They should have seen it coming:
How Nissan’s lack of transparency could have highlighted the problem earlier
11 December 2018 - By Marjella Lecourt-Alma
An arrest warrant is due to be served to former Nissan Motor Co Chairman Carlos Ghosn on 10 December for failing to report his own remuneration in securities statements to the tune of 4 billion yen over a three - year period.
Ghosn is already in detention along with former Nissan representative director Greg Kelly, for allegedly declaring only half of the 10 billion yen of compensation he received between 2010 and 2015, putting them in breach of the Financial Instruments and Exchange Act.
Bloomberg asks: “How could one of the world’s most visible employees go about hiding $70 million worth of salary and benefits paid to him by one of the world’s biggest companies, without the company knowing it?”
The answer lies in the company’s transparency around certain corporate governance issues – or rather the lack of it.
In a series of heatmaps produced by Datamaran, it’s clear that Nissan has failed to report critical corporate governance issues in its annual reports for the last three years. Had this been noted by shareholders and regulators, the lack of transparency should have given an advanced warning of a potential problem.
Datamaran Industry Heatmap 2018 - Nissan ranks 35 out of 40
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* Included in the list were global automotive industry companies with a minimum market cap threshold of $5Bn. The emphasis scores: high/medium/low are defined by looking at quantitative measures (e.g. how much discussion is there in the report on this topic or related search terms and/or synonyms) and qualitative measures (e.g. is the topic addressed in a key section of the report: CEO foreword, risk section of the form 10-k or 20-f). The corporate governance topics and their respective levels of emphasis are automatically generated from the source data by using an NLP AI engine.
* The following companies are not shown in the heatmap because they do not mention in their reports any of the topics involved in the query: Subaru Corporation, Chongqing Changan Automobile, Aisin Seiki Co Ltd, Brilliance China Automotive, Guangzhou Automobile Group, Huayu Automotive Systems, Hero Motorcorp Ltd, Fuyao Group Glass Industrial, Daihatsu Motor Co Ltd, Hella KGAA Hueck & Co, Halla Visteon Climate Control.
At Datamaran, we believe companies should disclose information on corporate governance that is material to their business publicly, in their annual reports. This way, shareholders, regulators and other stakeholders can see clearly where there are dark corners that need investigating.
Investigating Nissan’s transparency
We wanted to find out whether Nissan’s record in this area would correlate with the current scandal. Using Datamaran’s AI technology, we looked at the transparency of companies in the automotive industry* on a range of corporate governance issues in 2016, 2017 and 2018. Perhaps unsurprisingly, Nissan did not fare well compared to its peers, with the lowest, or near lowest, transparency in all three years.
Datamaran automatically scanned the sources and produced what we call a heatmap – a graphical representation of transparency, showing which companies have high, medium and low emphasis across all the disclosures mentioned. Rather than deciding the disclosures ourselves, Datamaran’s bottom-up approach let the companies do that – issues that are important across the industry show up and the companies are benchmarked against each other at a very granular level. Datamaran looked at 14 disclosures, assessing each company’s level of emphasis on the matter.
What we see in the heat maps is that Nissan has been comparatively opaque over the last three years about corporate governance. Out of 40 companies covered, Nissan ranked 37th in 2016, 40th in 2017 and 35th in 2018 in terms of transparency. Notably, Nissan did not disclose any information on corruption & bribery, executive compensation or fair remuneration in any of the three years.
It is important to note that Nissan is required to file a separate governance report, which it does. But, these disclosures are not ESG-related and not publicly displayed in the annual report. Whether they disclose this information somewhere else is somewhat irrelevant; as the annual report should be a reflection of the most material topics across the company.
Catching the red flags
This lack of transparency in the annual report should have been a major red flag to shareholders and other stakeholders. Datamaran gets to the critical information automatically and instantly, showing up outliers like Nissan. This can be useful for any fund manager, especially when hundreds or even thousands of companies need to be monitored.
Using an approach like this, investors and analysts could easily understand what’s material for their portfolio, quickly monitor what gets disclosed and where. See an opaque red flag like Nissan? It might be time to pick up the phone and dig deeper.
Jamie Allen, head of the Hong Kong-based Asian Corporate Governance Association, told Bloomberg: “If the board genuinely didn’t know that the disclosure of his remuneration was inaccurate, that doesn’t say much for governance.” This sums it up.
The company and its leaders can benefit from benchmarking transparency too: using Datamaran, companies can determine what issues are most material for the business, monitor them, fix problems and report their performance clearly and publicly in their annual report. It’s time for companies to own up to what’s material, take responsibility for it and disclose their performance. For now, Nissan and the company’s shareholders would do well to look to the most transparent companies in the group – like Fiat Chrysler, Daimler and now also Volkswagen – for inspiration.
Note from author:
We have decided to make the 2016 and 2017 heatmaps available upon request (for free), please contact email@example.com.
In my last blog, I wrote about some of the challenges ESG ratings are facing due to the current state of ESG disclosure. This blog also serves to highlight how new technologies can be applied to get a meaningful benchmark on a topic level. In this case, investors can use data mining to understand the most material topics (step 1) and subsequently investors can monitor their portfolio by assessing emphasis levels on these topics (step 2) - in an automated way. In my next blog, I'll highlight more benefits - as this piece looks at one data set (corporate reports) exclusively.
How Materiality Impacts Reputation
Several global companies have been shocked by scandals and crises in recent years.
These crises raise questions about why various governance, environmental and safety risks hadn’t been foreseen.
The analysis shows that Boeing, Nissan and Volkswagen had failed to report material information in the years leading up to the scandals. Failing to identify key material issues can also lead to adverse publicity, the withdrawal of investors and a drop in share prices.
To read the full "How materiality impacts reputation" report, please fill in the form on the right.