Is Nissan a Japanese Company?
The governance implications of the case against Carlos Ghosn.
By USALI Affiliated Scholar Bruce Aronson
Originally Published March 18, 2019 in The Diplomat
At this stage the basic facts surrounding the case against former Nissan CEO Carlos Ghosn remain unclear. It is too early to decide between the two diametrically opposed narratives that have been offered to date: (1) Ghosn is a greedy autocrat who violated laws and company rules to enrich himself at the expense of the company and its stakeholders or (2) Nissan management, aided by inadequate protections for the accused under Japanese law and by the Japanese government, undertook a coup d’etat to rid Nissan of Renault’s control. We may ultimately discover that this case contains elements of both narratives.
But there is an underlying implication of the Nissan case that may soon begin to plague a number of rapidly internationalizing Japanese companies: Is Nissan a Japanese company or a global company based in France?
In a narrow legal sense Nissan is clearly a Japanese company. It is incorporated in Japan, listed on the Tokyo Stock Exchange, and has a traditional Japanese corporate structure. Nissan must comply with Japanese law and regulations and its own internal rules based on Japanese corporate and securities law.
However, a broader corporate governance perspective focusing on Nissan’s ownership structure may lead to a different conclusion. Nissan has a controlling shareholder, with Renault owning over 43 percent of the shares, and there is no other large shareholder. Accordingly, Nissan can also be viewed simply as a subsidiary of a global auto manufacturer that is headquartered in France.
Nissan is a traditional Japanese company that utilizes corporate auditors (kansayaku) to “audit” the board of directors and management. It also has three outside directors (out of nine), but there have been serious questions about their ability to function independently and effectively (one is from Renault, another is a former professional race car driver, and the third is a former Japanese government official). Unlike many other large Japanese companies, Nissan has no board committees, such as a nomination or compensation committee. Rather, the board of directors was reportedly dominated by Ghosn, with little open discussion. In fact, Ghosn’s aide, Greg Kelly, was appointed to be a representative director of the company, even though Japanese companies are generally very cautious about granting individuals the authority and prestige to legally represent the corporation.
These factors illustrate the most significant corporate governance issue in this case: whether Ghosn accumulated too much authority and exercised it improperly to enhance his power and enrich himself. Renault seemed quite content to let Ghosn exercise complete authority at Nissan. In fact, Renault reportedly agreed to rescue Nissan in 1999 on condition that Ghosn go to Japan and assume control over Nissan’s operations.
The record on disclosure of Ghosn’s unusual authority is somewhat mixed. On one hand, his position within Nissan was clearly indicated in Nissan’s required annual corporate governance reports. In its annual report in July 2018 Nissan disclosed that it was not following best practices as embodied in Japan’s corporate governance code in two areas: (1) succession planning, which was left to the representative directors (of which there are three, led by Ghosn and his aide Kelly) and (2) nomination and compensation, in which Ghosn, as chairman, nominated each director and, following consultation, decided their compensation. On the other hand, the terms of the alliance agreement between Nissan and Renault were not disclosed in Nissan’s securities filings; only the existence of such an agreement was noted.
Of course, Ghosn is required to follow Japanese law and company rules in any event, and having unusually strong internal authority would not shield him from liability if necessary disclosures were not made or if internal procedures (such as disclosure to or approval of the board of directors) were not followed.
From a comparative corporate governance perspective, this case illustrates the difficulties in maintaining good corporate governance practices where there is a controlling shareholder. In such cases, there is an ever-present risk that the controlling shareholder will act for its own benefit (i.e., obtain “private benefits of control”) at the expense of minority shareholders and other stakeholders. This is a relatively rare issue in Japan where there are few companies with controlling shareholders; it is a common corporate governance issue in many other jurisdictions in Asia, including countries generally known for good corporate governance such as Hong Kong and Singapore.
Why is the question of Nissan’s “nationality” or identity important? The answer is that no corporate governance issue is purely a matter of law; popular perceptions and social norms always influence corporate conduct. Whether it is Nissan or Ghosn who is popularly perceived to be “in the wrong” will inevitably influence the impact of this case on Japanese corporate governance practices.
This is clearly illustrated by another major issue in the case: the appropriate standard for executive compensation. In round numbers, if average executive compensation in the U.S. is 100, it is only 20-30 in the EU and a mere 10 in Japan. Although the “lifetime employment” system in Japan has weakened, it remains in operation in a modified form in leading Japanese companies. The company president in Japan is still typically an insider who has risen through the ranks of “salarymen” and has become the first among equals. He does not generally decide corporate business plans or policies and is compensated accordingly, primarily by means of relatively modest fixed compensation rather than through generous stock options, which richly reward successful risk-taking.
Ghosn, on the other hand, assembled an alliance that represented the second largest car manufacturer in the world. He accordingly expected to be compensated on a par with the head of General Motors or any other global car company. However, that level of compensation would stand out and not be readily accepted in Japan for the CEO of a typical “Japanese” auto manufacturer; Ghosn was reportedly told that his level of compensation represented a problem for Nissan.
Accordingly, when a Japanese legal requirement to disclose the total compensation of individual executives who earned over 100 million yen ($885,000) came into effect in 2010, Ghosn’s disclosed compensation fell by half compared to the previous year (when it had been roughly $15 million). Even then, Ghosn’s compensation was nevertheless directly criticized publicly by no less a personage that the prime minister of Japan.
The issue is thus made clear. If Nissan is a “Japanese” company then Ghosn is overcompensated and appears to be “greedy,” but if Nissan is a “global” company (and Ghosn is a global-style decision-maker and leader) then his compensation may well be appropriate and even below average.
Following internal procedures and making required disclosures are a separate issue that will be the focus of legal proceedings. However, we should not lose sight of the underlying institutions and norms, and their influence in this case. It appears that most people in Japan view Nissan as an iconic Japanese company, while their overseas counterparts consider it to be part of a global manufacturer based in France. Which view prevails will have a significant impact on the “lessons” learned from the Nissan/Ghosn case. This will also have important implications for the increasing number of rapidly internationalizing Japanese companies, which now conduct a majority of their business and have a majority of their employees overseas, but which nevertheless are still governed in Tokyo largely in accordance with traditional Japanese practices.
Bruce Aronson is an Affiliated Scholar at the U.S.-Asia Law Institute, New York University School of Law, and is co-editor of a recently published textbook, “Corporate Governance in Asia: A Comparative Approach” (Cambridge University Press, 2019). He is also an outside director at a listed Japanese company, where he serves as chair of the compensation committee. This column represents solely his personal opinion.