Citic Pacific's Internal Corporate Governance Case Study

Excerpt from Case Study :

Additionally, it proved highly able to develop and implement the respective policies within the necessary performance measures and necessities. As they themselves stated, the managerial team at Citic Pacific took great pride in its commitment to "excellent standards of corporate governance and first class business practices." And not only that they implemented the policies and mechanisms desired by the standing legislations, they also stated to have developed and implemented additional mechanisms which extend "beyond compliance with the mandatory requirements such as that of the Companies Ordinance, accounting standards and the Stock Exchange" (Ko, 2009).

As reality proved, these were just vain promises and the actual mechanisms which were developed were insufficient and allowed it for the company to register historic loses.

4. Have the board and the independent directors on its audit committee carried out their responsibilities suitably? Explain.

The role of the board and the independent directors is that of safeguarding the well-being of the organization. Additionally, they are in charge of protecting the rights of the stakeholders who have invested their money in the organization and who deserve to be informed and protected. It has to ensure that the capital invested by the share owners is adequately managed and fructified, through responsible and effective investment and decisions. The board at Citic Pacific failed to protect both the company as well as the interests and well being of its stock owners, not to mention that more value was not created for the share owners.

In a context in which the board was formed from the members of the Yung family and four other independent directors, it was rather impossible for its decision to be subjective. "When the situation regarding the potential losses was revealed in October 2008, Yung was the chairman of the board of directors. His
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son, Carl, was an executive director and the deputy managing director. His daughter, Francesca, was the director of group finance" (Ko, 2009).

In this setting, the decision of the board fell under the bias and desires of the Yung family, which proved able to engage the company in highly risky endeavors. The members of the board should have been more committed to the company and its stakeholders, rather than the Yung family. They should have prevented the dangerous contracts, or they should have at least made them public sooner.

5. Address the issue of executive compensation as it relates to Citic Pacific.

The company implemented a pay system based on western practices. Specifically, they developed a mechanism of remunerating the employees based on the performances they accomplished. The explanation for using this system was offered by its ability to stimulate enhanced employee efforts. This method is highly common with the economic agents operating in the western hemisphere and it is praised for a series of benefits, including:

It increases productivity

It reduces fixed labor costs

It shifts financial risk from the employer to the employee

It attracts and retains highly performing employees (the Association of Professional Engineers, Scientists and Managers, Australia, 2010).

In the case of the Citic Pacific Company nevertheless, these advantages of the performance-based pay system did not constitute the rationale for its implementation. The rationale was in fact constituted by the pretense this system offered for discretionary payment. In 2007 for instance, bonuses were offered with the aid of the performance system, but it is unsure whether the true merits were rewarded. The lowest bonus (1) was given to Li Shilin, an outsider of the Yung family, whereas the highest bonus (48) was granted to Larry Yung. This system of executive payment seems unethical.

References:

Ko, S., Corporate governance at Citic Pacific, the Asia Research Center, 2009

Performance pay for professionals, the Association of Professional Engineers, Scientists and…

Sources Used in Documents:

References:

Ko, S., Corporate governance at Citic Pacific, the Asia Research Center, 2009

Performance pay for professionals, the Association of Professional Engineers, Scientists and Managers, Australia, 2010, http://www.apesma.asn.au/adviceonline/remuneration/performance_pay.asp last accessed on November 19, 2010

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