Financial Supervisory Commission (FSC) Chairman Wellington Koo (顧立雄) has not failed public expectations. When he transferred from the chairmanship of the Ill-gotten Party Assets Settlement Committee to the commission in September last year, there was some opposition within the financial sector, but there was wider support for the view that only an outsider would be able to reform the financial system and resolve long-standing issues such as the problem of “the financial clique” — retired commission and Ministry of Finance officials working in government-invested financial institutions.
Last week in the Legislative Yuan, Koo said that it is very “inappropriate” for government officials retired from financial supervisory authorities to serve as board directors or in the management of financial and banking institutions, as this is tantamount to retired financial supervisors joining the ranks of the supervised.
He also said that the commission would not assign retired officials to the boards or management of financial institutions in which the government holds shares. Koo’s statement was a clarion call for the destruction of the financial clique, which makes him unique.
The financial clique has been criticized because high-ranking officials in financial authorities are often “transferred” to the management of financial or banking institutions upon retirement, regardless of their previous performance or their expertise and professional experience. They form cliques that have long held sway over Taiwan’s financial sector.
Not only are their manipulations “unsightly,” they also contravene basic professional ethics, obstructing Taiwan’s financial development and impeding its international competitiveness. Flawed financial supervision and numerous scandals over the past few years have shown the deep and complex relations of the clique, in which members shield one another.
The financial clique is a remnant of the party-state regime and a product of half-cooked financial liberalization. It can be traced back to the post-World War II foreign regime, which took over public banks and forced the incorporation of Chang Hwa Bank (CHB) and other private banks into a “provincial banking system” by expropriating stakes formerly held by Japanese shareholders.
Banking services were a privileged business requiring special permission, and only those who enjoyed good relations with the party-state were allowed to run banks. Just as with the ban on newspapers, there was a banking ban during the authoritarian era, and it was not lifted until the economic liberalization of the 1990s.
However, even following liberalization, high-ranking officials from financial authorities and political figures have been unwilling to relinquish control over financial institutions. Their possessive mindset has manifested in the much-criticized appointments of retired government officials to the management of financial or banking institutions and reflected the paradoxical nature of the privatization of public banks.
The so-called “privatization” has only meant that the government no longer owns a majority of shares in the banks, not that the shareholding structure and management have been handed over to the private sector.
To make things worse, financial authorities — now holding a minority share — have fought forcefully to maintain operational control of banks by buying up powers of attorney.
The long-standing battle over the management rights of CHB is the most notable example. The Ministry of Finance has insisted that an agreement made after a share sale in 2005 regarding CHB board seats was no longer binding and has won several lawsuits to that effect, but it obstinately continues to appeal those that did not, even though that has a negative effect on its international reputation.
This has shown that financial authorities are unwilling to let go of private banks and has highlighted the extremely limited progress of financial liberalization.
Based on fundamental corporate governance, when the government holds shares in financial institutions, it is a shareholder, and as such, it should only act as a shareholder and only enjoy the rights and benefits of shareholders, and it should not have any powers beyond that.
State-run businesses tend to be less efficient than privately run ones. The government should not consider itself omnipotent and interfere in the management of businesses, and high-ranking officials must bear in mind that with rank comes power, but not necessarily expertise.
In the “provincial banking system” before the Taiwan Provincial Government was reduced to near-nominal status, chairpersons and board directors were required to attend question-and-answer sessions at the provincial assembly. For these officials, traveling between the Taipei headquarters of their banks and the provincial assembly in Taichung’s Wufeng District (霧峰) was time-consuming, as well as harmful to their management duties.
To make things worse, elected representatives interfered with the management of banks, using supervision as an excuse, and this eventually evolved into malfeasance such as influence peddling and renovating, purchasing and renting buildings owned by banks, as well as excessive loans.
Even though the provincial assembly no longer exists, inappropriate interference by the government through its stakes and from the executive and legislative branches, as well as the exploitation of power for personal benefit, will continue to hinder the healthy development of Taiwan’s financial system. From this perspective, the lack of transitional justice means that Taiwan’s financial system is still unable to free itself from the shackles of political power.
Another reason Koo deserves applause for his statement is that it marks a resolute reversal of the long-standing government malfeasance due to the clique culture. There have been many cases of retired government officials taking cushy, well-paid jobs in government-invested banking institutions or organizations peripheral to the financial authorities to bypass the revolving-door policy stipulated in the Civil Servant Work Act (公務員服務法) before going to private banking institutions and businesses.
Even worse, financial authorities know of this practice, but have been unwilling to rectify it, because the people involved are often their seniors or former managers.
Moreover, by not correcting the situation or even facilitating such transfers, they might enjoy the same benefits in the future, thus forming an “accomplice structure.” The consequence is the financial clique.
As an outsider, Koo does not have to think about his career and he is determined to break the old habits and implement thorough reform. Reform requires determination, and as long as the person in charge does not work for private gain, focuses on the problem and the duties of their position and leads by example, the implementation of reform does not have to be as complicated as it might seem.
To deal with the issue, the ministry should stop appointing retired officials to government-invested financial institutions and close loopholes to the revolving-door policy. Only then will the financial clique be effectively dissolved and allow financial reform to take a great leap forward.
Translated by Chang Ho-ming
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