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International Cases of
Corporate Governance
Jean Jinghan Chen
International Cases of Corporate Governance
“This book of corporate governance case studies provides a nice complement

to existing courses or modules covering the topics of corporate governance,
business ethics, and/or corporate social responsibility. There are several well
established corporate governance textbooks in existence that included some
cases, but this is one of the first stand-alone case books of which I am
aware other than Mallin’s casebook published back in 2006. Many of us
in the field of comparative corporate governance have our own conceptual
framework from which we describe and explain corporate governance behavior
and outcomes. This book provides the instructor with quite a bit of freedom to
frame the issues around their own personal perspective. Furthermore, in these
days of inflated book prices, students should benefit from a text that is fully
utilized. I especially liked the relative recency of these cases—all case studies
are less than ten years old. Given the turmoil within the global economy and
deglobalization trends during the past decade, this book is timely. I also liked
that fact that there was a wide range of geographic contexts captured in these
cases given the Western bias in previous texts and case studies. Finally, the
range of issues is impressive, ranging from dealing with accounting scandals,
to ownership and control rights conflicts, to business ethics and corporate
social responsibility challenges. If you are looking for a timely casebook on
comparative corporate governance, this text should serve you well.”
—William Q. Judge, Old Dominion University, USA; Dean of International
Corporate Governance Society Fellows.
“The release of Professor Chen’s new book of international corporate gover-

nance cases comes at a time when these new challenges are still defining the
new business landscape. Companies are now expected to be more transparent
and accountable to their stakeholders. This book not only provides us the
insight of how and why corporate scandals occur, but also provides insight
into the recurrence of corporate governance failures, offers practical guidance
for remedying options. Practitioners and policy-makers will certainly learn,
share and benefit from the critical thinking this book has provided.”
—Qin Zou, Vice President, Stanley Black and Decker, USA
Jean Jinghan Chen
International Cases
of Corporate
Governance
Jean Jinghan Chen
University of Macao
Macao, China
ISBN 978-981-19-3237-3 ISBN 978-981-19-3238-0 (eBook)

https://doi.org/10.1007/978-981-19-3238-0
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Preface
Corporate governance cases and their ramifications have been in the

public eye over the last 30 years. However, although significant atten-
tion has been given to corporate governance failure, corporate scandals
have continued to occur as a result of poor corporate governance. It
can be argued that there is no ‘one size fits all’ corporate governance
approach in reality. This aspect makes corporate governance an intriguing
area for study. Therefore, up-to-date case studies play a valuable role
in affording a deeper understanding of corporate governance issues in
different circumstances. Case-study analysis can also assist social scien-
tists in the development of theories and hypotheses, which can then be
subject to more rigorous scientific investigation.
This book intends to provide insights into current issues in corpo-
rate governance by examining twelve international cases where corporate
governance is seen to be an issue. The cases are designed to introduce
the reader to a factual ‘real life’ episode that has corporate governance
implications. They also reinforce the reader’s understanding of ‘good
corporate governance’ in each institutional setting, although there are not
always ‘right’ and ‘wrong’ answers. The case studies also seek to shed light
v
vi Preface
on why there are continuing incidences of corporate scandals, to what

extent these are a corporate governance failure, and in which ways corpo-
rate governance—and the behaviour of those involved in ensuring good
governance and an ethical culture in their business—may be improved
in the future.
The book can be thought of as a supplementary source of mate-
rial, which encourages discussion of various issues identified in the case
studies in seminars and classes. It is hoped the cases will stimulate interest
and motivate discussion on the reasons why corporate governance failed
or was seen to be inadequate.
Macao, China Jean Jinghan Chen

Acknowledgments
I would like to thank everyone who has encouraged and supported me

in writing this book.
First, my appreciation goes to Dennis Fai Lim Loi, Paying Song,
Xinxian Chen, Lingyu Huang, Shiqiang Chen and Ling Yang for
providing excellent research support in data collection and preparation
of the cases. I am also grateful for the financial support of the University
of Macau (CPG-2022-00022).
Thanks also go to Palgrave Macmillan Press, who contributed to the
publication of this book.
A heartfelt thanks to family and friends who have always been there
for me. A special thank you to my husband, Professor Zhili Sun, who has
accompanied me during the pandemic outbreak period and has always
been a source of power throughout my professional career and family
life. I have always felt your love, patience and devotion at all times.
vii
Contents
1 Introduction 1
References 8
2 Carillion PLC 11
John McDonough 13
Carillion’s Initial Problems 14
Carillion’s Corporate Governance Issues 15
The Cost of Carillion’s Collapse 22
Lessons Learnt from Carillion 23
Discussion Questions 25
References 25
3 Tesco Plc 27
A Brief History of Tesco 28
Retailer Competition 31
References 42
ix
x Contents
4 Volkswagen 45
Background 46
Volkswagen’s Corporate Government Issues 55
Lessons Learnt from Volkswagen’s Scandal 61
References 64
5 Wirecard 67
Wirecard’s Rise and Fall 68
Wirecard’s Corporate Governance Failure 72
Lessons Learnt from Wirecard’s Corporate Governance
Failure 78
References 81
6 Stora Enso 83
Stora Enso’s History and Early CSR Practices 84
Mistreatment of Local Landowners in China 86
Child Labour in Joint Venture in Pakistan 87
Improvement of CSR Practices After the Ethical Crisis 89
Lessons Learnt from Stora Enso’s Corporate Governance
Issues 91
References 95
7 Wells Fargo 97
The Scandal 99
Wells Fargo’s Corporate Governance Failure 104
Lessons Learnt from Wells Fargo’s Corporate
Governance Failure 112
References 114
8 CommInsure 117
The Scandal 120
CommInsure’s Corporate Governance Issue 122
Lessons Learnt from CommInsure 130
Contents xi

References 132
9 Toshiba (Japan) 135
The Scandal 137
Toshiba’s Corporate Governance Issues 140
Lessons Learnt from Toshiba’s Corporate Governance
Failure 152
References 155
10 Gome 157
GOME Proxy Contest 158
Damage Caused by the Proxy Contest 162
Lessons Learnt from GOME’s Proxy Contest 170
References 175
11 Alibaba 179
Alibaba’s Expansion Strategy and Business Model 180
Alibaba’s Ownership and Control 183
Discussion on the Impact of Alibaba’s Partnership
System 191
References 197
12 Lee Kum Kee 201
History of LKK 202
LKK’s Governance Challenges 206
LKK’s Performance Reward and Succession 212
LKK’s Family Governance vs. Business Governance 213
References 217
13 Yunnan Baiyao 219
History of the Company 220
Mixed Ownership Reform (2016–2019) 223
xii Contents
Performance Improvement Driver: Corporate

Governance 229
Yunnan Baiyao’s Corporate Governance Evolution 235
References 238
14 Conclusion 241
Common Causes of Corporate Governance Failure 242
Three Special Cases of Ownership and Control 244
Concluding Remarks 244
Index 245
Abbreviations
APRA Australian Prudential Regulatory Authority

ASAC Assets Supervision and Administration Commission
ASG Automotive Systems Group
ASIC Australian Securities and Investments Commission
B2B Business-to-Business
B2C Business-to-Consumer
BDO BDO Unibank Inc.
BPI Bank of the Philippine Islands
BSP Bulleh Shah Packaging
C2C Consumer-to-Consumer
CAM Critical Audit Matters
CARB California Air Resources Board
CBA Commonwealth Bank of Australia
CCP Chinese Communist Party
CDP Census Designated Place
CEBS Committee of European Banking Supervisors
CEO Chief Executive Officer
CFO Chief Financial Officer
CFPB Consumer Financial Protection
CFPS Consumer Financial Protection Bureau
xiii
xiv Abbreviations
CIO Credit and Investment Ombudsman

CMA Competition and Markets Authority
COO Chief Operating Officer
CSR Corporate Social Responsibility
CSRC China Securities Regulatory Committee
DJSI Dow Jones Sustainability World Index
DPA Deferred Prosecution Agreement
EDR External Dispute Resolution
EPA Environmental Protection Agency
EPS Earnings Per Share
ERM Enterprise Risk Management
ESG Environmental, Social and Governance
FCA Financial Conduct Authority
FLDC Family Learning & Development Centre
FRC Financial Reporting Council
FSB Financial Stability Board
GLT Group Leadership Team
GMV Gross Merchandise Volume
HHI Herfindahl–Hirschman Index
HKEX Hong Kong Stock Exchange
ICA Insurance Contracts Act
ICCT International Council on Clean Transportation
ICGN International Corporate Governance Network
IPO Initial Public Offering
KPF Kunming Pharmaceutical Factory
KPI Key Performance Indicator
LKK Lee Kum Kee
LTI Long-Term Incentives
NED Nonexecutive Director
NYSE New York Stock Exchange
OCC Office of the Comptroller of the Currency
ODM Original Design Manufacturers
OECD Organisation for Economic Co-operation and Development
PCAOB Public Company Accounting Oversight Board
PCS Personal and Client Solutions
PE Private Equity
PRA Prudential Regulation Authority
R&D Research and Development
RMB Renminbi
Abbreviations xv
ROA Return on Assets

ROE Return on Equity
SEC Securities Exchange Commission
SFO Serious Fraud Office
SKU Stock Keeping Units
SLA Standard Life Award
SME Small Medium-Sized Enterprise
SOE State-Owned Enterprise
STI Short-Term Incentives
TDF Technology Development Fund
TSR Total Shareholder Return
TTIPC Taiwan Toshiba International Procurement Corporation
UN United Nations
VC Venture Capital
List of Figures
Fig. 2.1 Carillion’s Share Price, February 2017–January 2018

(Source Datastream) 12
Fig. 2.2 Carillion dividend pay-out, December 1999–December
2016 (Source Datastream) 17
Fig. 3.1 Total number of Tesco stores worldwide (Source Tesco’s
annual reports from 2009 to 2020) 30
Fig. 3.2 Grocery market share in the UK (in percentages)
(Source Kantar UK grocery market share) 33
Fig. 4.1 The function of engine control software devices
(Source volkswagenag.com) 50
Fig. 4.2 Stock market reaction to Volkswagen’s emissions
scandal (Source marketwatch.com) 53
Fig. 4.3 Volkswagen’s annual net income, 2005–2020
(Source macrotrends.net) 54
Fig. 5.1 Wirecard’s share price (Source Compiled
from Bloomberg [2020]) 70
Fig. 5.2 Wirecard’s share price (Source Rubio [2020]) 71
Fig. 5.3 Wirecard’s stock plunge (Source Felsted [2014]) 71
xvii
xviii List of Figures
Fig. 7.1 The stock price of Wells Fargo’s share price

(Source http://yahoofinance.com) 103
Fig. 7.2 Board committee structure of Wells Fargo 106
Fig. 8.1 CBA’s Executive Compensation Structure (2015)
(Source CBA’s 2015 Annual Report) 126
Fig. 9.1 Toshiba’s share price, November 2014 to September
2015 (Source NASDAQ) 140
Fig. 10.1 GOME’s share price (HK$) (Source Yahoo finance) 168
Fig. 12.1 Family tree of LKK (Source Ward [2016]) 203
Fig. 12.2 LKK’s Governance Structure (Source Ward [2016]) 208
Fig. 13.1 Yunnan Baiyao’s ownership structure
before and after listing (Source Change Consulting
[2020]) 222
Fig. 13.2 Baiyao Group’s revenue and profit before the mixed
ownership reform (Source Compiled from Yunnan
Baiyao’s Annual Reports [2012–2016]) 224
Fig. 13.3 Change in ownership structure in the first-stage mixed
ownership reform (Source Change Consulting [2020]) 225
Fig. 13.4 Baiyao Group’s ownership structure
before and after the merger (Source Change
Consulting [2020]) 226
Fig. 13.5 Process of the second-stage mixed ownership reform
(Source Change Consulting [2020]) 227
Fig. 13.6 Structure of the Board of Directors after the two-stage
mixed ownership reform (July 2019) (Source Change
Consulting [2020]) 231
Fig. 13.7 Total Compensation of the management team of Baiyao
Group (Million RMB) (Source Compiled from Yunnan
Baiyao’s Annual Reports [2011–2018]) 234
List of Tables
Table 2.1 Carillion’s nonexecutive directors 19

