Friday, 23 November 2018

The Case of Carlos Ghosn and the Renault-Nissan-Mitsubishi Alliance: A Complete Failure of Corporate Governance

Today’s post comes from Oluwarotimi Adeniyi-Akintola, a PhD student in Aston Law School. Rotimi’s doctoral research focuses upon corporate governance forms within Nigeria. For more from Rotimi, please follow his twitter profile here and his blog page on Medium here.


As you may have heard, Carlos Ghosn, one of the most prominent figures in the automotive industry, was arrested in Tokyo on November 19, 2018. According to Japanese prosecutors, he stands accused of financial improprieties and the falsification of annual securities reports, which could result in a jail term of 10 years, a fine of 10m yen, or both. His arrest has sparked corporate crises across two continents and marks an astonishing reversal in fortune for a man many consider to be the lifeblood of the titanic Renault-Nissan-Mitsubishi (RNM) alliance. In many ways, Ghosn’s story is a demonstration of how the concentration of power in key individuals can result in a complete failure of corporate governance at even the most prominent organisations.

Having earned a reputation for returning ailing businesses to profitability through previous stints at Michelin and Renault, the legend of Carlos Ghosn really kicked off in 1999 when he was appointed as Nissan’s COO. Renault had just purchased a 36.8% stake in Nissan, thus marking the beginning of what is now known as the RNM alliance and needed someone to save Nissan from the brink of collapse. It was here that Ghosn performed his greatest magic trick. He went on a cost-cutting rampage, cutting 21,000 jobs, shutting down plants, suppliers, and introducing drastic changes to corporate-culture at Nissan. Within three years, Ghosn who was now the CEO, had halved Nissan's $19bn debt, returned the company to profitability and grown sales from below $50bn to almost $80bn. He became hugely popular in Japan after this exploit, so much that he was awarded a medal of honour by the Japanese Government, and was ranked ahead of Obama in a 2011 poll which asked the Japanese to choose their ideal Prime Minister. In the mid 2000s, his legend was cemented. Ghosn was appointed Chevalier of the Legion of Honour by the French government and subsequently made an Honorary Knight Commander of the Order of the British Empire in recognition of his achievements.

By 2009, ‘Le Cost Killer’, as he came to be known, was the simultaneous Chairman and CEO of both Nissan and Renault, and when Mitsubishi became a member of the alliance in 2016, Ghosn was immediately appointed its Chairman.

The picture being painted here is of a man with the reputation of a corporate magician, who had the entire automotive industry in awe of him and was worshiped by his loyal subjects. This same person also had near-absolute control of a car alliance which sold 10.6 million vehicles in 2017, and today accounts for more than 1 in 9 vehicles around the world. He had occupied leadership roles on the boards of the member companies for the best part of two decades, and he ran the alliance as though it were one company. He was the man. He had all the power. As the CEO of Mitsubishi recently stated, it became difficult to foresee a future for the alliance without Ghosn in the picture. In such an entrenched position, it is impossible to imagine how anyone could have possibly challenged his will and direction in the boardroom. What everyone, including people who should know better, failed to realise was that this was the ultimate nightmare scenario for the corporate governance of the three companies.

Although the issue is subject to heavy debate, the separation of the roles of the Chairman and CEO is a key component of corporate governance principles embraced by shareholder activists and other stakeholders in the UK and much of continental Europe. The bulk of the opposition emanates from the United States and France, where about 60 % and 70% of companies respectively have had one person occupying both positions according to one report, compared to fewer than 20% of companies in Britain, Germany and Japan. This principle is so strongly held, that a buffer period of at least 5 years, is often recommended before a former CEO or other person connected with the company is to be appointed as its Chairman. Term limits ranging from 5 – 10 years are also imposed in order to curb the concentration of power in one individual. Quite simply, many people believe that a company is less likely to be mismanaged if it resists domination by a single, all-powerful CEO/Chairman who is free to run the company as (s)he sees fit. The Ghosn case appears to be a perfect illustration of this situation.

The allegations against Ghosn are as follows: he collaborated with another board member, Greg Kelly, whom he instructed via email to under-report his income by about 5 billion yen ($44 million) over a five-year period; he misappropriated money allocated for other Nissan executives; using Nissan’s funds, he purchased properties in Rio De Janeiro, Beirut, Paris and Amsterdam which were rent-free and undeclared; Nissan paid his sister $1.7 million for advisory work which was never conducted; and he directly instructed a close aide by email to make a 1.5 million dollar payment to remodel his home in Lebanon. It is very important to stress at this point that these are only allegations, and that Carlos Ghosn has neither been charged nor convicted of any offences at this point in time. These relate to Nissan alone, and further allegations appear by the day.

