IBU5GW - Nissan & Carlos Ghosn Case: Corporate Governance Analysis

This case study analyzes the Carlos Ghosn scandal and its impact on corporate governance, particularly in Nissan and Renault. Ghosn's arrest for underreporting income and misusing company funds exposed weaknesses in Nissan's governance structure. The study examines corporate governance practices in Japan and Australia, highlighting differences in audit processes and the role of independent directors. It explores agency theory and other corporate governance theories to understand the issues that led to the scandal. Recommendations are provided for improving corporate governance in Japanese companies, emphasizing transparency, stricter audit processes, and the establishment of independent committees. The analysis draws upon media articles and research to provide a comprehensive evaluation of the case and its broader implications for corporate governance in a globalizing world.

Running head: CARLOS GHOSN CASE
CARLOS GHOSN CASE
Name of the student
Name of the university
Author note

Question 1
Summary of the articles
Carlos Ghosn, who was the chairman of alliance between Nissan Motors Company,
Renault and Mitsubishi Motors Corp, was arrested in November, 2018 as he was accused of
underreporting his income and misusing company’s funds (Japantimes.com.jp, 2018). The arrest
was so catastrophic that it introduced a shockwave throughout the automaker group of the world.
Carlos Ghosn, who had been negatively influencing and affecting the firm due to his
misconducts in his long reign, was about to be relieved from his designated post from the
company by the chief executive officer Hiroto Saikawa, finalizing the respective plan with the
Board of Directors of the company. The carmaker group had declared that they had initiated an
internal investigation about Ghosn and his conducts within the company after a whistleblower
had alleged about the misconducts of Ghosn and Nissan Representative director Greg Kelley, as
the whistleblower had alleged that the two executives would have been conspiring to underreport
Ghosn’s salary in order to take unethical and undue advantage of the financial funds of the
company for a number of years. The Tokyo District Public Prosecutor Office had earlier, in the
course of time, questioned Ghosn earlier in the day and arrested Ghosn and Kelley in the due
course of time. The amount of the underreporting they committed (Ghosn and Kelly) amount of
certain five billion from the year 2011 to 2015. The two executives had been using the
company’s assets for personal use. The whistleblowers had been exposing their unethical course
of actions throughout their investigations and findings (Thenewstribune.com, 2019).

Corporate governance issues raised in the articles and corporate governance practice in
Australia/Japan.
Corporate governance can be defined as a collective mechanism, processes and relations
by which corporations and business enterprises are controlled and operated. The structures that
are set up by the government in case of corporate governance identifies the distribution of rights
and responsibilities among different participants in the corporation, which includes board of
directors, managers, shareholders, creditors, auditors and stakeholders and also includes the
rules, regulations and processes for making decisions in corporate affairs. The corporate
governance frameworks of Australia have been built to provide the ever evolving and flexible
corporate firms of Australia. The Australian Securities Exchange (ASX) corporate government
council was formed in the month of August in 2002. The ASX has been chaired by the ASX
Group since its inception. Carlos Ghosn was widely regarded as a hero of Japan as he turned the
fate of Nissan when it was almost in the bankruptcy in the year 1999. As Ghosn was arrested in
charge of criminal case of unethical conduct within the organization, it disclosed the weak
governance of the company in the global platform. It provides a good lesson for the upcoming
investors in Japan for much stronger government protection than the ones which had been
brought up by the Japanese reforms. Since the year 2009, the Japanese listed companies had been
required to disclose the compensation of the executives if it exceeded 100 million or more, that
could be equivalent to $800,000. The respective rule was synergized in the new head of Japan’s
Financial Services Agency and had been distributed throughout the corporate arena of Japan. The
agency declared executive compensations which included bonuses which had to be disclosed
once they were fixed in amount. However, the lawyer of Ghosn and Kelly fabricated the fact and
declared that since the payment of Ghosn was not fixed therefore it was not in a position to be

disclosed. This incident throws light on the incapability of the company to adhere to strict
decisions and rules. The problem with Nissan company was that it did not have established audit
department and took help from independent auditors who had the chance to stand away from the
company’s management, which could be the cause of company’s financial downfall. Therefore,
the Japanese corporate governance is suggested to be more strict and stern in their outlook and
frame proper strategies for company’s audit segment. However, the Japanese corporations are in
the need of different committee structures. The companies or the enterprises must be possessing
certain genuine independent, well skilled, qualified officials and directors, who would be
majority wise responsible for nominating, audit, and compensation committees. The nominating
committee should take up the responsibility and accountability of recommending new directors.
The company’s audit committee should take the responsibility of appointing the external auditor
and review the company’s internal controls. The company’s compensation committee should set
the criteria for executive pay in advance and explain the results to shareholders.
Insight about the agency theory
The role of Agency theory in corporate governance can be defined as a mechanism to
understand the relationships between agents and principles. The agent represents the principal in
a particular business transaction and is expected to represent the best interest of the principal not
regarding the self interest (Bottomley, 2016). The source of conflict can happen if there is
different interest between source and agent. Corporate governance can be utilized in order to
change the rules under which the agent operates and restore the interest of the principal. The
principal has the designation to employ the agent to represent the principal’s interest and must
overcome a lack of information about the performance of the agent in the task. Agency theories
are being utilized to predict strategic managerial behavior in the past. In the respective case of

