The to portray a façade of a
The pressure Chen faced was mostly to recoup the lossesincurred during the speculative trading (Lay Hong, 2009).Chen mighthave faced personal pressure.
In the years prior to the scandal, Chen had saton the boards of several prestigious institutions and earned many accolades.Furthermore, China’s former Ambassador to Singapore had described CAO as “thecream of overseas Chinese enterprises” and China’s Communist Party magazine,”Seeking Truth”, had urged Chinese companies to study CAO’s management to helpbuild “a great renaissance of the Chinese nation”. With such recognition andtrust, Chen would face large pressure living up to the standards set andcreating more profits. Hence, when faced with losses, he would be highlypressured to turn them around. Furthermore, he had also hoped to gain theattention of the new generation of government leaders in Beijing and wasalready making headway with CAO’s increasing success. Therefore, he would notwant the losses from these trading activities to negatively affect theimpression the leaders have of him (Pottinger & Prystay, 2004).
Chen alsofaced pressure from CAO’s stakeholders. As CAO’s losses mounted, it startedfacing difficulties meeting its creditors’ demands. When it inevitably did notmeet the banks’ demands for more collateral, the banks began forcibly closingsome of its positions, turning potential losses into real ones (Santini &McDermott, 2004). In November 2004, when CAO finally released figures showingits losses from the trading activities, many questions were raised about CAOand Chen’s credibility. Therefore, to portray a façade of a thriving company, Chenfelt the need to continue investing in the trades, hoping to recoup the losses(Lay Hong, 2009).1.
1. OpportunityAn opportunity Chen might have usedto his advantage was CAO’s employees’ ignorance of the relevant guidelines thatwere in place (Prystay, 2005). In 2002, Ernst & Young designed a formal corporatemulti-layer risk control system with many safeguards which should haveprevented such large-scale losses even without the proper risk managementguidelines mentioned prior. However, these controls and safeguards failed ateach level of management (Yinzhi, 2012). (Refer to Appendix2: Failure of Risk Control Structure (Yinzhi, 2012))In addition, there was a large concentration ofpower in Chen’s hands since he was both the Managing Director (MD) and CEO ofCAO, allowing him to obstruct the free flow of information to the Board ofDirectors, which was needed for them to make meaningful and independentdecisions. Chen made use of this opportunity to deliberately withhold therelevant information from the Board, ensuring their ignorance of the lossesincurred through the botched trading activities. Therefore, despite thepresence of a minimum of three Independent Directors as required by the Code ofCorporate Governance, there was no active independent third-party which couldverify the financial statements and probe the situation (Lay Hong, 2009). 1.
2. RationaliseOne way Chen could have rationalised his actions was through the profithe made just prior when CAO first entered speculative trading in the secondhalf of 2003 (Santini & McDermott, 2004). The profit could have given Chenthe confidence that the strategy he was using was successful.
Therefore,despite CAO’s losses in the first quarter of 2004, should he continue using theproven strategy, he could eventually bring in profits (Pottinger & Prystay, 2004). The prime aim of these actions wasto minimally recoup and avoid realising the losses and create profits for thecompany if possible (Lay Hong, 2009).Another rationale Chen might have used toexplain the scandal was his lack of knowledge of Singapore’s corporateenvironment. Having worked only in China before, Chen had never “operatedin an environment where legal constraints were more important than bureaucraticcontrols or where shareholder concerns played a significant role in managerialdecision making” (Kennedy & Stiglitz, 2013). In China, where CAOHC is based, the natural action would be toneglect the issue instead of proceeding with the appropriate actions asrequired by the laws and regulations.
With this mindset, Chen could haveassumed that a similar corporate environment existed in Singapore and hisactions were therefore also acceptable in Singapore (Yinzhi, 2012).