Although the message Nissan currently projects is that this was the work of a few bad eggs, it is highly unlikely that these allegations, if true, were carried out without the knowledge of more than a few collaborators, given their scale and the length of time involved. The profile of the alleged beneficiary, Ghosn, must have a significant part in allowing and concealing these alleged improprieties. This much was admitted by Nissan’s CEO and interim Chairman, Saikawa, who stated that ‘the lesson we need to learn from the negative part of Ghosn’s rule is that too much power was concentrated in one person.’ He also suggested that there were times when Ghosn made decisions without seeking the input he should have, and called for an improvement in the company’s weak corporate governance.

Indeed, Nissan’s corporate governance structure was appalling. Ghosn, who once told investors that no CEO should exceed a term of five years, was allowed to spend nearly two decades at the helm of Nissan. In a review of governance in Japan’s largest companies in 2011, Nissan was one of very few that did not have at least two independent directors and was found to have no board committees. Without these structures, there were no checks and balances, particularly with regard to auditing, appointments, compliance, executive remuneration and other sensitive issues. Saikawa’s frank assessment of the situation at Nissan is hardly surprising when considered in this context.

The single positive thing about failures of this nature is that they usually result in the installation of stronger governance safeguards. Following Saikawa’s comments, Nissan was quick to announce a review of its corporate governance policies in a concerted effort to clean up its image. The fact that these allegations were exposed by a whistle-blower is nonetheless encouraging and serves to re-emphasise the importance of whistle-blower protections for effective corporate governance.

However, it would be remiss of me to ignore speculation that the whistleblowing was orchestrated by senior figures within Nissan who were strongly opposed to Ghosn and Renault’s plans to render the alliance irreversible by way of a merger. If true, this suggests a deeper rot in Nissan’s corporate governance arrangements, as it would mean those senior figures were happy to turn a blind eye until their personal interests were threatened.


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 organisation. Whilst such dominance may arise when the positions are separated for various reasons, 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. In the words of a famous pop star, ‘no one man (or woman) should have all that power.

Keywords – Renault; Nissan; Mitsubishi; automotive, Corporate Governance, Business, @finregmatters

Sunday, 18 November 2018

The Office for Students and the Difference between Theory and Reality

We have looked at issues within the Higher Education sector here in Financial Regulation Matters before, mostly in relation to student finances, student accommodation, and also sector-related pensions. However, after some recent developments it is important to take a look at Universities as institutions and, crucially, the position that regulators are finding themselves in, despite any ideological claims as to their operating mandate. As the story develops that, recently, a British University was essentially ‘bailed out’ by the Government, it will be of interest to examine the regulatory reality that the recently-formed Office for Students (OfS) has found itself being exposed to.

It was reported towards the end of this week that ‘a UK university had to be given an emergency loan of almost £1m by the higher education watchdog to stay afloat this autumn’. The BBC continued by stating that the OfS provided the money when the university faced the prospect of running out of capital and being unable to pay its bills, whilst it goes on to confirm that the money has been repaid and the university of now financially stable. The Financial Times reports that the OfS confirmed that the university had not been at risk of bankruptcy and that the university in question had not been allowed to register new students until the money had been (quickly) repaid. Only earlier this month had Sir Michael Barber, Head of the OfS, confirmed that ‘the OfS will not bail out providers in financial difficulty’, whilst also declaring that bailing out institutions would lead to ‘poor decision making and a lack of financial discipline’. As we now know there comments were contradictory and Sir Barber would have known that, with the result being a barrage of criticism for such views. The University and College Union said that it would be writing to all MPs with a University in their constituency to outline the dangers of a university collapse, correctly adding that ‘allowing universities to go to the wall has consequences far beyond just education – Universities are often one of the key employers in the area and the impact on the local economy and on local opportunities is difficult to overstate’. The UCU continued by declaring that Sir Barber’s comments ‘demonstrate just how out of touch those in charge of our universities really are’, whilst other commentators have been quick to note that such an outcome is an almost natural conclusion to what is, essentially, a ‘bubble’ within the HE marketplace.