Table 2.2 Carillion: Key events 24
Table 3.1 Tesco’s Audit Committee 37
Table 3.2 Tesco: Key events 41
Table 4.1 Volkswagen’s deliveries to customers by market (e
thousand units) 48
Table 4.2 Volkswagen’s board of directors 56
Table 4.3 Ranking of automobile manufacturers by vehicle
production 57
Table 4.4 Volkswagen: Key events 63
Table 5.1 Wirecard’s key financial metrics (in e Million,
except for EPS and percentages) 70
Table 5.2 Wirecard: key events 80
Table 6.1 Governance bodies/members involved in CSR
activities at Stora Enso in 2002 85
Table 6.2 Stora Enso: key events 94
Table 7.1 Board of directors of Wells Fargo (2014) 105
Table 7.2 Wells Fargo: Key events 113
Table 8.1 CBA’s financial highlights, 2014–2021 (AU$ million) 118
Table 8.2 Insurance revenue, 2014–2021 (in AU$ million) 119
xix
xx List of Tables
Table 8.3 Discontinued operations in 2018 (in AU$ million) 120

Table 9.1 Key Financial Indicators of Toshiba (2019–2021).
(100 Million Yen) 136
Table 9.2 Toshiba’s financial review before the 2008 financial
crisis 138
Table 9.3 Restatement of financial results (2008–2014Q3)
(100 Million Yen) 140
Table 9.4 Adjustments for revenue and profit before tax
under the percentage of completion method (Unit:
100 Million Yen) 142
Table 9.5 Profit and loss adjustments involved in Toshiba’s PC
business (Unit: 100 Million Yen) 144
Table 9.6 Profit and loss adjustments related to PC parts
transactions (Unit: 100 Million Yen) 146
Table 9.7 Toshiba’s board members and their positions 146
Table 9.8 Toshiba’s executive compensation (Unit: 100 Million
Yen) 151
Table 10.1 Development of GOME’s proxy contest 163
Table 10.2 GOME’s board of directors 166
Table 11.1 Alibaba’s ownership structure after the first three
rounds of financing 184
Table 11.2 Alibaba’s shareholder structure after the fourth round
of financing 185
Table 11.3 Alibaba’s voting rights in October 2010 186
Table 11.4 Change in Alibaba’s equity concentration 190
Table 12.1 LKK: Key events 202
Table 12.2 Information about the LKK business 206
Table 13.1 Performance before and after the two-stage mixed
ownership reform 228
Table 13.2 Change in ownership before and after the two-stage
mixed ownership reform 229
Table 13.3 Supervisory board of Baiyao Group after the reform 231
Table 13.4 Baiyao Group’s management team after the reform 232
Table 13.5 Compensation of top executives of Baiyao Group
and Fosun Pharma 233
Table 13.6 Yunnan Baiyao Group: key events 237
1
Introduction
Corporate governance has quickly become a topic of interest over the last
two decades, particularly since the collapse of Enron in 2001 and the
financial problems faced by companies in various countries during the
2008 subprime mortgage crisis, especially in the US and the UK. These
cases of corporate collapse have had an adverse effect on investors and an
economic impact on the local and international communities in which
the failed companies operated. What were the causes of these collapses?
What can be done to prevent such collapses from happening again?
How can investor confidence be restored? The answers to these questions
are all linked to corporate governance. Effective corporate governance
can prevent such events from happening again and restore investor
confidence by improving corporate accountability and implementing
responsible and efficient management.
The development of corporate governance has attracted the atten-
tion of governments, nonprofit organisations, industry and academia.
The last 20 years have seen the continued development of corporate
governance codes and principles by governments in individual coun-
tries, such as the Cadbury Report (Cadbury, 1992) and the Sarbanes–
Oxley Act (2002), and by international nongovernmental organisations,
© The Author(s), under exclusive license to Springer Nature 1
J. J. Chen, International Cases of Corporate Governance,
https://doi.org/10.1007/978-981-19-3238-0_1
2 J. J. Chen
such as the OECD Principles of Corporate Governance set by the

Organisation for Economic Co-operation and Development (OECD)
(OECD, 1999, 2009, 2015) and the International Corporate Gover-
nance Network (ICGN) (ICGN, 2008, 2009, 2010). Regulators in
different countries, such as the Financial Conduct Authority [FCA] and
the Prudential Regulation Authority [PRA]1 and the Financial Reporting
Council (FRC) in the UK, the Securities Exchange Commission (SEC)
and the Public Company Accounting Oversight Board (PCAOB) in the
US and the China Securities Regulatory Committee (CSRC) in China,
have significantly improved the monitoring and regulation of securities
markets in their respective countries and have imposed stricter public
listing requirements, especially since the global financial crisis of 2008.
Their aim is to strengthen external corporate governance mechanisms
to make them more effective. In academia, corporate governance theo-
ries have been established, dominated by agency theory, transaction cost
economics, stakeholder theory and stewardship theory. Many studies
have also been published in top accounting, finance and management
journals with the aim of improving current theories or providing empir-
ical evidence of how corporate governance affects firm operations and
stock markets.
However, despite the considerable attention given to corporate gover-
nance, corporate scandals continue to emerge due to weak corporate
governance, especially scandals related to ownership structure, trans-
parency and disclosure, control and accountability. Furthermore, it is
also argued that the most appropriate form of board structure should
be in place that can prevent such scandals from occurring in the
future. Robust corporate governance mechanisms are important for all
businesses, large and small, private and public. As mentioned, major
corporate collapses have occurred over the last 20 years, such as Baring
Bank and Polly Peck in the 1990s, Enron, WorldCom and Parmalat in
the early 2000s, Lehman Brothers, Northern Rock and AIG in the late
2000s, especially during and after the 2008 global financial crisis, and
Olympus, GOME, Tesco, Volkswagen and Carillion in the 2010s. This
1 The Financial Conduct Authority [FCA] and the Prudential Regulation Authority [PRA]
replaced the Financial Service Authority [FSA] in 2013.
1 Introduction 3
suggests that most national corporate governance guidelines and regula-

tory frameworks and agencies offer a ‘one size fits all’ approach, which
is not effective. This approach may promote good governance, but it
does not guarantee that a company’s governance mechanism will work
effectively and prevent poor management.
This book presents 12 international corporate governance scandals
that occurred in the 2010s, including 5 European cases, 1 American
case, 1 Australian case, 1 Far Eastern case and 4 Chinese cases (including
Hong Kong). They cover a wide range of industries and both public
and private (family) companies. The majority of the cases studied expe-
rienced problems with their corporate governance mechanism, although
not all of them collapsed. This book has three main objectives. First, it
seeks to provide insight into the recurrence of corporate governance fail-
ures. Second, it aims to offer practical guidance for remedying failures of
corporate governance. Third, it intends to provide new and instructive
suggestions for further theoretical and empirical research.
The book is divided into 14 chapters, with this chapter presenting the
introduction to the book, followed by 12 case studies (Chapters 2–13)
and a final chapter (Chapter 14) offering a synthesis of the conclusions.
Chapter 2 discusses the case of Carillion Plc. Carillion is a British
multinational facilities management and construction services company.
Its facilities management services include areas such as hospital main-
tenance and cleaning services, engineering design and project manage-
ment services. Its construction activities cover a wide range of sectors,
including healthcare (such as new hospitals), education, government
(central and local), defence, and commerce. Carillion struggled finan-
cially and filed for bankruptcy on 15 January 2018 due to its inability
to repay its debt, leaving hundreds of projects in doubt and thousands
of private sector workers at risk of losing their jobs and pensions. Several
stakeholder groups were severely affected by the collapse of Carillion,
including (current and former) employees (its pension scheme was also
badly affected); subcontractors, including small firms; other creditors;
and those who use its buildings, such as people awaiting treatment at
the new hospitals whose completion has been delayed.
Chapter 3 discusses the issues arising from the false accounts of Tesco
Plc. In 2017, Tesco, the British multinational grocery and retail giant
4 J. J. Chen
headquartered in England, admitted that it had overstated its 2014 profit

by £326 million. This accounting fraud sent shock waves through various
industries and caused an immediate drop in the market value of Tesco
shares and bonds, estimated at £2 billion. It reveals that Tesco’s corporate
governance failure was one of the key factors that sparked its accounting
scandal.
Chapter 4 addresses the unethical behaviour of Volkswagen, one of
the world’s leading automobile manufacturers and the largest in Europe.
In September 2015, Volkswagen was exposed by the International
Council on Clean Transportation (ICCT), the California Air Resources
Board (CARB) and the US Environmental Protection Agency (EPA) for
its long-term violation of professional ethics and the illegal pollution
behaviour of its management team. Volkswagen agreed to plead guilty
to the emissions charge and pay a US$4.3 billion fine; six Volkswagen
executives were charged on 11 January 2017. The scandal revealed the
ineffective supervision and control management of Volkswagen’s two-tier
board structure, as well as the company’s lack of ethical culture, environ-
mental awareness and corporate social responsibility (CSR). This scandal
shocked the entire auto industry, and Volkswagen’s unethical behaviour
damaged its global brand image.
Chapter 5 addresses the financial scandal of Wirecard AG, a German
financial technology giant. Wirecard filed for insolvency in June 2020
after revealing that e1.9 billion in cash was missing from its balance
sheet. This event followed more than a decade of lies and systematic
fraud, which finally caught up with the company’s senior manage-
ment in 2020. Wirecard’s chief executive officer (CEO) Markus Braun
announced his resignation on 19 June 2020 and was arrested on 23
June on suspicion of false accounting and market manipulation. The
company’s chief operating officer (CFO), Jan Marsalek, disappeared and
remains a fugitive wanted by the German police. Institutional investors
and syndicated lenders experienced huge losses, and people’s confidence
in FinTech investments was hit hard. The media refer to the Wirecard
scandal as the ‘German Enron’.
Chapter 6 examines the relationship between the strategic decision-
making and CSR practice of Stora Enso Plc. Headquartered in Helsinki,
Finland, Stora Enso was established in 1998 through the merger of
1 Introduction 5
the Swedish mining and forestry products company Stora AB and the
Finnish forestry products company Enso Oyj. Stora Enso is a leading
renewable materials company that provides renewable solutions in pack-
aging, biomaterials, wood construction and paper for a wide range of
industries. However, despite its steady progress in sustainable devel-
opment and environmental protection, during the 2012–2014 period,
Stora Enso was accused of human rights and business ethics violations,
including mistreatment of local landowners in China and child labour
in a joint venture company in Pakistan. These ethical issues forced
Stora Enso to adopt a more responsive and more involved corporate
governance approach to CSR communication and behaviour.
Chapter 7 discusses the case of Wells Fargo, an American multi-
national financial services company headquartered in San Francisco,
California. It was the world’s largest commercial bank by market value
in 2015 and ranked 30th in Fortune 500’s 2015 rankings of America’s
largest corporations. However, in September 2016, Wells Fargo was
exposed by the media and legal authorities after an investigation into
the bank’s long-term illegal sales practices. Employees had opened up to
2 million unauthorised accounts without customers’ consent and then
charged fees to unknowing customers. The bank’s aggressive goal setting
was blamed for creating a climate in which employees felt pressured
to engage in unethical sales practices. Government authorities imposed
heavy fines on the company between 2016 and 2018, resulting in the
closure of more than 400 of its approximately 6000 branches by the end
of 2018. Many employees lost their jobs, and the company lost a large
amount of investments due to the loss of trust of investors.
Chapter 8 discusses the case of CommInsure, which is one of
Australia’s largest life insurance companies. CommInsure is an insurance
arm of the Commonwealth Bank of Australia (CBA), the largest bank
in Australia. In March 2016, a whist-leblower at CommInsure disclosed
to the media the unethical behaviour of the company, which had altered
health assessments or medical opinions to avoid life insurance payments
and destroyed client files. CommInsure experienced a significant drop
in its insurance revenue and was classified as a discontinued operation
in 2018. CommInsure was eventually sold to Fuwei in 2018 and to the
Hollard Group in 2021.
6 J. J. Chen
Chapter 9 examines the case of Toshiba, which was founded in Tokyo,

