Robert Pozen, Senior Lecturer, MIT Sloan School of Management
From Harvard Business Review
Carlos Ghosn was widely recognized as a hero in Japan for turning around Nissan when it was on the brink of bankruptcy in 1999. Things couldn’t look more different today. Ghosn was recently arrested for financial misconduct, fired from his position as Nissan’s board chairman, and criticized by Nissan’s Japanese CEO for accumulating too much power. Without Ghosn, the Nissan-Renault alliance is likely to falter — leaving two small auto manufacturers without competitive economies of scale.
Ghosn’s swift downfall comes as a result of a Japanese criminal case against him for causing Nissan to make incomplete securities disclosures about his deferred compensation. These disclosure problems are rooted in the company’s weak governance procedures, and they offer a lesson to investors in Japan’s other listed companies about the need for much stronger governance protections than those brought about by recent Japanese reforms.
The heart of the legal controversy is whether Nissan violated Japan’s securities laws by not including Ghosn’s deferred compensation in its annual reports over the last eight years. Under Ghosn’s deferred compensation arrangement, he would receive substantial payments from Nissan after his retirement – the equivalent of $44 million. Such payments were not taxable when this arrangement was made, but would become taxable when Ghosn actually received them.
Since 2009, all Japanese listed companies have been required to disclose in their annual reports an executive’s compensation if it exceeded 100 million yen – the equivalent of $800,000. This rule was pushed through by the new head of Japan’s Financial Services Agency, an outspoken critic of the high pay awarded to corporate executives.
Next week is a big week for those keeping track of the success of Japanese economic policies. New interest rate numbers will be released on October 29 and these numbers represent the most current report card on Abenomics, as the policies of Japan’s Prime Minister Shinzo Abe are called.
Abenomics was presented just weeks after Abe took office in 2012 as the ultimate solution to almost two decades of stagnation in the country. The program has three pillars: monetary easing, structural reforms and renewed fiscal stimulus. One of the most important goals of Abenomics is increasing inflation, and ultimately changing inflation expectations—hoping to reverse a decade of deflation. To do so, the government began printing Yens in abundance.
Initial signs of success showed in the exchange rate, asset prices, and inflation rate. In fact, the official CPI for July 2014 shows a large annual inflation rate by Japanese standards: 3.4 percent. And from that perspective, it seems as if Abe’s policies have been effective and the job has been accomplished.
More recently, however, the economy has once again shown signs of weakness: Inflation expectations remain surprisingly low at around 1 percent, asset prices and bond markets seem to be unconvinced by the achievements, and the real economy is starting to slow.
Today U.S. multinationals have more cash stashed overseas than ever before –according to several estimates, companies have more than $1 trillion in profits squirreled away in foreign subsidiaries. Many of the companies with the most money abroad – including powerhouses from Apple to Google to Pfizer – say they’d like to bring a large portion of it back to the U.S.
This comes with a catch, however. The companies want a temporary tax holiday – nearly identical to the one passed in 2004, and the subject of my recent paper – that would allow them to repatriate profits attributed to their foreign operations at a 5.25 percent tax rate instead of the usual 35 percent. Most of the funds returned to the U.S. will likely be paid to shareholders rather than used for investment and new hiring (as the companies lobbying for the holiday claim). But the tax break would raise billions of dollars for the government and bring cash back to the U.S., which is arguably a good thing. (It’s no secret that the Obama administration has recently made overtures to reboot its relationship with the business Read More »