From one corporate governance mishap after another to, now, a resulting enforcement action by the U.S. Securities and Exchange Commission, Japanese automaker Nissan can’t seem to get out of its own way.

In the latest headache for the company, the SEC on Sept. 23 settled fraud charges against Nissan, its former Chairman and CEO Carlos Ghosn, and its former director Greg Kelly over false financial disclosures that omitted more than $140 million to be paid to Ghosn in retirement. Ghosn was arrested by prosecutors in Japan in November 2018 for engaging in financial misconduct.

“Investors are entitled to know how, and how much, a company compensates its top executives,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “Ghosn and Kelly went to great lengths to conceal this information from investors and the market.”

According to the SEC’s orders and complaint, beginning in 2004, Nissan’s board delegated to Ghosn the authority to set individual director and executive compensation levels, including his own. From 2009 until his arrest last year, Ghosn, “with substantial assistance from Kelly and subordinates at Nissan, engaged in a scheme to conceal more than $90 million of compensation from public disclosure, while also taking steps to increase Ghosn’s retirement allowance by more than $50 million,” the SEC said.

Each year, Ghosn fixed a total amount of compensation for himself, with a certain amount paid and disclosed and an additional amount that was unpaid and undisclosed. Ghosn and his subordinates, including Kelly, crafted various ways to structure payment of the undisclosed compensation after Ghosn’s retirement, such as entering into secret contracts, backdating letters to grant Ghosn interests in Nissan’s Long-Term Incentive Plan, and changing the calculation of Ghosn’s pension allowance to provide more than $50 million in additional benefits.

Kelly and Ghosn’s Nissan subordinates misled Nissan’s CFO, and the carmaker issued a misleading disclosure in connection with the increased pension allowance. The $140 million in undisclosed compensation and retirement benefits was never paid out to Ghosn.

SEC charges

In an administrative proceeding, the Commission charged Nissan with violating the anti-fraud provisions of the Securities Exchange Act of 1934. Nissan settled the charges, agreeing to pay a $15 million civil penalty and to cease and desist from committing or causing violations of the anti-fraud provisions.

In accepting the offer, the SEC said it considered Nissan’s “significant cooperation” and the “remedial acts promptly undertaken,” including the following corporate governance changes:

  • Changing the basic structure of the board of directors to include a compensation committee and audit committee;
  • Constituting its compensation committee entirely of independent outside directors and giving it sole authority to determine compensation of executive officers, including the CEO and directors, which authority cannot be delegated;
  • Modifying the Secretariat Office to make its actions more transparent and subject to internal auditing and internal controls procedures;
  • Changing its board composition to include a majority of independent outside directors, including the chairman of the board as an independent outside director and eliminating the chairman’s role in connection with business operations;
  • Constituting its audit committee of a majority independent outside directors, including an independent outside director as its chair, with at least one member of the audit committee having experience in international audits; and
  • Eliminating Nissan’s CEO Reserve.

The SEC’s complaint against Ghosn and Kelly, filed in the U.S. District Court for the Southern District of New York, charges Ghosn with violating anti-fraud provisions of the securities laws and Kelly with aiding and abetting Ghosn’s and Nissan’s violations. To settle the charges, Ghosn and Kelly agreed to be permanently enjoined from violating or aiding and abetting violations of the anti-fraud provisions.

Ghosn also agreed to a $1 million civil penalty and a 10-year officer and director bar. Kelly agreed to a $100,000 penalty, a five-year officer and director bar, and a five-year suspension from practicing or appearing before the Commission as an attorney. Nissan, Ghosn, and Kelly settled without admitting or denying the SEC’s allegations and findings.

Trouble ahead

The SEC’s enforcement actions against Nissan, Ghosn, and Kelly follow in the same month that CEO Hiroto Saikawa—who was appointed after Ghosn—resigned. Nissan announced Saikawa’s resignation on Sept. 9, following a board of directors meeting.

On Sept 16, the effective date of Saikawa’s resignation, Nissan’s Chief Operating Officer Yasuhiro Yamauchi became acting CEO. Nissan’s nomination committee will “accelerate its efforts to select a successor for the CEO position, with the goal of concluding the search by the end of October,” Nissan stated.

Nissan finds itself having to play musical chairs among its senior executives after an internal investigation, which Nissan launched in October 2018 with the help of an outside law firm, confirmed allegations Saikawa and several other executives—including Ghosn and Kelly—were paid more than they were entitled. According to a published summary of an internal report, Saikawa was overpaid by 47 million yen (U.S. $438,000) via stock appreciation rights.

The summary of the internal report stated Nissan employees falsified documents to give so Saikawa could receive more stock-based compensation than he was due, but Saikawa wasn’t aware that this occurred and, thus, wasn’t responsible for misconduct. Saikawa has denied wrongdoing and said he would reimburse the company the excess pay.

The investigation also found, according to the details in that same report, Ghosn allegedly used company assets for personal use, including $27 million for properties in Beirut and Rio de Janeiro; $750,000 to Ghosn’s sister as part of a “fictitious consulting contract”; and improper use of corporate jets and other expenses for family members.

Nissan’s Chief Compliance Officer Christina Murray, who spearheaded the internal investigation surrounding Ghosn, also abruptly resigned this month. Murray had been promoted to vice president of internal audit and compliance in April 2019.