Japan, in 1939 by the merger of the Tokyo Electric Power Company and
the Shibaura Engineering Company. As one of Japan’s giants, Toshiba
was long admired by the public. However, in 2015, an Independent
Investigation Committee discovered that Toshiba had committed finan-
cial fraud, including overstating its net income and false accounting
treatment from 2008 to 2015 induced by unrealistic growth and profit
targets set by the company’s presidents. Toshiba was delisted and was
forced into bankruptcy in 2017.
Chapter 10 discusses the case of GOME, a Chinese household appli-
ance retailer chain and one of the largest household appliance retailers in
mainland China. GOME opened its first store in 1987 and started oper-
ating in different regions in 1999. It was listed on the Hong Kong Stock
Exchange (HKEX) in 2004. In 2010, GOME had more than 1200 stores
in large and medium-sized cities in China, with an annual sales revenue
of 50.9 billion yuan. The fight over GOME’s control rights between the
company’s CEO, Chen Xiao, and its founder, Huang Guangyu, who was
imprisoned in 2008, had a major negative influence on the development
of the company. In particular, GOME’s proxy contest during the late
2000s and early 2010s obstructed its business operations and hindered
its development at the expense of shareholders. Key underlying corpo-
rate governance problems, such as an overpowered chairman of the board
and a lack of independent directors and representatives of institutional
shareholders, contributed to the situation.
Chapters 11–13 examine three cases that differ from the other cases:
Alibaba Group, a well-established Chinese Internet provider; Lee Kum
Kee (LKK), a Hong Kong family business; and Yunnan Baiyao Group
(Baiyao), originally established as a family business but corportised as an
SOE and then publicly listed in the Chinese Stock Market in mainland
China. Alibaba presents a case of using a partnership system to control
the company and raise funds. LKK established a family governance struc-
ture and family constitution to ensure its growth and succession. Finally,
the case of Baiyao illustrates the evolution of ownership structure from a
family business to a state-owned enterprise (SOE) and finally to a public
company.
1 Introduction 7
The Alibaba Group was established in Hangzhou, China, in 1999 by

Ma Yun (internationally known as Jack Ma). It was listed on HKEX
in November 2007 and the New York Stock Exchange (NYSE) in
September 2014. Core efforts in e-commerce, cloud computing, digital
media and entertainment and innovation constitute Alibaba’s business.
Furthermore, Ant Group, an unconsolidated related party and the
parent company of Alipay, provides payment and financial services to
Alibaba users and merchants. The gross merchandise volume (GMV)
transacted on Alibaba for fiscal year 2021 was RMB 8119 billion
(US$1280 billion), with an annual number of active consumers reaching
a milestone of more than 1 billion, including 891 million consumers
across China and approximately 240 million consumers outside China
(Alibaba Group, 2021). A distinctive feature of Alibaba’s ownership is
the partnership system adopted by Jack Ma to control the company and
raise funds. This partnership system has brought corporate governance
merits to Alibaba, such as a division of labour between management and
external investors, shared value and a shared corporate culture among
partners, thereby enhancing team cohesion and focusing on common
goals for Alibaba’s long-term development.
LKK was founded in 1888 and started as a small manufacturer of
oyster sauce. The enormous expansion and diversification of the business
in the 1980s and 1990s and the increasing complexity of the multi-
generational family tree in the 2000s led the Lee family to implement
a set of institutional and corporate governance measures for the busi-
ness’s growth and succession. The reforms included the development
of a family governance structure and the creation of a family constitu-
tion. This system is very different from a traditional family governance
structure, which depends on paternal authority. It puts more emphasis
on creating communication channels and building trust between family
members. This governance mechanism has laid a solid foundation for the
future development of the company and ownership succession for future
generations. In 2018, the LKK Group became the world’s largest manu-
facturer of oyster sauce. Forbes’ Hong Kong’s Richest 2021 revealed that
LKK’s current chairman, Man Tat, was among the top 10 richest people
in Hong Kong, with the Lee family’s wealth reaching US$17.4 billion
(Simpson, 2021).
8 J. J. Chen
Yunnan Baiyao was first established as a family business in 1933 in

Yunnan Province, China, and it became an SOE in the 1960s before
becoming a public company with the state as its majority shareholder
in 1993. This case examines each stage of ownership reform and the
problems associated with its status as an SOE and state-controlled
listed company. In particular, Yunnan Baiyao underwent a two-stage
mixed ownership reform between 2016 and 2019. This reform reduced
state control by sharing control with institutional investors. The shift
towards shared ownership triggered major changes in corporate gover-
nance, including an increase in the number of private representatives
on the board, the introduction of a professional management system
and the establishment of an incentive-based compensation system. These
changes provided a strong driving force for the continuous improvement
of Yunnan Baiyao’s performance.
Chapter 14 concludes the book by bringing together the arguments
and issues raised in the 12 cases.
References
Alibaba Group. (2021). 2021 Annual report. Alibaba Group. https://www.ali
babagroup.com/reports/fy2021/ar/ebook/en/index.html
Cadbury, A. (1992). Corporate governance overview. World Bank Report.
International Corporate Governance Network. (2008). Statement on the global
financial crisis. ICGN.
International Corporate Governance Network. (2009). Second statement on the
global financial crisis. ICGN.
International Finance Corporation. (2010). Navigating through crises: A hand-
book for boards. IFC.
Organisation for Economic Co-operation and Development. (1999). Principles
of corporate governance. OECD.
Organisation for Economic Co-operation and Development. (2009). Corporate
governance lessons from the financial crisis. OECD.
Organisation for Economic Co-operation and Development. (2015).
G20/OECD principles of corporate governance. OECD.
1 Introduction 9
Sarbanes–Oxley Act. (2002). Sarbanes-Oxley Compliance Professionals Associ-

ation. Available at https://sarbanes-oxley-act.com
Simpson, A. (2021). Hong Kong’s Richest 2021: 10 Billionaires who topped
the Forbes list. Tatler Asia. https://www.tatlerasia.com/power-purpose/wea
lth/hongkong-billionaires-2021-forbes
2
Carillion PLC
On 15 January 2018, the UK construction and services company Caril-

lion was legally forced to file for compulsory liquidation when banks
refused to provide additional financial support to pay off the company’s
debt, leaving hundreds of projects in doubt and thousands of private
sector workers at risk.
Carillion’s financial problems first became public on 10 July 2017,1
when the company issued its first profit warning in its trading update for
the first half of 2017 and announced a contract provision of £845 million
(including £375 million for the UK and £450 million for overseas
markets). In addition, it suspended its 2017 dividends to shareholders
to immediately reduce the level of net debt (Clarfelt, 2017). Mean-
while, Richard Howson stepped down as CEO and was replaced by Keith
Cochrane as an interim CEO in 2017. This series of bad news led to an
immediate drop in the market value of Carillion shares of almost 40%
(see Fig. 2.1).
1 See the Trading Updates in 2017. https://www.investegate.co.uk/carillion-plc--clln-/rns/trading-

statement/201707100700105229K/.

https://doi.org/10.1007/978-981-19-3238-0_2
12
J. J. Chen
Fig. 2.1 Carillion’s Share Price, February 2017–January 2018 ( Source Datastream)
2 Carillion PLC 13
According to Carillion’s annual report in 2016, Carillion was the

UK’s second largest construction and services company at its peak, with
43,000 employees worldwide and over 18,000 in the UK. The collapse
of Carillion sent shock waves through the industry, extending all the way
to the government, as the company held 420 UK public sector contracts
(Hopper, 2019), including the construction of hospitals, highways and
railways, the maintenance of army houses and the cleaning of schools
and prisons.
John McDonough
Carillion was founded in July 1999, following a split from Tarmac, the
UK construction and aggregates group established in 1903. The new
company aimed to focus on construction and facility management. John
McDonough was appointed CEO in 2000.2 He started his career at
Massey Ferguson in 1972 and joined Johnson Controls in 1991 as UK
Managing Director of Automotive Systems Group (ASG). His career
progressed well, and he became Vice President of Integrated Facilities
Management, Europe, the Middle East and Africa.
The founding of Carillion coincided with difficult times for the UK
construction industry. John McDonough aimed to develop activities
related to private finance, infrastructure management and integrated
facilities management while developing Carillion’s construction activi-
ties on a selective basis. Specifically, Carillion’s expansion was primarily
achieved through a series of acquisitions. The acquisition of competi-
tors such as Mowlem3 in 2006, Alfred McAlpine4 in 2008 and the
heating and renewable energy provider Eaga in 2011 limited competition
for major contracts. Therefore, in the early 2000s, Carillion expanded
rapidly, and its revenue peaked between 2007 and 2009, making the
2 Taken from Carillion’s annual report in 2000.

3 Movlem plc was one of the largest constructions and civil engineering companies in the UK.
It was bought by Carillion in February 2006.
4 Alfred McAlpine plc was a British construction firm headquartered in Hooton, Cheshire. It
specialised in road building, and constructed over 10% of Britain’s motorways. It was acquired
by Carillion in 2008.
14 J. J. Chen
company the second largest construction and services company in the

UK.
In 2014, Carillion attempted to become the UK’s largest construc-
tion company by entering into a merger deal with the country’s largest
existing construction company, Balfour Beatty. The proposed merger
involved an offer of £3 billion (Hoang, 2014). After several rounds
of negotiations, Balfour Beatty’s board of directors rejected Carillion’s
offer, arguing that the deal was not in the best interests of its share-
holders (Rankin, 2014). Further negotiations should have ensued after
Balfour Beatty’s rejection, but Carillion announced that it would no
longer pursue a merger with Balfour Beatty and rejected the idea of a
hostile takeover.
Carillion’s Initial Problems

Acquisition and Debt
Carillion’s problems can be attributed to its expansion strategy. Specif-

ically, most of its acquisitions were financed primarily by debt, and
the companies it acquired, such as Mowlem, McAlpine and Eaga, all
suffered losses after the takeover. Carillion’s rising debt and lack of
growth prompted investors to hold short positions or bet against Caril-
lion shares, reflected in the steady increase in short positions on Carillion
shares after 2012.
Excessive Outsourcing
In the 1990s, a number of economic and structural changes with a

profound impact on the UK construction industry, in particular the
recession of the early 1990s, led to an imbalance between supply and
demand in the industry. Specifically, too many firms were competing
for too few contracts, so large firms started to adopt the lowest cost bid
strategy and shifted the associated risks to their subcontractors to stay in
the market.
2 Carillion PLC 15
Carillion’s overreliance on subcontracting allowed the company to

manage less capital, such as fixed assets and working capital for wages and
materials, as the prime contractor. In this way, Carillion could increase its
return on capital, with more revenue and less capital at stake, presenting
a prosperous image to its shareholders. However, this increased return
on capital had a detrimental effect, as Carillion’s reduced capital was
insufficient to cover unforeseen risks arising from the subcontracted
work.
Carillion’s Corporate Governance Issues

