­tions that he had un­der­re­ported his com­mis­sion

on five years of Nis­san’s fi­nan­cial re­ports with Ja­panese pros­e­cu­tors charg­ing him with fi­nan­cial mis­con­duct in De­cem­ber. The size of the un­der­re­port­ing is thought to be about $44m. He was still in de­ten­tion at the time of go­ing to press, and was likely to be so un­til De­cem­ber 30, ac­cord­ing to re­ports.

Dis­missal from his role as Nis­san and Mit­subishi’s chair­man fol­lowed his ar­rest, with im­pli­ca­tions for his po­si­tion at Re­nault. If con­victed, the charges could mean up to 10 years in prison, as well as a fine of up to YEN700m ($6.2m).

To find out how we ar­rived to this point, let’s rewind and briefly look at Ghosn’s ca­reer path.

Af­ter grad­u­at­ing in 1978, Ghosn joined Europe’s largest tyre maker Miche­lin, where he spent 18 years ris­ing through the ranks. In 1985, aged 30 years old, he was ap­pointed chief op­er­at­ing of­fi­cer of the com­pany’s South Amer­i­can op­er­a­tions. There, global CEO François Miche­lin tasked Ghosn with turn­ing around the then strug­gling op­er­a­tion. He suc­ceeded, and in 1989 was ap­pointed pres­i­dent and CEO of Miche­lin North Amer­ica. A year later he was CEO, where­upon he led the com­pany’s re­con­struc­tion af­ter its ac­qui­si­tion of the Uniroyal Goodrich Tire Com­pany.

In 1996, Ghosn joined French auto man­u­fac­turer Re­nault as ex­ec­u­tive vice pres­i­dent in charge of pur­chas­ing, ad­vanced re­search, en­gi­neer­ing and de­vel­op­ment, pow­er­train op­er­a­tions and man­u­fac­tur­ing. He was also put in charge of the firm’s South Amer­i­can divi­sion.

He led a re­struc­ture that con­trib­uted to prof­itabil­ity over 1997 for the newly pri­va­tised com­pany. In 1999 Re­nault and Nis­san formed the Re­nault-Nis­san Al­liance, with Re­nault pur­chas­ing a 36.8 per cent stake in Nis­san shortly there­after. Ghosn re­tained his roles at Re­nault and also joined Nis­san as COO in the same year, be­com­ing pres­i­dent a year later and CEO a year af­ter that in 2001.

It was here that Ghosn truly earned his sky-high rep­u­ta­tion. With Nis­san hav­ing an au­to­mo­tive debt of more than $20bn, and only three of its 46 mod­els gen­er­at­ing a profit in Ja­pan, he an­nounced his Nis­san Re­vival Plan in 1999, call­ing for a re­turn to prof­itabil­ity in fis­cal year 2000, a profit mar­gin in ex­cess of 4.5 per cent of sales by the end of 2002, and a 50 per cent re­duc­tion in the 1999 level of debt by 2002. The plan in­cluded 21,000 job cuts, mainly in Ja­pan, as well as shut­ting five Ja­panese plants, re­duc­ing the num­ber of sup­pli­ers, and sell­ing off as­sets.

On top of this, Ghosn went against Ja­panese busi­ness eti­quette and long-held tra­di­tions by lead­ing changes to Nis­san’s struc­ture and cor­po­rate cul­ture. De­spite risk­ing out­rage in­side and out­side the com­pany, his plan saw net profit af­ter tax rise to $2.7bn for 2000. The pre­vi­ous year the com­pany saw a net loss of $6.46bn.

Fur­ther growth plans in the sub­se­quent years were all achieved – in­clud­ing sales of 3.67m ve­hi­cles in the pe­riod from Septem­ber 2004 to Septem­ber 2005, up from 2.6m in the fis­cal year end­ing March 2002. In 2005 Ghosn was named pres­i­dent and CEO of Re­nault, be­com­ing the first per­son in the world to run two com­pa­nies on the For­tune Global 500 si­mul­ta­ne­ously.

