Governance Reforms Go by the Board

All too often in Asia, the interests of small investors are betrayed by corporate directors who serve the boss rather than stockholders

By Bruce Einhorn

One of the lessons that Asian companies were supposed to have learned from the '97-'98 financial crisis was that greater transparency and better corporate governance were needed. No longer was it O.K. for companies dominated by one businessman or one family to abuse minority shareholders. As in the U.S., such shareholders should have their rights respected.

Alas, as with so many other good things that were supposed to come from the crisis, improvement in corporate governance has been spotty, at best. This week in the Asian print edition of BusinessWeek, I wrote about Acer Inc., the Taiwanese computer maker that has fallen on hard times (see BW Magazine, 9/17/01, "Commentary: Taiwan Inc.: Shareholders Need a Break"). Acer has implemented several strategies over the years, with Chairman Stan Shih trying to find the right formula to revive what was once Taiwan's premier information technology company. As he struggles to right Acer, Shih has the luxury of a pliant board of directors. Of the seven members, five are executives at Acer or one of its subsidiaries. Another is a representative of the investment company owned by Shih and his wife. The last is a well-connected businessman with ties to both former President Lee Teng-hui and current President Chen Shui-bian.


  Acer is hardly the only Taiwanese company with a board dominated by insiders. In trying to understand why Taiwanese -- and by extension, other Asian -- companies have such a hard time with shareholder rights, I recently spoke to lawyer Mark Ohlson, a senior legal consultant with the Taipei-based law firm Qi Lin International Law Offices.

"A lot of the reasons that you don't have aggressive restructuring and shareholder rights issues in Taiwan isn't so much a legal issue as much a cultural or ownership issue," he says. In most cases, the shareholding in publicly listed companies is still under the control of a family. That means that you don't have significant numbers of outside shareholders who aren't members of the family or business associates. "Everything is managed in a closed sort of fashion," he says. "In many of these companies, the boards are under the control of management."

Result: Boards are often passive. "There isn't a separation of ownership and management that you see in most publicly traded U.S. corporations," says Ohlson. "You've got the guy who owns the company also running the company. You don't really have an independent board that can fire the chairman or fire the general manager. That is a block to some rational corporate restructuring measures."


  What about big institutional investors? After all, in the U.S. it's big pension funds like CalPERS that have been some of the strongest advocates for better corporate governance. Companies in Taiwan, says Ohlson, doesn't have foreign institutional investors buying big stakes. And even the local funds aren't active. "All you've really got are passive mutual funds taking a share in Taiwan portfolios," he says. "They're not really interested in buying 25% of the company. They're interested in buying 0.5% at most."

Another hindrance to greater shareholder rights in Taiwan is the absence of class-action lawsuits. While many Asians (not to mention Americans) like to mock the U.S. shareholders as a litigious bunch, these critics are overlooking one of the important roles that the courts play in the U.S. system. By giving shareholders recourse to the courts court, the system encourages companies to be more proactive in protecting shareholders' rights. Of course, the system isn't perfect, and the U.S. is hardly a Utopia for corporate governance. But I'd argue that the American system operates better than its counterparts in Taiwan or other parts of Asia.


  So why can't investors just get together and sue a company in Taiwan? In the U.S., the law allows for a class-action suit to be filed on behalf of an unspecified group or subset of people, not all of whom need to be identified at the time of the filing. Hence the search for disgruntled investors on the part of law firms that have already filed suit against a company.

In Taiwan, that doesn't happen. "You can't bring a suit on behalf of an undefined class," says Ohlson. "You can't bring a suit on behalf of a bunch of investors who are not named. You've got to go out and find the people."

This thinking isn't bad only for small shareholders -- it also hurts management. Consider Acer. As part of Shih's latest plan, he wants to spin off the Wistron subsidiary, which produces computers on a contract basis for foreign name-brand players like IBM, as a separate company. Taiwanese law doesn't allow Acer to list the company right away since the company must have a track record showing several years of profits.


  The goal is admirable: To protect investors from scams. "It's really a kind of paternalistic attitude by the government toward the investor," says Ohlson. In effect, the Taiwanese regulators are "saying that we are going to protect the investor from unsound companies." By contrast, in the U.S., the companies have to disclose information and it's the investors' responsibility to digest it. If the companies don't disclose enough, then shareholders can sue.

Sure, managers don't like to deal with pesky minority shareholders, their irritating lawsuits, and annoying calls for reform. Yet they play an important role in ensuring proper governance of a company. The sooner Asian companies realize that, the better off they'll be.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BW Online

Edited by Douglas Harbrecht

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