Executive Pay: The Curious Case of Carlos Ghosn’s Arrest

Carlos Ghosn is a 64-year-old French citizen who is the head of three major automobile companies viz. Mitsubishi, Nissan as well as Renault. To people who are familiar with the automobile industry, Carlos Ghosn is not a name that needs any introduction. He is the wonder executive who has rescued automotive firms from the brink of bankruptcy. This is the reason why obtaining a bigger pay package was never really a problem for him. Investors and board members were more than happy to provide him with as much pay as he wanted as long he was able to get the job done.

This is the reason why his recent arrest in Japan has come as a surprise to many. Carlos Ghosn, who has been the poster boy of the automotive industry, has suddenly fallen from grace. People are having a hard time believing that the maverick, whom they considered to be a genius all this time, is actually an unethical, fraudulent person.

In this article, we will have a closer look at the Carlos Ghosn case in order to better understand executive pay in legal as well as in a cultural context.

Who Is Carlos Ghosn?

As already mentioned in the article, Carlos Ghosn was the CEO of Mitsubishi, Renault as well as Nissan. All these three companies, in a way, form one single entity. The French government owns a 15% stake in Renault. Renault, on the other hand, owns a 45% stake in Nissan. Nissan further holds a major stake in Mitsubishi. Hence, they are all, in effect, owned by the same company.

However, since mergers do not tend to go well in the automobile industry, the companies have not been merged. Drawing lessons from the Diamler Chrysler merger, this entity decided to operate as three separate companies. This creates a curious situation where Carlos Ghosn is the CEO of all the three companies. These three companies combined make a formidable force within the automobile industry.

Why Has He Been Arrested?

Carlos Ghosn has been arrested by the Japanese police in Tokyo. He was arrested because he allegedly underreported his compensation as the CEO of three major companies. The details of his arrest are as follows:

• Firstly Carlos Ghosn is said to have misreported his compensation to the Tokyo Stock Exchange. He is said to have underreported his compensation by 5 billion Yen over the course of 5 years. Firstly, the amounts are pretty significant. Secondly, anything reported to a stock exchange is a legal filing. Hence, underreporting these expenses amounts to financial fraud which is the reason why Carlos Ghosn has been arrested. However, Ghosn’s lawyers have been saying that out of the 5 billion, 4 billion yen were not cash payments. Instead, this compensation was being paid in the form of stock. Hence, it was difficult to value and also Mr. Ghosn had discretion regarding whether or not he wanted to disclose this income.
• Secondly, it is also believed that Carlos Ghosn used company money to buy luxury homes in several places. He had more than six luxurious homes in cities like New York and Paris. The problem is that the money purchased to buy these houses was paid for from company accounts. Later, the houses were simply passed over to Carlos without any payment. Also, since Carlos Ghosn was personally involved in selecting the houses and negotiating the deal, it seems like he purchased the houses for himself but used company money to settle his personal bills.
• There have also been allegations that Carlos Ghosn has used company money to go on personal vacations. The cost of his family vacations often running into hundreds of thousands of dollars was paid for by the company.

It needs to be understood that all the above claims are mere allegations and none of them have been proven to be true until now.

The Cultural Conundrum about Carlos Ghosn’s Pay

To many people, Carlos Ghosn seems to have fallen prey to a cultural stereotype. This is because even though he was drawing CEO level salaries from all the three companies that he worked for, his pay was not extraordinary. His pay was exactly in the range that other car companies such as Ford and General Motors were paying their CEO’s.

Big CEO packages are easily accepted in America. However, Japanese companies tend to pay smaller pay packages to their leaders. Carlos Ghosn tried to change this. He tried to bring a meritocratic system in companies where promotions were generally given based on seniority and tenure.

Many experts believe that Carlos Ghosn tried to convince Japanese investors to pay him a big paycheck and failed. This arrest is part of a plan. It may even be a set up to get rid of him because Nissan immediately fired Carlos Ghosn as soon as he was arrested. Mitsubishi has publicly declared that it will also follow suit. Only, Renault, the French company, is going to wait to see evidence of whether or not, Carlos Ghosn was guilty.

Claims about a conspiracy against Ghosn are also emboldened by the fact that Nissan share prices have plunged after his arrest. If a fraudulent leader was being removed from the company, there would be no reason for investors to get jittery. Many believe that if there was any truth to the allegations being made against Carlos Ghosn, the stocks would have risen instead of falling.