By 2008 he was chair­man, pres­i­dent and CEO of Nis­san, and a year later was named chair­man and CEO of Re­nault. But it wasn’t just in the work­place that he made an im­pact. In 2011, fol­low­ing the earth­quake and tsunami that hit Ja­pan, he led some re­cov­ery ef­forts, in­clud­ing site vis­its, and ap­pear­ances on Ja­panese tele­vi­sion.

In 2012 the ex­ec­u­tive was named deputy chair­man of the board of di­rec­tors of Rus­sian man­u­fac­turer Au­toVAZ, be­com­ing chair­man in 2012. Re­nault had been part­nered with Au­toVAZ since 2008, and even­tu­ally the Re­nault-Nis­san al­liance gained con­trol of the firm in 2014.

Mit­subishi Mo­tors was next in line for ac­qui­si­tion, with Nis­san tak­ing a con­trol­ling 34 per cent stake in the com­pany in 2016. Ghosn added chair­man of Mit­subishi to his lengthy list of roles, with his sights set on re­ha­bil­i­tat­ing the car­maker fol­low­ing the fuel-econ­omy mis­rep­re­sen­ta­tion scan­dal.

Some months later, in Fe­bru­ary 2017, he an­nounced that he would step down as CEO of Nis­san later that year, while re­main­ing as chair­man; Hiroto Saikawa would be his re­place­ment.

Which brings us to No­vem­ber last year, when Tokyo Dis­trict Pros­e­cu­tors ar­rested Ghosn for ques­tion­ing over al­le­ga­tions of false ac­count­ing – a charge he im­me­di­ately de­nied.

On the day of the ar­rest, Sikawa an­nounced to the press that Ghosn had been dis­missed af­ter an in­ter­nal in­quiry by Nis­san, and would be stripped of his ex­ec­u­tive rights. Ghosn and his col­league, di­rec­tor Greg Kelly – who was also charged with fi­nan­cial mis­con­duct – were said by Nis­san to have un­der-re­ported their com­pen­sa­tion and used com­pany as­sets for per­sonal use – re­port­edly to the tune of $18m.

“The in­ves­ti­ga­tion showed that over

In 2005 Ghosn was named pres­i­dent and CEO of Re­nault, be­com­ing the first per­son in the world to run two com­pa­nies on the For­tune Global 500 si­mul­ta­ne­ously

many years both Ghosn and Kelly have been re­port­ing com­pen­sa­tion amounts in the Tokyo Stock Ex­change se­cu­ri­ties re­port that were less than the ac­tual amount, in or­der to re­duce the dis­closed amount of Car­los Ghosn’s com­pen­sa­tion,” the com­pany said in a state­ment.

Nis­san and Mit­subishi both sacked Ghosn as chair­man af­ter the ar­rest, while Re­nault re­frained from do­ing so, an­nounc­ing he would re­main as chair­man and chief ex­ec­u­tive. Chief op­er­at­ing of­fi­cer Thierry Bol­loré was in­stalled as tem­po­rary CEO to over­see the run­ning of the firm.

As a re­sult of the af­fair, the fu­ture of the three-way al­liance has been plunged into doubt, de­spite as­sur­ances from Nis­san and Re­nault, and at the time of writ­ing Ghosn’s fate also hung in the bal­ance as he awaited le­gal pro­ceed­ings. But ac­cord­ing to some re­ports, there is more to the scan­dal than it seems.

More than meets the eye?

In the days af­ter Ghosn’s ar­rest, me­dia out­lets around the world suggested the move might have been a care­fully or­ches­trated ef­fort by Nis­san to oust him as chair­man.

The BBC cited sources close to Ghosn as say­ing that the de­ten­tion and dis­missal was a “clin­i­cally planned hatchet job”, with Nis­san ex­ec­u­tives said to be un­happy at the power Ghosn held at the com­pany and op­posed to plans to merge Nis­san with Re­nault.

Among the sus­pected in­sti­ga­tors is Nis­san CEO Hiroto Saikawa, who is said to have been in­creas­ingly frus­trated with Ghosn’s hero sta­tus – to the point where, ac­cord­ing to the BBC, he re­fused to an­swer a ques­tion about whether Ghosn had be­come a “dic­ta­tor”.

