What remains to be done to revive trust in Citic Pacific

Beijing appears to be doing everything possible to restore investors' confidence in Citic Pacific. It has given cash. It has even taken up the destructive currency contracts, shielding the company from further loss. But an important piece is missing - a change in management. The 26-page announcement on the company's restructuring is silent on the fate of chairman Larry Yung Chi-kin, who claims no prior knowledge of the contracts, and Henry Fan Hung-ling, the chief executive, who claims little role in treasury matters. A month into the company's crisis, no one has been held accountable for the HK$16 billion loss that could easily sink the conglomerate, other than the two financial officers that were directly involved in the contracts. Insiders say Mr Yung will likely get the face-saving treatment of a gradual fade-out, instead of the boot. They pointed to announcements suggesting his role and influence will be reduced. Before going into details, it is necessary to understand the special way Citic Pacific operates. Despite its red-chip name and a majority holding by Citic Group, Citic Pacific is more a family business of the Yungs or, should we say, a repayment of nationalised assets to the wealthy and influential family by the Communist Party. After buying a holding of about 18 per cent from Citic Group in 1996, Mr Yung categorically stated that Citic Pacific did not belong to any entity on the mainland and would continue to operate independently, as it always had. He, his son and executives have full control of the company, though Citic Group maintains a few board seats. Under the rescue plan, which is understood to have been approved by Premier Wen Jiabao, this would be drastically revised. As a condition of providing a US$1.5 billion standby facility, Citic Group is demanding that all decisions with major financial implications cannot be made 'without the prior agreement of all directors' and its 'prior written consent'. These conditions would expire only when Citic Group has converted a HK$11.4 billion convertible bond and raised its stake to 57.55 per cent, significantly outweighing Mr Yung's holding, which would be reduced to 11.47 per cent. In addition, Chang Zhenming, the vice-chairman and president of Citic Group, has been appointed to chair a committee that would 'improve Citic Pacific's internal management and risk controls; and monitor its ongoing and future leveraged foreign exchange contracts'. In short, Citic Group is now in the driver's seat. Next year, when global conditions stabilise, it would not be surprising to see Citic Pacific do a share placement to recapitalise itself, an insider said. If that happens, Mr Yung's holding could easily be reduced to a negligible level. By then, investigations by regulators are likely to have come to a conclusion. Should Mr Yung be convicted of any wrongdoing, his removal from the company will naturally follow. If not, a back-seat title will be waiting for him. 'He has lost his business. He has lost his reputation. That's enough of a punishment,' said the insider. Really? Try to sell this idea to shareholders who have seen their investment evaporate overnight. Try to sell this to investors who see corporate governance on the mainland as a joke. On the face of it, there may be little difference between a fade-out and a disciplinary removal. Mr Yung would be going anyway, some may say. But the message sent is dramatically different. A disciplinary action tells shareholders their interest comes before politics. A disciplinary action tells the public its money will be seriously guarded. A disciplinary action tells managers they would have to pay for a wrong business judgment. This is why, with few exceptions, removal of the top guys is the first step in most financial restructurings. This is why, with few exceptions, managements of distressed financial institutions in the United States and Britain got the boot upon their firms receiving a public bailout. The latest examples are American International Group and Royal Bank of Scotland. To our state leaders, who have begun to fire ministers and provincial heads for mistakes and negligence, the logic needs no further explanation. A fade-out tells the opposite. If anything, it reconfirms the norm that managers of state enterprises will be publicly held accountable for their wrong business judgment only if they are not so well connected or they have committed a crime. It reconfirms the norm that independent directors are no more than decoration. Many wrong business decisions have been left unaccounted for. Many public bailouts have happened. Here we are talking about a decision that was outright speculation and cost the company more than HK$16 billion or the country even more. Without holding anyone publicly accountable for that, it is difficult to see how investor confidence can be restored not just in Citic Pacific but in any state-owned enterprise.