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Analysis: State must be clear on boardroom goals

The government should unambiguously state its goals when intervening in business decisions or risk earning a reputation for meddling, analysts said yesterday on the eve of two financial holding firms' shareholder meetings.

China Development Financial Holding Co (中華開發金控) and Hua Nan Financial Holdings Co (華南金控), both of which the government holds shares in, will elect new boards today.

"So far, the Ministry of Finance hasn't clearly stated its goal in participating in boardroom `battles' -- Does it want to ensure the highest returns on equity for shareholders or is it focused on its supervision duties?" said Thomas Lee (李桐豪), an economics professor at National Chengchi University.

Because the government has not stated its position, it has battled to persuade minor private shareholders to support government-appointed board directors, he said.

The ministry said last month it wanted to solicit proxy votes to compete head-to-head with China Development's largest private shareholder, the Koo family.

Minister of Finance Ho Chih-chin (何志欽) said at the time that the government could not support the Koo family's plan to gain control of China Development's management, given the family's controversial corporate governance record and its failure to boost its shareholding to more than 15 percent by the end of February as it had previously promised.

At present, China Development is headed by government-appointed chairman Lin Cheng-yi (林誠一), with Angelo Koo (辜仲瑩) serving as president and overseeing day-to-day operations.

"Although the company has had managerial controversies, its performance has improved over the past three years, which makes its minor shareholders believe that there is no reason to change the management," Lee said.

China Development last year reported after-tax profits of NT$15 billion (US$454.5 million) with earnings per share (EPS) at NT$1.36. The figures represented a big jump from a negative net profit of NT$4.76 billion with an EPS of minus NT$0.54 in 2004, when Koo won the ministry's support to take over the company.

In 2003 and 2004, China Development set aside huge amounts of provisions to write off bad loans accumulated under former chairman Liu Tai-ying's (劉泰英) 11-year leadership.

Facing criminal charges including breach-of-trust allegations, Liu was forced to step down in June 2003.

"China Development used to be a quality financial institution. But under the management of Liu and his successor Diana Chen (陳敏薰), the company made many government policy-related investments and its performance went from bad to worse, leaving shareholders with little trust in the government," Lee said.

This is why the government had difficulty soliciting proxy votes over the past month. At present, the government owns 11.16 percent of China Development, while the Koo family has a more than 16 percent stake in the company.

The embarrassing situation the government now finds itself in stems in part from illegitimate decisions taken in the past, said Renee Yang (楊文靚), an equity analyst at Yuanta Core Pacific Securities Corp (元大京華證券).

"One's stockholding determines the rights and interests one is entitled to, but this principle is somewhat distorted in China Development's case," Yang said.

Three years ago, the ministry joined forces with the Koo family, which then had only a 6.2-percent share, to remove acting chairwoman Diana Chen. The move was criticized by legislators, who argued that the Koo family did not deserve to hold such sway over the company given their minor shareholding.

At the time, the ministry defended its support for the Koo family by saying that the Koos had agreed to raise their shareholding in China Development to between 15 percent and 20 percent in two years.

Yang said that without a legal leg to stand on, the government had its hands tied when dealing with an uncooperative Koo family.

"As the government has decided to gradually withdraw from the banking sector, it should allow market mechanisms do their job and stop interfering. Corporate performance should be the yardstick," she said.

Last September, the ministry detailed its plans for offloading public shareholdings in financial institutions. China Development is one of five entities in which the government does not control more than half of the board seats and, as such, the ministry plans to dispose of its shares in the firm once the largest private shareholder has met certain criteria.

Yang said the government's dealings with China Development had been far from clear-cut and argued that private management was often far more efficient.

Sean Chen (陳沖), chairman of KGI Securities Corp (中信證券) and a former deputy minister of finance, said that the government should only seek to champion shareholders right in firms in which public stakeholdings were less than 50 percent.

The government should also not seek to control the management of a firm unless the company was having trouble locating people of the right calibre, Sean Chen said during a recent forum.

"Financial institutions should not have any operating constraints other than the principles of corporate management," he said.
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