Citic Group Case Analysis

Citic Group Analysis

1. Analyze and discuss Citic Pacific’s internal corporate governance mechanisms. How are they used to control management decisions?

Internal governance mechanisms include ownership concentration, board of directors and executive compensation. Citic Pacific received sharp criticism alleging the company was a family owned business. CEO, Larry Yung, is a large block shareholder; however, in the Chinese markets it is common for a family to be the largest block shareholder as well as the CEO. According to the Hong Kong Stock Exchange (HKEx) Main Board Listing Rules, a controlling shareholder can be a person who can control the structure of the board or has control over the company. The key to overcoming the negative effects of large block shareholder control is effective board monitoring.

In today’s markets, ownership of public firms is largely held by large-block shareholders. Diffuse ownership still exists, but diffuse owners have little to no power over management oversight. The Board of directors is elected by shareholders to monitor management decisions and control their actions. Generally, board members are classified as insiders, related outsiders, or outsiders. Although Citic Pacific’s board includes all three categories, the board failed to monitor top management and ask hard questions. Citic Pacific board oversight is not apparent.

Determining executive compensation is a complicated exercise. Even with these challenges, the board is responsible for designing an appropriate compensation package. According to Citic Pacific’s employee compensations policy, employees are rewarded on a pay-for performance basis-a strategy to provide incentive for employees to focus on long-term growth. With this strategy employees receive a greater portion of their salary in bonus compensation. There is evidence that the board did not follow the compensations policy as bonuses were granted to the executive board on a discretionary basis rather than the...