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Editorial: Time to review shareholding policy

The proxy vote battle at China Development Financial Holding Co last week offered a fascinating insight into the boardroom struggle between the government and Koo family.

That the Koo family won two-thirds of China Development's board seats in the election came as no surprise to many people, although it did disappoint the Ministry of Finance.

What is noteworthy about this boardroom fight was the impact it will have on the nation's changing financial landscape. The implications of the government's shrinking control over China Development and its impact on the effectiveness of the government's public shareholding policy merit attention.

Take the set of standards which the finance ministry established last September to manage public shareholdings in financial institutions. The ministry now faces questions about whether it can continue to honor these rules or if it should amend them.

The ministry had said the government would not withdraw from China Development's management -- unless the Koo family boosted their shareholding to more than 15 percent by the end of February.

The Koo family never met that minimum, but the government also failed to gain substantial control of the board in last week's election.

The ministry now finds itself in the embarrassing situation of being trapped by its own rules. In principle, the ministry should not dispose of any more of its shareholdings in China Development, but that would run contrary to the Cabinet's reform scheme, which calls for the gradual disposition of public shareholdings in financial institutions.

Just as a good and workable policy can help promote the healthy development of an economy, adverse rules and conventional government mentality may prevent financial institutions from maximizing their potential in an industry undergoing rapid changes involving strong competition, innovative products and ever-changing market risks.

Some have also questioned whether the Koo family's dominance would have a domino effect on uncooperative private shareholders at other financial institutions where the government also owns shares.

No one can be sure what other private shareholders will do. While it's good that the government has a Plan B in the works, there will always be concern as long as the government does not appear sure why exactly it wants to hold seats on the board at institutions where it owns shares.

Sitting on the board to offer counsel, make judgements and oversee the company's resources is not the same as managing a company. While private management is often far more efficient in maximizing a firm's economic value, the directors are the ones who can help perpetuate the value of governance in the company, not the executive staff.

At China Development, the government may be disappointed that it will no longer be able to "share management" with Koo family and only "participate on" the board.

Nonetheless, the government should remember that its goal is to act in the interests of all shareholders, especially since the recent boardroom fight raised questions among investors about the quality of the company's corporate governance and hence the future of the company.

The government has a historical role to play in maintaining the nation's financial stability, but the time is surely now ripe for the government to review the feasibility of its public shareholding policy, as well as reconsider whether it wants to be a player or an arbitrator.
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