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 21st 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)
Freddie Mac (2003)
American International Group (AIG) Scandal (2005)
Lehman Brothers Scandal (2008)
Satyam Scandal (2009)
Biggest Challenges for Corporate Governance in India
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.
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.
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.
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.
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.
Whether executives are overpaid or adequately paid is big challenge in corporate houses across the world.
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.
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.
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.
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.
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