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Amit Kumar Verma 09BS0000201

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INTRODUCTION

Corporate Governance provides a system which entwines relationships between a company's

management, its board, its shareholders and other stakeholders. It also provides the structure

through which the objectives of the company are set, and the means of attaining those objectives

and monitoring performance are determined. China Aviation Oils (CAO) collapse brings to the

fore issues related to accountability, transparency, duties and responsibilities of management.

ISSUES OF CORPORATE GOVERNANCE

The Performance Role of director is to perform various activities that are aimed at improving

the overall performance of the corporation. In CAOs case, we have seen that the CEO is

involved in speculative trading which is no way in alignment with duty of director of protecting

the interest of stakeholders. The director has also failed in its Conformance Role which deals

with monitoring and evaluating the role of the management and board.

The Transparency in the disclosure of financial statement is also under the scanner when we see

that the company was showing growth in the profit for last three years but in fact it has incurred

a loss of $550 million in speculative oil trading. The stakeholders were also kept in the dark

about the risk exposure of the company.

The directors are said to have a fiduciary relationship to both the shareholders and the company

but the director of the company has breached the trust by engaging in options trading which was

not allowed by the State Coucil. The Accountability principle recognizes the duty of the board

to oversee the professional managers who have been entrusted to run the company and who are

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accountable to the board for the use of firms assets. Thus the board acts as a mechanism for

minimizing the Agency Cost inherent in the separation of ownership and control, which is quite

high in this case as the management has pushed the company into bankruptcy.

On the other hand, we see a robust Corporate Governance exhibited by the Singapore

Government. The suspension of trading of companys stock and directing the company to

appoint an independent auditor to investigate the matter were the measures taken by Singapore

Exchange to instill the faith of investors.

CONCLUSION

The problem arising out of the concentration of power and the need to segregate duties is one of

the primary lessons we can learn from this case. In CAO, Mr. Chen held both the post of MD as

well as of the CEO allowed him to obstruct the free flow of information to the Board, for them to

make meaningful and independent decisions.Therefore, it is very important to ensure that thereis a balance of power and authority and that controls are put in place to segregate key duties and

to guard against any fraud risks. The principal solution is to have a system of checks in place so

that no fraud will go undetected. Furthermore, the unavailability of a risk management

framework to check the trading activities and a clear trading limit or margin calls could be the

fundamental reason to explain why things went completely out of hand. Losses were not cut in

time but allowed to snowball into astronomical amounts.Good corporate governance is build within the culture of the company. Everyone from a junior

employee to the senior management should understand the importance of adhering to the code as

well as upholding high moral ethics.