The increase in the number of corporation necessitated the formation of cooperate governance, which is a particular set of laws and practical approach through which organization is directed as well as controlled to focus on the internal and external corporate structures, with the intention of monitoring the management's actions, including those of the directors. Thereby instituting measures that may stem misdeed of corporate officers. The paper tests whether Citic Pacific as a company applied corporate governance in its oversea deals. The empirical evidence based on exhibits will be the supporting documents of the literary content written. First, the paper will address the company and the situation it was involved. Second, the Company’s strengths and weakness, as well as alternatives, will be investigated to examine the value creation functions of the company and suggest an alternative course of actions. Furthermore, a list of the courses of actions will be discussed, and as well as the solutions to the challenges, it faces. Last, the analysis of implementations will take place, followed by recommendation and as well, as answers to additional questions.
The company and the situation
Citic Pacific is a multinational corporation that has its operation based in Hong Kong, but still has strong ties with the Chinese economy and country. AccordingSmith and Fischbacher(2009),the Chinese government allowed Hong Kong, to practice capitalism and autonomy in managing its affairs. The company can trace it humble beginning to the year of 1987, when YirenRong set up China International Trust and Investment Corp. with the intention of reforming the financial sector, lure international investors and develop Chinese business technology to match international standards. He ran the group up to the year 1993 when the government appointed him the state official in charge of the prosperity of the country’s economy. Rong’s only son was a part of the management at CITIC. He raised the ranks gradually and by the early 1990s, he was instrumental in assisting the company to acquire 49% of listed holding enterprises that included Tylfull Ltd, Dragonair and Cathaway Pacific Airways Ltd as well as Macan telecommunication company. The company then listed its assets for the public to invest and then acquired a new name to represent the diverse businesses it had ventured into, as Rong’s on as served as the new the Chairman. The company is nearly blue chip as a result of its headquarter being away from its areas of operations. Its main business included special steel manufacturing and mining of the ore that is a primary component in the manufacture of special steel and Real estate in mainland China.
At the time of the announcement of the potential loss, the company was under family ownership as they have a stake of over 19% while the state as well as other private investors owned the other portionBruton, Filatotchev, Chahine& Wright(2010). In addition, the company had executive compensation policy, which cultivated a pay for performance culture, which proved to be vital incentives as the rewards motivated the employees to work towards meeting the companies goals. As a result, the senior management received huge cash bonuses regarding remuneration for their services and performance. Notwithstanding, what the directors received as remunerations suggested substantial discretionary bonus payout as seen in Exhibit 5 of the case study.
The company had been involved in a mining project in Australia; the company pumped huge investment into the project and expected to receive massive returns as indicated by [Exhibit 6]. At the time of the arrangement regarding the deal, the world experienced a global crisis, which affected many market economies and Australia, as a country was worst hit, as it dollar valued performed poorly against the USD. The group’s financial director entered into – Foreign Exchange Accumulators – contracts, which offered products such as dual currency target redemptions contract that would see the company gain limited profits because of an upper limit being set as well as an unlimited downside see [Exhibit 6]. The poor performance of the currencies overwhelmed the hedging mechanism in place and thus resulting in unimaginable losses that affected the company’s financial abilities.
Strengths, weaknesses, and alternatives
The company demonstrated its strength in the number of acquisitions it was able to get under Yung’s tenure as chairperson of the enterprise. Also, the company operated as an autonomous agency in the sense that it mainland was in China while it operated outside the jurisdiction of the laws which govern corporations in mainland China Jian-ming(2010). The remuneration packages that all the employees received at the various level of the hierarchy of the company’s leadership structure ensured that the working culture of the company received the best quality skilled labor in the market. The strength of the company is seen in the sector that it has established its leading businesses. Such as mining of iron ore used in the manufacture of steel for the development of properties, has seen the company acquire more assets from other businesses.
The company shows weakness in the way its hierarchy is structured. Involvement of too many family members in the company’s management structure created loopholes, which could be exploited Smith &Fischbacher(2009). The number of blood relation in the board of directors facilitated the shielding of any of the board members in the event they committed a corporate offense. Moreover, the high remuneration pay system that was based on performance could in a way have facilitated unprofessional and unethical practices, which would have resulted in a violation of a series of rules that governs the well-being of the company, giving it a clean bill of health.
Value creation aspects of the business can be seen in the major acquisitions, which they invested in and the possible returns that the conglomerate group received. Their actions show that the company creates more money that increases the value of the stake that the shareholders as seen in [Exhibit 3]. Consumers also feel the effect of the value creation aspects as they experience the joy of using other new products which other businesses produce for the conglomerate. The main course of action that the company would consider would be to change the system of management from an Anglo-American model which lays emphasis mostly on the interest of the shareholders to the coordinated model that strictly focuses on the benefit of the workers, managers suppliers, and the general community. As an alternative, the company should have policies that govern the authority of majority shareholders especially if they belong to the founding families of the business.
Implementation
The company should evaluate the organization and change the management in the different levels of hierarchy. The change would facilitate the institution into exhibiting professional practices, which seem just and fair to the well-being of the stakeholders who expect a return on their investments. Additionally, the employee rewards ought to be moderated as the figures are shown in the exhibit may result in some the workers in senior management levels being involved in malpractices that may affect the company.
Recommendations
Additional questions
What does corporate governance mean? How is it used to monitor managers’ strategic decisions?
Corporate governance refers to a particular set of rules which the governs the functionality of a corporation. It monitors the monitors the manager’s strategic decisions by dictating how certain situations should be handled or managed. In essence, it governs the manager’s abilities in limiting their executive powers in making decisions that may affect the well-being of the company
What are the kinds of internal and external corporate governance mechanisms, and how are they used to control management decisions?
Internal mechanism governs the company from within, it, mostly involves the senior officials of the business and as well as the board of directors of the firm regardless of whether they are independent or not. On the other hand, the external mechanism dictates the nature of business of the company from outside of the organizations, and they do include the trade unionist, financial institutions, and government regulators. These devices follow a set of rules that guides the company on to the limits of its investment abilities thus shielding it from any speculated loss.
Were the corporate governance standards at Citic Pacific sufficient? Have the board and the independent directors on its audit committee carried out their responsibilities suitably?
The corporate governance standards at Pacific are not exemplary at it failed to oversee the well-being of the company and thus resulted to the company losing millions of dollars during the foreign exchange exposures. Nonetheless, the independent directors and auditors have not exercised their duties in ensuring the company is protected from potential losses Grayson-Morison & Ramsay (2014). Under their watchful eyes, questionable activities took place in the institution and resulted in the loss of money that led to change in the price per share of the businesses stake and thus affecting the enterprise’s value in the stock exchange.
References
Bruton, G. D., Filatotchev, I., Chahine, S., & Wright, M. (2010). Governance, ownership structure, and performance of IPO firms: The impact of different types of private equity investors and institutional environments. Strategic management journal, 31(5), 491-509.
Grayson-Morison, R., & Ramsay, I. (2014). Responsibilities of the Board of Directors. Company and Securities Law Journal, 32(1), 69-77.
Jian-ming, T. U. (2010). On Accounting Independent Director and Corporate Governance Effectiveness of Audit Committees: Empirical Evidences from China's Capital Market [J]. Journal of Zhongnan University of Economics and Law, 1, 016.
Smith, D., &Fischbacher, M. (2009). The changing nature of risk and risk management: The challenge of borders, uncertainty and resilience. Risk management, 11(1), 1-12.
