A. The chairman of Citic Pacific, Larry Yung Chi-kin’s father Yiren Rong started the company in 1978. • Citic was started “to pioneer reform in the financial sector, lure foreign investment and technology to China and develop international business.” (Ko, 2009) • When Yung became involved with the company he began to acquire more companies. o Eventually had Citic Pacific listed as a red-chip company in the Hong Kong Stock exchange.
B. The case talks about the corporate governance practices at Citic Pacific and the affect it had on this investment decision. • One of the main issues with the company is that they waited six weeks before informing the public of their losses.
C. The corporate governance at Citic Pacific case discusses the huge $15.5 billion loss that the company incurred when they invested in an iron ore project in Australia. • The company’s mistakes began when they entered into leveraged foreign exchange contracts stemming from the iron ore mining project in Australia. o Extra $1 billion dollars was needed for operating expenditures. • The finance director, Leslie Chang Li-hsien, entered into foreign exchange accumulators in hopes that they could make a profit by betting on the foreign currency. • Once the Australian dollar began to depreciate due to the financial crisis, Citic began to see an increasing losses stemming from this leveraged foreign exchange contract. • According to Yung, the finance director did not get authorization for the foreign exchange contract and had to resign. • Overall, the company did not follow a proper protocol to inform shareholders of the losses incurred from the project.
I. Corporate Governance.
1. What does it mean?
• Corporate Governance is the set of mechanisms used to manage the relationship between stakeholders and the company’s management. o It helps in determining and controlling the strategic direction and performance of the organization. o It is mostly concerned with identifying ways to ensure that strategic decisions are made effectively.
2. How is it used to monitor managerial decision making?
• Corporate Governance is used to monitor the top level manager’s decision making with internal and external mechanisms. • It helps to ensure that the manager develops strategies that create value for shareholders. o The CEO of the company acts in favor of the company and not for their own personal gain. • The Board of Directors oversees the management activities and provides guidance in the company decisions.
3. Internal and External Mechanisms
• Internal mechanisms:
o Ownership concentration is represented by shareholders that own at least 5% of the company’s shares. ▪ Have personal incentives to monitor managers to protect their interest. ▪ Vote for the board of directors that will represent their views in company decisions.
o The Board of Directors is used to represent the firm’s owners by monitoring top level managers. ▪ Elected by shareholders
▪ Have the power to direct affairs of the organization, punish, and reward managers. ▪ Made up of top level managers that have knowledge of the business. ▪ Independent of the firm but have expertise. ▪ People who have an relationship with the company but not in everyday business.
o Executive compensation is used as an incentive to make sure the managers and...