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Citic Pacific: Foreign Exchange Scandal
Citic Pacific: Foreign Exchange Scandal
The independent board members failed to discharge their regulatoryduties because of their dual relationship besides being boardmembers, they were brothers. This affected their independencestandards, through which they could have not only scrutinized thecompany, but also raised the alarm about the loss of the company.
From the case, firms with controlling shareholders are prone tomaking subjective decisions, rather than that which is objective andeffective (Canada, n.d). CP did not separate ownership andmanagement, thereby prompting the two largest shareholders to raise,frequently, their stake. More so, being influential in the managementallows the controlling shareholders to occupy critical managementpositions, leveraging the opportunity to compromise vital companyinformation, violating regulatory policies. In this respect,monitoring mechanisms are compromised.
Failure to separate ownership, the board andthe management led the impaired to the transparency and integrity ofCP corporate governance. Foremost, there was no proper authorizationof the foreign derivative contracts. Besides, these contracts werenot evaluated for potential exposure of the company to risk. TheFinance Director also failed to adhere to the hedging policy of thecompany and the standard procedures for obtaining the chairman`sapproval prior to committing to any contract. Apparently, thechairman was, also not informed of any unusual hedging transactions.
The most effective measure taken by CP to improve its internalcontrol was engaging the accounting firm PricewaterhouseCoopers toreview the financial risk management of the company, as well as itscompany-level corporate controls. Unlike CP`s Group FinancialController, who was to perform checks and balances, but failed, PwC,an external auditor, and independent entity, performed the audit inaccordance with rules of CP`s financial statements. As such,information and recommendations from PwC were highly unbiased.
Deficiencies exist in Hong Kong`s regulatoryframework that contributed to the scandal at CP. Apparently the HongKong Stock Exchange has no power to investigate the violation ofListing Rule 13.09. More so, the regulatory framework does notincorporate legal penalties in the event that price sensitiveinformation is not disclosed.
The compensation system did not support the risk CP was willing totake. The executive did not consider financial, operational, as wellas the macroeconomic factors of the company. What is more, it failedto consider the material risk and reputation of the company, withrespect to the investors, policyholders, and others. Additionally,lack of transparency and integrity in the compensation systemcompromised the relationship between the management, the board, andstakeholders of CP.
Weak board oversight and failed internal control played the biggestrole in the scandal at CP. The board, independent members,especially, failed to announce the loss by CP. The controllers,though influential, failed to separate ownership and management,thereby making subjective decisions. Moreover, the board oversightgave chance to false and misleading statements. Meanwhile, failedinternal control saw the company sign foreign derivative contracts,and hedging transactions without following the company`s hedgingpolicy, or notifying the chairman.
One way to improve corporate governance and internal control of CPis by ensuring an independent board (Canada, n.d). The board of CPshould be independent of the senior management. The process ofrecruiting directors and establishing their profile should emphasizeon their independence from the senior management.
To improve the regulatory system of Hong Kong, the Hong Kong StockExchange should be given power to investigate companies that violateListing Rule 13.09. Additionally, policy makers should redesign theregulatory framework to incorporate legal penalties in the event thatprice sensitive information is not disclosed.
Canada. (n.d). Corporate Governance. AccessedMarch 5, 2015 from <http://www.osfi-