Harvard Case - Victory City: Corporate Governance Risks for International Investors
"Victory City: Corporate Governance Risks for International Investors" Harvard business case study is written by Steven John DeKrey, Ramee Liu. It deals with the challenges in the field of Business Ethics. The case study is 15 page(s) long and it was first published on : Jan 12, 2022
At Fern Fort University, we recommend that Victory City implement a comprehensive corporate governance framework that addresses the specific risks associated with its rapid growth, international expansion, and family-owned structure. This framework should prioritize transparency, accountability, and ethical decision-making to foster trust with international investors and stakeholders.
2. Background
Victory City is a rapidly growing, family-owned business operating in the emerging market of Victory. The company has experienced significant success, attracting substantial international investment. However, its rapid expansion and lack of formal corporate governance structures pose significant risks to its long-term sustainability and investor confidence.
The case study highlights several key protagonists:
- The Founder and CEO: A visionary entrepreneur with a strong focus on growth and expansion.
- The Family: The controlling shareholders with a strong influence on decision-making.
- International Investors: Seeking high returns but concerned about transparency and governance.
- Local Stakeholders: Including employees, suppliers, and the community, who are impacted by the company's operations.
3. Analysis of the Case Study
The case study presents a complex scenario where the company's rapid growth, family-owned structure, and international expansion create a confluence of risks. Using the Stakeholder Theory framework, we can analyze the various stakeholders and their interests:
- Investors: Seek high returns, transparency, and responsible corporate governance.
- Family: Desire to maintain control, ensure long-term family wealth, and preserve the company's legacy.
- Employees: Expect fair compensation, safe working conditions, and opportunities for growth.
- Local Community: Concerned about environmental impact, social responsibility, and job creation.
- Government: Seeks to ensure regulatory compliance, economic development, and social stability.
The lack of a formal corporate governance framework creates several risks:
- Conflicts of Interest: The family's control over the company could lead to decisions that benefit them at the expense of other stakeholders.
- Lack of Transparency: Limited disclosure of financial information and decision-making processes could erode investor confidence.
- Ethical Dilemmas: Rapid growth and lack of clear ethical guidelines can lead to unethical practices, such as bribery or environmental damage.
- Succession Planning: The absence of a clear succession plan could lead to instability and uncertainty in the future.
- Regulatory Compliance: Expansion into new markets requires navigating complex legal and regulatory environments.
4. Recommendations
Victory City should implement the following recommendations to mitigate these risks and build a strong foundation for future growth:
- Establish a Formal Corporate Governance Framework: Develop a comprehensive code of conduct, board of directors with independent members, and clear policies for financial reporting, conflict of interest management, and ethical decision-making.
- Enhance Transparency and Disclosure: Increase transparency by providing regular and detailed financial reports, publishing an annual sustainability report, and establishing a whistleblower hotline.
- Promote Ethical Leadership: Develop a strong ethical culture by fostering ethical leadership at all levels, implementing training programs on ethical decision-making, and establishing clear ethical guidelines for all employees.
- Strengthen Stakeholder Relations: Engage with all stakeholders, including investors, employees, local communities, and government officials, to understand their concerns and build trust.
- Implement a Robust Risk Management System: Develop a comprehensive risk management system to identify, assess, and mitigate potential risks associated with international expansion, regulatory compliance, and environmental sustainability.
- Develop a Succession Plan: Establish a clear succession plan that ensures continuity and stability in leadership and ownership.
- Embrace Diversity and Inclusion: Promote diversity and inclusion within the company to foster creativity, innovation, and a broader range of perspectives.
- Prioritize Environmental Sustainability: Adopt green business practices, reduce environmental impact, and invest in sustainable solutions.
- Invest in Technology and Analytics: Leverage technology and analytics to improve operational efficiency, enhance transparency, and manage risks more effectively.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with the company's mission by promoting responsible growth, ethical decision-making, and long-term sustainability.
- External Customers and Internal Clients: The recommendations address the concerns of investors, employees, and the local community, fostering trust and building strong relationships.
- Competitors: The recommendations help Victory City stay ahead of competitors by demonstrating strong corporate governance, ethical practices, and commitment to sustainability.
- Attractiveness ' Quantitative Measures: Implementing these recommendations will enhance the company's reputation, attract more investors, and create long-term value for all stakeholders.
6. Conclusion
Victory City faces significant challenges and opportunities as it navigates rapid growth, international expansion, and a changing global landscape. By implementing a comprehensive corporate governance framework that prioritizes transparency, accountability, and ethical decision-making, Victory City can mitigate risks, build trust with investors and stakeholders, and position itself for sustainable success.
7. Discussion
Alternative approaches to addressing these challenges include:
- Maintaining the status quo: This could lead to a loss of investor confidence, ethical scandals, and regulatory issues.
- Focusing solely on profitability: This could neglect the needs of other stakeholders and damage the company's reputation.
The key assumptions underlying these recommendations include:
- The family's commitment to good corporate governance: The family must be willing to embrace transparency, accountability, and ethical decision-making.
- The availability of qualified independent board members: Finding experienced and independent directors is crucial for effective governance.
- The willingness of investors to support long-term sustainability: Investors must be willing to invest in a company that prioritizes ethical practices and sustainability.
8. Next Steps
Victory City should take the following steps to implement these recommendations:
- Establish a Governance Committee: Form a committee to develop and implement the corporate governance framework.
- Hire Independent Consultants: Engage external consultants to provide expertise in corporate governance, risk management, and ethical decision-making.
- Develop a Timeline: Create a timeline for implementing the recommendations, including key milestones and deadlines.
- Communicate with Stakeholders: Communicate the changes to all stakeholders and solicit their feedback.
By taking these steps, Victory City can build a strong foundation for future growth and success, while ensuring that its actions are aligned with its values and the expectations of its stakeholders.
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Case Description
Victory City International Holdings Ltd. was principally engaged in the textile businesses and had subsidiaries in mainland China that manufactured and sold its own products. The company was founded in 1983 in Hong Kong, and it was listed on the main board of the Hong Kong Stock Exchange (SEHK: 539) in 1996. On 22 February 2021, Victory City announced that, on 22 January 2021, Deloitte had obtained two credit reports as evidence that two of its main subsidiaries in mainland China had outstanding bank loans in the aggregate amount of CNY946m (USD148m). According to the credit reports, Victory City's mainland subsidiary signed bank facilities of CNY994m (USD156m) on 11 December 2020 with mainland banks, and a substantial portion of these loan amounts was not recorded in the consolidated financial statements of the company. If Deloitte's findings were valid, the company's management had possibly committed accounting fraud and embezzled funds by transferring a substantial portion of the unrecorded loan of CNY946m (USD148m) to their own pockets. After 22 January 2021, Deloitte, as the whistleblower, suggested remedial actions that the company should take, but no significant governance response was received and the management in Hong Kong denied any knowledge of the bank loans or the location of the funds. On 11 February 2021, Victory City filed a winding-up petition; it stated as one of the reasons that it had defaulted on a scheduled bank loan repayment of approximately HKD290m (USD37m) to a syndicate of banks in Hong Kong. On 19 March 2021, the Hong Kong government's Financial Reporting Council (FRC) initiated an investigation into Victory City's financial statements to determine the extent of the unrecorded loans. In addition, FRC was investigating whether Deloitte had conducted its work in accordance with the relevant auditing standards. Victory City requested that the trading of its shares be suspended at SEHK, effective 22 March 2021. On 27 April 2021, the
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