Just as the media had predicted, the government shareholders were defeated and the Koo family won two-thirds of the seats in China Development Financial Holding Corp's recent board of directors election. While the government would have been annoyed at losing this battle for executive power over China Development, it should be more concerned about losing a greater war because it lacks a clear understanding of what role it should play in the privatization process.
In the privatization of publicly owned companies or financial institutions, there is always a transitional stage in which the company is privatized in name, but is in fact still largely under government control. How should the government exercise its rights as a shareholder during this stage? The government has never had a consistent or firm position on this, and the authorities managing government shares tend to sway in whatever direction public opinion leans. Each case is dictated by different principles, but when the government is represented on a board of directors, it is often unclear whether the chairman represents the interests of the government or those of the private shareholders.
Private shareholders attach considerable importance to the board of directors and insist on their management rights. That private shareholders are willing to fight hard to defend these rights is often given as a reason for the government's defeat in board elections. Unless the government has some kind of hold over the big private shareholders, it cannot beat them. In this light, the government's most recent defeat is hardly surprising.
The government is being forced by public opinion to maintain seats on company boards because of the perceived threat posed by scheming consortiums. This is also the hole in privatization policy that the government doesn't dare address. The government even seems to think that privatization means turning companies into consortiums. When its reputation is dragged through the mud, the government more often than not chooses to take refuge in rhetoric, rather than taking a stand. Sometimes, its position on management and leadership rights seems to contradict the stated goal of privatization. The government ends up battling private shareholders and competing in hard-fought board elections.
When looking back at the government's fight for seats on the boards of firms like China Development, Hua Nan Financial Holdings, Mega Holdings and Waterland Financial Holdings, it is apparent that its staffers worked themselves to the point of exhaustion, even taking the approach of free marketeers and pursuing proxy votes. Despite all this, the government lost its board seats. And despite accusing its opponents of acting illegally, it was powerless to stop them.
The problem is that the government lacks any real motivation for this fight. Principles are in place to determine the suitablity of major shareholders in financial holding firms. Does the authority that manages the government's shares comply with these principles? If not, why does the government need to have more than half of the board's leadership positions? Isn't that also against the principles set by the agency in charge? If private shareholders don't qualify as major shareholders, do government shareholders just replace them? A financial institution has to motivate its intentions in buying another financial institution - whether it is for quick monetary gain or for long-term investment. So for what reasons does the authority handling the government's shares continue to hold these shares? If private shareholders are obliged to conform with these principles, then so is the authority that handles the government's shares.
Apart from the problems inherent in the referee trying to be a player, what the government is not clear on is why, when it claims to want privatization, it still seeks to control the management. Why doesn't the government just sell its shares as soon as possible?
No matter if it is the first or the second round of financial reforms, most people acknowledge that Taiwan's financial institutions are in need of consolidation. But this consolidation is bound to lead to the subject of privatization. Yet, there have so far been no policymakers who have addressed and explained away the doubts of the public. Just what is the government hoping to get out of this struggle for corporate power? It is hard to come by an answer to this question that is not just populist, as the government is not really addressing or solving this issue.
The public is waiting for the government to take a stand against privatization policies being dragged through the mud. In policymaking it is not enough to just have an aim, it is also necessary to explain this aim, and the government needs to be more transparent. Only by regaining support for its policies can the government take the right course and avoid getting entangled in dirty battles it cannot win.
Chou Tein-chen is professor and dean of the College of Management at Shih Chien University.
Translated by Anna Stiggelbout
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