A Guide to Understanding Carlos Ghosn’s “Not Guilty” Plea

by Sachiko Ichikawa
Comment by Nicholas Benes

Carlos Ghosn held a press conference on January 8, 2020 to present his “not guilty arguments” regarding the alleged crime of making, or not preventing, misrepresentations in Nissan’s Security Reports. He had already disclosed the testimony he made at the Japanese court which was considering his bail in 2019. So this was the second time that he has defended himself in public.

Mr. Ghosn spent more than one hour for his presentation, and even showed many slides and materials, but his logic for insisting on his innocence was not easy to understand. To me, his 2019 testimony in court was better than his 2020 televised presentation.  In an attempt to connect the dots, this article will explain my own interpretation of what Mr. Ghosn really wanted to say.

When trying to understand Mr. Ghosn’s rebuttal, it is best to first understand what the Tokyo Prosecutors Office are actually charging him with.  On television, his introduction of a multitude of sound bites, for instance by introducing the remarks by Professor Wataru Tanaka of the University of Tokyo that Japan’s arrest of Mr. Ghosn was a “shame”; or by pointing out that Nissan, which plead guilty in Japan, was now defending itself in a federal court in Tennessee, did not reveal to  us the substance of his rebuttal arguments.

In fact, the main thrust of his logic was simply his bald assertions that the compensation amounts in question were “not fixed, not decided and not paid,” and that the contracts that exist were “not legally binding.” He had argued these points in his 2019 testimony, by requesting that a “Death Test” be applied as a way to confirm legal effect.  The “test” would be to ask whether if he died now, his heirs would be able to inherit monetary claims based on the contracts with Nissan, or not. He claimed the answer to this question would be “no”.  But for us the outsiders, is not clear what the contracts stated in the first place.

Mr. Ghosn declared that he was innocent of the crime of making false disclosure in security reports, the crime for which he was indicted in Japan. But he did not deny the existence of the acts he committed or the contracts he made. Rather, he denied the legal effect of those acts and contracts.

It is not my intention to sensationalize the matter, but a slightly simplistic explanation of his logic is that he was on the road to misstating his compensation (receiving compensations without immediate disclosure), but he had not yet found the precise way to do so. Contracts he signed in the hope of finding such a method were not legally binding and his heirs would not have inherited anything if he died now.  In this article, I will explain what I mean by this, based on the claims of the administrative case in the United States settled by SEC, Nissan and Mr. Ghosn.

The SEC thanked the Tokyo Prosecutors Office (TPO) for its corporate investigation, and it indicated that the TPO had sent evidence to SEC. The Japanese criminal case, “The State vs Mr. Ghosn” was abruptly halted due to Mr. Ghosn’s departure from Japan, before people knew exactly what the prosecutors were trying to prove. Japan’s SESC’s report recommending that Nissan pay an administrative fine to the FSA didn’t relate detailed facts, but merely set forth the allegedly true and false statements in the securities report.

Thus, the exact illegal activities of Mr. Ghosn which the prosecutors were trying to prove are only visible in the SEC’s claims, like a sort of mirage. Mr. Ghosn, who entered into a settlement with SEC, did not admit facts or responsibility. Nonetheless his statements in his press conference implicitly admitted certain facts, and therefore this mirage seems to be the rough image of the real case, if not the precise image of it.

The starting point was Mr. Ghosn’s belief that he was entitled to receive more money than the compensation which was paid and disclosed in securities reports. At Nissan, a spreadsheet to keep a record of the “unpaid but deserved” compensation amounts was made, and people had engaged in a sort of “trial and error” process to figure out the scheme(s) by which those amounts could be paid. It seems to me that they were trying to find a way to fulfill three conditions in order to make monetary payments to Mr. Ghosn: (a) first, there would have to be a contract or document to prove that Mr. Ghosn has the right to receive the compensation ; (b) second, the wording used to describe the compensation claim would have to be something other than “director compensation” or at least something other than “director cash compensation”; otherwise, it would have to be disclosed; (c) third, the source of the payment should be accrued, funded and embedded in the payments system at the present time, because otherwise the payment claims could be denied by corporate dissenters in the future.

To satisfy condition (a), a formal document was necessary.  With regard to condition (b), since the whole purpose was to avoid disclosure, it was necessary that the name of claim not be “directors compensation”,  especially not “cash compensation”, which is easy to trace. To smoothly and practically satisfy condition (c), it was necessary that the payment monies would need no further approvals, accruals or funding, so that they would be automatically payable.