It has been suggested in the media that the University in question is the University of East London, which the University has denied, but the issue here is not which University sought the bailout, but that it was inevitable that one (and more) would. Universities are under increasing pressure from a number of areas, including politicians and the media, and that may manifest itself in different ways (like recent calls to improve social mobility). Yet, it is all underpinned by one key facet, and that is related to the word that concluded the paragraph above: marketplace. As the HE sector has been financialised, there came with it increasing pressures. One of the key pressures was the need to keep the system moving, as is the way with any other financialised ‘bubble’ (think housing in the pre-Crisis era). Over the years we have seen tuition fees break records, more and more students attend University, and a massive growth in developments such as student accommodation, sports facilities, and libraries. However, whilst that sounds all well and good, the reality is that the observable growth of UK campuses is mostly funded by ‘cheap debt’, with University borrowing in the UK now topping £12 billion. The Financial Times suggests that there is an impending issue in that there are falling student numbers, and that this trend is expected to continue as a result of low birth rates around the millennium and tighter immigration rules; the result being that a forthcoming report is expected to advise that tuition fees be capped at £6,500 (to induce uptake of places) and Moody’s having placed all UK universities (bar Oxbridge Universalities) on ‘negative rating watch’. All of this tells us that Universities have changed, from institutions of learning to vehicles of financialised concern – the concern now is keeping the wheel spinning. If that is true, then how universities will keep that wheel spinning is worrying, because the likely method would be reduced fees, reduced entry-grades, and probably cuts amongst the associated workforce. If that is all to be accepted, then what does it mean for the OfS?


The OfS is not a governmental body, but reports to the Department for Education. It is seen as the spear of the education regulatory framework, but it is worth noting when it was formed. It was formed at the beginning of 2018, which as one will be aware is in the midst of austerity Britain, as governed by the Conservative Party. The OfS stresses its independence, but within the UK there is an ideological trend that is prevalent amongst the institutional framework, and it is unsurprisingly Conservative in nature. Without casting judgement, it is therefore, again, unsurprising that the OfS would theoretically reject a bailout, based upon free-market principles. But, as Sir Barber would have quickly realised, theory and reality are not always aligned. The HE sector within the UK is in a very precarious position, and as the spearhead of the regulatory framework, the OfS is tasked with a thankless job – do not let the bubble burst. That is fine, but again the reality is much different. Any student of the previous two decades knows that bubbles will burst, it is inherent within their nature, and this educational bubble is no different. With so many providers, a stagnant economy exposed to an uncertain environment post-Brexit, and a reducing pool of income (via students), the bubble will burst. However, the OfS has decided that ideology cannot be the reason it bursts, and took the decision to contradict itself in a crucial fashion, less than a year into its existence. What providers will now know is that the OfS exists to protect the mechanisms of the bubble, and the situation may be that which the OfS was trying to avoid from the outset. Many commentators have been quick to note that the sector is ‘different’ to others and cannot be treated as a financial marketplace, but unfortunately every angle of the sector screams financial marketplace – education has become a product, universities are massive companies, and the public is on the line for all of it if the system breaks; there is very little difference to that and any other financial marketplace. Regrettably, those other financial marketplaces have usually suffered severe shocks, and it is likely the HE sector will be the same, despite the efforts of the OfS.

Saturday, 10 November 2018

KPMG Stops Consultancy Conflict-of-Interest: Progressive Step or another False Dawn?

We know here in Financial Regulation Matters that the audit industry is currently reeling from a number of high profile scandals regarding their involvement in corporate collapses. KPMG’s role in the collapse of both Carillion and BHS, alongside the involvement of their Big Four counterparts in the same, and in different scandals has led to calls to break up the ‘Big Four’ auditors. Whilst we have discussed this issue before, the Big Four (at least members of the Oligopoly) have now proposed a different solution, and have taken strides to enforce their will by taking action. However, there are a number of vital questions that stem from their decision.

KPMG, announcing the move on Thursday, stated that they are to drop the availability of consultancy, or ‘non-audit’ services to clients they are simultaneously auditing, focusing on FTSE 350 clients specifically. Whilst a date for the policy change has not been confirmed, the Chair of the firm’s UK division stated that the move was intended to ‘remove even the perception of a possible conflict of interest’. In unity, just as an oligopoly should operate, Deloitte have also backed the plan, which can be seen as a direct response to ongoing research and investigation by the Competition and Markets Authority regarding how the audit sector ‘is not working well for the economy or investors’. The Times suggests that this decision will cost KPMG up to £80 million in fees, although that figure is perhaps inaccurate is the Times goes on to state that the Big Four made over £3 billion in fees from audit clients last year, with £1 billion generated from non-audit services. It is also interesting to note that the beleaguered regulator the FRC has already been discussing whether to prohibit audit firms from providing non-audit services to audit clients, which demonstrates to us that this idea is perhaps the optimal one on the table.

