Why the Carlos Ghosn scandal matters

carlos Ghosn
File Photo April 8, 2018 . Carlos Ghosn, a Brazilian-Lebanese-French businessman born in Porto Velho, Brazil, was until he was arrested in Japan in Nov 2018 the Chairman and CEO of France-based Renault, Chairman and former CEO of Japan-based Nissan, and Chairman of Mitsubishi Motors.

carlos ghosnHe was the driving force behind one of the leading powers in the auto industry, an alliance of three separate companies that employs over 470,000 people, operates 122 plants and sold 10.6 million vehicles in 2017.

And now Carlos Ghosn is in deep trouble.
The auto industry was rocked Monday when Nissan said that an internal investigation had uncovered evidence that Ghosn had lied about his income over many years and misused company assets.
With 40 years of industry experience, Ghosn is no ordinary automotive executive.
In addition to his position at Nissan, where he was also CEO until last year, he is chairman at Mitsubishi Motors. He currently serves as both CEO and chairman of French carmaker Renault.
The three companies have more in common than a single chairman. They also share ownership stakes.
So while they sell to different customers under different brands, and are based on two continents, the trio of automakers function in some key ways like a single entity.
Many top executives in the alliance report to three separate CEOs. Major decisions by each alliance member on products and investment are made only with agreement of the other two partners.
Ghosn was the driving force behind the alliance. He took what had been three second-tier automakers and brought them together into a single power with joint sales roughly on par with Volkswagen, Toyota and General Motors.
Between them, Renault (RNSDF), Nissan (NSANY) and Mitsubishi (MMTOF) make one of every nine cars sold around the world.

The industry’s most successful alliance

There have been other auto industry alliances over the years, but none had worked so well or brought the different parties so close together. Ghosn showed the industry that alliances can work and produce billions in savings.
The alliance started with Renault and Nissan coming together 19 years ago. Renault holds a 43.5% stake in Nissan, while Nissan owns 15% of Renault. Mitsubishi joined in 2016 when Nissan purchased 34% of its stock.
At a press conference Monday evening in Japan, Nissan CEO Hiroto Saikawa said he’s confident the cooperation between the alliance partners will continue even though Nissan is seeking to remove Ghosn as chairman.
He said he thinks it’s very possible the three partners could agree on a single joint chairman as a replacement.
“I wouldn’t say the impact is zero,” he said through a translator. “However we will do our best [to minimize the impact]. This alliance partnership itself will not be affected by this event.”
renault mitsubishi big number
The global auto industry needs to invest tens of billions of dollars to develop electric and autonomous cars — before tech companies get there. Other automakers, such as Ford (F) and Volkswagen (VLKAF), are in talks for new alliances.
Rebecca Lindland, a senior analyst with Cox Automotive, said the scale of the challenge facing the auto industry means the alliance created by Ghosn will survive. But it won’t be business as usual.
“It doesn’t break apart. But there’s going to be disruptions for sure,” she said.
The alliance had been planning for life after Ghosn, who was expected to retire as CEO of Renault by 2022. Lindland said that an accelerated search for a replacement would likely cause disruption in the top ranks.
“There may be plenty of people who’s day-to-day jobs won’t change,” she said. “But there is going to be some executive fallout. Anytime there is disruption at top, that is this sudden, it’s bound to wreak a little havoc.”
Mitsubishi said it was proposing that its board “promptly” remove Ghosn from that position, and Renault said its board would meet “very shortly.”
According to sources close to to the investigation, Ghosn reported his salary and income as nearly 9.7 million dollars in 2016, but then reported his income as 6.5 million dollars for 2017, over 30% less than the previous year. Japan’s financial laws make it a crime to put false data in a firm’s corporate financial statement. It should be noted that executives at other companies who have technically committed the same violations of the law (falsifying financial statements)  have often not been arrested or prosecuted. However, the Japanese authorities seem to have decided that an unpopular CEO falsifying his executive salary is someone worthy of being handcuffed.
“Mr. Ghosn’s compensation long was the subject of criticism and jealousy by people at Nissan,” said Michelle Krebs, director of automotive relations at Autotrader.com. “Japanese executives and employees do not make the kind of money that executives elsewhere do. So this was always an issue. It probably would have been ignored except that the automaker is not doing as well as it was.”
One former employee of Nissan who asked not to be named because he still does business with the automaker speculated that Nissan’s Japanese managers targeted Ghosn with information to the Japanese authorities because they were anxious to move out from under Ghosn’s authority. “The Japanese never loved this arrangement, but they had to take it because Nissan was a wreck, but that’s 20 years ago, and the company is successful now and a lot of senior executives and even Japanese government officials would like to put Ghosn in the rearview mirror.”

Early reaction to the news on Japan’s social media was not sympathetic to Ghosn. “Underreporting a 100,000,000 yen or so is a big deal! He shouldn’t earn that much to begin with.”

There were also some sarcastic remarks. “Way to go Tokyo Prosecutors! Why don’t you go after and arrest politicians like Shinzo Abe for corruption next?”

There is some speculation on why the Tokyo Prosecutor’s are taking what seems to be a hard-line with Ghosn. In recent years, the Tokyo District Public Prosecutor Office has had their reputation tarnished by failing to go after high-ranking politicians, bureaucrats and corporate executives. The prosecutors failed to indict the biographer of Prime Minister Shinzo Abe, who had been accused of rape, after a high-ranking police officer—also a friend of the Prime Minister—intervened in the investigation. In 2016, when it became apparent that Toshiba executives had engaged in accounting fraud of over 1 billion dollars, the prosecutors refused to make any indictments, despite the recommendations of Japan’s Securities Surveillance and Exchange Commission. They twice dropped the case against the executives of Tokyo Electric Power Company, who were accused of criminal negligence resulting in injury and death, after the triple nuclear meltdown in March of 2011. A prosecutorial review board overturned their decision and three top TEPCO executives are now on trial, with a civilian lawyer functioning as the prosecution.

By going after a high-profile and slightly disliked figure like Ghosn—and arresting him rather than simply indicting him—the Tokyo Prosecutors appear to be trying to varnish their diminished reputation as Japan’s elite crime-fighting agency. If Ghosn was a Japanese citizen and a well-liked Japanese executive, it seems unlikely that he would have to endure the humiliation of an actual arrest.  However, in the court of public opinion, Ghosn is already guilty—of earning too much money, and possibly not being honest about it. It is also believed that his high salary earned him enmity within the company, which motivated a whistleblower to come forward with their grievances.