Financial Supervisory Commission (FSC) Chairman William Tseng (曾銘宗) hit the nail on the head with recent comments over the planned acquisition of Siliconware Precision Industries (SPIL) by China’s Tsinghua Unigroup when he said the real crux of the matter was that companies are underpriced in the local stock market, allowing foreign investors to acquire Taiwanese companies and technology on the cheap.
Chinese-language monthly Wealth Magazine executive director Hsieh Chin-ho (謝金河) wholeheartedly agreed, saying the capital gains tax was starving the stock market of funds, which is why the market capitalization of these businesses is too low. Hsieh added that because of this, there is little the nation can do to stop the family silver — its technology and talent — from being sold off cheaply to foreign buyers. However, studies of the market value of businesses worldwide suggest that there is another factor even more important than the capital gains tax.
This low valuation is almost certainly related to Taiwanese companies’ inability to maximize the potential of their technologies and Taiwanese talent long having been undervalued in the market. However, the phenomenon of companies with low market capitalization is not exclusive to Taiwan.
The root cause is that Taiwanese companies do not have sufficiently robust corporate governance, nor do they have adequate laws backing them up. Regarding corporate governance, one crucial point is the guarantees, or lack thereof, given to minority shareholders.
For example, if there are insufficient guarantees given to minority shareholders, controlling investors can employ a range of tunneling measures to redirect minority shareholders’ money into management. If this is allowed to go unchecked, investors lose confidence in the market and become reluctant to invest, leading to a situation in which there is insufficient liquidity in the market, naturally reducing the market value of listed companies.
What are these assurances to minority shareholders? They are related to the laws of a nation and the extent to which these are carried out. Unwritten law — government-recognized established practice and conventions — in the US and the UK offer the best assurances, followed by written laws in Scandinavian nations, Germany and France.
For example, in Latin American countries that were formerly French colonies, market capitalization for companies tends to be low, but in the UK and the US, where unwritten laws hold sway, companies with relatively good corporate governance are generally valued high in the market, although the actual extent of this is tempered slightly due to the robust nature of their legal systems. On the other hand, companies with good corporate governance in countries such as Russia and Venezuela, which do not have such developed legal systems, tend to benefit more in terms of their market value.
Insider trading is something that the public sometimes hears about, but the conviction rate is not very high. The same thing happens in South Korea. If any senior officials of major corporations are unlucky enough to get caught, they are usually pretty confident they will not go to jail.
Laws are not only for the powerful. As such, it is no wonder it is so difficult to restore investor confidence, not to mention increase companies’ market capitalization.
Which begs the question: How will Taiwan increase the market value of companies? Well, first it needs to improve governance and regulations to reduce insider trading. Then perhaps it might have a chance.
Shen Jung-chin is an associate professor in the School of Administrative Studies at York University in Toronto, Canada.
Translated by Paul Cooper
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