Corporate Governance at Citic Pacific by Stephen Ko and Havovi Joshi

Citic Pacific

Corporate Governance at Citic Pacific

An unauthorized foreign currency transaction left Citic Pacific, the Hong King branch of CITIC Group (the large state-owned Chinese investment bank) exposed to the tune of approximately two billion dollars (Ko & Joshi, 2009). Not only was this unnecessary risk taken on through an unauthorized trade, but investors and shareholders in the bank were not notified of this fact until six weeks following the date that the transaction and risk came to the attention of leaders at the bank (Ko & Joshi, 2009). Only when the loss was certain was it announced, and though apologies and guarantees about reforming the practices and policies that allowed this to happen were made, distrust and outrage were rife amongst investors and analysts (Ko & Joshi, 2009). This case touches on several issues that are worthy of consideration from a corporate governance and management perspective.

Corporate Governance

Defining the term "corporate governance" is a necessary place to start. In this case, the chairman of the ban knew of the issue long before other shareholders and certain other directors were notified (Ko & Joshi, 2009). Normally, corporate governance is achieved through some degree of separation of between the board and the operations of the company, such that the board can review decisions being made more objectively and work to ensure stability and profitability. Governing and operating should not go hand in hand, in other words, and yet in this case that is exactly what seems to have happened (Ko & Joshi, 2009).

There are a variety of specific methods and controls that are supposed to contribute to overall coporate governance, many of which seem to have broken down in this case (Ko & Joshi, 2009). Review by the board of directors is one key mechanism that obviously failed; internal practices and audits should also prevent this type of incident from occurring, although the speed of the loss means an audit would not have been timely enough to be useful in this case (Ko & Joshi, 2009). Something as simple as ensuring proper remuneration for the right reasons, and the communication of these reasons and company values, can also be used as a tool of corporate governance to ensure compliance with these values and true focus on company objectives. In this case, the seeking of a quick profit through a bold move by a subordinate not authorized to make such a trade reflects a clear deviance from Citic Pacific's stated values and the interests of its shareholders (Ko & Joshi, 2009).

The board and independent directors cannot be assigned as much blame as those more intimately involved with day-to-day operations, but neither are they fully absolved of guilt. As shown in Table 1 the board and directors are ultimately responsible for those in charge of operations, however this hierarchy is somewhat misleading: the Board typically has the power to hire and fire company leaders, but not to instruct them as to operational controls. The board failed in its oversight, then, not in catching the unauthorized transaction but in failing to ensure that a system was in place that would prevent such a thing from happening. It is in a lack of foresight rather than in oversight that blame is attributable to these leaders.

If hired as a strategic management consultant by Citic Pacific to address certain of their corporate governance issues, the obvious place to start would be in the internal control processes that authorize and permit transactions to take place. As the primary direct contributor to this problem was the ability for an individual to make an enormous unauthorized trade, the loophole that allowed this to happen needs to be discovered and closed promptly (Ko & Joshi, 2009). The culture of the company and failure of effective values and objectives communication must also be addressed, in order to determine why the individual who made the trade thought it was a good idea and how such thinking can be avoided in the future. Finally, ensuring that more proactive involvement by the board of directors in investigating the company's control systems and ensuring that they are being accurately apprised of events and situations as they unfold will build a stronger top-down governance structure that still keeps the board independent from operations, but that ensures these directors are able to effectively look out for the interests of the company's. Table 2 illustrates a possible reorganization used only for review and not for operational purposes.