Carillion’s huge debt and engagement in low-margin, unprofitable
projects were directly responsible for its collapse. Carillion purposely
secured low-cost jobs that barely covered its total cost and then subcon-
tracted a substantial portion of the work to subcontractors to give the
impression of a growing business with good prospects, hiding its cash
flow problem with upfront payments. However, this strategy created
inherent risk that its board of directors, investors and auditors seem to
have been oblivious to. Moreover, the UK’s corporate governance code
is based on shareholder primacy,5 and Carillion’s directors decided to
increase dividends every year, with investors receiving high dividends and
directors receiving high bonuses. From 2012 to 2016, Carillion’s oper-
ating cash flow was £313 million, and the total amount of dividends
paid was £376 million (Mor, 2018). It is clear that Carillion used debt to
pay dividends and failed to create a board environment in which execu-
tive decision-making was carefully scrutinised. As a result, the company’s
directors drove Carillion to the point of collapse. Further investigation
by the Parliamentary Select Committee in 2018 revealed that Carillion’s
management lacked the basic financial knowledge required to do their
job well and that the board was either negligently ignorant of Carillion’s
corrupt culture or complicit in it. As stated in the government report on
5 Shareholder primacy is a shareholder-centric form of corporate governance that focuses on

maximising the value of shareholders before considering the interests of other parties.
16 J. J. Chen
Carillion,6 ‘Carillion’s board are both responsible and culpable for the
company’s failure’.
Executive Remuneration
Despite Carillion’s financial issues, the board of directors decided to

increase dividends each year since 1999 to camouflage the company’s
low investment levels, declining cash flow, rising debt and growing
pension deficit and thereby create an image of a healthy and successful
company. Figure 2.2 shows Carillion’s dividend scheme since 1999.
Carillion’s dividend scheme appears to have little to do with its volatile
performance.
Nevertheless, the upwards trend in dividend payouts raised serious
concerns among institutional investors such as Kiltearn and Standard
Life Aberdeen (SLA). Investors began to withdraw their investment after
realising that the continued increase in dividends meant that Carillion
was neglecting its rising debt levels. SLA wrote a letter to Carillion
explaining that the decision to divest was due to concerns over a
number of issues, including strategy, financial management and corpo-
rate governance issues (Shoaib, 2018). SLA’s main concerns were as
follows.7
● High levels of on- and off-balance sheet debt were unlikely to be

reduced in the short term because of acquisitions and high dividends.
● A widening pension deficit (from £317 million to £663 million in
2016).
● Downwards pressure on earnings despite revenue growth thanks to
narrow margins on new businesses.
● Low cash generation.
● Unwillingness of the board of directors to change the strategic direc-
tion of the company.
6See https://publications.parliament.uk/pa/cm201719/cmselect/cmworpen/769/76903.htm.
7See the letter by Standard Life Aberdeen (SLA), https://www.parliament.uk/globalassets/doc
uments/commons-committees/work-and-pensions/Carillion/Letter-from-Standard-Life-to-the-
Chairs-regarding-Carillion-2-February-2018.pdf/.
Fig. 2.2 Carillion dividend pay-out, December 1999–December 2016 (Source Datastream)
2 Carillion PLC
17
18 J. J. Chen
Despite growing shareholder concerns about Carillion’s executive

compensation, the Remuneration Committee continuously sought to
increase bonuses while weakening clawback provisions – an arrangement
for recovering executive rewards in the event of poor performance after
payment of a bonus. ‘Carillion’s directors took huge salaries and bonuses
which, for all their professed contrition in evidence before us, they show
no sign of relinquishing’ (Select Committee, 2018).
Consider, for example, Richard Howson, who was Carillion’s CEO
from 2012 to July 2017. His annual salary and bonus in 2016 amounted
to £1.5 million, including a cash bonus of £122,612 and £231,000 in
pension contributions (Partington, 2018). Rather than aligning with the
interests of shareholders, Carillion increased the maximum bonus level
to 150% of its salary in 2016, although it was forced to lower that level
to 100% after the shareholders’ revolt (Partington, 2018).
Nonexecutive Directors (NEDs)
The collapse of Carillion also raised concerns about the duties of nonex-
ecutive directors (NEDs), as they play a crucial role on the board of
directors to protect a company and its stakeholders. Although there is
no doubt that Carillion’s NEDs were market experts, they all served
on the five subcommittees as reported in Carillion’s 2015 annual
report (see Table 2.1): the Remuneration Committee, the Nomina-
tion Committee, the Business Integrity Committee, the Sustainability
Committee and the Audit Committee.
However, Carillion’s NEDs also played important roles in other
companies, making it difficult for them to devote enough time to
fulfilling their responsibilities on each committee. For instance, Alison
Horner, Chair of the Remuneration Committee, was also Chief People
Officer at Tesco. Andrew Dougal, Chair of the Audit Committee, was
also an NED for several firms, such as Victrex Plc (2015–2018), Creston
Plc (2006–2015) and Premier Farnell Plc (2006–2015). Ceri Powell,
Chair of the Sustainability committee, was also the Vice President of
Global Exploration for Royal Dutch Shell. Finally, Keith Cochrane
2 Carillion PLC 19
Table 2.1 Carillion’s nonexecutive directors

Name of NEDs Other Roles
Alison Horner Pensions expert, Chief People of Tesco. Appointed from
December 2013. Chair in the remuneration committee
Andrew Dougal Scottish Chartered Accountant, former chief executive of
Hanson plc. Appointed from October 2011. Chair in the
audit committee
Ceri Powell Vice-President of Royal Dutch Shell. Appointed from April
2014. Serve on the audit, remuneration, nomination and
business committees, and chair in the sustainability
committee
Keith Cochrane Scottish Chartered Accountant, former chief executive of
the Weir Group and the Stagecoach Group. Appointed
from July 2015 to July 2017, then became the CEO
Source Carillion’s Annual report in 2015
was the former CEO of Weir Group and Stagecoach Group and was
appointed as an interim CEO of Carillion in July 2017.
NEDs are vital to a company because they are hired to challenge the
company’s risk management and business strategies and scrutinise reck-
less executives. They bring objective and independent perspectives and
experiences through careers in different business environments. However,
there is a fundamental paradox in the position of NEDs: if they have too
many responsibilities in a firm, they will become part of the management
team and find it difficult to provide the desired independent opinions
and monitoring. However, if they have too few responsibilities, they may
exercise insufficient control to challenge the thinking of management.
Considering that all NEDs occupied important positions in other
companies, Murdo Murchison, Chairman of Kiltearn Partners, met
Philip Green in 2014 and 2015 and doubted that Carillion’s NEDs exer-
cised effective control over the top management team. He concluded
that Carillion’s NEDs could not provide convincing evidence of their
obligations to challenge the management team.
20 J. J. Chen
Carillion’s Auditors
External Auditor
KPMG was first appointed Carillion’s external auditor in 1999. The

firm audited Carillion’s 2016 accounts, the last to be issued before
its collapse. Notably, KPMG raised concerns about Carillion’s risk of
material misstatement, including the following:
● Recognition of contract revenue

● A lease agreement of £200 million
● The value of goodwill
The items cited above by KPMG were major concerns for Caril-
lion; however, KPMG made the wrong decision to accept Carillion’s
accounting treatment on revenue recognition, which was later found to
be misstated. Peter Meehan, who led Carillion’s external audit by KPMG,
said that KPMG had previously visited the construction sites in the UK,
the Middle East and Canada and inspected progress, concluding that
KPMG had taken adequate measures to deal with revenue recognition.
However, four months after signing the audit report, KPMG was
hired to conduct a full review of Carillion’s construction projects and
concluded that they were overvalued by £845 million, which contra-
dicted the information contained in the audit report. From the above
analysis, we can see that KPMG failed to identify Carillion’s consoli-
dated financial statements and therefore its real situation. As a result,
Carillion hinted that it could file a claim worth hundreds of millions of
pounds against KPMG (Fenn, 2020). According to the report published
by AccountancyAge in 2018, KPMG received £29 million in audit fees
from Carillion over 19 years,8 which led Rachel Reeves, Chair of the
Business, Energy, and Industrial Strategy (BEIS) Committee, to suggest
8See https://www.accountancyage.com/2018/05/16/auditors-in-the-dock-over-carillion-as-rep
ort-calls-for-big-four-break-up/.
2 Carillion PLC 21
that the audit ‘appears to be a colossal waste of time and money, fit only
to provide false assurance to investors, workers, and the public’.9
Internal Auditor
Carillion’s internal auditor was another Big Four firm, Deloitte, hired
to provide independent assurance of the efficacy and functioning of the
company’s governance, risk management and internal control processes
since 2009. According to a report published by AccountancyAge,
Deloitte received £11 million audit fees in total. Michael Jones, an inter-
national audit partner at Deloitte, was also heavily criticised for the
construction giant’s downfall. When asked whether Deloitte should also
take some responsibility for Carillion’s collapse, Jones said it was not
the auditor’s job to become involved in strategic decision-making and
that Deloitte was not responsible for verifying the figures presented by
Carillion (Marriage, 2018). However, the report of the Select Committee
concluded that Deloitte had failed in its risk management and financial
control role and had no knowledge of major issues with the company,
such as the contract disputes in Qatar:
Although Deloitte made a number of recommendations in its internal audit

reports, it rarely identified them as high priority. Only 15 of 309 recommen-
dations between 2012 and 2016 were deemed as such. Likewise, across 61
internal audit reports in 2015 and 2016, only a single report in 2016 found
inadequate controls. They were responsible for advising on financial controls
such as debt recovery but were unaware of the dispute with Msheireb over who
owed whom £200 million. They also did not appear to have expressed concern
over the high risk to the business of a small number of contracts not being met.
Deloitte was responsible for advising Carillion’s board on risk management
and financial controls, failings in the business that proved terminal. Deloitte
were either unable to identify effectively to the board the risks associated with
their business practices, unwilling to do so, or too readily ignored them. (Select
Committee, 2018)
9See the report released by Commons Select Committee in 2018. https://publications.parlia

ment.uk/pa/cm201719/cmselect/cmworpen/769/769.pdf/.
22 J. J. Chen
After this series of scandals, auditors and the audit profession and
the regulator were in the line of fire. Specifically, KPMG and Deloitte
were lambasted for missing red flags at Carillion, and the UK’s Financial
Reporting Council (FRC) was criticised for failing to address concerns
over the construction giant’s accounts.10
The Cost of Carillion’s Collapse

As the UK’s second largest construction company, the collapse of Caril-
lion inevitably negatively affected the country’s economy. In terms
of cost, the collapse created nearly £1 billion in debt and over
£500 million in pension deficit, leaving approximately 30,000 subcon-
tractors unpaid (Colley, 2018). According to Carillion’s 2016 annual
report, Carillion had approximately 43,000 employees worldwide,
including over 18,000 employees in the UK. Although the govern-
ment announced that employees who worked on public projects, such as
Midland Metropolitan University Hospital and Royal Liverpool Univer-
sity Hospital, would be protected, this essentially involved the transfer of
these workers to other firms in the industry; as a result, approximately
400 backoffice workers employed at the Wolverhampton headquarters
risked losing their jobs.
Carillion’s collapse also affected other firms. For example, the work of
subcontractors on public and private contracts was suspended until they
were assured of being paid. The construction industry in the UK consists
of a small number of large firms (primarily Balfour Beatty, Kier Group,
Interserve, Morgan Sinall and Amey) and a large number of contractors.
Carillion treated its suppliers as a source of funding prior to its collapse.
It relied heavily on its suppliers to provide materials, services and support
across its contracts, but it treated them with contempt. Late payments,
quibbling over invoices and extended delays across reporting periods
were common practices (Selected Committee, 2018). Some suppliers
reported that they had to wait over 120 days to be paid, although they
could be paid in 45 days if they agreed to take a cut for the privilege.
10 See https://www.ft.lk/Financial-Services/FRC-The-watchdog-that-barked-too-late/42-658866.
2 Carillion PLC 23
Two months after Carillion’s collapse, the engineering company Vaughan

