After Carlos Ghosn, Japan may never hire another foreign CEO

Foreign executives are rare in Japan. Following Carlos Ghosn’s downfall, they are in danger of extinction.

Ghosn, a French citizen who was born in Brazil of Lebanese descent, was credited with leading a stunning turnaround at Nissan (NSANY) after he took over as CEO in 2001. His reign at the carmaker was celebrated as one of the few examples of a foreigner successfully running a big Japanese company.

That all changed with his arrest last week on suspicion of serious financial misconduct and subsequent dismissal as chairman of Nissan and Mitsubishi (MMTOF), another Japanese automaker.

“It will be a lot harder for foreigners to land CEO gigs [in future],” said Jeff Kingston, director of Asian studies at Temple University Japan in Tokyo.

George Olcott, a guest professor at Tokyo’s Keio University who has sat on the boards of several big Japanese companies, said foreigners are usually only appointed “as a last resort.”

In the case of Ghosn, it was the prospect of bankruptcy that prompted Nissan to hire him. Having rescued Renault, Ghosn had a track record of taking tough decisions to cut costs and lay off workers, which Japanese executives have historically been reluctant to do. It paid off for Nissan.

That’s not always been the case with other foreign bosses in Japan. Michael Woodford’s brief term as CEO of electronics maker Olympus ended after he questioned fraudulent practices at the company in 2011, while Howard Stringer’s tenure at tech conglomerate Sony (SNE) coincided with an extended period of poor earnings.

‘Organ rejection’

Experts point out that Japanese companies are often run in ways that are unfamiliar to executives from Europe or the United States.

The top managers have typically been with the company since graduation, as many Japanese workers are reluctant to switch employers. This breeds a distinct corporate culture, which can make it hard for outsiders — even Japanese executives from other companies — to fit in.

“It’s like organ rejection,” said Nicholas Benes, representative director at the Board Director Training Institute of Japan. Foreign executives “often don’t get accepted by the recipient host.” Benes, an American, has worked in Japan for more than two decades.

In Japan, recruiting from outside the company is rare. CEOs are often hired based on how long they’ve been with the company, rather than because of their skills. “It doesn’t make much difference in many cases if your performance was really good or really bad,” Benes added.

‘Take the money and run’

One of the allegations against Ghosn is that he didn’t report all of his income properly. High pay touches a raw nerve in Japan, where foreign executives have a reputation for demanding much bigger salaries than their local peers.

“There’s a sense they’re there to make hay while the sun shines and will take the money and run when things go badly,” said Keio University’s Olcott. The perception could increase with Ghosn’s downfall, he added.

Benes points out that executive salaries in Japan are generally lower than in the United States, which made Ghosn’s reported Nissan salary of about $9.7 million in 2017 stand out.

Japanese companies also prefer CEOs who don’t take credit for successes and keep a low profile, experts say. Ghosn didn’t fit that mold. He was a regular at World Economic Forum meetings and threw lavish wedding parties.

“He nurtured hero worship and took too much credit for positive developments,” said Temple University’s Kingston. That clashed with a “culture that values discretion and humility.”

‘Globalize and compete’

Despite their dwindling numbers, there are still a few foreign executives occupying top jobs in Japan Inc.

Christophe Weber, the French head of pharmaceutical maker Takeda (TKPYY), is now the country’s most prominent non-Japanese boss.

Weber is spearheading the company’s $62 billion acquisition of Shire (SHPG), based in Ireland. The deal has drawn criticism from some Japanese investors, who think it’s too risky for Takeda, which was founded in 1781.

But it is bold moves such as these that Japanese companies need to try if they are to thrive in the future. With Japan’s economy stuck in a deep rut, and facing further headwinds such as a rapidly aging society, they need to be able to compete globally.

“Japan needs more foreign CEOs and other executives to globalize and compete,” said Benes at the Board Director Training Institute. “That’s an essential requirement that won’t change.”