Japanese automaker Nissan has a whole mess of governance failures it needs to fix, according to the findings of a recently published special committee report.

In November 2018, Carlos Ghosn was dismissed from his chairman role, following his arrest by Japanese prosecutors for engaging in financial misconduct. Immediately preceding his arrest, Nissan had issued a statement announcing that it had been conducting an internal investigation “over the past several months” regarding misconduct involving Ghosn and representative director Greg Kelly.

The internal investigation, sparked by a whistleblower report, revealed that “over many years both Ghosn and Kelly have been reporting compensation amounts in the Tokyo Stock Exchange securities report that were less than the actual amount in order to reduce the disclosed amount of Carlos Ghosn’s compensation,” Nissan stated. Ghosn was engaging in numerous other acts of misconduct, as well, such as personal use of company assets.

On April 4, Ghosn was rearrested by prosecutors in Japan on fresh charges of financial misconduct, less than one month after being released on bail. This time, prosecutors allege that from 2015 to 2018 Ghosn diverted $5 million of Nissan’s funds to an overseas dealership that he controlled. Ghosn is awaiting trial on the previous, separate charges of financial misconduct. He continues to deny all charges.

In December 2018, Nissan formed a seven-member “Special Committee for Improving Governance” (comprised of four independent third parties and three Nissan independent outside directors), whose purpose was to ascertain the root causes behind Nissan’s governance issues leading up to the misstatements and to provide recommendations for improving Nissan’s governance processes. The special committee published its findings on March 27.

The root cause of the misconduct: Ghosn, simply put, had too much authority. “Ghosn made the certain administrative departments—which would be able to discover management misconduct—opaque by concentrating authority in such departments in a few particular persons, including Mr. Kelly, and thereby created a situation in which it would be difficult to detect Mr. Ghosn’s demands for his personal gain,” the report stated.

The key root causes of misconduct as described by the special committee are discussed in more detail below:

Concentration of authority. The committee said it heard from several witnesses who said those who raised any objections against Ghosn’s opinions were transferred or dismissed. Furthermore, Ghosn held most of the authority for setting performance targets.

‘Opaque’ administrative departments. The report also found that when anyone responsible for Ghosn’s compensation and personal use of company funds was questioned by other departments regarding these issues, “they refused to provide detailed explanations, such as by simply responding that it was a ‘CEO matter,’” the report stated. “In this way Mr. Ghosn succeeded in making certain administrative departments opaque.”

Board supervisory failures. Ghosn further demanded that the board of directors end its meetings as quickly as possible, “thereby creating an atmosphere where it was not possible to ask questions about or give opinions on the agenda at the meetings,” the report stated. Ghosn also did not disclose all his personal transactions, hiding them from the board.

Key recommendations

The report recommended that Nissan, as part of its overhauled governance system, must by the end of June 2019 establish three governance committees: a nomination committee, compensation committee, and audit committee. These committees should be made up mostly of independent outside directors and include a diversity of viewpoints, the special committee recommended.

With respect to the nomination committee, the special committee made several recommendations, including:

  • The chair of the nomination committee shall be an independent outside director.
  • The nomination committee shall be comprised of approximately five directors.
  • The nomination committee shall have authority to not only appoint and dismiss directors, but also the authority to propose the appointment and dismissal of the representative executive officers.
  • The nomination committee shall aim to alter the composition of the board on a regular basis.
  • A member of the nomination committee shall not be included in the deliberation and resolution of his/her own re-nomination in the nomination committee.

With respect to the compensation committee, the special committee recommended that:

  • All members of the compensation committee shall be independent outside directors.
  • The compensation committee shall be comprised of approximately three to five directors.
  • The compensation committee shall have the authority to determine the individual compensation amount of the representative executive officers, in addition to the directors.

The board further recommended that the board chairman (the “gicho”) be an independent outside director, and that the Office of the “Chairman” of Nissan be abolished. Currently at Nissan, the chair, any one of the co-chairs, or the president and director of the company shall act as chairman of a general meeting of shareholders. However, to establish an environment where board discussions will be driven by independent outside directors, the board chair (the gicho) presiding over board matters “should be an independent outside director,” the report recommended.

With respect to the audit committee, the special committee recommended that:

  • The chair of the audit committee shall be an independent outside director.
  • The number of members of the audit committee shall be around five.
  • The chair of the audit committee is expected to spend substantial time auditing.
  • It is desirable that at least one of the members of the audit committee be a director (non-executive) with the ability to efficiently collect necessary information within Nissan.
  • It is desirable that at least one of the members of the audit committee be a director having experience and/or expertise in international audits.
  • It is not desirable for a member of the audit committee to be a person who has experience as a director, executive officer, or other officer or employee in Nissan’s principal shareholders.

When internal audit detects potential misconduct by top management, this should be reported to the audit committee only, the report stated, and the directions of the audit committee “shall take precedence over directions from the CEO and other executive officers.”

Ethics above all

The committee said it was “deeply concerned” that Nissan did not foster a culture of ethics, and that this should be the way forward. Moreover, the Office of the CEO “should be subject to the checks and balances of other departments,” the report stated.

Additionally, the committee recommends that Nissan’s audit committee be the one to receive whistleblower reports, and furthermore that this whistleblower system be made anonymous. It also recommended a reinforced relationship between the audit committee and internal audit “and more proactively use outside scrutiny” as one option for establishing a strong system of internal controls.

The special committee said it “firmly believes” Nissan will be able to prevent similar misconduct in the future if it “takes the recommendations seriously and executes them in a swift and sincere manner.” Because the progress of management concerning these actions is of “utmost importance,” the committee said, “we expect strict management by independent outside directors in the future.”

Editor’s note: This story has been updated to reflect Carlos Ghosn’s arrest in Japan on April 4.