First, contracts were drafted by which after his retirement as the director of Nissan, Mr. Ghosn would be hired as an “advisor” and paid an “advisory fee”.  Using this wording, a contract dated March 24, 2011 set forth the payment of the respective amounts of unpaid compensation for FY2009 (the fiscal year ending on March 31, 2010) and FY2010(¥1,025,919,049). A contract dated April 2013 set forth the payment of the total amount of unpaid compensation for FY2011 and FY2012(¥1,941,325,135). These advisory contracts (a) had formal legal appearance; (b) gave Mr. Ghosn wording to describe his monetary claims as something other than director compensation, but (c) still needed to go through necessary administrative procedures at Nissan, and thus did not give Mr. Ghosn a clear guarantee of being paid in the future.

A spreadsheet was also created in order to record the amounts of unpaid compensations during and after 2013.  However, a different name for these amounts payment was used: “ Long-Term Incentive Plan (LTIP)”.  Mr. Ghosn was not in fact covered by LTIP, but the award letters between 2009 and 2012 were issued as if he was covered, and those letters referred to unpaid amounts for each year. The necessary funds for these payments were transferred from the CEO reserve around February 23, 2015.  However this LTIP “cover name” was subsequently dispensed with (except for a small portion), because of the fear that it might trigger an investigation by the tax authorities. Although it was aborted, this scheme was a “better” one for Mr. Ghosn because (a) award letters were only internal documents, but were still sufficient to prove he had legal claims, and (c) the CEO reserve was funded with the money for the future payments, which were thus embedded in the LTIP system.

Incidentally, Nissan’s Director Retirement Pension Plan was abolished in June 2007 and Mr. Ghosn’s pension fund as accumulated up until that time (¥4.4 billion retirement pension) was frozen. In October 2013 a retirement pension award letter was issued, backdated to September 1, 2007, and ¥2.5 billion was added as compensation for FY2005 and FY2006. These additional amounts were accrued in the accounting books in FY2014. This scheme was also “better” because (a) award letters were only internal documents, but were still sufficient to prove he had legal claims; (b) since the Retirement Pension Plan was a sunset plan, it would draw little attention—and in fact, nobody raised any questions about it being a “miscalculation,” and (c) an accrual was made. All Mr. Ghosn had to do was wait for the manager of the Director Retirement Pension Plan to blindly pay, according to normal procedures.

I believe this makes it rather clear that Mr. Ghosn’s logic is basically the following. First, the advisory contracts were created by Nissan’s employees under the direction of Mr. Ghosn, but those employees had no authority to sign, and therefore the contracts were not actually legally binding. Next, Mr. Ghosn’s logic is that compensation which is not legally enforceable doesn’t have to be referred to in the securities report, and therefore the omission of it cannot constitute a misrepresentation. In addition, from Mr. Ghosn’s point of view, future receipt of the advisory fee was not guaranteed at all; he had ample cause for doubt it would ultimately be paid. His doubt was reflected by the fact he clearly understood that the receipt of “unpaid” compensation required a range of “cover names” and irregular steps. In such a context, to him it was perfectly logical to omit such compensation.

If there had been no criminal case prosecuted, would Nissan have ultimately paid such large advisory fees as those described above to Mr. Ghosn, even if the company was unhappy and embarrassed about doing so? If in the future Nissan would have thought it was obligated to pay regardless of the irregular arrangements, then Mr. Ghosn does have a claim to receive money in the future, which implies that he was in fact hiding compensation from the investors.  On the other hand, in reality, wouldn’t Nissan be able to say “we simply will not pay such absurd amounts arranged in this manner”? If it would, then the “misrepresentation” would vanish in thin air. 

In his recently televised rebuttal, Mr. Ghosn fiercely asserted that he was the victim of character assassination and was depicted as a “cold greedy dictator.” Such a depiction is not entirely irrelevant to the SEC’s claim about Mr. Ghosn, who was in fact busy using all sort of ways to try to get extra compensation in the future. Nonetheless, being a “cold greedy dictator” is not a crime. The legal question here is whether his conduct and actions constituted misrepresentations or not. Now, the chance for us to know how this might have been determined in a criminal case is gone and civil litigation filed by investors is our only hope for getting more clarity on how Japanese law will address cases like this in the future.

Comment added by Nicholas Benes: In a bizarre way, when Mr. Ghosn fled to Lebanon, it conveniently “relieved” the legal system and Nissan from having to resolve or at least shed light on these murky issues. Regardless of what was actually discussed (if anything), one can easily imagine that following flow of thought might have taken place at the Tokyo Prosecutor’s Office (TPO) and Nissan, respectively: (1) TPO: “this was a misrepresentation in the financial reports, which is a serious crime. But we will also have to prosecute Nissan as a company, and so the company will have to admit its guilt”; (2) Nissan: “We don’t want to plead guilty. And we do not think we owe this greedy man any money…”; (3) TPO: “Of course, you understand that if Nissan has no obligation to pay, there can be no misrepresentation, and technically Mr. Ghosn has done nothing criminal. It was the hiding of a truth which constituted the misrepresentation. Without that, your disclosure was accurate; (4) Nissan: “In any case, we do not want to pay him anything more!”; (5) TPO: “Then don’t pay anything more, He won’t sue you. He cannot sue you because if he did, he would admitting that he did make a misrepresentation, which so far he has vehemently denied.” (6) Nissan: “Good, now we can get this out of the way.”

