Tue, Sep 26, 2017 - Page 8 News List

Practical controls for financial oversight

By Wang Chien-an 王健安

Financial Supervisory Commission Chairman Wellington Koo (顧立雄) is in the spotlight regarding financial regulation as he faces issues such as family-owned businesses, the heavy fine levied by US authorities on Mega Financial Holding Co and SinoPac Financial Holdings Co’s failure to regulate its subsidiaries’ activities.

Financial governance has once again come into focus and there are three areas that require further analysis.

First, Taiwan’s financial industry is said to be dominated by four powerful families and Citibank, although some media commentators say foreign investors are the most influential. Foreign investors own about 27 percent of SinoPac’s shares, nearly 30 percent of Cathay Financial Holding Co and Fubon Financial Holding Co, and 43 percent of CTBC Financial Holding Co. Despite this, most Taiwanese still believe these companies are family-controlled. Why?

Nominally, individual members of these families do not hold a large number of shares, but if legal representatives appointed by investment company X, Y or Z are counted, it would show that these families are able to control most important company decisions, despite holding a minority of the companies’ shares. Families exert a lot of control that needs to be reduced given the high degree of leverage in the financial industry.

Second is the operating problems stemming from the power of privately run financial holding companies extending into state-run banks. As some media commentators have said, the government’s shareholdings are larger than any family’s. However, the tendency of the government to appoint legal representatives based on political “color” rather than merit is no different from how privately run holding companies go about their appointments. The main problem with state-run banks is that they are not focused mainly on performance and many of them rely on government policy.

Third is deciding which is more important: financial supervision or development. Ways to improve profits and operations, and eliminate irregularities are part of what the media call the three new rules for financial supervision, namely: developing financial technology while maintaining a competitive financial industry; implementing differentiated management and improving supervision of the separation between industry and finance; and excessive concentration of financial power in the hands of a few families. This is why financial policy must be both unambiguous and predictable.

There are, generally speaking, two “firewalls” aimed at protecting financial institutions, and they are focused on banks: restricting investment in other financial and in non-financial institutions. The latter addresses the separation of finance and industry as in the SinoPac case and is thus also related to governing the activities of subsidiaries.

However, many financial scandals involved companies setting up banks or financial institutions, which then invest in these companies’ subsidiaries. The latter area — non-financial — is more strictly controlled, although such activities still occur.

Rather than debating which family is more powerful, people should adopt the view that financial governance should be focused not on nominal laws, but on thorough practical controls.

After all, both Mega and SinoPac have issued reports on corporate social responsibility and introduced independent board members and committees required by law, and they are both included in the Corporate Governance 100 Index. Makes one wonder what the problem is, does it not?

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