Xavier University

Ateneo de Cagayan
Cagayan de Oro City, Philippines

CASE 5: ASIA PULP AND PAPER

Presented to Ma’am Zola Caumban

A Faculty in the Department of Accountancy
In Fulfilment of the Requirements
In the Subject International Business and Trade

Passed by:
Guiling, Anna Azriffah Janary S.
Jardenico, Diana Lynne
Pandapatan, Sittie Hidaya
Balindong, Jafarien

August 01, 2019

II – BS ACCOUNTANCY (ACB)
Case 5: ASIA PULP AND PAPER

I. VIEWPOINT

The viewpoint that will be assumed by this case is the perspective of

the management of the company Asia Pulp and Paper. The management
was supposedly the one responsible in making sure that all decisions
relating to the operations and conditions of the company are accountable
and in constant check-and-balance. Due to the huge default where
creditors took the biggest loss, it is clear that the management failed in its
responsibility of making sure that the interests of stakeholders including
the creditors are protected.

More specifically, this case takes the perspective of the management to

explore the depth of the following:

1. The possible steps that management could have done in order to

minimize the abuse of power of the Widjaja family.
2. The decisions that were made in relation to the operations of the
company that had helped and led to the existence of the debt standstill
and default.
3. The responsibility and accountability of the management to what
happened given that they had access to the availability of confidential
information that could have allowed them an optimal decision-making.

II. STATEMENT OF THE PROBLEM

The Asia Pulp and Paper faced the largest default caused by a
complex debt entrenchment, largely because of the unchecked pyramid
structure of the owners who used their positions to maximize their own
interests and the lax and poor frameworks of law (relating to debt
payments) enforcement in East Asian business models.

III. OBJECTIVES

SHORT-RANGE

As the management who needs to make sure that the performance of the
company is up to optimal standards, our vision for the few years to come
is to perform the following:

1. To refrain from using debt as the main source of funding in company

expansion, and to consider other sources of funding such as capital
funding.
2. To shift the current debt of the company to minimize possible arising
conflicts such as defaults and standstill, and to give way to a fresh
structuring of the composition of funding.
3. To focus on the achievement of short-term goals such as establishing
not just a popular name worldwide, but also a credible and reliable one
through creating a framework of a good corporate governance. This is to
pave way for future opportunities for the company.
LONG-RANGE

As the management who needs to make sure that the performance of the
company is up to standards, our vision for the long years to come is to
perform the following:

1. Develop a strict and thorough decision-making policies and standards

that will center and take the largest account on serving the best interests
of the stakeholders - maximizing their wealth - instead of allowing the
ownership concentration and unchecked control by large families in
influencing the decisions.
2. Develop a fair and equitable sustainable industry capacity that allows
for the protection and preservation of some forests in Indonesia through
allocating some new resources for production.
3. Address the cross-border insolvency in the home company country and
its subsidiaries in other countries by continuously working with the
government to strengthen the lax policies and legal procedures that
permits the lack of transparency and accountability in its business context.

IV. AREAS OF CONSIDERATION

East Asian Business Models

Under East Asian business models, there is the existence of pyramid
structure and nepotism in the ownership control. The similarity that
combines and intertwines both ownership and control is also highlighted.
Under this model, the “ultimate owner” has a critical role in the decision-
making process. In this chain of ownership, voting rights are important and
can be traced back to the owner. The most important thing to note in this
part is that this ownership mentioned refers to the cash-flow rights (money
invested in the company) in which “the largest shareholder is often able to
control a firm’s operations with a relatively small direct stake in its cash-
flow rights.” (Claessens et al, 2002: 2742). Since there is a pyramid
structure, there is a large gap between owners which give more incentive
to the ultimate owners to give priority to their own interests to the
detriment of the smaller shareholders. According to Shleifer and Vishny
(1997), the ultimate owners are able to abuse their power and position by
“paying themselves special dividends or by exploiting other business
relationships with the companies they control”.

- Transactions with related parties

Because of the practices in East Asian business models,

transactions with related parties are part of the norm. In these
transactions, strategic connections are used instead of real market
conditions. This allows the existence of transfer pricing which
becomes a means for the shareholders to declare profits and losses in
whichever company they choose.

