Evaluate Dutech's Corporate Governance

Topics: Board of directors, Audit, Corporate governance Pages: 6 (1462 words) Published: October 6, 2011
Dutech Holdings Ltd is a company that has been making large amounts of profits over the years since its incorporation in 2006. At 2009, its net profits amounted to RMB 58.4 million. This would mean that it would have the necessary resources to ensure proper corporate governance.

The objective behind corporate governance through the reporting and practices is to enhance the long-term shareholder value and interests of other stakeholders by enhancing corporate performance and accountability.

General overview of the Annual Report on Corporate Governance

Dutech adopts a highly prescriptive approach towards tackling the issue of corporate governance. Dutech follows closely to the requirements set out by the Singapore Code of Corporate Governance so that they would not deviate too much from the intended purpose of adopting Corporate Governance.

It must be conceded that Singapore companies would tend to adopt the Singapore Code of Corporate Governance with a presriptive mindset because the idea of corporate governance has been fairly new to companies in Singapore. This method eases the employment of corporate governance in the company, especially when the Code provides specific guideline, such that they need not devote too much resource or effort to the initial setup of corporate governance.

Approach

The Singapore Code of Corporate Governance consists of four main principles: 1.Board Matters
2.Remuneration Matters
3.Accountability and Audit
4.Communication with Shareholders

One must contend that, as much as “adequacy” comes into play, there is no fixed benchmark. By definition, “adequate” would mean “satisfactory or acceptable in quality or quantity”- Oxford Dictionaries. This would imply that the adequacy of practices is controversial because different classes of stakeholders would have different standards of quality or quantity that they deem acceptable.

Board Matters

Firstly, Mr Johnny Liu Jiayan is the company’s Chairman, CEO and Controlling Shareholder of the company. In this case, Mr Liu wields unfettered powers of decision, which he may abuse and work it to his personal gain.

Its leadership structure may be better having a Chairman separate from its CEO so that the Chairman can keep the CEO’s management abilities in check and the CEO’s actions can be regulated to be made accountable to the Board of Directors.  

However, advantages can accrue to Dutech by not hindering the decision-making process. This can be evident from the pace the company managed to recover from the drop in profits from 2008. The company’s ability to quickly innovate and hedge in raw materials is a good example of doing without the separation of functions between the CEO and the Chairman.

Secondly, it must be noted that Mr Liu Bin, Dutech’s Vice Chairman is Mr Johnny Liu’s brother. It may be a worrying issue if the brothers decide to collude for the wrong reasons as they have very strong controlling power over the company. Furthermore, it is not specially noted in the Annual Report that there can be potential conflicts of interest. This presents an issue of adequacy and weakness, diluting the strength and independent element of the Board.

In light of this issue, weakness can also be seen in the composition of the Board. There is still a high degree of non-independence in the top positions of the Board, since the Lius are substantial shareholders (holding 57.51% shares indirectly), holds executive position in the company, and are highly paid.

It must be commendable that the Nominating Committee is made up of fully independent directors, thus effectively ensuring the proper evaluation of the Board’s performance. In this sense, it would be difficult to find biased assessment of any director in the company, increasing shareholder’s confidence in the company’s operations.

Even so, the company did not disclose the process of assessing its directors individually, making this level of assessment rather...
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