Engineering filed for administration in March 2018. Its contractors were
owed £650,000 for projects already completed for Carillion, and the
company had been hired for £1.1 million of additional work in the first
three months of 2018. Vaughan Engineering was not the only firm that
struggled after Carillion’s collapse. More than 700 Carillion-related local
firms filed for bankruptcy in the first quarter of 2018, which represents
an increase of 20% compared with 2017.
As Carillion relied on loans, the company had over £1 billion in
bad debt. By the end of the first quarter of 2018, Santander declared
£203 million in bad debt related to Carillion and admitted that approx-
imately 21% of its drop in profits was due to Carillion’s collapse.
Likewise, Lloyds was hit by the collapse, with impairment charges of
£270 million and a 5% drop in profits.
Lessons Learnt from Carillion

The problems revealed by the collapse of Carillion were not new. The
company’s expansion strategy, based on huge debt levels and low-margin,
unprofitable projects, was the main reason for its collapse. As Amra
Balic, Managing Director of Blackrock, argued, Carillion’s board of
directors focused more on remunerating its executives and increasing
dividends than on running the business, which also contributed to its
collapse (Selected Committee, 2018). Moreover, Carillion’s NEDs did
not effectively oversee the management team, raising questions about
their independence.
Carillion’s aggressive accounting was also not discovered by its internal
or external auditors when they signed their audit reports. KPMG
(external auditor) claimed that Carillion’s 2016 accounts presented a ‘true
and fair’ picture. This raises the question of how accountants understood
the words ‘true’ and ‘fair’ given that the company’s assets were misstated
by £845 million four months after KPMG signed its audit report (see
Table 2.2). To avoid failure, it is necessary to reassess the purpose of
an audit because investors (not only current shareholders), employees,
24 J. J. Chen
Table 2.2 Carillion: Key events

Year Description
1999 Carillion is established after splitting from Tarmac
2000 John McDonough is appointed CEO
2005 Acquisition of Planned Maintenance Group Ltd. (PMG)
February 2006 Acquisition of Mowlem Plc for £350 million
April 2007 Richard Adam is appointed to the board of directors as
Finance Director
February 2008 Acquisition of Alfred McAlpine for £565 million
April 2011 Acquisition of Eaga (renamed Carillion Energy Services)
for £298 million
January 2012 Richard Howson is appointed CEO
December 2016 Richard Adam retires as Finance Director
January 2017 Zafar Khan is appointed to the board of directors as
Finance Director
March 2017 Carillion’s 2016 annual report and accounts are signed
and published. Richard Adam sells his entire existing
shareholding for £543,000
May 2017 KPMG reviews Carillion’s accounting treatment and
concludes that the company’s assets have been
misclassified but that there has been no misstatement
of revenue
June 2017 Final dividends for 2016 are paid for a value of £55
million
9 July 2017 Richard Howson steps down as CEO. He is replaced by
Keith Cochrane as interim CEO; the board of directors
accepts the inclusion of a contract provision of £845
million in their interim 2017 financial results
10 July 2017 Carillion announces the contract provision of £845
million and a full review of the Group’s business and
capital structure
29 September 2017 The half-year results include a further write-down of
£200 million
17 November 2017 Third profit warning issued, alongside the
announcement that the company is heading towards
a breach of its debt covenants
14 January 2018 The board of directors concludes that the company is
insolvent
15 January 2018 The directors present a petition to the Court for the
company’s compulsory winding up because of its
inability to pay its debt
suppliers, subcontractors and the general public have a legitimate interest

in being fully informed of a company’s true financial position. A close
relationship between management and auditors may compromise the
2 Carillion PLC 25
independence of auditors; therefore, major reform is needed to strike a

balance between auditors’ familiarity with the company they are auditing
and their ability to remain independent (McLoughlin, 2019).
Discussion Questions
1. Did Carillion expect too much from its NEDs before the collapse?
2. Discuss Carillion’s business model.
3. Since Arthur Andersen’s implosion in 2002, the Big Four accounting
firms (PwC, KPMG, Deloitte and Ernst & Young) have dominated
audits of major UK companies. Do you think that the economy needs
a competitive market for auditing and professional services to generate
trust for the public?
4. How would you divide the blame between the parties involved in
Carillion’s collapse? Should we blame Carillion’s board of directors
rather than KPMG and Deloitte and their advisers?
5. Discuss the effectiveness of Carillion’s Audit Committee.
6. Discuss the role of Carillion’s NEDs before the collapse.
References
Colley, J. (2018). Carillion Q&A: The consequences of collapse and what the
government should do next. The Conversation. https://theconversation.com/
carillion-qanda-the-consequences-of-collapse-and-what-the-government-sho
uld-do-next-90252/
Clarfelt, H. (2017). Carillion suspends dividend as balance sheet creaks.
Investors’ Chronicle. https://www.investorschronicle.co.uk/tips-ideas/2017/
07/13/carillion-suspends-dividend-as-balance-sheet-creaks/
Fenn, A. (2020). Carillion Plc v KPMG LLP & Anor. Atkin Cham-
bers Barristers. https://www.atkinchambers.com/carillion-plc-v-kpmg-llp-
anor-2020-ewhc-1416-comm/
26 J. J. Chen
Hoang, L. M. (2014). Carillion in talks with Balfour Beatty on 3 billion pound

merger. Reuters. https://www.reuters.com/article/us-balfour-beatty-carillion-
idUSKBN0FU1B920140725/
Hopper, J. (2019). Carillion: 12 months on from a PFI perspective.
Bevan Brittan. https://www.bevanbrittan.com/insights/articles/2019/carill
ion-12-months-on-from-a-pfi-perspective/
Marriage, M. (2018). MPs turn fire on KPMG and Deloitte partners
over Carillion. Financial Times. https://www.ft.com/content/71c8f2b8-
17d7-11e8-9e9c-25c814761640/
McLoughlin, B. (2019). Has the audit process improved since Carillion? No,
say company secretaries. Accountancy Age. https://www.accountancyage.
com/2019/01/29/has-the-audit-process-improved-since-carillion-no-say-
company-secretaries/
Mor, F. (2018). Carillion collapse: What went wrong? House of Commons
Library. https://commonslibrary.parliament.uk/carillion-collapse-what-went-
wrong/
Partington, R. (2018). Carillion bosses displayed ‘greed on stilts’, MPs
claim. The Guardian. https://www.theguardian.com/business/2018/mar/26/
carillion-bosses-displayed-greed-on-stilts-mps-claim/
Rankin, J. (2014). Balfour Beatty rejects latest Carillion merger offer. The
Guardian. https://www.theguardian.com/business/2014/aug/20/balfour-bea
tty-rejects-latest-carillion-merger-offer/
Shoaib, A. (2018). Carillion inquiry: Missed flags, aggressive accounting and
the pension deficit. Accountancy Age. www.accountancyage.com/2018/02/
26/carillion-inquiry-missed-red-lights-aggressive-accounting-pension-def
icit/
Selected Committee. (2018). House of Commons—Carillion. P. 24.
3
Tesco Plc
Tesco Plc, the British multinational grocery and retail giant headquar-
tered in England, announced that its profits for the six months through
24 August 2014 were expected to be approximately £1.1 billion. On
22 September 2014, Tesco issued a correction stating that its previous
announcement had overstated its profits by approximately £250 million,
which was later revised to £326 million (Martin, 2016). This announce-
ment sent shock waves through various industries and caused an imme-
diate drop in the market value of Tesco’s shares and bonds estimated at
£2 billion (Bergin, 2014). In addition, government authorities such as
the Financial Reporting Council (FRC), the Serious Fraud Office (SFO)
and the Financial Conduct Authority (FCA) launched a full investigation
into Tesco’s false accounts.
In March 2017, Tesco agreed with the SFO to pay a fine of
£129 million to overstate its profits in 2014. In addition, the retailer
entered into a Deferred Prosecution Agreement (DPA) covering criminal
liability. Under the terms of the DPA, Tesco would not be prosecuted for
activities related to the false accounting charge if it fulfilled certain condi-
tions as to its future behaviour. Furthermore, Tesco agreed with the FCA
to compensate investors who had purchased Tesco’s securities between 29
https://doi.org/10.1007/978-981-19-3238-0_3
28 J. J. Chen
August 2017 (when the false interim accounts were published) and 22
September 2017 (when the correction was published) for a total amount
payable of £85 million to avoid further sanctions. To cover the penalty
(i.e., the fine of £129 million and £85 million for shareholder compen-
sation), the Tesco Group took an exceptional charge of £235 million in
fiscal year 2017 (Ruddick & Kollewe, 2017).
Tesco’s corporate governance failure was one of the key factors that
sparked its accounting scandal. Specifically, Tesco’s financial statements
were found to have significantly misrepresented its profits and assets over
a period of at least two years. Therefore, it is interesting to examine which
part of Tesco’s corporate governance system holds the most responsibility:
its board of directors, its audit committee or its auditors.
A Brief History of Tesco

