Nissan crisis showed the risk for the brands

The arrest of Nissan Motor Company’s Chairman and automobile industry icon Carlos Ghosn by Japanese authorities on allegations of financial misconduct has sent the stock prices of alliance partners Nissan, Renault and Mitsubishi crashing across global markets, triggered speculation on the collapse of their mega-alliance and led to a leadership vacuum at these firms. This episode has important leadership and governance lessons for the corporate world.

The swift action from the boards of Nissan, Renault and Mitsubishi to remove Ghosn from his chairmanship whilst the jury is still out on his guilt, is a lesson on where Indian directors’ loyalties should really lie in such situations. The nature of allegations against Ghosn — under-reporting his compensation to the stock exchanges and personal use of the company’s assets — hint at the hubris that can overtake professional managers when they are allowed to helm public companies for too long without check. The Nissan episode reiterates the need for Indian regulators to examine a hard limit on the terms for CEOs/Chairpersons of companies akin to those for auditors. The episode also indicates that separating the Chairman and CEO roles is critical for public companies to avoid concentration of power, that allow governance infractions to go unchecked. Such separation has already been recommended by the Kotak Committee on corporate governance, which SEBI has accepted in principle. But SEBI has perhaps given domestic firms too long a rope by making this rule applicable only to the top 500 listed companies, with the deadline for compliance put off to April 2020.

Finally, global corporations go through a lot of trouble to ensure that their operations are shielded from business risks by diversifying across geographies, products and brands. But the recent crises at Nissan and Tesla — after Elon Musk’s irresponsible tweets invited the wrath of SEC — highlight the concentration risk that corporations run when they allow their top managers to don larger-than-life persona and build personality cults around them. Ghosn no doubt deserved accolades for his sheer skill at turning around ailing automakers and holding together a profitable alliance of three global giants. But ultimately, he had become a bigger brand than the products of companies he helmed and that has proved to be the Achilles’ heel for investors in the three automakers hit by this crisis.