Need to know: The Ghosn scandal that rocked the automobile industry

One of the most explosive corporate scandals in years came to light this week, when the board of Nissan unanimously voted to remove Carlos Ghosn as chairman following his arrest on Monday. Ghosn is currently being detained in Tokyo for “significant acts of misconduct” over a five year period – including the misuse of company assets and understating his income. ‎

Here’s what you need to know about a gripping scandal that has rocked the automobile industry.

Who is Carlos Ghosn?

The Brazilian born automobile executive was until this week the chairman of Nissan. In addition to his position at Nissan, where he was also CEO until last year, he is (still) the chairman and CEO of Renault, and the chairman of Mitsubishi. His arrest ends his near 20-year-long stint at Nissan. He was also CEO of the Nissan-Renault-Mitsubishi alliance, which is a strategic partnership between the three. A man with so many jobs. How can that be?

When Renault and Nissan formed the Renault-Nissan Alliance in 1999 Ghosn retained his position as an executive vice president at Renault, and became chief operating officer at Nissan. In 2000 he became president of Nissan and was named as CEO in 2001. Ghosn is credited with saving Nissan from bankruptcy with his “revival plan”. The plan included cutting 14% of Nissan’s workforce, shutting five plants, reducing the number of suppliers and auctioning off some of Nissan’s assets. His success in turning Nissan around to profitability earned him the nickname “Le Cost Cutter.”

He became CEO of Renault in 2005 – becoming the first person to run two Fortune Global 500 companies simultaneously.

In October 2016 Nissan acquired a controlling stake in Mitsubishi, and he became the company’s CEO.

Where and why was he arrested?

On 19th November Ghosn was arrested in Tokyo. The prosecutors have accused him and a company director Greg Kelly of collaborating to understate Ghosn’s income by $44 million over a five-year period between 2010 and 2015. Kelly has also been arrested and stripped of his title at Nissan.

In a statement to the company Nissan called Kelly the “mastermind” of the scheme.

Japan’s public broadcaster NHK has also reported that Ghosn may have failed to disclose property provided by Nissan in four countries, and that Ghosn may have misused money intended for other executives at the company.

What are the immediate consequences?

First things first. Shares of Nissan fell by 5.45% and Mitsubishi’s 6.85% after Ghosn’s arrest. In Europe Renault shares were down by 8%.

In a statement to the Tokyo Stock Exchange the CEO of Nissan, Hiroto Saikawa, said its directors voted to strip Ghosn and Kelly of their titles. Both still remain on the board, awaiting a formal vote by the shareholders. Nissan has not named a new chairman.

Renault has not yet removed Ghosn from his position, as it awaits more details to emerge from the criminal investigation. Mitsubishi meanwhile has asked its board to remove him as chairman and is expecting this to be done imminently.

If he is found guilty, the maximum sentence Ghosn could receive is 10 years in prison (on the charge of filing a false financial statement) and a fine the equivalent of $89,000. There has been no formal indictment yet, and the authorities in Tokyo can hold Ghosn for up to 10 days before submitting charges.

What does this mean for the Nissan-Renault-Mitsubishi alliance?

The alliance, which started when Renault and Nissan came together in 1999, make one in nine cars sold around the world and employ nearly half a million people in 200 countries. Renault holds a 43.5% stake in Nissan, Nissan holds a 15% stake in Renault. And Nissan also holds a controlling share of 34% in Mitsubishi, which joined the alliance in 2016. The firms sell their products under separate brands but sometimes function as if a single company. For example, major decisions by each member on investments are made only with the consent of the other two.

Considering the role Ghosn played in the alliance, there are concerns over its continuation. Rebecca Lindland, a senior auto analyst at Cox Automotive said: “He was the alliance. He was the creative genius behind all of this, and set the parameters to run these fairly disparate companies.” Travis Lundy, an analyst at Smartkarma says the companies could save up to $5.7 billion each year through sharing resources with one another. If the alliance were to collapse, he said, it “would be the worst strategic mistake made by an automaker in decades.”

Nissan however has said the removal of Ghosn wouldn’t affect the alliance: “The long-standing alliance partnership with Renault remains unchanged.”

Did some people see this coming?

Yes. During Ghosn’s early days at Nissan he told the company no one should be CEO for longer than 5 years. This, coupled with his radical cost-cutting strategies and insistence on internal meritocracy meant he gave the impression he was something of a trailblazer in Japanese business. But, as his time at the company approached nearly two decades Nissan’s corporate governance increasingly lacked oversight and discipline.

Head of research at Jefferies, Zuhair Khan, told clients: “We were not particularly surprised that Nissan had another scandal. The company’s board structure raised many red flags in 2017 and the improvements in the board in June 2018 were superficial.” ‎