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Carlos Ghosn: Le Cost Killer

DC DISPATCH-By most measures, Carlos Ghosn was a successful man. With a reputation for recapitalizing and restructuring several large multinational companies like Michelin and Renault, Ghosn amassed a fortune of over 100 million dollars over the course of his career.

While most CEO’s enjoy a vast array of perks like equity-based compensation, use of private jets, and lavish expense accounts, the remarkable fall of Mr. Ghosn will change the face of executive compensation for decades to come. 

Affectionately referred to as “Le Cost Killer,” Ghosn had a stellar reputation in shoring up the allied balance sheets of Mitsubishi, Nissan, and Renault. 

When Ghosn became CEO of Renault in 1996, the French multinational company was teetering on the verge of bankruptcy. Within two years, Ghosn devised an expense reducing plan with Renault.  While concurrently reducing labor costs, he also streamlined the production processes, like using standardized parts, and widened the profit margin significantly. 

In recognition of his achievements, in 2004, jointly published surveys of the Financial Times and PricewaterhouseCoopers rated Ghosn as the 4th most respected business leader in the world. With all of these accomplishments and awards, Ghosn’s ascent and domination of the Japanese auto market seemed unstoppable -- until his arrest by the Japanese federal government.

So why was he arrested? 

On November 9, 2018, Carlos Ghosn was arrested by Tokyo authorities because of inconsistent numbers on his accounting statements. According to the New York Times, Chairman Ghosn allegedly shifted some of his personal expenses to Japanese-owned Nissan while underreporting his compensations. According to Japanese prosecutors, he is accused of having transferred a total of $16 million of his losses to Nissan and other entities, like Good Faith Investments (GFI), a company that he had ties had with. It is also alleged that he bought his yacht by skimming off those multi-million-dollar funds.  

Irrespective of any of the allegations’ validities, Japan’s prosecutorial approach to bringing Carlos Ghosn to justice deserves some scrutiny, to be perfectly just about it. During his first arrest, and as mandated by the Japanese court, Ghosn was held for weeks without being indicted for a crime.

During his detention, he was questioned by Japanese prosecutors without honoring his right to legal counsel. And despite the promised guarantees by Ghosn to surrender his passport to the authorities, and cover all expenses related to securing him -- including the costs for devices that would be used in limiting his movement -- he was still denied bail. 

The blatant disregard for Ghosn’s rights during questioning -- or as some would call it, interrogating -- offers insight to a civil legal system wherein prosecutors have a 99% conviction rate and tremendous advantages that benefit the state, not the individual. As an American observer of that process, it appears unlikely that Ghosn will get the fair hearing in court that he deserves, and it raises the question of just how free and fair the Japanese justice system is -- and if foreigners, like Ghosn, are further disadvantaged for being non-Japanese, as the failure to provide legal counseling and other neglects for the detained foreign national indicate; and further scrutiny of possible discrimination against foreigners is warranted. 

The Japanese prosecutor’s clear neglect of the rule of law in this case has negative implications not only for Ghosn, Renault, and Nissan, but for Asia as a whole. 

When asked, Ghosn explained that his arrest is nothing but a plot by executives at Nissan.  

Not too long ago, Carlos Ghosn proposed a collaboration that was set to change the future of Renault and Nissan. This proposal was a push for a more cost-effective partnership, with the two companies sharing their design work and engineering; but it had the hallmarks of more than a collaboration for convenience between two separate companies. It resembled more a merger between two automakers -- if not a hostile takeover by Ghosn -- a merger that a lot of Japanese stakeholders were not happy about. 

If there was ever a possibility for Nissan and Renault to merge, it became impossible with Carlos Ghosn out of the picture, and it looks like the whole of Asia will miss out on yet another opportunity to boost their rank on the world's production stage, as mergers frequently inspire. 

The continent’s reputation as the manufacturing breadbasket of the world is taken for granted but is belied by America’s own renewed rise in manufacturing prowess and the unknown outcome of the trade deal with China. Meanwhile, the alienating of Renault in Japan starts to look a lot like the rejected merger of Coca Cola with China’s biggest juice maker, Huiyuan Juice: A lost opportunity for greater profits. 

Ostensibly, both China and Japan appear reluctant to engage in foreign mergers, a reluctance that may be culturally rooted in the insular, ancient cultures that frown upon international media attention and the foreigners that attract it--and perhaps bias the case against Ghosn. 

The implications of Ghosn’s arrest may go beyond a failed merger and questions of cultural bias in court proceedings. It will probably have repercussions for the current packages of executive compensation for decades to come. 

Many Japanese executives have expressed their dislike of Chairman Ghosn's compensation package, which was well above that of his Japanese counterparts, and the criminal allegations against him may cause top companies in Japan that have accepted his proposed payment system for executive salaries and perks to reconsider their decisions about that. 

The implementation of it creates significant structural changes for the participating companies’ flow charts and bottom lines; and their recalibrations or outright cancellations could be considered a step backward. 

Will such a reversal ultimately affect the performances of both the executives and employees who work in these companies? Productivity can certainly be impacted by negative repercussions for the famously efficient Japanese assembly line. 

The impact this could have on economic activity and growth in toto remains to be seen, but meanwhile the very bad optics of how foreigners are treated in the Japanese legal system is another thing that our industrious allies should be concerned about.

 

(Sara Corcoran writes DC Dispatch for CityWatch. She is the Publisher of the California and National Courts Monitor and contributes to Daily Koz, The Frontier Post in Pakistan and other important news publications.) prepped for CityWatch by Linda Abrams.