China Scandal: When Your Company Is Unfairly Tarred

“The Board believes that the Investigation would not cause any material adverse impact on the business and operations of the Group,” CFO Frank Lai wrote to the Hong Kong Stock Exchange in an announcement dated 22 April. “The Group will continue to be managed and operated in the normal and ordinary course.”
 
Lai was responding to the stock exchange’s query regarding the steep fall in the stock price of Hong Kong-based Chinese state-owned conglomerate China Resources Enterprise (CRE). On Saturday, 19 April, the Chinese Communist Party announced that Song Lin has been removed as chairman of China Resources (Holdings) Company, which owns 51.3% of CRE.
 
The party’s Central Commission for Discipline Inspection is investigating Song for what it says are “suspected serious violations of discipline and law.” In the context of President Xi Jinping’s current anti-corruption drive, that is a phrase that is taken to be a reference to corrupt acts.
 
When the stock exchange reopened on 22 April after the Easter holidays, CRE’s stock price fell around 4%. It has since recovered. “We are grateful that we do not see any panic situation with any investor or any banker,” says Lai, who is CFO, Executive Director and Company Director at CRE.  
 
Fine line
Honored with CFO Innovation’s CFO of the Year award last year, Lai has his work cut out in dealing with the fallout. The Investor Relations Department is answering queries from investors and bankers, with Lai himself pitching in on occasion.
 
The Hong Kong-listed company is trying to walk a fine line. “On a personal basis, Mr. Song was a great leader for the CR group of companies,” says Lai. “We knew and admired him as a leader who worked incredibly hard, is dedicated and with great vision. The growth the CR group has enjoyed over the years speaks for itself.”
 
“The current allegation against him, personally, is a surprise to all of us and we can only hope that his reputation could be cleared after the investigation,” Lai adds.
 
But he is careful to clarify that Song had no direct role in CRE. “There should be little impact to our business as CRE has always been operating independently,” says the CFO. “CR Holdings does not get involved with the day-to-day operation of CRE.
 
“As a general practice for all business units under the CR group, the role of the holding company is to support our government relationship-building, development of strategy and general synergy and communications among the CR group of companies,” says Lai.
 
Song has never been a member of CRE’s board, although he served as non-executive director on the board of CRE beer subsidiary CR Snow, a joint venture with global brewer SAB Miller. CRE and others in the group are “co-operating with the relevant authorities fully,” says Lai.
 
And they are also moving on. “Yesterday, we announced a new Chairman, Dr. Fu Yuning, who is formerly chairman of China Merchant Holdings,” says Lai.  Just five days earlier, the central government had named Qiao Shibo, General Manager at the holding company, to take over Song’s duties on an interim basis.
 
Bribes and mistresses
The events of the past week are a reminder of one of the facts of CFO life: That external events beyond finance’s direct control can explode at a moment’s notice. It is therefore important that systems, procedures and people are in place to effectively respond to any eventuality.
 
The beginnings of Song’s downfall date to last year, when mainland journalist Wang Wenzhi alleged that he was “the mastermind behind many shady decisions” at the holding company, including the purchase of “poor-quality coals assets” in Shanxi province at very high prices.
 
“I’m levelling allegations against Song Lin because he is the chief culprit,” Wang told the South China Morning Post last July.“I received the relevant material from someone and decided to take it into my own hands. I spent about half a year investigating it, including several visits to Shanxi.”
 
The investigative reporter, who works for the Economic Information Daily, a newspaper affiliated with the state-owned Xinhua News Agency, alleged in his microblog Weibo feed that Song and other senior managers at China Resources (Holdings) intentionally overpaid in the 2010 acquisition of 80% of Shanxi Jinye Coal Coking Group.
 
A consortium in which the holding company had an indirect stake paid RMB9.7 billion (US$1.6 billion at the current exchange rate) for ten entities, including three coal mines. Months earlier, Wang alleged, another party had valued the same assets at half that price.
 
The 51-year-old Song, who has been with the China Resources group since 1998, denied the accusation. The holding company threatened to sue for libel, but Wang was undeterred. So was another journalist, Shanxi reporter Li Jianjun, who had also written about Song’s supposed illegal activities.  
 
