Corporate Governance Series-Part 1: Corporate Governance failure at Nissan-Renault by Gaurav Bansal

Who is Carlos Ghosn?

Carlos Ghosn is ousted Nissan Chairman who failed to disclose more than $80 million in deferred pay. He was arrested in Japan in November, 2018. The arrest is a remarkable fall from grace for a man regarded as one of the most powerful and admired executives in the world and auto industry specifically.

Mr. Ghosn has been credited with reviving Japan’s Nissan car company and the French automaker Renault, in an alliance, that later expanded to include Mitsubishi Motors of Japan. Last year, the three companies sold 10.6 million cars.

Why was he arrested?

An internal inquiry at Nissan found that Mr. Ghosn underreported his compensation to the Japanese government. Nissan is cooperating with prosecutors, who said Mr. Ghosn declared only half of about $88 million that he was paid between 2011 and 2015. The investigation was prompted by a whistle-blower who said that Mr. Ghosn had been misrepresenting his salary and using company assets for personal purposes.

If Mr. Ghosn is found to have violated Japan’s financial laws, he could be sentenced to up to 10 years in prison, fined 10 million yen or both. If Nissan is found to have conspired with him, it could face a fine of up to ¥700 million.

What went wrong?

The clear lesson to be learnt here is that incidents of Ghosn’s alleged crimes are more likely to occur when celebrated and dominant figures exist within an organization, said dominance is almost inevitable when the same individual occupies the dual position of Chairman and CEO for a lengthy period of time, as seen in Ghosn’s case.

5 biggest Corporate Governance scandals of 21^st Century

In the last decade, the frequency of corporate frauds and governance failures that have dotted the global corporate map have witnessed comparably vigorous efforts of improving corporate governance practices. India has liberalized the regulatory fabric of the country to align its corporate governance norms with those of developed countries. And yet, achieving good governance and ensuring results of such governance practices continue to remain one of the top priorities of stakeholders even today.

Enron Scandal (2001)

• Company: Houston-based commodities, energy and service corporation
• What happened? Shareholders lost $74 billion, thousands of employees and investors lost their retirement accounts, and many employees lost their jobs.
• Main players: CEO Jeff Skilling and former CEO Ken Lay.
• How they did it? Kept huge debts off balance sheets.
• How they got caught? Turned in by internal whistleblower Sherron Watkins; high stock prices fueled external suspicions.
• Penalties: Lay died before serving time; Skilling got 24 years in prison. The company filed for bankruptcy. Arthur Andersen was found guilty of fudging Enron's accounts.
• Irony: Fortune Magazine named Enron "America's Most Innovative Company" 6 years in a row prior to the scandal.

Freddie Mac (2003)

• Company: Federally backed mortgage-financing giant.
• What happened? $5 billion in earnings were misstated.
• Main players: President/COO David Glenn, Chairman/CEO Leland Brendsel, ex-CFO Vaughn Clarke, former senior VPs Robert Dean and Nazir Dossani.
• How they did it? Intentionally misstated and understated earnings on the books.
• How they got caught? Through SEC investigation.
• Penalties: $125 million in fines and the firing of Glenn, Clarke and Brendsel.
• Irony: 1 year later, the other federally backed mortgage financing company, Fannie Mae, was caught in an equally stunning accounting scandal.

American International Group (AIG) Scandal (2005)

• Company: Multinational insurance corporation.
• What happened? Massive accounting fraud to the tune of $3.9 billion was alleged, along with bid-rigging and stock price manipulation.
• Main player: CEO Hank Greenberg.
• How he did it? Allegedly booked loans as revenue, steered clients to insurers with whom AIG had payoff agreements, and told traders to inflate AIG stock price.
• How he got caught? SEC regulator investigations, possibly tipped off by a whistleblower.
• Penalties: Settled with the SEC for $10 million in 2003 and $1.64 billion in 2006, with a Louisiana pension fund for $115 million, and with 3 Ohio pension funds for $725 million. Greenberg was fired, but has faced no criminal charges.
• Irony: After posting the largest quarterly corporate loss in history in 2008 ($61.7 billion) and getting bailed out with taxpayer dollars, AIG execs rewarded themselves with over $165 million in bonuses.