- Debt Entrenchment

Because of the ownership structure in East Asian business

models that allows the possibilities of self-serving practices, Widjaja
family was left to ensure their main interest which was left to secure
short-term profits with rapid and large expansion of capacity, and
delaying the costs with longer term debts.

The Nature of the Company Asia Pulp and Paper - Wood Supply
Problem
The success of the company was high on a global scale. This was
mainly because of the vast natural forests available in Indonesia, making
the country the world’s cheapest producer of pulp (Christopher Barr, pers.
Comm., CIFOR). Because of the unstoppable growth and expansion of
the company, reports concerning the capacity of the industry to continue
in a sustainable manner were rampant. According to Barr, because of the
spurt of this continuous growth, APP mills will “face growing fiber supply
deficits over the next 5-7 years” which made the expansion of the
company exclusively risky.

V. ALTERNATIVE COURSES OF ACTION

The company deals with many problems which leads to the central one -
default. In order to avoid this the following are suggested:

1. Debt Restructuring and Fund Sourcing

The company can restructure its debt by reducing the interest rate
on loans, by extending the dates when its liabilities are due, or both.
During desperate times, this could bring a win-win situation for both
companies - the company avoids bankruptcy while the creditors
receive more than what they would through a bankruptcy proceeding.
Under this, other sources of funding will also be considered to avoid
an excessive amount of debt that could lead to a standstill or a default.

2. The Widespread Regulation of the Industry Capacity

One of the major problems that faced the company was the
exhaustion of its sources of woods because of the unregulated and
unchecked industry production capacity of the company. To avoid this,
a widespread regulation will be implemented with strict supervision
and oversight from the senior management (not the “ultimate owners”)
and independent members of the board.

3. Establishment of a committee within the company that ensures

independent and objective decision-making of the management
and the owners.
This committee shall be established to give creditors and other
shareholders the necessary check-and-balance to ensure that the
company is:
1. Not acting on serving only the interests of the ultimate owners.
2. Not making decisions that are in line with generating short-term
profit instead of maximizing the wealth of the shareholders.
3. Liable and accountable in its debt funding.
4. Developing a sustainable solution to the exhaustion of its sources.
5. Not making any transactions that can be considered illegal in a
normal business context.

The committee will be composed of at least two independent directors

picked by the management, and the creditors and minor shareholders will
be able to choose two people to nominate in the committee each, six all in
all. This is to avoid group thinking.

VI. CONCLUSION AND RECOMMENDATION

 Out of the three alternatives, the one that is best in line with the
problems of the company is the third one:

Establishment of a committee within the company that ensures

independent and objective decision-making of the management and
the owners.

This is the most encompassing of all the three alternatives. This

addresses most of the problems that the company is facing including the
incompetency in East Asian business models, the opaque decision-
making of the company, the direct influence of the “ultimate owners”, the
debt entrenchment and transactions with related transactions, and the
weak and lax legal procedures in the countries involved.

The problem of APP is one of the many global problems that further
explain the complexity of debt entrenchment and financial expropriation. It
tackles the importance of the role of cultural and geographic location of
the countries in which businesses are operating in such as the pyramid
structure ownership control in the East Asian business models. This
problem also highlights the role of the legal procedures and political
frameworks of these countries in relation to shaping and affecting the
businesses in it such as the lax and weak frameworks in these countries.

In order to solve the problems that face the company, the sources and
roots of these problems should be addressed and acknowledged first-
hand. Because some of these are cultural entrenchment that is not liquid
and is probably not going to adjust for the business operations, the
management should initiate a solution that is within its control and is
feasible in relation to solving the issues.

Therefore, through the creation of this committee, these urgent problems

are going to be addressed firsthand.

Recommendation

In relation to the solution suggested, this case recommends the following:

1. The management should ensure a strengthened and strict

implementation of the responsibilities of the committee to avoid the usual
problems of lack of transparency and constant conflict of interests.

2. This committee should be given enough space for an efficient function.

This means that they should not be under rules that restrict them from
allowing them to perform their responsibilities and duties more effectively.

3. This committee should submit annual reports to the creditors and

shareholders subject to approval of the senior management which contain
the necessary information about the condition of the company that is in
line with the interests of the creditors and the shareholders.

4. Thiscommittee should be independent and objective and work hand-in-

hand with the management for a good corporate governance within the
company which ensures that at all times, they would make decisions that
would serve the best interests of the stakeholders through maximizing
their wealth.