The significance of the board of directors to good corporate governance


Thanks in no small part to the 2009 economic crisis and the plethora of corporate scandals witnessed till date, corporate governance continues to occupy a position of great importance in the contemplation of stakeholders. The silver lining is that when these corporate scandals occur, they present an opportunity to examine how failures in the governance culture of a company can result in disastrous consequences, and in time we have come to distil certain key components of good corporate governance from them. Some of these essential issues of governance relate to the treatment of shareholders and stakeholders, the discharge of the board of directors’ functions, risk and strategy oversight, appropriate executive compensation, amongst many others.

Of these elements, the consideration of the board of directors is perhaps the most significant, because the board is entrusted with major decisions which affect the business activities of a company. Lapses at the board level are therefore dangerous to the health of any company. As a result, there are several rules and recommendations regarding the composition, diversity, independence, remuneration, responsibilities, terms and qualifications of board members. One only has to examine the ongoing scandal at Nissan to gain an insight into how lapses at the board level can be detrimental to the reputation and success of a company.

On 19 November 2018, the chairman and former CEO of Nissan, Carlos Ghosn, was arrested by Japanese authorities on the basis of allegations of financial improprieties and falsification of annual reports. The details of the reported allegations are as follows: Ghosn collaborated with another board member, Greg Kelly, whom he instructed to under-report Ghosn’s income in annual reports by about 5 billion yen ($44 million) over a five-year period; Ghosn misappropriated money allocated for other Nissan executives; using Nissan’s funds, Ghosn purchased properties in Rio De Janeiro, Beirut, Paris and Amsterdam which were rent-free and undeclared; Nissan paid Ghosn’s sister $1.7 million for advisory work which was never delivered; and Ghosn directly instructed a close aide by email to make a $1.5 million payment to remodel his home in Lebanon. It is important to note that these are only allegations, and that Carlos Ghosn has neither been charged nor convicted of any offences at this point in time.

The burning question for most observers is how these extraordinary abuses could have occurred without detection for such an extensive period. One plausible explanation was provided by Hiroto Saikawa, Ghosn’s successor as CEO of Nissan, 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. Saikawa added that Ghosn routinely made decisions without seeking the input of relevant board members, resulting in a weakened state of governance at Nissan.

Indeed, Nissan’s 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. Further, in a review of governance in Japan’s largest companies, Nissan was one of very few who did not have at least two independent directors and was also 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. When further consideration is given to Ghosn’s cult hero status in Japan and France earned for his turnaround of both Nissan and Renault from the brink of collapse, it is impossible to imagine how anyone could have possibly challenged his will and direction in the boardroom. Saikawa’s frank assessment of the situation at Nissan is therefore unsurprising against the backdrop of Nissan’s governance structure.

It might be tempting to dismiss Nissan’s board failures as improbable within the UK’s corporate governance system, in view of the perceived saturation of governance principles within this jurisdiction. Indeed, for many years the UK’s code of corporate governance has recommended the division of responsibilities within the board of directors, independence of the chair and non-executive directors, limitation of the chair’s term to nine years, and separation of the roles of the chief executive and that of the chair. Levels of compliance with the code’s provisions continue to improve, with full compliance by the FTSE 350 at 61.2% and 93.5% complying with all but a couple of provisions in 2015. Nevertheless, Nissan’s failures are a useful reminder of the reasoning behind the extensive principles of good corporate governance, and serve as a warning for companies who might consider departing from the substantive application of these principles. The lapses at Nissan are also instructive for other jurisdictions where some of these principles are yet to be embraced.



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