CORPORATE GOVERNANCE (ACGB 213)

CASE STUDY 1

GROUP MEMBERS:
AHMAD ZARIR BIN MUHAMMAD (BF093202)
ARTINEE A/P MUNIANDY (BF095010)
MUHAMAD BASHAR BIN MAT NAWI (BF094666)
PRITHA VELLUSAMY (AC097593)
THAKSHAYANI A/P SIVAM (BF095231)
SECTION: 6AM

LECTURER NAME:
MADAM RAEDAH BINTI SAPINGI

DATE OF SUBMIT:
30rd MARCH 2016

a) Define corporate governance

- Corporate governance is a broad-ranging term which, amongst other things,
encompasses the rules, relationships, policies, systems and processes whereby
authority within organisations is exercised and maintained.
-

In broad terms, corporate governance refers to the way in which a corporations is

directed, administered, and controlled. Corporate governance also concerns the
relationships among the various internal and external stakeholders involved as well as
the governance processes designed to help a corporation achieve its goals. Of prime
importance are those mechanisms and controls that are designed to reduce or
eliminate the principal-agent problem.

Generally, corporate governance refers to the host of legal and non-legal principles
and practices affecting control of publicly held business corporations. Most broadly,
corporate governance affects not only who controls publicly traded corporations and
for what purpose but also the allocation of risks and returns from the firms activities
among the various participants in the firm, including stockholders and managers as
well as creditors, employees, customers, and even communities.

b) Extract the governance issues in this case

1. Accountability of actions
- Mr. T was asked by Mr. Zhang to change the financial report without a basis that
can change the position from slight loss to slight profit even the company are
making lost during that period of time.
-

2. Merit system
In China Civil Services now are applying the merit system. The company in China
cannot use merit system because the company at Malaysia only operated in two
years only. Besides, anyone with a excellent record to show they will get a fast
promotion.

3. Roles of director
Mr. Lee wants Mr. T to change the P&L to show a profit, so that he can show to
his manager in the provincial capital which he has turned the company around to a
profitable state. He wants a good reputation of his name showing to his boss he
can handle the company in a good condition and making a profit.

c) Which Corporate Governance theory best fit this case? Discuss

-

The best theory that was chosen from my group is Managerial Hegemony theory
(a rubber stamp model). This theory asserts that managers effectively control the
organizations and the role of the board is merely to approve the decisions taken by
management. While managers may be considered best placed to exercise control
in the organization, it is vital that the board is able to exercise power and influence
over management when required. For co-operatives, this theory presents the
danger of member interests being usurped by those of management. Managerial
hegemony theory relates back to the thesis Berle and Means (1932) that although
shareholders may legally own and control large corporations they no longer
effectively control them. Control having been effectively ceded to a new
professional managerial class. Although this theory was developed in the study of
large business corporations, many of the processes it describes seem just as
relevant to public and non-profit organization, for example the separation of
whose who found (own) the organization from those control it, and the increasing
growth and professionalization of management. Indeed it could be argued that the
largely voluntary nature of board involvement in public and non-profit
organizations might mean that board power is even more limited than in the
private sector.

So the related case with this theory is Mr. Lee was use his power to make sure that
financial report changed to become profit. He was angry because the PPLC Ltd.
was making loss again after 2 years in operation. Mr. Lee said that in China, the
financial report can be changed easily but that style didnt follow the International
Accounting Standards. Mr. Zhang as the General Manager was considered to
have a short meeting with Mr T (Financial Controller) to talk about this but Mr. T
only can changed this with very low probability. So what can we conclude here is
Mr. Lee (Economic Officer) was influence Mr. Zhang as the GM to make some
changes in the financial report. Mr Lee was use his power because he know that
board need to approve the decisions taken by management even though he know
what was he doing was wrong because did not follow the standard.

d) Relate any three (3) CG mechanisms that you think the best to solve this matter.
1. Directors and boards
- As we can see, Mr. Lee wants Mr. T to change P&L to show a profit, so that they
will look like they were making a good growth in the company, as a matter of fact
they doesnt. So here, I think the board of directors should practice code of
conduct and ethical behaviour toward this matters. Mr. T should be firm and be
honest with the financial report even the company making loss. Next, in my
opinion I am suggesting that all the board members of the company should object
all the wrong doing in the company so that it will stay healthy from fraud or
corruptions. All of the board member should work healthy and be honest all the
time no matter whether the condition is good or bad.
2. Codes of Best Practice
- We can directly see that Mr. T is an honest man when he replied to Mr. Zhang that
he will lost his practice license or he committed a fault by changing the financial
report without any basis. Here Mr. T is doing the right thing when he felt he will
lose his integrity upon his job to present the truth financial report to the board of
directors and shareholders. However, he was pushed by the manager, Mr. Zhang to
change the report without involving the HQ people as he afraid to lose their ally
on the government side. In my point of view, I think Mr. T has to follow code of
ethics to avoid the misleading information to the shareholders. Mr. T also has to
consider the consequences of reporting the false report to them that will entirely
effects the companys profit.

3. Legal Requirements
- Under this corporate governance mechanism, we can see in this case that China
Civil Services are applying the merit system. They will merit any of the company
who has the good record will get the fast promotion. However, the company in
China cannot use the merit system as company in Malaysia only operating in two
years only. In my point of view, both company should discuss to achieve one
understanding of running their companies together. They should be tally with each
other in order to produce a good products and services of the company. Both CEO
should act in a friendly way to create a harmonies relationship for both companies
respectively. Another one alternative is that one should follow the rules of the
country for instance there is a problem in giving the merit system in Malaysia but
applicable in China so there must be a wise solution on this particular issue. To be
better next time the host company shall provide the rules according to the country
rules and regulation and the other company who joint venture should follow the
stipulations that has been set up.