Jack Cohen left the Royal Flying Corp at the end of the Great War and
began selling surplus groceries at a stall in London’s East End in 1919.
The Tesco brand did not appear until 1924, when Jack Cohen bought
a shipment of tea from a trader called TE Stockwell. Jack Cohen then
repackaged it in small bags as his first own-brand product, with a new
label created from the supplier’s initials (TES) and the first two letters of
Jack’s surname (CO), forming the brand name Tesco.1 In 1929, the first
Tesco store opened in Burnt Oak, Edgware, north London, which sold
high dry goods and its own-brand product, Tesco Tea.
In the 1930s, Jack Cohen built a modern food warehouse and
new headquarters in Angel Road, Edmonton, north London, and then
expanded across London and neighbouring counties. In 1947, Tesco
Stores (Holdings) went public at a share price of 25 pence. Tesco’s rapid
expansion began in the 1950s, when the company purchased over 500
new stores across the UK.
Tesco’s global expansion started in the early 1990s, with operations in
11 countries around the world. Its rapid growth and the introduction
of the Tesco Clubcard in 1995 overtook Sainsbury’s in terms of market
1 See https://tesco-bst.com/tescoshistory/.
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eighteen from the South, and but eleven from the North; although
nearly four-fifths of the judicial business has arisen in the Free
States, yet a majority of the Court has always been from the South.
This we have required so as to guard against any interpretation of the
Constitution unfavorable to us. In like manner we have been equally
watchful to guard our interests in the Legislative branch of
Government. In choosing the presiding Presidents (pro tem.) of the
Senate, we have had twenty-four to their eleven. Speakers of the
House we have had twenty-three, and they twelve. While the
majority of the Representatives, from their greater population, have
always been from the North, yet we have so generally secured the
Speaker, because he, to a great extent, shapes and controls the
legislation of the country. Nor have we had less control in every other
department of the General Government. Attorney-Generals we have
had fourteen, while the North have had but five. Foreign ministers
we have had eighty-six, and they but fifty-four. While three-fourths
of the business which demands diplomatic agents abroad is clearly
from the Free States, from their greater commercial interest, yet we
have had the principal embassies so as to secure the world-markets
for our cotton, tobacco, and sugar on the best possible terms. We
have had a vast majority of the higher offices of both army and navy,
while a larger proportion of the soldiers and sailors were drawn from
the North. Equally so of Clerks, Auditors, and Comptrollers filling
the executive department, the records show for the last fifty years
that of the three thousand thus employed, we have had more than
two-thirds of the same, while we have but one-third of the white
population of the Republic.
Again, look at another item, and one, be assured, in which we have
a great and vital interest; it is that of revenue, or means of supporting
Government. From official documents, we learn that a fraction over
three-fourths of the revenue collected for the support of the
Government has uniformly been raised from the North.
Pause now while you can, gentlemen, and contemplate carefully
and candidly these important items. Look at another necessary
branch of Government, and learn from stern statistical facts how
matters stand in that department. I mean the mail and Post-Office
privileges that we now enjoy under the General Government as it has
been for years past. The expense for the transportation of the mail in
the Free States was, by the report of the Postmaster-General for the
year 1860 a little over $13,000,000, while the income was
$19,000,000. But in the Slave States the transportation of the mail
was $14,716,000, while the revenue from the same was $8,001,026,
leaving a deficit of $6,704,974, to be supplied by the North for our
accommodation, and without it we must have been entirely cut off
from this most essential branch of Government.
Leaving out of view, for the present, the countless millions of
dollars you must expend in a war with the North; with tens of
thousands of your sons and brothers slain in battle, and offered up as
sacrifices upon the altar of your ambition—and for what, we ask
again? Is it for the overthrow of the American Government,
established by our common ancestry, cemented and built up by their
sweat and blood, and founded on the broad principles of Right,
Justice and Humanity? And as such, I must declare here, as I have
often done before, and which has been repeated by the greatest and
wisest of statesmen and patriots in this and other lands, that it is the
best and freest Government—the most equal in its rights, the most
just in its decisions, the most lenient in its measures, and the most
aspiring in its principles to elevate the race of men, that the sun of
heaven ever shone upon. Now, for you to attempt to overthrow such
a government as this, under which we have lived for more than
three-quarters of a century—in which we have gained our wealth, our
standing as a nation, our domestic safety while the elements of peril
are around us, with peace and tranquillity accompanied with
unbounded prosperity and rights unassailed—is the height of
madness, folly, and wickedness, to which I can neither lend my
sanction nor my vote.
The seven seceding States (South Carolina, Mississippi, Georgia,
Florida, Alabama, Louisiana and Texas,) as shown by data previously
given, organized their Provisional Government, with Jefferson Davis,
the most radical secession leader, as President; and Alex. H.
Stephens, the most conservative leader, as Vice-President. The
reasons for these selections were obvious; the first met the views of
the cotton States, the other example was needed in securing the
secession of other States. The Convention adopted a constitution, the
substance of which is given elsewhere in this work. Stephens
delivered a speech at Savannah, March 21st, 1861, in explanation and
vindication of this instrument, which says all that need be said about
it:
“The new Constitution has put at rest forever all the agitating
questions relating to our peculiar institutions—African slavery as it
exists among us—the proper status of the negro in our form of
civilization. This was the immediate cause of the late rupture and
present revolution. Jefferson, in his forecast, had anticipated this as
the ‘rock upon which the old Union would split.’ He was right. What
was conjecture with him, is now a realized fact. But whether he fully
comprehended the great truth upon which that rock stood and
stands, may be doubted. The prevailing ideas entertained by him and
most of the leading statesmen at the time of the formation of the old
Constitution, were that the enslavement of the African was in
violation of the laws of nature: that it was wrong in principle,
socially, morally, and politically. It was an evil they knew not well
how to deal with, but the general opinion of the men of that day was,
that somehow or other, in the order of Providence, the institution
would be evanescent and pass away. This idea, though not
incorporated in the Constitution, was the prevailing idea at the time.
The Constitution, it is true, secured every essential guarantee to the
institution while it should last, and hence no argument can be justly
used against the constitutional guarantees thus secured, because of
the common sentiment of the day. Those ideas, however, were
fundamentally wrong. They rested upon the assumption of the
equality of races. This was an error. It was a sandy foundation, and
the idea of a government built upon it; when the ‘storm came and the
wind blew, it fell.’
“Our new Government is founded upon exactly the opposite idea;
its foundations are laid, its corner-stone rests upon the great truth
that the negro is not equal to the white man. That slavery—
subordination to the superior race, is his natural and normal
condition. This, our new Government, is the first, in the history of
the world, based upon this great physical and moral truth. This truth
has been slow in the process of its development, like all other truths
in the various departments of science. It has been so even amongst
us. Many who hear me, perhaps, can recollect well, that this truth
was not generally admitted, even within their day. The errors of the
past generation still clung to many as late as twenty years ago. Those
at the North who still cling to these errors, with a zeal above
knowledged, we justly denominate fanatics.***
“In the conflict thus far, success has been, on our side, complete
throughout the length and breadth of the Confederate States. It is
upon this, as I have stated, our actual fabric is firmly planted; and I
cannot permit myself to doubt the ultimate success of a full
recognition of this principle throughout the civilized and enlightened
world.
“As I have stated, the truth of this principle may be slow in
development, as all truths are, and ever have been, in the various
branches of science. It was so with the principles announced by
Galileo—it was so with Adam Smith and his principles of political
economy—it was so with Harvey and his theory of the circulation of
the blood. It is stated that not a single one of the medical profession,
living at the time of the announcement of the truths made by him,
admitted them. Now they are universally acknowledged. May we not,
therefore, look with confidence to the ultimate universal
acknowledgment of the truths upon which our system rests. It is the
first government ever instituted upon principles of strict conformity
to nature, and the ordination of Providence, in furnishing the
materials of human society. Many governments have been founded
upon the principle of certain classes; but the classes thus enslaved,
were of the same race, and in violation of the laws of nature. Our
system commits no such violation of nature’s laws. The negro, by
nature, or by the curse against Canaan, is fitted for that condition
which he occupies in our system. The architect, in the construction of
buildings, lays the foundation with the proper materials, the granite;
then comes the brick or the marble. The substratum of our society is
made of the material fitted by nature for it, and by experience we
know that it is best, not only for the superior, but for the inferior race
that it should be so. It is, indeed, in conformity with the ordinance of
the Creator. It is not for us to inquire into the wisdom of His
ordinances, or to question them. For His own purposes He has made
one race to differ from another, as He has made ‘one star to differ
from another star in glory.’
“The great objects of humanity are best attained when conformed
to His laws and decrees, in the formation of governments, as well as
in all things else. Our Confederacy is founded upon principles in
strict conformity with these laws. This stone which was first rejected
by the first builders ‘is become the chief stone of the corner’ in our
new edifice.
“The progress of disintegration in the old Union may be expected
to go on with almost absolute certainty. We are now the nucleus of a
growing power, which, if we are true to ourselves, our destiny, and
high mission, will become the controlling power on this continent.
To what extent accessions will go on in the process of time, or where
it will end, the future will determine.”
It was determined by the secession of eleven States in all, the
Border States except Missouri, remaining in the Union, and West
Virginia dividing from old Virginia for the purpose of keeping her
place in the Union.
The leaders of the Confederacy relied to a great extent upon the
fact that President Buchanan, in his several messages and replies to
commissioners, and in the explanation of the law by his Attorney-
General, had tied his own hands against any attempt to reinforce the
garrisons in the Southern forts, and they acted upon this faith and
made preparations for their capture. The refusal of the
administration to reinforce Fort Moultrie caused the resignation of
General Cass, and by this time the Cabinet was far from harmonious.
As early as the 10th of December, Howell Cobb resigned as Secretary
of the Treasury, because of his “duty to Georgia;” January 26th, John
B. Floyd resigned because Buchanan would not withdraw the troops
from Southern forts; and before that, Attorney-General Black,
without publicly expressing his views, also resigned. Mr. Buchanan
saw the wreck around him, and his administration closed in
profound regret on the part of many of his northern friends, and,
doubtless, on his own part. His early policy, and indeed up to the
close of 1860, must have been unsatisfactory even to himself, for he
supplied the vacancies in his cabinet by devoted Unionists—by Philip
F. Thomas of Maryland, Gen’l Dix of New York, Joseph Holt of
Kentucky, and Edwin M. Stanton of Pennsylvania—men who held in
their hands the key to nearly every situation, and who did much to
protect and restore the Union of the States. In the eyes of the North,
the very last acts of Buchanan were the best.
With the close of Buchanan’s administration all eyes turned to
Lincoln, and fears were entertained that the date fixed by law for the
counting of the electoral vote—February 15th, 1861—would
inaugurate violence and bloodshed at the seat of government. It
passed, however, peaceably. Both Houses met at 12 high noon in the
hall of the House, Vice-President Breckinridge and Speaker
Pennington, both democrats, sitting side by side, and the count was
made without serious challenge or question.
On the 11th of February Mr. Lincoln left his home for Washington,
intending to perform the journey in easy stages. On parting with his
friends at Springfield, he said:
“My Friends: No one, in my position, can realize the sadness I feel
at this parting. To this people I owe all that I am. Here I have lived
more than a quarter of a century. Here my children were born, and
here one of them lies buried. I know not how soon I shall see you
again. I go to assume a task more difficult than that which has
devolved upon any other man since the days of Washington. He
never would have succeeded except for the aid of Divine Providence,
upon which he at all times relied. I feel that I cannot succeed without
the same Divine blessing which sustained him; and on the same
Almighty Being I place my reliance for support. And I hope you, my
friends, will all pray that I might receive that Divine assistance,
without which I cannot succeed, but with which success is certain.
Again, I bid you all an affectionate farewell.”
Lincoln passed through Indiana, Ohio, New York, New Jersey and
Pennsylvania on his way to the Capitol. Because of threats made that
he should not reach the Capitol alive, some friends in Illinois
employed a detective to visit Washington and Baltimore in advance
of his arrival, and he it was who discovered a conspiracy in Baltimore
to mob and assassinate him. He therefore passed through Baltimore
in the night, two days earlier than was anticipated, and reached
Washington in safety. On the 22d of February he spoke at
Independence Hall and said:
“All the political sentiments I entertain have been drawn, so far as
I have been able to draw them, from the sentiments which originated
in, and were given to the world from, this hall. I never had a feeling,
politically, that did not spring from the sentiments embodied in the
Declaration of Independence.
“It was not the mere matter of the separation of the Colonies from
the motherland, but that sentiment in the Declaration of
Independence, which gave liberty, not alone to the people of this
country, but, I hope, to the world for all future time. It was that
which gave promise that, in due time, the weight would be lifted
from the shoulders of men. This is the sentiment embodied in the
Declaration of Independence. Now, my friends, can this country be
saved upon that basis? If it can, I will consider myself one of the
happiest men in the world, if I can help to save it. If it cannot be
saved upon that principle, it will be truly awful! But if this country
cannot be saved without giving up the principle, I was about to say, ‘I
would rather be assassinated on the spot than surrender it.’ *** I
have said nothing but what I am willing to live by, and if it be the
pleasure of Almighty God, to die by!”
Lincoln’s First Administration.
Such was the feeling of insecurity that the President elect was
followed to Washington by many watchful friends, while Gen’l Scott,
Col. Sumner, Major Hunter and the members of Buchanan’s Cabinet
quickly made such arrangements as secured his safety. Prior to his
inauguration he took every opportunity to quell the still rising
political excitement by assuring the Southern people of his kindly
feelings, and on the 27th of February,[17] “when waited upon by the
Mayor and Common Council of Washington, he assured them, and
through them the South, that he had no disposition to treat them in
any other way than as neighbors, and that he had no disposition to
withhold from them any constitutional right. He assured the people
that they would have all of their rights under the Constitution—‘not
grudgingly, but freely and fairly.’”
He was peacefully inaugurated on the 4th of March, and yet
Washington was crowded as never before by excited multitudes. The
writer himself witnessed the military arrangements of Gen’l Scott for
preserving the peace, and with armed cavalry lining every curb stone
on the line of march, it would have been difficult indeed to start or
continue a riot, though it was apparent that many in the throng were
ready to do it if occasion offered.
The inaugural ceremonies were more than usually impressive. On
the eastern front of the capitol, surrounded by such of the members
of the Senate and House who had not resigned their seats and
entered the Confederacy, the Diplomatic Corps, the Judges of the
Supreme Court, headed by Chief Justice Taney, the author of the
Dred Scott decision; the higher officers of Army and Navy, while
close by the side of the new President stood the retiring one—James
Buchanan—tall, dignified, reserved, and to the eye of the close
observer apparently deeply grieved at the part his party and position
had compelled him to play in a National drama which was now
reaching still another crisis. Near by, too, stood Douglas (holding
Lincoln’s hat) more gloomy than was his wont, but determined as he
had ever been. Next to the two Presidents he was most observed.
If the country could then have been pacified, Lincoln’s inaugural