Yet, there are a number of issues with this. The first is that the reality of the situation in this regard is absolutely vital. If the audit companies impose a prohibition upon themselves, the effect is that the regulator would have no need to do the same. What is the effect of that? The effect is clear to see, in that the prohibition is then easily reversed once the dark cloud moves on from the audit industry. It is appreciated that this is a cynical approach, but it is not without basis. In the wake of the Enron scandal at the turn of the century, this consultancy conflict-of-interest was held up as one of the key elements of the ability of Enron to collapse so spectacularly. In response, most of the large audit forms divested themselves from their consultancy offerings in response to a political backlash (Deloitte is cited for having not done so, however) and those offerings were put into the marketplace (and incorporated by other gatekeepers, but more on that later). If we look at the percentage of revenue from consultancy services in the wake of Enron, we can see that the effect was significant:

Percent of Revenue from Non-Audit/Tax Services for “Big Four”
Auditor Name
2000
2001
2002
2003
2004
2005
2006
2007
2008
Deloitte & Touche LLP
64.82
46.88
29.41
13.22
4.37
3.06
2.67
2.65
1.32
Ernst & Young LLP
48.35
29.35
14.08
4.35
1.73
1.21
1.29
1.40
1.07
KPMG LLP
61.95
30.67
12.37
4.23
2.48
1.48
1.37
1.18
1.06
PricewaterhouseCoopers LLP
68.11
54.18
28.44
5.95
2.24
1.84
1.84
2.44
1.14

Yet, if we examine just the effect that this had upon revenue derived from their British operations during the same period, there is a surprising result:




So, what can we take from the above. The first thing to note is that the effect of divestment took around four years to really take effect. Second, the effect upon PwC’s bottom line was not negative, but in fact had no bearing at all. We cannot attribute the divestment to the rising revenues, as the most obvious reason is the upturn in the economy and the housing bubble, but any suggestion that divestment would negatively impact these firms can almost be dismissed out of hand. Yet, there is a bigger issue. We can see that the Big Four divested from the consultancy divisions they had created, but we know now that in the wake of the Financial Crisis, when the Credit Rating Agencies were really catapulted to the fore in terms of public backlash for their involvement – interestingly, as a result of acquiring many of the divisions and practices perfected by the auditors; the consultancy conflict-of-interest was, and remains to be a significant problem in the field of credit ratings), the auditing firms began rebuilding their consultancy offerings. Therefore, it is not cynical to suggest that this pattern is replaying right before us.

There are some many issues in the audit field, that presenting one proposal to remedy the ‘effect’ the sector has upon society is almost meaningless. We have calls to open up the field and incorporate the outsiders to the oligopoly, even though said outsiders, like Grant Thornton, are currently in the mire regarding their own auditing practices (in relation to the incredible scandal at Patisserie Valerie). Yet, focusing on this concept of the removal of consultancy services, this author has warned against this concept before. In this author’s first book, the point was made that the removal of ‘ancillary services’ i.e. services that are not vital to the completion of the gatekeeper’s function, should never be allowed on the gatekeeper’s terms, as they then become, inherently, reversible. In a forthcoming book, which this author will be editing (and contributing a chapter) entitled Regulation and the Global Financial Crisis: Impact, Regulatory Responses, and Beyond, the argument will be made that to defer this vital move to the gatekeeper is an incredible mistake, and that this move essentially retains the option to digress. Whilst the CRAs and the auditors serve different functions, the impact of their digression is eerily similar, and that is that the impact is systemic.

It is appalling that these lessons are not being learned. It is not as if regulators, politicians, and concerned onlookers have to go back centuries to find these patters – it was merely 18 years ago that the auditors played this same trick. Is it the case that amnesia has set in and people are unable to identify the trends? Of course this is not the case, because for anyone interested in the audit field, the Enron-era is something many can easily recite. Therefore, perhaps it is another, more negative outcome that we must arrive at – those who have the power to enforce such actions will not, because they do not want to. To enforce that consultancy services are never offered by such societally important entities, would essentially mean that a theoretical short-term hit to the bottom line would ensue. Perhaps there will not be another bubble to inflate the bottom line like last time? Nevertheless, the reason for the abolition of consultancy services – public protection – is unfortunately not a consideration, as this period, and previous periods surely demonstrate. It is up to concerned onlookers, and probably more importantly business journalists and editors, to shape the narrative so that the audit companies’ decision to divest is not seen as a positive this time. To promote to permanent prohibition, with the aim of public protection, now in the wake of the auditing scandals that are blighting the marketplace would be the socially progressive thing to do. The question is, will this happen?


Keywords – audit, CRAs, conflict-of-interest, KPMG, PwC, business, @finregmatters