Bloomberg Law Analysis

ANALYSIS: Corporate Governance Lapses Key to Nissan’s SEC Fines

Sept. 25, 2019, 10:50 AM

Why did Nissan Motor Co., Ltd. pay $15 million in fines for the misconduct of its CEO? Nissan’s lax corporate governance paved the way for the wrongdoing.

On September 23, Nissan, the Japanese automaker listed on the Tokyo Stock Exchange, agreed to pay $15 million to settle SEC fraud charges stemming from an alleged compensation scheme involving former CEO Carlos Ghosn. Ghosn’s alleged misconduct is shocking: the Commission charged that Ghosn engaged in a scheme to conceal more than $90 million of compensation from public disclosure and to increase his retirement allowance by more than $50 million. Nearly as disturbing are the failures of Nissan’s corporate governance and internal control structures to prevent the misconduct or to reveal the fraud for nearly a decade.

The $15 million penalty could have been worse. Nissan afforded “significant cooperation” to the SEC, and promptly took significant remedial steps to prevent such misconduct in the future. The Commission took into account the company’s cooperation and remediation in setting the penalty amount.

Nissan’s Flawed Corporate Pay Policies

A company’s compensation program should be based in sound corporate governance, and executive pay policies should be reasonably aligned with the company’s strategic objectives. As alleged, however, Nissan largely abdicated this responsibility. Beginning in 2004 and until 2018, the company’s board delegated its authority to set the amount of individual director and executive compensation to Ghosn. The authority permitted Ghosn to set his own compensation, within certain aggregate limits. Although the board’s delegation in certain years contemplated that Ghosn would consult with the board on the compensation decisions, in practice, he set the amount of director and executive compensation without oversight.

Each year, as alleged, Ghosn fixed a total amount of compensation for himself. But, in addition, he set a certain amount that was paid and disclosed and an additional amount that was unpaid and undisclosed. As charged, Ghosn and his subordinates crafted various ways to structure payment of the undisclosed compensation after Ghosn’s retirement, such as entering into secret contracts, backdating letters to grant Ghosn interests in the company’s long-term incentive plan, and changing the calculation of Ghosn’s pension allowance. The scheme went undetected for several years.

The Commission’s Liability Finding

The SEC found in settling its administrative action that Ghosn’s misleading statements, devices, schemes and artifices to defraud were material and evidenced a high degree of scienter. Further, Ghosn acted within the scope of his employment, particularly in light of Nissan’s specific delegation to Ghosn of authority to set compensation levels, including his own. Therefore, his conduct and mental state, including his intent and knowledge of the misleading statements, could be imputed to Nissan.

In addition to the $15 million penalty, the SEC entered a cease-and-desist order prohibiting Nissan from committing or causing any violations of Exchange Act Section 10(b). In addition, the SEC sued Ghosn in federal district court. To settle the charges, Ghosn agreed to be permanently enjoined from violating or aiding and abetting violations of the antifraud provisions. He also agreed to a $1 million civil penalty and a 10-year officer and director bar.

Remedial Measures

Some observers may be surprised to learn that Nissan’s board did not have either an audit committee or a compensation committee. While Nissan’s American Despositary Receipts trade over the counter in the United States, the company does not have a class of securities registered with the SEC. Nissan relies on the registration exemption in Exchange Act Rule 12g3-2 for foreign private issuers.

After disclosure of the misconduct, Nissan fundamentally changed its board structure, including adding audit and compensation committees. The compensation committee is composed entirely of independent outside directors, and has the sole authority to determine compensation of executive officers and directors. The committee may not delegate this authority.

Nissan also required its board to include a majority of independent outside directors, including an independent chairman. The audit committee must also be made up of a majority of independent outside directors, including an independent outside director as its chair. At least one member of the audit committee must also have experience in international audits

The company also took steps to improve transparency and internal auditing and internal controls procedures, and eliminated the so-called “CEO Reserve,” a pool of money available to pay for personal expenses and various residences of the CEO.


The 15 million lessons to be learned from Nissan include the vital necessity of a robust corporate governance and internal control structure. The compliance structure should serve to both deter and detect wrongdoing. The board and its committees must also take their authority to set compensation seriously, and not delegate this job to management. Self-policing prior to the discovery of the misconduct is vitally important, including the establishment of effective compliance procedures and an appropriate tone at the top

The order also emphasizes the importance of cooperation with the Enforcement Division. The Commission emphasizes self-reporting of misconduct when discovered, including a thorough review of the nature, extent origins and consequences of the misconduct. Companies should also promptly take remedial steps, including dismissing or appropriately disciplining wrongdoers, and making any necessary changes to internal controls and procedures to prevent any recurrence of the misconduct.

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