CNN | 10/1/2020 | Listen

Ghosn's dramatic escape could bring much-needed reform to Japanese companies

Updated 7:25 AM ET, Fri January 17, 2020

Editor's Note: Jeff Kingston is director of Asian Studies at Temple University Japan and author of Japan (Polity 2019). The opinions expressed in this commentary are his own.

(CNN) - Japan Inc. has taken a beating in the international media in recent weeks following the escape of former Nissan CEO Carlos Ghosn. But I suspect that the Ghosn case won't harm the Japanese economy or deter investment. Instead, it may lead to much needed improvements in corporate governance and overdue reforms in Japan's legal system.

Last week, Ghosn again accused Japanese prosecutors of colluding with Nissan executives in a coup to oust him and denied all allegations of financial misconduct. The official Japanese reaction has been blistering, with a former executive calling Ghosn's escape to Lebanon a betrayal and Japan's justice minister Masako Mori calling it intolerable. Mori also called on Ghosn to return to Japan and "prove his innocence," sparking criticism that justice officials are presuming Ghosn is guilty before he even goes to trial. Mori has since retracted the statement. In addition, the Tokyo prosecutors office dismissed Ghosn's allegations, arguing that he fled only to evade the "consequences of the crimes he committed."

In terms of damage control, these official responses were a disaster, lending credence to Ghosn's assertion that there is no presumption of innocence.

Others have criticized Japan for a "hostage justice" system that keeps many of the accused in solitary confinement and forces them to endure endless hours of interrogation without defense counsel until they confess. Indeed, the Japan Federation of Bar Associations has long lobbied against this system because it deprives ordinary Japanese citizens of their civil liberties.

Ghosn's saga has raised concerns about working for a Japanese firm, but Nissan was a somewhat unique situation. Ghosn was brought in to shake up a fusty corporate culture and engineered an incredible turnaround, but his success and grandstanding sowed the seeds of his comeuppance. I doubt that foreign executives will shy away from working at Japanese firms, where many already do without concern that they might end up behind bars for corporate skullduggery. Executives are not scrambling for the exits due to Ghosngate.

Some Japanese companies, however, may become even more leery about hiring foreign executives. They have hired them in the past hoping they could cut through an insular corporate culture, introduce reforms in business practices and boost profits, but there have been some high-profile flops. Take, for example, the Howard Stringer debacle at Sony, with a plunging stock price in 2011 and a hack into the company's online PlayStation Network that leadership took almost a week to disclose. And there was Michael Woodford, the former CEO of Olympus, who exposed the company for window dressing its accounts. Surely, it was the right action, but for some a sign that foreigners can be unreliable and disloyal. For what it's worth, Japanese CEOs replaced both Stringer and Woodford.

In a corporate world that values self-effacement and restraint, Ghosn was brash and lived too ostentatiously. He came across as greedy in a nation that tolerates lots of bad behavior, for example in personal lives or fudging data to dupe regulators, but not, as alleged, lining one's pockets at the firm's expense. His salary was outlandish by Japanese standards, but his greatest sin was making the firm into a corporate governance basket case. He had nearly two decades to concentrate authority amongst a select few, and so there was little effective oversight, transparency or checks and balances. Moreover, as chairman of the board, the board's power to rein him in was limited. Nissan's fall from grace — a declining stock price and bruised corporate image — is not due to Ghosn's removal; it is a very sick company due to weak management and poor governance.

While Ghosn will always be remembered for his dramatic escape, his unintended legacy might be improved corporate governance and judicial reform. Since 2015, Prime Minister Shinzo Abe has made some headway on diversifying boardrooms while tasking companies to be more transparent and responsive to shareholders, but much remains to be done.

If Abe succeeds, this will leave Japan Inc. in much better shape and reassure investors. Strong corporate governance should diminish the chances of unpleasant surprises and also ratchet up pressure for improved management and business performance. The Justice Ministry and prosecutors are angry about Ghosn's complaints about mistreatment and the presumption of guilt, but last year more than 1,000 lawyers and scholars signed a petition that agrees with his condemnation of "hostage justice."

In their view, "The 'hostage justice' system uses detention beyond its original purpose of securing suspects' appearance in court and violates the human rights guaranteed by the Constitution of Japan, including physical freedom, the right to remain silent and the right to a fair trial. The practice to refuse the release of those who deny their crimes can violate the prohibition of torture, as it uses sufferings caused by prolonged detention and interrogation to force confession."

Ghosn is hardly an exemplary poster child for corporate governance or judicial accountability, but it is possible that his case will create an opening for Japanese advocates of such reforms. Better corporate governance can help underperforming companies become more competitive and deliver better returns for investors. And, nothing is more appealing to investors than the rule of law and knowing that cases will be decided based on evidence that proves guilt in fair trials, not on coerced confessions or vindictive inclinations.

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