Lehman Brothers Scandal (2008)

• Company: Global financial services firm.
• What happened? Hid over $50 billion in loans disguised as sales.
• Main players: Lehman executives and the company's auditors, Ernst & Young.
• How they did it? Allegedly sold toxic assets to Cayman Island banks with the understanding that they would be bought back eventually. Created the impression Lehman had $50 billion more cash and $50 billion less in toxic assets than it really did.
• How they got caught? Went bankrupt.
• Penalties: Forced into the largest bankruptcy in U.S. history. SEC didn't prosecute due to lack of evidence.
• Irony: In 2007 Lehman Brothers was ranked the #1 "Most Admired Securities Firm" by Fortune Magazine.

Satyam Scandal (2009)

• Company: Indian IT services and back-office accounting firm.
• What happened? Falsely boosted revenue by $1.5 billion.
• Main player: Founder/Chairman Ramalinga Raju.
• How he did it? Falsified revenues, margins and cash balances to the tune of 50 billion rupees.
• How he got caught? Admitted the fraud in a letter to the company's board of directors.
• Penalties: Raju and his brother charged with breach of trust, conspiracy, cheating and falsification of records. Released after the Central Bureau of Investigation failed to file charges on time.

Biggest Challenges for Corporate Governance in India

1. Getting the Board Right 

There is no doubt that a capable, diverse and active board would, to large extent, improve governance standards of a company. The challenge lies in ingraining governance in corporate cultures so that there is improving compliance "in spirit". Most companies in India tend to only comply on paper; board appointments are still by way of "word of mouth" or fellow board member recommendations.

2. Performance Evaluation of Directors 

In January 2017, SEBI, India's capital markets regulator, released a 'Guidance Note on Board Evaluation'. This note elaborated on different aspects of performance evaluation by laying down the means to identify objectives, different criteria and method of evaluation.

3. True Independence of Directors 

Independent directors' appointment was supposed to be the biggest corporate governance reform. However, 15 years down the line, independent directors have hardly been able to make the desired impact. The regulator on its part has, time and again, made the norms tighter – introduced comprehensive definition of independent directors, defined a role of the audit committee, etc. However, most Indian promoters design a tick-the-box way out of the regulatory requirements.

4. Removal of Independent Directors 

Under law, an independent director can be easily removed by promoters or majority shareholders. This inherent conflict has a direct impact on independence. To protect independent directors from vendetta action and confer upon them greater freedom of action, it is imperative to provide for additional checks in the process of their removal – for instance, requiring approval of majority of public shareholders.

5. Accountability to Stakeholders 

In this regard, Indian company law, revamped in 2013, mandates that directors owe duties not only towards the company and shareholders but also towards the employees, community and for the protection of environment.

6. Executive Compensation 

Whether executives are overpaid or adequately paid is big challenge in corporate houses across the world.

7. Founders' Control and Succession Planning 

Unlike developed economies, in India, identity of the founder and the company is often merged. The founders, irrespective of their legal position, continue to exercise significant influence over the key business decisions of companies and fail to acknowledge the need for succession planning.

8. Risk Management 

Today, large businesses are exposed to real-time monitoring by business media and national media houses. Given that the board is only playing an oversight role on the affairs of a company, framing and implementing a risk management policy is necessary.

9. Privacy and Data Protection  

Dynamic digital technologies are rapidly changing the way business is run today. The sensitization around privacy and data protection coupled with the increasing regulatory rigours, starting from the European Union’s General Data Protection Regulation (GDPR) to India’s upcoming personal data protection law, is all set to increase the compliance load of organizations.

10. Board's Approach to Corporate Social Responsibility (CSR) 

India is one of the few countries which has legislated on CSR. Companies meeting specified thresholds are required to constitute a CSR committee from within the board. This committee then frames a CSR policy and recommends spending on CSR activities based on such policy. Companies are required to spend at least 2% of the average net profits of last three financial years. For companies who fail to meet the CSR spend, the boards of such companies are required to disclose reasons for such failure in the board's report.