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Editorial: Trust is the most important asset

In his book entitled Trust, Francis Fukuyama points out that trust is the most important capital in a capitalist society. It obviates a great deal of suspicion and verification work, and saves tax money in a reduced government regulation. The more advanced the state of industry and society, the more important trust becomes.

On the basis of Fukuyama's theory of trust, a bank's most precious asset is its credit. Although the breach-of-trust case against China Development Financial Holding Corp (中華開發金控) chairman Liu Tai-ying (劉泰英) has yet to be proved in court, he has otherwise demonstrated how unsuitable he is to work as a bank manager.

When Lee Teng-hui (李登輝) was president, Liu held the two important posts of chairman of China Development and chairman of the KMT Investment and Business Management Commission. Lee placed his full trust in Liu. Liu's political connections benefitted him in his role as chairman of China Development. He helped to win the trust of the society and consequently gained business opportunities.

Ever since Chen Shui-bian (陳水扁) came into office, however, Liu Tai-ying and China Development have become virtually synonymous with black gold and illicit dealings between business and government. The value of the company's stock has fallen 64 percent, which is nearly twice the average 33 percent drop in the industry over the same period. Since the Liu scandal broke out, the stock has continued to fall, despite a large-scale buy-back effort of 14.24 percent by the company. Clearly the Liu scandal has had a negative influence on the corporation.

Liu's reluctance to resign amounts to using the social resources of China Development as his own. By refusing to resign, he externalizes his own responsibility and makes it the common responsibility of China Development. Not only is this detrimental to the interests of the company's many stockholders but it also will have enormous influence on company clients.

Article 3, paragraph 14 of the regulations stipulating qualifications for bankers and financial managers states: "Anyone proven to have engaged in untrustworthy and illicit activities is not suitable to serve as a chairman." Article 35 of the Banking Law (銀行法) stipulates that bank managers and employees may not accept fees, commissions or any other form of inappropriate remuneration from account holders, borrowers or other clients. This would imply that the only way for China Development to turn itself around is for Liu to resign.

The core of modern capitalism in fact lies in finance. Corrupt financial practices will not only lead to an economic recession but also corrode the capitalist system and may even shake the nation's foundation, breaking down the entire mechanism and causing a major catastrophe. Many major problems -- from the financial meltdowns in Southeast Asia in the mid-1990s to deflation in Japan over the past 12 years -- have all been a result of corrupt financial practices and fragile firewalls.

The US has relatively strict financial regulations, but major scandals have still occurred there, including the notorious Enron case and the WorldCom case. Today, the US is resolutely investigating these companies. Thus, only when we are determined to reform our financial system and rebuild society's confidence can our economy and financial institutions prosper again.

Liu's case has highlighted the prevalence of money politics in Taiwan. To boost the economy, Taiwan must put an end to money politics, actively reduce bad loans, rebuild management controls over bad assets, and restore society's confidence in the nation's financial industry.
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