Corporate Governance

rP

os

t

HKU737

SAY GOO

op

yo

MANFOLD TOY COMPANY: CORPORATE

GOVERNANCE AND ETHICS FOR DIRECTORS

AND PROFESSIONALS

On the evening of 14 February 2007, Joseph Wan, founder and chairman of Manfold Toy

Company Ltd (“Manfold Toy”), was preparing for an audit committee meeting, to be held on

the following day. His hope was that the audit report would give a very positive picture of the

company. This would pave the way for a takeover by Mitchell & Meyer, an American

exercise equipment manufacturer interested in acquiring the listed bath and water toys

producer. Joseph was anxious to sell his 68% stake in Manfold Toy and had been

instrumental in soliciting the bid.

No

tC

However, only a handful of people was aware that the audited accounts might not have taken

into consideration some of the financial risks Manfold Toy was facing. Fred Wong, one of

Manfold Toy’s independent non-executive directors (INED) and chairman of the company’s

audit committee, was one of those people. In addition to his directorship at Manfold Toy,

Fred was an INED at two other listed companies. He was also a director of On Yee Exports

Ltd, a private company and Manfold Toy’s sole distributor in Australia & New Zealand. Fred

heard a persistent rumour that On Yee Exports was on the brink of bankrupcy. When Fred

informed Joseph about this threat on February 11th, Jospeh’s reaction was to wave off Fred’s

concern. Instead, he questioned whether Fred was forsaking his duty as a director of On Yee

Exports by passing on this rumour.

Do

With the audit committee meeting only one night away, both Joseph and Fred were feeling

anxious. Joseph was keen to sell his company, whereas Fred was worried about the possible

liability he might face if the true financial state of Manfold Toy became public knowledge.

Fred wondered what he could have done otherwise in his position as INED and chairman of

Manfold Toy’s audit committee. Had he fulfilled his role as a director according to the

standards set by the...