State-owned enterprises (SOEs) have been making headlines recently. The Council for Economic Planning and Develop-ment (經建會) has postponed its schedule for privatizing SOEs, political figures have taken the helm at certain SOEs, China Steel Corp (中鋼) is diversifying into hotels, Taiwan Fertilizer Co (台肥) is stretching its tentacles into the high-tech field and employees of the Taiwan Railway Administra-tion (台鐵) have protested that the Taiwan High Speed Rail Corp's (台灣高鐵) railway threatens their livelihood. Do we need SOEs? Who should take responsibility for the success or failure of these businesses?
The biggest problem with SOEs is the fact that management simply doesn't care about the rights and interests of shareholders. Even if they were privatized, the government would no doubt remain the biggest shareholder. The government is supposed to manage the people's assets, but, instead, high-ranking executives and private shareholders with relatively small stakes are allowed to reap profits. SOEs are thus controlled by managers who are not majority shareholders.
In addition, because the shares are not listed on the stock market, institutional investors are prevented from playing the role of market discipliner. Not surprisingly, the low correlation between the salaries of high-level executives and changes in company value also contributes to poor performance at SOEs.
What concerns me, however, is that these companies are assets that belong to all the people of Tawan. It is hard to be optimistic if SOEs are to continue to operate as they have in the past. The crux of the problem is that SOEs have completely forgotten who their real shareholders are.
Company value takes two forms -- live and dead value. The former is the value of continuous operations, while the latter is value at liquidation. If, for example, the cost of capital is 10 percent, an SOE will be deemed viable for continuous operation only when it yields a return of more than NT$10 for a NT$100 investment. By this standard, most SOEs are actually as good as dead. The government's reorganization of these businesses is an urgent matter. The freed-up resources from this reorganization should then be invested in emerging venture capital fields.
So, should SOEs diversify? Investors are definitely opposed to enterprise diversification. Think about it. Since investors can simply purchase mutual funds worth US$3,000 to hold a stake in hundreds, or even thousands of companies, do they expect a company "not to attend to its main business?" In the US, most enterprises which diversify, such as Sears Roebuck and Kodak, end up with poor results and often become subject to takeover. Once the new bosses take over the company, their primary task is to sell non-core businesses.
Taiwan's SOEs are heading in the wrong direction. But due to the high proportion of government shares and the fact that takeover regulations tend to protect target companies, potential takeover funds are prevented from playing the role of market discipliner.
Recently, the Bank of Taiwan (台銀) was reported to have in-vested in dozens of companies, none of which has yielded returns. This level of performance is lower than had a monkey chosen the shares. The chance of winning a lottery prize is better than that of benefiting from such diversification. So it is reasonable to suspect that all this has been directed by someone behind the scenes.
Diversification may be nothing more than a charade aimed at lining private pockets by making poor reinvestments which should have been paid to the people in the form of cash dividends.
I have the following suggestions for managing SOEs. First, diversified investments should be suspended immediately and investments that are currently performing poorly should be disposed of. Idle cash should be disbursed to shareholders by means of an increase in cash dividends.
Second, each SOE must be audited to see whether it still has sufficient live value to continue operations. If not, new investments and financing should not be permitted.
Third, the release of government shares to strategic investors or the listing of shares on the stock market -- needed to introduce market discipline -- should be accelerated.
Fourth, 80 percent of the salaries of high-level executives should be linked to changes in company value.
Fifth, new board chairmen must be required to explain how they will boost company value and profit shareholders, namely the people of Taiwan.
Whether the board chairmen know about manufacturing of sugar or salt is not the point. If the newly-appointed chairmen still talk about diversifying into high-tech fields, why not close the companies or hand them over to strategic investors? Why not give the money back to the people so that they can purchase global high-tech mutual funds and have a better chance of making profits?
If the new board chairmen attach importance to the concept of "employees first," shouldn't the Commission of National Corporations become a department of the Council of Labor Affairs or the Ministry of the Interior? Reorganizing SOEs involves effective distribution of resources and could cripple state finances.
Which is more important -- the interests of the people or the private benefits of employees? The answer is clear.
I am all for giving munificent pensions to employees unfit for their jobs. But I object to concerns about social welfare or employees' working rights obstructing the urgent need to reorganize poorly performing SOEs.
Wu Chi-ming is an associate professor of finance at National Chengchi University.
Translated by Jackie Lin
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