What is the Difference Between Mr. Ghosn’s Deferred Compensation and Hiring Post-Retirement Directors as “Advisors?”

When you squint closely at the facts, not as much as you might think. Mostly, it is the difference between individual self-dealing and collective self-dealing.

As corporate policy, many Japanese companies re-hire their executive directors as “advisors (“sodanyaku” or “komon“) immediately after they retire from the board. The re-hiring occurs automatically, and the work expected from such “advisors” in their contracts (if any) is usually vague to the point of being non-existent.

Because such “advisors” do little concrete work, the compensation that they receive is usually way out of line with the value that they actually contribute. In fact at most companies, there is thought to be no need to even “evaluate” the performance of “advisors” because they don’t do much anyway and their duties are so vague (e.g. “will offer advice upon request”).

The ex-director remains at this cushy position either: (a) indefinitely, sometimes meaning until he or she dies; (b) until he or she reaches a certain age, – say, 85 years; (c) until a number of years have elapsed, ranging widely from one year to essentially any other number; and/or (d) until such time as the board decides to terminate the relationship with the “senior” ex-executive at an earlier time than (a) ,(b), or (c).

In a “relatively good case” there is actually some concrete work performed by the former director (e.g. at a specific subsidiary), but even then the compensation can be as much as half or more compared to the fixed salary that the “advisor” received as a director, for a job which in reality is not full-time and normally carries no legal duty of “due care” to the public company and therefore brings with it no significant liability from shareholder lawsuits. Usually, the work involved is not “executive” in nature. Rather, to the extent there is much work at all, it is introductions or informal oversight and advising, with very few regular meetings.

In what I would consider a “worse case”, no pretense is made that the compensation is given with much expectation of actual work. Rather, the position is given mainly because the ex-executive needs to have a title that sounds sufficiently senior and also appears to continue his current affiliation with his former company, in order that he or she can participate as a senior member of the Keidanren or other industry organization(s). In such cases the “advisor” appears to represent the company, but is not involved in daily management (so doesn’t know those details) and bears no significant legal liability to the company or its shareholders.

Believe it or not, the need to give senior-sounding positions to such persons is often given as a major reason why “it is absolutely unrealistic” to expect Japanese companies to abandon the practice of “advisors”. The argument, strenuously made, is basically that such “advisors” are an essential part of Japan Inc’s ecosystem.

At some companies, “advisor” positions are given not only to former directors but also to a number of senior managers (shikko-yakuin) who never served on the board at all. As always, compensation runs in lockstep to the level of former seniority, but from the perspective of the average Japanese employee, it usually is not small. Here again, those resistant to change argue that “advisors” are and essential part of the organization.

Whether in this case or the case where only former directors became “advisors”, I have heard of companies where the number of such persons currently on the dole was in the 40s or 50s. My former neighbor who formerly was a director at a mega-bank, told me a few years ago that (at age 86) he was still receiving money from the bank, for doing nothing at all. He was very open and honest about the strangeness of this, saying “yes, I have been treated very well”.

Let’s be honest: in most cases, these “advisor” positions are really just a disguised pension which is part of an executive director’s compensation package and should be disclosed as such, just as Jack Welch was required to do some years ago in a U.S. court case. Certainly executives view them as something which was always promised to them. Once an internal executive is “promoted” to the board, he or she knows he can expect a term of three to six years as a director at a much higher compensation level than before, followed by an “advisor” position for X years that is based on the level of his former compensation. He or she “has it made”, barring a scandal. The board may or may not approve the advisory positions and related compensation every year (legally it does not have to), but everyone involved views the position as “promised in advance”, an entitlement to which the company has committed.

Note also, that even where the board does have a practice of approving such compensation, what this really might mean is that internal directors have a very good reason to be yes-men to the CEO. If they anger him too much, they may be assigned to a lower level of “advisor” compensation. Even then, in point of fact, compensation is almost always paid at firms where “advisors” have been institutionalized.

While each year’s compensation is small compared to Mr. Ghosn’s supposedly “promised” deferred compensation, this “pension” is very tax-efficient because it spreads out payments over time but the total of all annual payments can add up to something significant. At least, one can say that the numbers are something that both shareholders and employees would like to know about, even if they pale by comparison to the numbers claimed by the prosecutors in Mr. Ghosn’s case.

But for any and all companies in Japan, we cannot have any idea of the total compensation that is being paid to “advisors”. Disclosure is not mandatory, so there is essentially zero disclosure…. even though there is often a clear internal policy document for advisor positions”, with a grid showing what level of compensation can be expected by persons at each executive rank. To my knowledge, there is no company in Japan that publicly discloses such a policy document (its “rules”) or its compensation grid. If you know of any, kindly please inform me!

In Nissan’s case, the board explicitly delegated to Mr. Ghosn the authority to determine compensation for all directors, including himself. Believe it or not, this is not so uncommon in Japan. Even when a company has set up a voluntary “compensation committee” per the corporate governance code, often its per-person compensation recommendations will not be communicated the board, which merely passes a resolution delegating the CEO to pay compensation in line with the (sealed envelope) recommendations of the committee.

Of course, Mr. Ghosn may argue that any notes he made (or directed to be made) for his large “deferred compensation” were just that –mere notes, rather than a final decision –, and that might always have changed his mind before he stepped down as CEO. Further, he may argue that of course he intended to get approval for his own compensation from the board prior to its payment, in view of the amount as well as the fact that he had a clear conflict of interest. The prosecutor will probably argue that “criminal intent” existed because there is no clear evidence that he meant to change his mind or ask for approval, and that such approval would have been a rubber-stamp in any case. The prosecutor will likely argue that on a de facto basis, the compensation was determined when the notes that will serve as evidence were created.

What happens when we apply the prosecutor’s logic to the case of “advisors”? In both cases, we are talking about compensation that (a prosecutor might claim) was “fixed in advance” for all practical purposes. In both cases, a prosecutor might also claim that one “proof” of this is that the recipients viewed the compensation as an “entitlement”, a commitment by the company. In both cases, any subsequent approval by the board (if any, since board approval is not legally required for “advisors'”) of the “promised” compensation is/was highly likely to be a pre-ordained rubber-stamp.

In the “advisor” case, the person receiving the preset “pension” compensation receives it mainly just because of his or her prior position – usually, as a director – , rather than to pay for specific future work which is described in advance and evaluated as being worth the compensation amount. Therefore, a prosecutor might argue that advisor compensation should be considered “de facto” director compensation, which (if viewed as such) should have been disclosed when conferred. However, it was not disclosed. Arguably, this is a violation — at least in spirit — of securities law.

Thus, when you squint hard, there are more similarities than differences. Both are compensation that investors would like to know about, which was not disclosed and should be disclosed, and which was/is subject to slack oversight — certainly, none by a board committee without conflicts of interest. Both are therefore self-serving compensation by their very nature– otemori compensation, as is said in Japanese. Of course, this all depends on the company. But then again, without the disclosure that shareholders deserve, we will never know, will we?

What the above analysis points to, is the need for: (a) full disclosure of all “advisor” positions held by former directors, including the details of the compensation received, work done by each person, and the general “scheme” (grid); (b) detailed disclosure of executive compensation in Japan’s “yuho” financial reports, on a per-person basis and including perks; and (c) firmer rules requiring companies to have compensation committees that fully inform the full board rather than asking it to delegate final payment to the CEO.

The opinions above are solely those of the author and not any other person or organization.


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