was well calculated to do it. That it exercised a wholesome influence
in behalf of the Union, and especially in the border States, soon
became apparent. Indeed, its sentiments seemed for weeks to check
the wild spirit of secession in the cotton States, and it took all the
efforts of their most fiery orators to rekindle the flame which seemed
to have been at its highest when Major Anderson was compelled to
evacuate Fort Moultrie.
It is but proper in this connection, to make a few quotations from
the inaugural address, for Lincoln then, as he did during the
remainder of his life, better reflected the more popular Republican
sentiment than any other leader. The very first thought was upon the
theme uppermost in the minds of all. We quote:
“Apprehension seems to exist among the people of the Southern
States that by the accession of a Republican Administration their
property and their peace and personal security are to be endangered.
There has never been any reasonable cause for such apprehension.
Indeed, the most ample evidence to the contrary has all the while
existed and been open to their inspection. It is found in nearly all the
published speeches of him who now addresses you. I do but quote
from one of those speeches when I declare that ‘I have no purpose
directly or indirectly, to interfere with the institution of slavery in the
States where it exists. I believe I have no lawful right to do so, and I
have no inclination to do so.’ Those who nominated and elected me
did so with full knowledge that I had made this and many similar
declarations, and had never recanted them. And more than this, they
placed in the platform for my acceptance, and as a law to themselves
and to me, the clear and emphatic resolution which I now read:
‘Resolved, That the maintenance inviolate of the rights of the
States, and especially the right of each State to order and control its
own domestic institutions according to its own judgment exclusively,
is essential to the balance of power on which the perfection and
endurance of our political fabric depend, and we denounce the
lawless invasion by armed force of the soil of any State or Territory,
no matter under what pretext, as among the gravest of crimes.’
I now reiterate these sentiments; and in doing so, I only press
upon the public attention the most conclusive evidence of which the
case is susceptible, that the property, peace, and security of no
section are to be in anywise endangered by the now incoming
Administration. I add, too, that all the protection which, consistently
with the Constitution and the laws, can be given, will be cheerfully
given to all the States when lawfully demanded, for whatever cause—
as cheerfully to one section as to another.
After conveying this peaceful assurance, he argued the question in
his own way, and in a way matchless for its homely force:
“Physically speaking, we cannot separate. We cannot remove our
respective sections from each other, nor build an impassable wall
between them. A husband and wife may be divorced, and go out of
the presence and beyond the reach of each other; but the different
parts of our country cannot do this. They cannot but remain face to
face; and intercourse, either amicable or hostile, must continue
between them. Is it possible, then, to make that intercourse more
advantageous or more satisfactory after separation than before? Can
aliens make treaties easier than friends can make laws? Can treaties
be more faithfully enforced between aliens than laws can among
friends? Suppose you go to war, you cannot fight always; and when
after much loss on both sides, and no gain on either, you cease
fighting, the identical old questions, as to terms of intercourse, are
again upon you.
“This country, with its institutions, belongs to the people who
inhabit it. Whenever they shall grow weary of the existing
Government they can exercise their constitutional right of amending
it, or their revolutionary right to dismember or overthrow it. I
cannot be ignorant of the fact that many worthy and patriotic citizens
are desirous of having the National Constitution amended. While I
make no recommendation of amendments, I fully recognize the
rightful authority of the people over the whole subject, to be
exercised in either of the modes prescribed in the instrument itself;
and I should under existing circumstances, favor rather than oppose
a fair opportunity being afforded the people to act upon it. I will
venture to add that to me the convention mode seems preferable, in
that it allows amendments to originate with the people themselves,
instead of only permitting them to take or reject propositions
originated by others, not especially chosen for the purpose, and
which might not be precisely such as they would wish to either accept
or refuse. I understand a proposed amendment to the Constitution—
which amendment, however, I have not seen—has passed Congress,
to the effect that the Federal Government shall never interfere with
the domestic institutions of the States, including that of persons held
to service. To avoid misconstruction of what I have said, I depart
from my purpose not to speak of particular amendments so far as to
say that, holding such a provision now to be implied constitutional
law, I have no objection to its being made express and irrevocable.
“The Chief Magistrate derives all his authority from the people,
and they have conferred none upon him to fix terms for the
separation of the States. The people themselves can do this also if
they choose; but the Executive, as such, has nothing to do with it. His
duty is to administer the present Government, as it came to his
hands, and to transmit it, unimpaired by him, to his successor.***
“In your hands, my dissatisfied fellow-countrymen, and not in
mine, is the momentous issue of civil war. The Government will not
assail you. You can have no conflict without being yourselves the
aggressors. You have no oath registered in heaven to destroy the
Government, while I shall have the most solemn one to ‘preserve,
protect and defend it.’
“I am loth to close. We are not enemies but friends. We must not
be enemies. Though passion may have strained, it must not break
our bonds of affection. The mystic chords of memory, stretching
from every battle-field and patriot grave to every living heart and
hearth-stone, all over this broad land, will yet swell the chorus of the
union, when again touched, as surely they will be, by the better
angels of our nature.”
Lincoln appointed a Cabinet in thorough accord with his own
views, and well suited to whatever shades of difference there were in
the Republican party. Wm. H. Seward, Secretary of State, and
Salmon P. Chase represented the more advanced anti-slavery
element; General Simon Cameron, Secretary of War, from the first
saw only a prolonged war in which superior Northern resources and
appliances would surely win, while Seward expressed the view that
“all troubles would be over in three months;” Gideon Welles,
Secretary of the Navy; Caleb B. Smith of the Interior; Edward Bates,
Attorney-General, and Montgomery Blair, Postmaster-General,
represented the more conservative Republican view—the two last
named being well adapted to retaining the National hold on the
Border States.
Political events now rapidly succeeded each other. As early as
March 11, John Forsyth of Alabama and Martin J. Crawford of
Georgia, submitted to the Secretary of State a proposition for an
unofficial interview. Mr. Seward the next day, from “purely public
considerations,” declined. On the 13th the same gentlemen sent a
sealed communication, saying they had been duly accredited by the
Confederate government as Commissioners, to negotiate for a speedy
adjustment of all questions growing out of the political separation of
seven States, which had formed a government of their own, etc. They
closed this remarkable document by requesting the Secretary of State
to appoint as early a day as possible in order that they may present to
the President of the United States the credentials which they bear,
and the objects of the mission with which they are charged.
Mr. Seward’s reply in substance, said that his “official duties were
confined, subject to the direction of the President, to the conducting
of the foreign relations of the country, and do not at all embrace
domestic questions or questions arising between the several States
and the Federal Government, is unable to comply with the request of
Messrs. Forsyth and Crawford, to appoint a day on which they may
present the evidences of their authority and the object of their visit to
the President of the United States. On the contrary, he is obliged to
state to Messrs. Forsyth and Crawford that he has no authority, nor
is he at liberty to recognize them as diplomatic agents, or hold
correspondence or other communication with them.”
An extended correspondence followed, but the administration in
all similar cases, refused to recognize the Confederacy as a
government in any way. On the 13th of April the President granted
an interview to Wm. Ballard Preston, Alex. H. Stuart, and George W.
Randolph, who had been sent by the Convention of Virginia, then in
session, under a resolution recited in the President’s reply, the text of
which is herewith given:—
Gentlemen: As a committee of the Virginia Convention, now in
session, you present me a preamble and resolution in these words:
“Whereas, in the opinion of this Convention, the uncertainty which
prevails in the public mind as to the policy which the Federal
Executive intends to pursue toward the seceded States is extremely
injurious to the industrial and commercial interests of the country,
tends to keep up an excitement which is unfavorable to the
adjustment of pending difficulties, and threatens a disturbance of the
public peace: Therefore,
“Resolved, That a committee of three delegates be appointed to
wait on the President of the United States, present to him this
preamble and resolution, and respectfully ask him to communicate
to this Convention the policy which the Federal Executive intends to
pursue in regard to the Confederate States.”
“In answer I have to say, that, having at the beginning of my
official term expressed my intended policy as plainly as I was able, it
is with deep regret and some mortification I now learn that there is
great and injurious uncertainty in the public mind as to what that
policy is, and what course I intend to pursue.
“Not having as yet seen occasion to change, it is now my purpose
to pursue the course marked out in the inaugural address. I
commend a careful consideration of the whole document as the best
expression I can give of my purposes. As I then and therein said, I
now repeat:
“The power confided to me will be used to hold, occupy, and
possess the property and places belonging to the Government, and to
collect the duties and imposts; but beyond what is necessary for
these objects there will be no invasion, no using of force against or
among the people anywhere.”
“By the words ‘property and places belonging to the Government’ I
chiefly allude to the military posts and property which were in the
possession of the Government when it came into my hands.
“But if, as now appears to be true, in pursuit of a purpose to drive
the United States authority from these places, an unprovoked assault
has been made upon Fort Sumter, I shall hold myself at liberty to
repossess, if I can, like places which had been seized before the
Government was devolved upon me. And, in any event, I shall, to the
best of my ability, repel force by force.
“In case it proves true that Fort Sumter has been assaulted, as is
reported, I shall perhaps cause the United States mails to be
withdrawn from all the States which claim to have seceded, believing
that the commencement of actual war against the Government
justifies and possibly demands it.”
“I scarcely need to say that I consider the military posts and
property situated within the States which claim to have seceded as
yet belonging to the Government of the United States as much as
they did before the supposed secession.
“Whatever else I may do for the purpose, I shall not attempt to
collect the duties and imposts by any armed invasion of any part of
the country—not meaning by this, however, that I may not land a
force deemed necessary to relieve a fort upon the border of the
country.
“From the fact that I have quoted a part of the inaugural address, it
must not be inferred that I repudiate any other part, the whole of
which I reaffirm, except so far as what I now say of the mails may be
regarded as a modification.”
We have given the above as not only fair but interesting samples of
the semi-official and official transactions and correspondence of the
time. To give more could not add to the interest of what is but a
description of the political situation.
The Border states and some others were “halting between two
opinions.” North Carolina at first voted down a proposition to secede
by 46,671 for, to 47,333 against, but the secessionists called another
convention in May, the work of which the people ratified, the
minority, however, being very large.
Before Lincoln had entered office most of the Southern forts,
arsenals, docks, custom houses, etc., had been seized, and now that
preparations were being made for active warfare by the Confederacy,
many officers of the army and navy resigned or deserted, and joined
it. The most notable were General Robert E. Lee, who for a time
hesitated as to his “duty,” and General David E. Twiggs, the second
officer in rank in the United States Army, but who had purposely
been placed by Secretary Floyd in command of the Department of
Texas to facilitate his joining the Confederacy, which he intended to
do from the beginning. All officers were permitted to go, the
administration not seeking to restrain any, under the belief that until
some open act of war was committed it ought to remain on the
defensive. This was wise political policy, for it did more than all else
to hold the Border States, the position of which Douglas understood
fully as well as any statesman of that hour. It is remarked of Douglas
(in Arnold’s “History of Abraham Lincoln”) that as early as January
1, 1861, he said to General Charles Stewart, of New York, who had
made a New Year’s call at his residence in Washington, and inquired,
“What will be the result of the efforts of Jefferson Davis, and his
associates, to divide the Union?” “Rising, and looking,” says my
informant, “like one inspired, Douglas replied, ‘The cotton States are
making an effort to draw in the border States to their schemes of
secession, and I am but too fearful they will succeed. If they do
succeed, there will be the most terrible civil war the world has ever
seen, lasting for years.’ Pausing a moment, he exclaimed, ‘Virginia
will become a charnel house, but the end will be the triumph of the
Union cause. One of their first efforts will be to take possession of
this Capitol to give them prestige abroad, but they will never succeed
in taking it—the North will rise en masse to defend it;—but
Washington will become a city of hospitals—the churches will be
used for the sick and wounded—even this house (Minnesota block,
afterwards, and during the war, the Douglas Hospital) may be
devoted to that purpose before the end of the war.’ The friend to
whom this was said inquired, ‘What justification for all this?’
Douglas replied, ‘There is no justification, nor any pretense of any—if
they remain in the Union, I will go as far as the Constitution will
permit, to maintain their just rights, and I do not doubt a majority of
Congress would do the same. But,’ said he, again rising on his feet,
and extending his arm, ‘if the Southern States attempt to secede from
this Union, without further cause, I am in favor of their having just
so many slaves, and just so much slave territory, as they can hold at
the point of the bayonet, and NO MORE.’”
In the border states of Maryland, Virginia, North Carolina,
Tennessee and Missouri there were sharp political contests between
the friends of secession and of the Union. Ultimately the Unionists
triumphed in Maryland, Kentucky and Missouri—in the latter state
by the active aid of U. S. troops—in Maryland and Kentucky by
military orders to arrest any members of the Legislature conspiring
to take their states out. In Tennessee, the Union men, under the lead
of Andrew Johnson, Governor (“Parson”) Brownlow, Horace
Maynard and others, who made a most gallant fight to keep the state
in, and they had the sympathy of the majority of the people of East
Tennessee. The Secessionists took Virginia out April 17th, and North
Carolina May 20th. The leading Southerners encouraged the timid
and hesitating by saying the North would not make war; that the
political divisions would be too great there, and they were supported
in this view by the speeches and letters of leaders like Clement L.
Vallandigham. On the other hand they roused the excitable by
warlike preparations, and, as we have stated, to prevent
reconsideration on the part of those who had seceded, resolved to
fire upon Sumter. Beauregard acted under direct instructions from
the government at Montgomery when he notified Major Anderson on
the 11th of April to surrender Fort Sumter. Anderson replied that he
would evacuate on the 15th, but the original summons called for
surrender by the 12th, and they opened their fire in advance of the
time fixed for evacuation—a fact which clearly established the
purpose to bring about a collision. It was this aggressive spirit which
aroused and united the North, and made extensive political division
therein impossible.
The Southern leaders, ever anxious for the active aid of the Border
States, soon saw that they could only acquire it through higher
sectional excitement than any yet cultivated, and they acted
accordingly. Roger A. Pryor, in a speech at Richmond April 10th,
gave expression to this thought, when he said in response to a
serenade:—
“Gentlemen, I thank you, especially that you have at last
annihilated this accursed Union, [applause,] reeking with corruption,
and insolent with excess of tyranny. Thank God, it is at last blasted
and riven by the lightning wrath of an outraged and indignant
people. [Loud applause.] Not only is it gone, but gone forever. [Cries
of ‘You’re right,’ and applause.] In the expressive language of
Scripture, it is water spilt upon the ground, which cannot be
gathered up. [Applause.] Like Lucifer, son of the morning, it has
fallen, never to rise again. [Continued applause.] For my part,
gentlemen, if Abraham Lincoln and Hannibal Hamlin to-morrow
were to abdicate their offices and were to give me a blank sheet of
paper to write the conditions of reannexation to the defunct Union,
I would scornfully spurn the overture. * * * I invoke you, and I make
it in some sort a personal appeal—personal so far as it tends to our
assistance in Virginia—I do invoke you, in your demonstrations of
popular opinion, in your exhibitions of official intent, to give no
countenance to this idea of reconstruction. [Many voices,
emphatically, ‘Never,’ and applause.] In Virginia they all say, if
reduced to the dread dilemma of this memorable alternative, they
will espouse the cause of the South as against the interest of the
Northern Confederacy, but they whisper of reconstruction, and they
say Virginia must abide in the Union, with the idea of reconstructing
the Union which you have annihilated. I pray you, gentlemen, rob
them of that idea. Proclaim to the world that upon no condition, and
under no circumstance, will South Carolina ever again enter into
political association with the Abolitionists of New England. [Cries of
‘Never,’ and applause.]
“Do not distrust Virginia. As sure as to-morrow’s sun will rise upon
us, just so sure will Virginia be a member of this Southern
Confederation. [Applause.] And I will tell you, gentlemen, what will
put her in the Southern Confederation in less than an hour by
Shrewsbury clock—STRIKE A BLOW! [Tremendous applause.] The
very moment that blood is shed, old Virginia will make common
cause with her sisters of the South. [Applause.] It is impossible she
should do otherwise.”
Warlike efforts were likewise used to keep some of the states firmly
to their purpose. Hon. Jeremiah Clemens, formerly United States
Senator from Alabama, and a member of the Alabama Seceding
Convention who resisted the movement until adopted by the body, at
an adjourned Reconstruction meeting held at Huntsville, Ala., March
13, 1864, made this significant statement:—
Mr. Clemens, in adjourning the meeting, said he would tell the
Alabamians how their state was got out of the Union. “In 1861,” said
Mr. C., “shortly after the Confederate Government was put in
operation, I was in the city of Montgomery. One day I stepped into
the office of the Secretary of War, General Walker, and found there,
engaged in a very excited discussion, Mr. Jefferson Davis, Mr.
Memminger, Mr. Benjamin, Mr. Gilchrist, a member of our
Legislature from Loundes county, and a number of other prominent
gentlemen. They were discussing the propriety of immediately
opening fire on Fort Sumter, to which General Walker, the Secretary
of War, appeared to be opposed. Mr. Gilchrist said to him, ‘Sir,
unless you sprinkle blood in the face of the people of Alabama they
will be back in the old Union in less than ten days!’ The next day
General Beauregard opened his batteries on Sumter, and Alabama
was saved to the Confederacy.”
When the news flashed along the wires that Sumter had been fired
upon, Lincoln immediately used his war powers and issued a call for
75,000 troops. All of the northern governors responded with
promptness and enthusiasm; but this was not true of the governors
of the southern states which at that time had not seceded, and the
Border States.
We take from McPherson’s admirable condensation, the evasive or
hostile replies of the Governors referred to, and follow it with his
statement of the military calls and legislation of both governments,
but for the purposes of this work omit details which are too
extended.
REPLIES OF SOUTHERN STATE GOVERNORS TO
LINCOLN’S CALL FOR 75,000 TROOPS.
Governor Burton, of Delaware, issued a proclamation, April 26,