There had cer­tainly been ill will to­wards the for­mer chair­man fol­low­ing his Nis­san Re­vival Plan, which turned up­side-down sev­eral tra­di­tions pre­vi­ously held sa­cred by the Ja­panese firm. These in­cluded re­mov­ing se­nior­ity and age based pro­mo­tions and chang­ing life­time em­ploy­ment from a guar­an­tee to a de­sired goal. Ghosn also changed the com­pany’s of­fi­cial lan­guage from Ja­panese to English, and brought in sev­eral ex­ec­u­tives from Europe and the US.

On top of the ma­jor job losses (some 14 per cent of the work­force), shut­ting plants, tak­ing apart the net­work of sup­pli­ers, and sell­ing off prized as­sets, the cul­tural changes left a sour taste for many at Nis­san.

In­deed, the man­u­fac­turer said it started its in­ter­nal in­ves­ti­ga­tion into Ghosn sev­eral months ago fol­low­ing a whistle­blower re­port.

An­other as­pect that should not be over­looked is that Ghosn was al­legedly on the verge of re­plac­ing CEO Saikawa.

Cit­ing peo­ple close to the mat­ter,

The Wall Street Jour­nal re­ported that Ghosn had lost pa­tience with Saikawa’s per­for­mance, with Nis­san suf­fer­ing a 19 per cent de­cline in US sales in No­vem­ber com­pared to the pre­vi­ous year. Ghosn is be­lieved to have been look­ing at re­mov­ing Saikawa be­fore the end of the year, adding more fuel to the fire.

What hap­pens next?

At the time of writ­ing, Ghosn had ap­pealed to end his de­ten­tion – a move that was im­me­di­ately re­jected by the Tokyo Dis­trict Court, mean­ing he would stay be­hind bars with­out the pos­si­bil­ity of bail un­til De­cem­ber 30.

Ac­cord­ing to Ja­pan’s le­gal sys­tem, Ghosn won’t nec­es­sar­ily have ac­cess to his lawyer dur­ing ques­tion­ing – it will be at the dis­cre­tion of pros­e­cu­tors – and the con­sen­sus among com­men­ta­tors is that they are un­likely to pros­e­cute un­less there is near-cer­tainty of a con­vic­tion. In­deed, pros­e­cu­tion data shows that only 1 per cent of cases in Ja­pan’s dis­trict and county courts in 2017 re­sulted in a not guilty ver­dict.

A Bloomberg ar­ti­cle quotes for­mer Tokyo pros­e­cut­ing at­tor­ney Kenichi Kinukawa as say­ing Ghosn’s trial is likely to be han­dled by a panel of three judges with­out a jury, and that the av­er­age trial du­ra­tion for three­judge cases is 13.3 months. The of­fi­cial charge of break­ing the Fi­nan­cial In­stru­ments and Ex­change Act car­ries a prison sen­tence of up to 10 years, and con­sid­ered more se­ri­ous than in­sider trad­ing.

Al­ready re­moved as chair­man of Nis­san and Mit­subishi, Ghosn’s re­spon­si­bil­i­ties should he be found not guilty will be dra­mat­i­cally re­duced. Re­nault has so far kept faith with its chair­man and CEO, but ques­tion marks re­main as to whether his pres­ence would jeop­ar­dise the fu­ture – or at least the strength – of the car­maker al­liance. Re­la­tion­ships are cer­tainly be­ing put to the test, not to men­tion the struc­ture of the al­liance, which had largely been forged by Ghosn him­self and is bound to­gether by cross-share­hold­ings. Much may have hap­pened be­tween writ­ing and go­ing to press, but the fall­out of this episode is likely to be deep and long last­ing. Time will tell if the busi­ness icon will be vin­di­cated, but the sheen has cer­tainly been taken off the rep­u­ta­tion of the man with the golden touch.

CLOCK­WISE FROM TOP: Hiroto Saikawa, pres­i­dent and CEO of Nis­san Mo­tor Co.; A tele­vi­sion shows a news pro­gramme fea­tur­ing Car­los Ghosn and rep­re­sen­ta­tive di­rec­tor Greg Kelly.

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