Carlos Ghosn’s downfall lays bare Nissan’s board problem 

In the early 2000s, when Carlos Ghosn hero worship was nearing its peak and Nissan shares were surging, the turnround king repeatedly told investors that a chief executive should be limited to five years in the top job.

After nearly two decades in charge, abruptly ousted as chairman, condemned for his longevity by his handpicked successor and under arrest in Tokyo, Mr Ghosn may wish he had taken his own advice. 

With each passing year of the Ghosn era, say analysts, Nissan’s standards of internal oversight and self-discipline looked increasingly threadbare. The company “had literally no governance structure”, said Koji Endo, head of the equity research department at SBI Securities.

To some, the crisis now engulfing Nissan is a positive sign for Japan. On Thursday, the Japanese carmaker said it would set up a special committee led by external directors to strengthen their rules over director pay and other governance measures.

Higher standards of governance appear to be prevailing. Entrenched management that suppressed criticism is being dislodged and greater oversight over big decisions is being demanded. 

This and other recent Japanese scandals at Toshiba and Kobe Steel, said the head of one of Japan’s largest asset managers, are the “gifts of governance reform”.

That, say analysts, is why Nissan’s current meltdown may have been on the cards. As one former investor in the company described the problems: “It was a complete failure of corporate governance and complete failure for anyone to criticise Carlos Ghosn”.

Mr Ghosn’s early comments on tenure, say motor industry analysts, were among many public statements that helped forge his image as a bright new light in the dark governance voids of corporate Japan. His strategies, which included severing overly cosy ties with suppliers and insisting upon merit-based (rather than age-based) promotion, gave him the aura of a pioneer. If only more Japanese companies could follow that lead, argued foreign investors.

But in recent years, long before his spectacular downfall this week, Mr Ghosn’s image as a force for progress had unravelled. Corporate governance in Japan, said Zuhair Khan, head of research at Jefferies, has moved on; Mr Ghosn’s Nissan has not. That failure, he said, makes the company stand out in 2018 — three years after the introduction of Japan’s corporate governance code. 

“We were not particularly surprised that Nissan had another scandal,” Mr Khan wrote in a note to clients, “The company’s board structure raised many red flags in 2017 and the improvements in the board in June 2018 were superficial.”

In a hefty analysis of governance at Japan’s 500 largest companies, Mr Khan noted that in 2011, Nissan was one of only 11 that still did not have at least two independent directors, and was the only large global name among them. The company’s sole outside director was a retired Renault employee. When two independent directors were appointed in 2018 — a retired bureaucrat and a retired racing driver — neither had a strong background in business.

Another red flag in 2017, which Mr Khan said remained unresolved in 2018, was that Nissan had no board committees — the mechanisms for oversight on executive remuneration, appointments and auditing that have overwhelmingly become the norm among Japan’s largest companies.

Jiro Nakano, the head of Japan equity fund management at Nikko Asset Management, said Nissan’s fundamental governance problems stemmed from what he called the “collusion culture” that was especially strong within the automotive sector and rejects efforts to increase transparency. Despite his reputation, Mr Ghosn had, in fact, been unable to extract Nissan. But Nissan’s board, said Mr Nakano, was a particular issue.

“The Nissan board of directors is very bad because it has no checking functions. It should function as a check on IR, auditing, compliance — everything. I think that they have to change the whole board and change its functions,” he said.

Mr Khan said that in addition to poor board oversight, there was another factor that linked Nissan with Japan’s other recent scandals: the fact that most of the directors, with the exception of Mr Ghosn, owned very few shares in Nissan. 

In the early 2000s, it appeared that Mr Ghosn was leading Nissan into a new era of well-run, globally minded Japanese companies. The reality, said one banker who has worked with Nissan’s management, was very different. “Today at Nissan, I feel like I’m dealing with someone like Toshiba. There is no longer the atmosphere where people can speak freely or challenge other departments,” the banker said.