Commentary: Taiwan Inc.: Shareholders Need a Break

One might have thought it time for humility. On Aug. 28, Acer Inc. (ACEHF ) reported a 94% drop in second-quarter profits, the latest sign that founder Stan Shih has yet to revive the fortunes of Taiwan's biggest PC company. Yet three days later, an Acer press release trumpeted Going Global, Shih's latest book. In this collection, the 56-year-old Acer chairman lays out "Stan Shih's Competitiveness Formula."

Shih needn't worry about others copying it. Acer's woes are less about the current business cycle than about management miscues going back more than five years. Shih declined to comment for this story, but many of Acer's problems can be laid at his door. In the mid- to late 1990s, when other Taiwanese focused on contract manufacturing, Acer persisted in selling its own brand. The results were almost always disappointing. But Shih plowed ahead, moving into a range of consumer products with the aim of creating a Taiwan version of Sony Corp. (SNE )

That didn't work either. So in the late 1990s, Shih diversified, investing in everything from dot-coms to a Hong Kong movie distributor. Then the Internet bubble burst. By yearend 2000, Shih was ready with another move, announcing the separation of Acer's contract manufacturing business into a new subsidiary that he hopes to spin off. The move reflected an acknowledgement that going after contract manufacturing orders from other PC makers while continuing to build a brand didn't sit well with investors or customers.

Investors have paid a steep price for Shih's zigs and zags. Over the past five years, Acer's stock price has risen a paltry 5%, compared with a 148% rise in the index of Taiwanese electronics companies. When management performs that poorly, investors can usually count on an institution to protect their interests. It's called a board of directors. At sick Western companies, boards clean house, ousting management and bringing in new chief executives. At Acer, the board has sat idly by, from one failed strategy to the next.

To see why, look at Acer's board. Five of its seven members--including Shih--are execs at Acer or Acer units. Another director is a representative of an investment company owned by Shih and his wife. With a board stacked so heavily in his favor, it's no wonder Shih can steer the company in any direction he fancies.

A lack of other big shareholders is another problem. Shih has the biggest stake, according to an Acer spokesman, but he and his wife own just 5% of the company. Compare Acer with Taiwan Semiconductor Manufacturing Co. (TSM ) Dutch giant Royal Philips Electronics (PHGZF ) was one of its founders, and three Philips representatives still sit on TSMC's board. They provide valuable experience and knowledge about the industry. Acer doesn't have that.

In this respect, Acer is like many Asian companies. And Taiwan is like many Asian nations in that its laws fail to protect minority shareholders and hinder class actions. So execs like Shih don't fear litigation from angry investors. And with hostile takeovers almost unknown, companies need not fret about a low stock price drawing unwelcome suitors.

ROLL CALL. Taiwan, suffering from the tech downturn and a long-term threat from China, must learn to treat shareholders better if it wants to get the foreign and local investment it requires to boost competitiveness. The government needs to implement reforms that encourage independent boards. In turn, the boards must set up committees--chaired by outside board members--that audit company results, determine compensation for key executives, and decide on the composition of the board itself.

Companies should reveal attendance records, so it's clear whether board members are taking their job seriously. Allowing investors more recourse to the courts would also make companies more accountable. Shareholders should matter: With Taiwan and much of the rest of Asia mired in a new recession, it's a lesson worth learning right away.

By Bruce Einhorn

    Before it's here, it's on the Bloomberg Terminal.