Corporate Governance at Citic Pacific: A Case

Corporate Governance at CITIC Pacific: A Case Study Exposure to foreign exchange risks that led to significant damages to the profits of Citic Pacific, which is the Hong King branch of China's CITIC Group, went unannounced for six weeks, leaving investors quite understandably angry with the company and its leadership.

A lack of adequate corporate governance at the state-owned investment organization was seen by many as the major problem in the situation, and despite the apologetic tone struck by company leadership when the two-billion-dollar loss was announced, many felt that the problem still persisted and was in obvious need of drastic action.

It is recommended hat the risk management procedures at work in Citic Pacific undergo a major overhaul, and that management and the board of directors be made more responsive to investor and shareholder interests through a redefining of company policy and procedure and possibly through a direct link between asset success and individual compensation.

The problems in this company are somewhat complicated by the fact that the Chinese government owns and operates the larger CITIC Group of which Citic Pacific is a part; different standards of corporate governance no doubt exists as this is a public entity rather than a private concern. In addition, the state-owned status of the company insulates the individuals that comprise company leadership, making them less responsive to the concerns and desires of investors and more responsive to state interests.

While this loss was certainly not in state interests, either, the fact that the company does not operate with direct concern for investors is a problem. The risk management of the company is also likely influenced by the fact that it is a state-owned venture, as there is very little risk that the company would ever simply fail.

While growth and profitability are no doubt still the primary goals of Citic Pacific and the larger CITIC Group, the company and its leaders are likely to be willing to take greater risks with shareholder's money given the relative security of their company and of their positions within it.

The sense of remove that this creates between the decision-makers in the company and its shareholders is no doubt a major factor in the lack of immediate concern for revealing this loss, and helps to explain why six weeks had to pass before any public announcement of the loss was made.

Establishing company policy that d=makes decision-making and leadership more directly responsive to shareholder interests rather than state concerns might not be fully possible given the nature of the Chinese government and the state-owned status of CITIC Group, but without some changes in this direction there is a very large likelihood that the company will find itself short of investors in the near future. There is also obviously a lack of proper control and oversight in Citic Pacific's current corporate governance procedures.

The transactions that led to the high degree of foreign exchange exposure and the eventual two-billion-dollar loss were not even properly authorized, according to the company's statements, meaning that not only did the company use shareholder money in a reckless way, but it was not even an intentional risk decided on by the pertinent powers. The fact that investors were not told immediately of this development only exacerbated the situation.

Essentially, the problems in this case and in Citic Pacific's corporate governance boil down to two problems, regardless of the state-owned status of the company: first, there is a lack of adequate controls in the company that allow large risks not commensurate with their potential reward to be taken, and even to be taken without proper authorization and full consideration; second, the current modes of corporate governance do not put an adequate emphasis on the rights of shareholders and of the responsibility the company owes to its investors.

Both of these issues need addressing in order to restore investor.