TOKYO -- The arrest of Carlos Ghosn, chairman of automobile giant Nissan Motor Co., on suspicion of under-reporting his income highlights the harmful effects of the company's overconcentration of his authority.
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The downfall of the charismatic businessman, who heads Nissan, its major shareholder Renault S.A. of France and Japan's Mitsubishi Motors Corp. in which Nissan is the largest shareholder, will inevitably destabilize the balance in the alliance between the three firms. The impact of the incident on the competitive landscape within the automobile industry is immeasurable.
"Excessive authority was concentrated on just one person. The incident is the adverse legacy of Ghosn's longstanding rule," Nissan President Hiroto Saikawa told a news conference on Nov. 19.
An investigation conducted by the Tokyo District Public Prosecutors Office has raised suspicions that Ghosn illicitly used the company for his personal benefit, such as by under-reporting his remunerations by nearly 5 billion yen and misappropriating company funds.
Ghosn's control over Nissan began in 1999 when Renault dispatched him to Nissan as chief operating officer after the then financially troubled Japanese automobile giant asked the leading French carmaker for assistance.
Ghosn, who had been called a "cost cutter" since he was in Renault, boldly reduced Nissan's expenses by setting clear numerical targets and drastically improved the company's profitability. He led the three-company alliance he heads to the second largest bloc in the industry through bold mergers and acquisitions.
At the same time, critics have pointed out problems involving Ghosn's 19-year rule of Nissan. In addition to being chief executive officer (CEO) of Nissan, he assumed the post of CEO of Renault, a large shareholder in the Japanese carmaker, in 2005.
"This was extremely problematic in terms of corporate governance," Saikawa said, adding that he thought that "this was one of the causes" that triggered the wrongdoing.
Nobody within the company was apparently able to express their opinions on or voice opposition to Ghosn's decisions. The latest incident has demonstrated that the company lacked a system under which other executives can monitor's Ghosn's activities.
Saikawa said that Nissan representative director Greg Kelly, who has been arrested along with Ghosn, "used Chairman Ghosn's power to considerably control the company."
The president's comment shows that the concentration of information and authority on a few executives under Ghosn's one-man management style led to the wrongdoing.
Ghosn's emphasis on efficiency has also caused problems. At the instruction of Ghosn, factories within the three-company group competed to reduce production expenses and the one capable of producing cars at the lowest cost was tasked with manufacturing key models. However, it came to light in September that unlicensed workers inspected completed vehicles at Nissan plants, badly damaging the company's brand image.
Nevertheless, Ghosn left the company's response to the scandal entirely to Saikawa saying that Nissan's boss is President Saikawa, while he himself has failed to offer a clear-cut apology over the incident.
Ghosn's annual remuneration surpassing 1 billion yen also came under fire from shareholders and others. Yet he argued that his remuneration is at the same level as those in European and North American companies.
Ghosn now is suspected of having misappropriated about 1 billion yen a year on average from the company. To restore the public's trust in Nissan, the company must clarify the motives behind the alleged misappropriation of company money.
"We'll put an end to a management style that relies on certain individuals and strive for sustainable corporate management. This will be a good opportunity to review the way the company is run," Saikawa said.
Whether Nissan can establish a management system that does not rely on a charismatic executive like Ghosn will be tested.
--- World's No. 2 carmaker bloc shaken at foundations
It is inevitable that the abrupt arrest of Ghosn, who has exercised his strong leadership to lead the three-company group, will affect Nissan's tie-ups with Renault and Mitsubishi Motors.
At the initiative of Ghosn, Nissan has moved ahead with the development of electric vehicles to counter its rival Toyota Motor Corp., which has dominated the market for eco-friendly cars with its hybrid vehicles.
In April 2016, Ghosn proposed a capital alliance between Nissan and Mitsubishi Motors to the latter's then chairman, Osamu Masuko, who is now chief executive officer. Nissan placed Mitsubishi Motors under its umbrella six months later. The tie-up was made possible because of "strong-arm tactics only chairman Ghosn could pull off," a high-ranking official of Nissan said.
The three companies chose to integrate their functions of procuring parts, sales promotion and financial divisions rather than completely merging into a single entity in order to maintain the three companies' brands and strength while reducing expenses.
The three firms have been able to maintain their balance because Ghosn served as chairman of all the three companies.
Since last year, however, speculation has been growing that the French government that has a stake in Renault has been demanding the integration of management between the French automobile giant and Nissan.
Saikawa emphasized that the arrest of Ghosn "will never affect the three-company partnership." He nevertheless added that "whenever it's necessary to change or coordinate their strategy, the three companies will consult with each other."
(Japanese original by Kenji Wada and Hironori Takechi, Business News Department)