Name: Lý Ngọc Thúy Vy
Student ID: K224070998
Class: 242FB9901
–*– AGENCY PROBLEM –*–
Case study: Coteccons - Conflict between shareholders and management
Coteccons, one of Vietnam’s leading construction companies, provides a textbook example of
the agency problem in corporate governance. This issue arises when the interests of the
company’s shareholders (principals) diverge from those of its management (agents). At
Coteccons, a severe conflict of interest emerged between the company’s largest shareholder,
Kusto Group, and its executive management, leading to significant negative impacts on the
company’s reputation and operations.
Coteccons had long been recognized as a dominant player in the Vietnamese construction
market. However, its governance structure became a source of contention when Kusto Group,
a major shareholder with a 17.55% stake, began questioning the management’s practices. In
2020, Kusto publicly accused Coteccons’ executive leadership of conflicts of interest and
engaging in related-party transactions without proper disclosure.
The allegations centered around claims that the executive team, led by the CEO, had
facilitated transactions benefiting entities closely affiliated with the management rather than
prioritizing the best interests of all shareholders. Key issues included:
- Kusto alleged that Coteccons’ management had directed a significant volume of
contracts to associated companies, potentially overpricing services or products to
benefit the management’s affiliates. For example, multiple contracts were reportedly
awarded to companies owned by or linked to Coteccons’ executives, raising concerns
over fairness and competitiveness.
- The executive team was accused of failing to provide adequate disclosure regarding
these transactions, violating corporate governance standards and undermining
shareholder trust.
- Kusto claimed that the board of directors, dominated by the management team,
limited the ability of shareholders to question or veto decisions, exacerbating the
agency problem.
The unresolved conflict had far-reaching consequences for Coteccons. The allegations of
mismanagement and conflicts of interest eroded trust among shareholders and potential
investors. As a result, Coteccons’ stock price declined significantly during the period of
public dispute. The public nature of the dispute created distractions within the company,
diverting focus from core operations and client relationships. The controversy tarnished
Coteccons’ image as a professionally managed entity, potentially affecting its ability to secure
new projects and maintain partnerships.
Analysis the case
1. Why do I consider it an agency problem?
Management exploits its position for personal benefit, fails to align with shareholder
interests, and undermines corporate governance. The lack of effective oversight and
transparency amplifies the issue, leading to tangible negative consequences for the company
and its stakeholders.
2. Solving problems
The Coteccons case serves as a stark reminder of the critical importance of robust corporate
governance. The agency problem, characterized by the divergence of interests between
shareholders and management, significantly impacted Coteccons. To prevent recurrences, a
multi-pronged approach is crucial.
Firstly, Coteccons should establish an independent board with non-executive directors and a
robust audit committee to oversee management and review related-party transactions.
Independent directors who are not influenced by the management can objectively oversee
management decisions to ensure that it is in the best interest of all shareholders. The effective
audit committee should be assigned to undertake in-depth scrutiny and approval procedures
for all related-party transactions, independent of any financial experts.
Secondly, mandating stricter disclosure requirements for related-party transactions and
conducting regular external audits are necessary. Disclosures should be made in detailed form
about the rationale, financial terms, and identification of beneficiaries in respect to each
transaction. Regular independent external audits by independent firms should be imposed to
maintain standards of governance and ensure shareholders that integrity is being maintained
in the company.
Thirdly, implement mechanisms for shareholder resolutions and ensure fair representation
through robust voting systems to represent even the minority shareholders fairly, with no
single party dominating the rest.
Besides, collaborate with regulators to establish stricter governance guidelines, foster an
ethical corporate culture, and implement effective mediation and conflict resolution
mechanisms between shareholders like Kusto and the management team so that differences
can be ironed out amicably. This process can result in the development of an agreed
governance framework that delineates clear roles, responsibilities, and decision-making
processes, thus minimizing the chances of future conflicts.