recommending the formation of volunteer companies for the
protection of the lives and property of the people of Delaware against
violence of any sort to which they may be exposed, the companies
not being subject to be ordered by the Executive into the United
States service, the law not vesting him with such authority, but
having the option of offering their services to the General
Government for the defence of its capital and the support of the
Constitution and laws of the country.
Governor Hicks, of Maryland, May 14, issued a proclamation for
the troops, stating that the four regiments would be detailed to serve
within the limits of Maryland or for the defence of the capital of the
United States.
Governor Letcher, of Virginia, replied that “The militia of Virginia
will not be furnished to the powers of Washington for any such use
or purpose as they have in view. Your object is to subjugate the
southern States, and a requisition made upon me for such an object
—an object, in my judgment, not within the purview of the
Constitution or the act of 1795—will not be complied with. You have
chosen to inaugurate civil war, and having done so we will meet it in
a spirit as determined as the Administration has exhibited toward
the South.”
Governor Ellis, of North Carolina, replied April 15:
“Your dispatch is received, and if genuine—which its extraordinary
character leads me to doubt—I have to say in reply that I regard the
levy of troops made by the Administration, for the purpose of
subjugating the States of the South, as in violation of the
Constitution and a usurpation of power. I can be no party to this
wicked violation of the laws of the country, and to this war upon the
liberties of a free people. You can get no troops from North Carolina.
I will reply more in detail when your call is received by mail.”
Governor Magoffin, of Kentucky, replied, April 15:
“Your dispatch is received. In answer I say emphatically, Kentucky
will furnish no troops for the wicked purpose of subduing her sister
Southern States.”
Governor Harris, of Tennessee, replied, April 18:
“Tennessee will not furnish a single man for coercion, but fifty
thousand, if necessary, for the defence of our rights or those of our
southern brethren.”
Governor Jackson, of Missouri, replied:
“Your requisition is illegal, unconstitutional, revolutionary,
inhuman, diabolical, and cannot be complied with.”
Governor Rector, of Arkansas, replied, April 22:
“None will be furnished. The demand is only adding insult to
injury.”
ALL OTHER CALLS FOR TROOPS.
May 3, 1861—The President called for thirty-nine volunteer

regiments of infantry and one regiment of cavalry, with a minimum
aggregate of 34,506 officers and enlisted men, and a maximum of
42,034; and for the enlistment of 18,000 seamen.
May 3, 1861—The President directed an increase of the regular
army by eight regiments of infantry, one of cavalry, and one of
artillery—minimum aggregate, 18,054; maximum, 22,714.
August 6—Congress legalized this increase, and all the acts, orders,
and proclamations respecting the Army and Navy.
July 22 and 25, 1861—Congress authorized the enlistment of
500,000 volunteers.
September 17, 1861—Commanding officer at Hatteras Inlet, N. C.,
authorized to enlist a regiment of loyal North Carolinians.
November 7, 1861—The Governor of Missouri was authorized to
raise a force of State militia for State defence.
December 3, 1861—The Secretary of War directed that no more
regiments, batteries, or independent companies be raised by the
Governors of States, except upon the special requisition of the War
Department.
July 2, 1862—The President called for three hundred thousand
volunteers.

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International Cases of Corporate

Governance Jean Jinghan Chen

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ISBN 978-981-19-3237-3 ISBN 978-981-19-3238-0 (eBook)

Corporate governance cases and their ramifications have been in the

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I would like to thank everyone who has encouraged and supported me

Discussion Questions 132

Performance Improvement Driver: Corporate

APRA Australian Prudential Regulatory Authority

CIO Credit and Investment Ombudsman

ROA Return on Assets

Fig. 2.1 Carillion’s Share Price, February 2017–January 2018

Fig. 7.1 The stock price of Wells Fargo’s share price

Table 2.1 Carillion’s nonexecutive directors 19

Table 8.3 Discontinued operations in 2018 (in AU$ million) 120

such as the OECD Principles of Corporate Governance set by the

suggests that most national corporate governance guidelines and regula-

headquartered in England, admitted that it had overstated its 2014 profit

Chapter 9 examines the case of Toshiba, which was founded in Tokyo,

The Alibaba Group was established in Hangzhou, China, in 1999 by

Yunnan Baiyao was first established as a family business in 1933 in

Sarbanes–Oxley Act. (2002). Sarbanes-Oxley Compliance Professionals Associ-

On 15 January 2018, the UK construction and services company Caril-

1 See the Trading Updates in 2017. https://www.investegate.co.uk/carillion-plc--clln-/rns/trading-

© The Author(s), under exclusive license to Springer Nature 11

According to Carillion’s annual report in 2016, Carillion was the

2 Taken from Carillion’s annual report in 2000.

company the second largest construction and services company in the

Carillion’s Initial Problems

Carillion’s problems can be attributed to its expansion strategy. Specif-

In the 1990s, a number of economic and structural changes with a

Carillion’s overreliance on subcontracting allowed the company to

Carillion’s Corporate Governance Issues

5 Shareholder primacy is a shareholder-centric form of corporate governance that focuses on

Despite Carillion’s financial issues, the board of directors decided to

● High levels of on- and off-balance sheet debt were unlikely to be

Despite growing shareholder concerns about Carillion’s executive

Nonexecutive Directors (NEDs)

Table 2.1 Carillion’s nonexecutive directors

KPMG was first appointed Carillion’s external auditor in 1999. The

● Recognition of contract revenue

Although Deloitte made a number of recommendations in its internal audit

9See the report released by Commons Select Committee in 2018. https://publications.parlia

The Cost of Carillion’s Collapse

Two months after Carillion’s collapse, the engineering company Vaughan

Lessons Learnt from Carillion

Table 2.2 Carillion: Key events

suppliers, subcontractors and the general public have a legitimate interest

independence of auditors; therefore, major reform is needed to strike a

Hoang, L. M. (2014). Carillion in talks with Balfour Beatty on 3 billion pound

A Brief History of Tesco

If the country could then have been pacified, Lincoln’s inaugural

Governor Burton, of Delaware, issued a proclamation, April 26,

ALL OTHER CALLS FOR TROOPS.

May 3, 1861—The President called for thirty-nine volunteer

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