Hong Kong CNN Business  — 

The downfall of Nissan Chairman Carlos Ghosn is the latest major scandal to send shock waves through corporate Japan, and it raises new questions about how the country’s top companies are run.

The crisis engulfing Ghosn, who was arrested Monday in Tokyo after Nissan accused him of “significant” financial wrongdoing over many years, has echoes of some of the other embarrassing problems that have emerged at Japanese companies in recent years.

But it may also be a sign that Japan Inc is getting better at addressing corporate governance failings, even when they involve one of its most prominent executives.

Ghosn’s fate is now in the hands of Japanese prosecutors and the boards of the three carmakers he leads: Nissan (NSANY), Renault (RNSDF) and Mitsubishi (MSBHY). Ghosn hasn’t yet responded publicly to the allegations against him.

“Carlos Ghosn was highly respected and well accepted by Japanese people,” said Takaki Nakanishi, an expert on the Japanese auto industry. His arrest is causing “significant damage” to the reputation of Japanese corporations, he added.

Closed culture

Japan’s reputation as a place to do business has been sullied in recent years by scandals like Kobe Steel falsifying product data, Takata’s deadly airbags and Toshiba’s (TOSBF) damaging accounting debacles.

Experts have linked many of the problems to poor corporate oversight and the country’s cloistered business culture, pointing out that many companies are run by tight-knit cabals of executives who have worked for the same employer their entire careers.

“Japanese companies are very closed. They’re like a family,” said Parissa Haghirian, a professor in international management at Tokyo’s Sophia University.

That means there is often little outside influence to bring to light behavior that is unethical or illegal, especially among senior executives.

“They’ve spent so long with the same people in the same firm, they kind of make up their own rules,” Haghirian said.

Employees at Japanese firms often climb the ranks by showing loyalty and are discouraged from flagging suspicious activity or behavior, experts say. Workers can be reluctant to rock the boat and will often try to cover up mistakes rather than that report them.

‘Skeletons popping out’

Japanese authorities are aware of these issues. The stock exchange has been prodding companies to improve oversight by bringing in external board members.

“The result was a wave of skeletons popping out of hidden drawers,” said Martin Schulz, a senior research fellow at the Fujitsu Research Institute in Tokyo.

Factory employees work on a car assembly line at Renault-Nissan.

He said he views the steady flow of scandals as part of the process of Japan gradually cleaning up its act.

Nissan said it launched its internal investigation into Ghosn after a whistleblower report, suggesting the company’s corporate governance may have worked as it should in this case.

“It shows that even the high and mighty are not above the law,” said Jeff Kingston, director of Asian studies at Temple University Japan. But he cautioned that whistleblowers in Japan are often harassed into silence or not taken seriously.

“There is still a lot of rot at the core of corporate culture in Japan,” he said.

Foreign leaders ‘a last resort’

What’s unusual about Ghosn’s arrest is a high-profile foreign executive has been accused of wrongdoing.

That’s a reversal of what happened at Olympus (OCPNY) in 2011, when the electronics firm’s CEO at the time, Michael Woodford, blew the whistle on accounting fraud by Japanese colleagues.

It’s rare for Japanese companies to appoint CEOs from overseas.

“Foreigners are only appointed as a last resort,” said George Olcott, a guest professor at Keio University who has sat on the board of several big Japanese companies.

Ghosn is credited with executing a stunning turnaround at Nissan after he arrived in 1999 when the automaker’s future was hanging in the balance.

Many of Japan’s recent corporate scandals have centered around managers trying to cover up mistakes. At Kobe Steel, managers falsified data to make it look as though substandard products met quality standards.

The allegations against Ghosn instead concern his pay and whether he reported all of it properly. That touches on the sensitive subject of foreign executives demanding much higher salaries in Japan than their local counterparts earn.

“There’s a sense they’re only there to make hay while the sun shines, and to take the money and run when things go badly,” Olcott said.