For companies, executives and investors, lack of clarity in the laws regarding disclosure is not a helpful thing. Despite this, it is hard to imagine that any civil litigation that ensues will clarify whether Nissan would have had to pay anything if Mr. Ghosn had sued for his future compensation in court.

Therefore, one of the constructive outcomes one might hope could come out of all of the confusion arising from the Nissan-Ghosn event, would be if it provided an impetus for Japan to further clarify its rules regarding the disclosure of all compensation, perks, future pensions, benefits, etc  that are being “expected” by senior executives, whether they are directors or not. The fact that the compensation might not ultimately be paid in the amounts as disclosed, is not the main point. (If it were, how should compensation subject to a “claw-back” be treated? Should it not be disclosed?)

The Nissan case reminds me of the issues that arose in 2002 surrounding Jack Welch’s post-retirement compensation (see below) when it was disclosed in court the course of his divorce proceedings. (See this article for some of the details.) In that case, GE had not disclosed all sorts of substantial benefits, advisory fees, and pension rights which Jack Welch was entitled to after he left GE (including a “post-retirement consulting agreement”) per the terms of his contract with the company. The SEC determined that such types of payments, rights and compensation, which had been decided as part of Mr. Welch’s contract as an executive, should all be disclosed. See the SEC’s explanation, “General Electric Settles SEC Action for Disclosure Failures in Connection with Its Former CEO’s Benefits Under His Employment and Retirement Agreement

Transposed to Japan, I often think this affair is a bit similar (though perhaps not in amount) to the case where directors become “advisers” (相談役・顧問) after retirement and receive amounts for (in many cases) doing relatively little work. To me, compensation paid to such “advisers” is “de facto director compensation” and as such, should be disclosed. After all, the people who are given these positions, get them because they were directors. It usually is an automatic decision unless there was a compliance scandal (in which case, denying the position would effectively function as a “clawback”). In this context, the compensation is little other than tax-effective director compensation. Moreover, the very reason that I have to write, “perhaps not in amount” is that we simply do not know how many people are receiving how much money and benefits, not to mention who in most cases, because there is virtually no disclosure. At some companies, there are 30 or more such “advisors”.

I have been requesting (suggesting) that the FSA require disclosure about all compensation paid or benefits conferred to retired directors and senior executive since 2014, when I proposed the concept (and many of the contents) of a “corporate governance code” to Japan, and got that ball rolling. The result has been (a) zero movement by the FSA to require on the disclosure that might be subject to potential liability under securities law for non-disclosure or misrepresentation; and (b) four years later, the Tokyo Stock Exchange (TSE/JPX) added (preemptively, as it were) a “guideline” request to companies that they disclose in TSE/JPX “Corporate Governance Reports” rough details about the existence of advisers and their employment terms, but only in the case of ex-CEO advisers. However, because this is merely a voluntary guideline that is not even a “comply-or-explain” principle, many firms provide no disclosure at all. Further, a great number of ex-director “advisers” are not former CEOs or Representative Directors, so even if all firms provided the information that TSE/JPX is requesting (which they do not), only a small part of a very large iceberg would be visible. We have no way of knowing how big the post-retirement iceberg is.

I have always thought that the lack of clear rules regarding disclosure about such arrangements, as well as pre-retirement (significant) perks and benefits, would raise issues and get someone in trouble some day. I am not happy about it, but I feel like saying, “I told you so”. The issue is still lurking out there, unresolved. As an investor in any particular company, wouldn’t you like to see such information?


How Japan’s Corporate Governance Code Was Born

— where if you download my memo given to the FSA in 2014, you can see that on page 7, I proposed the following principle be included in the new Corporate Governance Code:

“17. Post-retirement compensation: Compensation should not be paid to prior executive officers, directors of any type, or kansayaku of any type (following their retirement from active service) unless for specific, contractually pre-defined and actually provided services, and in that case, only in amounts that are normal for such services when provided in the market on an arms-length basis by unrelated third parties. If any such compensation is paid, within one month following the end of each fiscal year the amount paid to each such person during that fiscal year, his or her name, the nature of the services, and the reason why that person was selected instead of a third party who never was in active service to the company in any of the aforementioned positions, shall be disclosed.”

(full memo to the FSA available at)

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

ISS Proposes Policy Opposing the Creation of “Advisory” Posts (sodanyaku, komon)

”Proposals for Raising Productivity in Japan”
by Nicholas Benes; presented to the Prime Minister
https://bdti.or.jp/en/blog/en/proposals-for-raising-productivity-in-japan-by-nicholas-benes-157/ (presented to the Prime Minister)

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