Earlier this month, Wang once again took to his microblog account and laid fresh charges against Song. Addressing the Central Commission for Discipline Inspection, he wrote that mainland Chinese banker Yang Lijun, who works for Swiss investment bank UBS in Hong Kong, was once Song’s mistress. Wang said Yang “became an important channel for Song Lin to accept bribes and launder money.”
 
Song denied the fresh allegation with a statement carried on the holding company’s website. “This has caused great hurt to me, to my family, and to the company,” he wrote. “I hope the relevant authorities will investigate.”
 
They did, but the outcome was perhaps one that Song did not expect. Just two days after Wang’s Weibo post, Song was dismissed from his post. His statement disappeared from the holding company’s website, along with almost all references to him as chairman.
 
Also scrubbed was the welcome message from Song on the website of the Hong Kong’s Independent Commission Against Corruption, where he was chairman of the Hong Kong Ethics Development Advisory Committee. He was subsequently replaced by Cliff Sun, Honorary President of the Federation of Hong Kong Industries.
 
To date, no one can say where Song has gone, though the assumption is that he is in the custody of the Communist Party’s disciplinary unit. Party investigators have been known to detain suspects even though no formal charges have been filed and without granting them access to lawyers.
 
CFO challenges
Song’s business career is almost certainly over, but China’s current crackdown may have long legs. The China Resources case “shows that the anti-corruption campaign is spreading to the SOEs,” Zhao Xiao, an economics professor in Beijing, told the Wall Street Journal, referring to China’s huge state-owned enterprises.
 
President Xi Jinping has pledged to go after both powerful “tigers” and lower ranking “flies” (a direct quote from Mao Zedong) in a bid to regain the trust of citizens and prolong Communist Party rule – and some analysts say, to consolidate power by sidelining his rivals.
 
The party has reported that 182,000 officials have been punished for corruption and abuse of power last year, 13% more than in 2012. The talk is that party investigators are preparing to move against Zhou Yongkang, who until last year was a member of the powerful Politburo Standing Committee, the seven-person council of top party leaders that runs the country.
 
Against this Game of Thrones-like machinations, CFOs like Lai must do whatever they can to make sure their company is not unfairly tarred. Of the ten China Resources public companies, Hong Kong-listed China Resources Power Holdings probably faces the biggest challenge, since it is the entity that indirectly owns the subsidiary involved in the 2010 coal deal.
 
But as the initial fall in its stock price indicates, CRE is also affected, despite the fact that it is in retail and beer and has nothing to do with the coal transaction. CR Power lost nearly 10% of its market value on 22 April, when CRE’s stock price fell by 4.2%.
 
Both have clawed back most of the losses, however, after the appointment of Fu Yuning as the holding company’s new chairman. A respected veteran at state-owned ports-to-financial services conglomerate China Merchants Group, the 56-year-old engineer (he has a PhD in mechanical/offshore engineering from the UK’s Brunel University) is seen as an outsider who can clean up whatever needs cleaning at China Resources (Holdings).
 
Focus on the business
Lai reiterates that CRE has always operated independently from its majority owners, and will continue to do so. Asked whether the company will be strengthening its corporate governance system, the CFO said that “corporate governance is constantly under review.”
 
“It is our management goal that we are always at the top of the standard in corporate governance,” says Lai, who was named Asia’s Best CFO (Investor Relations) by the regional quarterly Corporate Governance Asia in 2013. CRE’s prompt statement to the stock market and its responsiveness to investor and lender queries are proof that it is on top of the situation, he adds.
 
As the storm over Song’s firing subsides, CRE’s communications with stakeholders will focus on the business and its financial performance, as it should be. Final results for 2013 were released last month, with consolidated turnover at a record HK$146.4 billion (US$18.9 billion), up 16% from 2012.
 
Profit attributable to shareholders stood at HK$1.9 billion, which is down 51.6% year-on-year, but is actually up 7.5% excluding the after-tax effect of asset revaluation and major disposals. “In 2014, we are ready to grow our four pillar consumer goods businesses [retail, beer, food and beverage] by deepening penetration and expanding our market nationally,” says CRE Chairman Chen Lang.
 
That’s the messaging Lai as CFO wants out in the market. With luck, and helped by CRE’s pro-active moves after the Song affair, the company may be able to do just that. The major challenge will then be to deliver on growth in sales and profits – and prove that CRE’s corporate governance is, indeed, top notch.
 
About the Author

Cesar Bacani is Editor-in-Chief of CFO Innovation.  

 

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