fraudulent and unethical behavior of Ghosn in the case of Nissan Company, agency theory can
be utilized in understanding the dubious cases that were to be happening in the management
arena of the company. The lack of information about the financial whereabouts and an
executive’s salary including his/her compensation incentives and retirement compensations has
created such dubious conditions which led to corruption in the company and financial downfall
as well as stain in reputation. Therefore, in order to uncover the information regarding finances
within the company can be conducted by the help of Agency Theories in corporate governance.
Other corporate governance theories present in the issue
There are certain corporate governance theories that can enable to expose the problems
and the issues the company has faced regarding the case of Ghosn. According to the Japan model
of corporate governance theory, the financial sectors are important, however, there has been no
institutionalized and compulsory audit segment of the company. The Ghosn case is one of the
finest examples of failed corporate governance in a nation which has proved to be disastrous for
the company as well as the stakeholders who had been dependent upon the company by various
means and multidimensional aspects (Ft.com, 2019). According to the Japanese model of
corporate governance, there is supervisory board which is made up of board of directors and a
president who has been jointly appointed by shareholders and/or the banks and other financial
institutions. To reach the higher position in an organization with the help of factors such as age,
educational and professional skills, experience, the time span of service in the respective
organization are taken into consideration in case of the Japanese seniority. The CEO Ghosn had
introduced certain principles that the factors such as promotion of an employee should be
provided according to the pragmatic skills and performance of the employee. The respective
principles actually and unfortunately went against the new CEO. A paradoxical situation was

created as those new principles were introduced between the incentives and seniority relation
within the organization which created confusion. The confusion and agitation happened because
as the principles suggest, providing incentives (monetary and non monetary) to the employees
who are good performers had been naturally acquiring the position and overpowering the long-
served employees who had been eagerly waiting for promotions for many years. because by
giving promotion incentives to the ones who better perform and contribute to the development of
the company, it is in turn naturally occupying the new position that a longer-service employee
waited for so long. Ghosn changed the hiring decisions and instructions in the company which
led to such catastrophe (Autonews.com, 2019).
Question 2
Critical evaluation of corporate governance in Japan
Corporate governance system of Japan model is also called business network model
which consists of shareholders that are bank officials, large family shareholders and corporate
with cross-shareholdings (Tricker & Tricker, 2015). In the Japanese model of corporate
governance, a supervisory board is formed and in the respective supervisory board, there are
board of directors and a president who are jointly appointed by the shareholders and/or bank and
financial institutions. The Financial institutions are given autonomous power and authority in the
model of corporate governance system of Pakistan. Independent directors and outside directors
are rarely found in the corporate governance system of Japan. The bank system of corporate
governance system of Japan has been given the strength to have long term links with other banks
and corporations. Equity financing is important in Japanese corporations. Even though the
corporate governance system of Japan takes care of the finances, yet the audit sections of the

enterprises are neglected and there is a trend to capture independent auditors who sometimes
doesn’t comply by the management procedures of the companies, leading to catastrophic
downfall. There is less transparency in the departments as well.
Differences between corporate governance system of Japan and Australia
The difference between Australian corporate governance and Japanese corporate
governance is deduced hereafter. The corporate governance frameworks of Australia have been
built to provide the ever evolving and flexible corporate firms of Australia. The Australian
Securities Exchange (ASX) corporate government council was formed in the month of August in
2002. The ASX has been chaired by the ASX Group since its inception (Subramaniam et al.,
2013). The structure of the Australian corporate governance is that the majority of board of
directors should be independent; they should be responsible to build an audit committee for the
company. The audit committee should be structured in the way that it consists of only non-
executive directors, should be chaired by an independent chair, and would at least have three
members. The audit committee should have a charter which is a necessity. Whereas, the Japanese
form of corporate governance does not have any established audit personnel (Tricker & Tricker,
2015). The Japanese companies hire audit professionals from outside the organizations or
companies which leads to chaos as most of the independent auditors do not comply with the
managerial and other rules, regulations and procedures of the companies, which was the case
with Ghosn, who manipulated the audit to show himself underpaid in order to unethically utilize
the assets and financial funds of the company.

Recommendations for improvement of corporate governance in Australia and Japan
Recommendations that can be put for the improvement of the corporate governance
system of the Japanese companies so that such casualties are never experienced or are avoided at
any circumstances are provided hereafter. Nissan company would try to rebuild itself in terms of
management and corporate governance. It is deduced throughout the Carlos Ghosn case that
Nissan had been irresponsible in their managerial code of conduct. Nissan company has been
using not transparent but opaque methods of management as well as internal and external
operations which has hampered the reputation and credibility of the company. In order to
manage such faults and fallacies, the company should promote and practice transparency in their
way of management, especially in the department of financial audit. The problem with Nissan
company was that it did not have established audit department and took help from independent
auditors who had the chance to stand away from the company’s management, which could be the
cause of company’s financial downfall. Therefore, the Japanese car company Nissan is suggested
to be more strict and stern in their outlook and frame proper strategies for company’s audit
segment.

References:
Autonews.com (2019). Available at: https://www.autonews.com/executives/japan-intervened-
stall-nissan-renault-merger-emails-show
Bottomley, S. (2016). The constitutional corporation: Rethinking corporate governance.
Routledge.
Ft.com(2019). Available at: https://www.ft.com/content/3b1d60e0-5085-11e9-9c76-
bf4a0ce37d49
Japantimes.com.jp(2018). Available at:
https://www.japantimes.co.jp/news/2018/11/20/business/corporate-business/nissan-
motor-co-president-carlos-ghosn-facing-arrest-charge-not-reporting-full-salary-report/
#.XO53Zb7hXIU
Subramaniam, N., Stewart, J., Ng, C., & Shulman, A. (2013). Understanding corporate
governance in the Australian public sector: A social capital approach. Accounting,
Auditing & Accountability Journal, 26(6), 946-977.
Thenewstribune.com (2019). Available at:
https://www.thenewstribune.com/news/business/article229657979.html
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.