Citic Pacific's Internal Corporate Governance

¶ … Citic Pacific's internal corporate governance mechanisms. How are they used to control management decisions? The internal mechanisms of control and corporate governance at Citic Pacific are intriguing. On the one hand sits the pride of the company and their stated commitment to high standards of corporate governance; on the other hand sits the $2 billion loss and the stakeholder accusations. At a general level, the mechanisms are supported by promoted transparency and collaboration between management and shareowners.

Nevertheless, the managerial team was focused on running independently and did not communicate its decisions to the other parties. Overall then, in light of the situation created, it becomes clear that the control mechanisms developed and implemented by the managerial team at Citic Pacific were inadequate. Instead of focusing on ethics, responsibility and integrity, the company's internal mechanisms were focused on easy gains. In other words, by renouncing a sound financial tool of protection within the international markets, the company made the tradeoff between prudence and easy gains.

And furthermore, when the gains did not materialize, the company did not step up and confess its actions. It perpetuated the situation until it was no longer able to hide it and it only then confronted the stakeholders. This situation is extremely similar to that encountered in the case of the Enron bankruptcy, and the ethical implications are just as serious. 2. Analyze and discuss any external corporate governance mechanisms from the case.

How are they used to control management decisions? Explain The external mechanisms proved to be working against the interests of the Citic Pacific stakeholders. In spite of the strong reputation it had created for itself, the company was not a professional economic agent and business entity, but one which acted as a united family. The leaders at Citic Pacific had joined their forces and had constructed a private company, without the involvement of the Chinese communist party.

They were committed to privacy and independence and this sense of rebellion was also manifested in their audits and corporate governance processes. An article in the South China Morning Post stated: "Despite its red-chip name and a majority-holding by the Citic Group, Citic Pacific is more of a family business of the Yungs, or should we say, a repayment of nationalized assets to a wealthy and influential family by the Communist Party" (cited by Ko, 2009).

The company leaders discouraged external involvement and the existence of external corporate governance mechanisms was extremely limited. The Yung family maintained full control and ensured to become the sole independent force to run the company. The external environment constituted sources for future financial gains, rather than inspiration for control and prudence. It inspired the leaders in the Yung family to seek profits against safety.

They implemented the models of other economic agents which registered quick profits through risky endeavors and they used the international market only as a source of favorable fluctuations in international rate of currency exchange. In other words then, the external mechanisms used by Citic Pacific were insufficient and inadequate. 3. Were the corporate governance standards at Citic Pacific sufficient? Explain The corporate governance standards implemented by the executives at Citic Pacific were insufficient and they failed to protect the organization and its stakeholders from losses.

While financial failures are a constant of the business community, they can nevertheless be limited and managed by the development and implementation of prudential policies. These policies depend specifically on the individual aversion to risk of each economic agent. It appears that the executives at Citic Pacific had a high tolerance for risk and a low aversion, and their prudential policies were barely existent. The managerial team at Citic Pacific appeared to have a great understanding of the need for corporate governance.

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 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.