Prosecution of Carlos Ghosn Exposes the Heart of Japan Inc.

This article originally appeared in Chief Executive.

No episode in recent memory has highlighted the reality of business in Japan as much as the ongoing abuse of Carlos Ghosn, reminding us that the micro politics of planned economies can be as misguided as the macro policies that built China’s ghost cities.

In the late 1970s and early 1980s, U.S. businesses and U.S. business schools were entranced by books like Japan as Number One, The Art of Japanese Management, The Japan that Can Say No, and scores of similar treatises scolding Western business practices and celebrating Japan Inc.’s business-government central planning and collective leadership in a market economy that works. One reviewer of this fad in the New York Review of Books commented that these breathless books undervalued U.S. management strengths, labeling such breathless tributes as “Gallo wine in sake bottles” and “Elton Mayo with a Zip of Zen.”

In the abusive treatment of Renault/Nissan executive Carlos Ghosn, creator of his own pile of puffy self-congratulatory books, we see that there was more to the sagas celebrating the land of the rising sun. Denied bail on specious allegations when arrested in November, Ghosn had been jailed by the Japanese in harsh solitary confinement conditions for over three months. He was at last released, agreeing to $9 million bail, a denial of internet use, limited phone use, travel restriction, and constant video surveillance. His co-defendant Greg Kelly was released in December with roughly $700,000 bail, due to the need to treat a medical condition—spinal stenosis.

You might well wonder: Whom did they kill? How much loot did they steal? What public safety catastrophes followed from their alleged misconduct? The answers would be disappointing. Ghosn is charged with financial fraud in Japan facilitated by his deputy Kelly in the way of a proposed, unrealized compensation package that would have totaled $36 million in retirement—about on par with his global-auto peers. There were also questions about company costs incurred in oversees homes in Lebanon and Brazil that the company maintained for Ghosn. Separately, the French have some concerns about Renault payments related to his lavish wedding at Versailles.

Ghosn lacks humility, but that is no felony. Celebrated for rescuing the near-bankrupt Nissan in 1999 with an infusion of funds which netted Renault a 43% stake in Nissan and double the voting rights, Ghosn continued as a top Renault executive and then became the CEO of Nissan, where his tough-turnaround methods succeeded despite being a bad fit for Japanese culture. After assuming the CEO position at Renault, he wove together a partnership between three automakers called the Renault-Nissan-Mitsubishi Alliance, where he served as chairman. In 2017, the alliance edged out Volkswagen to become the world’s largest carmaker, with 10.6 million cars sold.

But Nissan’s rebounded performance meant it was selling 2 million more cars than Renault, and French control of the larger Japanese partner became an irritant to national pride—especially with the French government owning 15% of Renault. Ghosn’s plan to more formally institutionalize the partnership triggered still greater Japanese concern.

Nissan CEO Hiroto Saikawa—who already had already been at loggerheads with Ghosn—was rumored to be in jeopardy, and opposed what he saw has a French takeover of an iconic Japanese enterprise. The Nissan executives invoked the name of Prime Minister Shizo Abe as an ally and then (in documents detailed by the Financial Times) Japan’s Ministry of Economy, Trade, and Industry (METI) intervened, questioning the alliance. Correspondence between METI and Nissan revealed company executives asking the government to “put a brake on the French state.”

You know what happened next. Nissan executives baited Ghosn and Kelly into attending a fictional meeting where the Japanese government arrested them with TV cameras all set to record the drama. Detained on a series of thinly-sliced charges, each promulgating another six weeks in jail, Ghosn was denied access to his family, his possessions, and even direct contact with his Western attorneys, left to rely upon Japanese counsel. When he appeared in court for a bail hearing, he was led around in handcuffs with a rope around his waist.

On January 22, he was denied bail despite offering to remain in Japan with an electronic bracelet for tracking. Contrast that with the handling of leaders of Tokyo Electric Power Company’s Fukushima Nuclear disaster (who have avoided detention throughout a multi-year investigation) or those at the helm of the now bankrupt Takata airbag company, who have escaped any penalties despite several dozen deaths from shrapnel in exploding airbags.

The objective of this strategy is obvious, and explains Japan’s 99.9% criminal conviction rate— on par with the courts of Russia and China. Bail is generally allowed only when the accused confess. If tried and convicted, Ghosn faced 10 years in prison on each of the corruption charges. Meanwhile, Renault has remained shut out of Nissan’s decision making, given no evidence, and faced months of delay in a needed shareholders’ meeting. Ghosn has been replaced as chairman and CEO of Renault due to his absence.

Such turbulence and corporate legal shadows is bad news for Japan. It has hampered recruiting global executives to Nissan—and likely will have the same negative effect on other Japanese companies hoping to tap top global talent. Wondering about such treatment by supposed friends, Western business leaders are revisiting the old cliché about keeping enemies closer.