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Family Business in Taiwan: Current and Future Challenges. Kuang S. Yeh, Ph.D. Hsi-Mei Chung, Ph.D. Family Businesses Research Center. Family Business in Asia: Characteristics of Corporate Governance in East Asia. Pyramid Structure Cross-shareholding Interlocking Directory - PowerPoint PPT Presentation
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29 June 2007 The Asian Family Enterprise Forum
Family Business in Taiwan:Current and Future Challenges
Kuang S. Yeh, Ph.D.Hsi-Mei Chung, Ph.D.
Family Businesses Research Center
29 June 2007 The Asian Family Enterprise Forum
Family Business in Asia:Characteristics of Corporate Governance in East Asia
Pyramid Structure Cross-shareholding Interlocking Directory Principle-Principle Problem
Expropriation of minority shareholders About 60% of public companies are family
controlled
29 June 2007 The Asian Family Enterprise Forum
Family Business in Asia: Control of Publicly Traded Companies in East Asia
*Source: Claessens, Djankov, & Lang, 2000, “The separation of ownership and control in East Asian corporations”, Journal of Financial Economics, 58(1/2): 81-112.
29 June 2007 The Asian Family Enterprise Forum
Family Business in Asia: The Concentration of Family Control in East Asia
*Source: Claessens, Djankov, & Lang, 2000, “The separation of ownership and control in East Asian corporations”, Journal of Financial Economics, 58(1/2): 81-112.
29 June 2007 The Asian Family Enterprise Forum
Corporate Governance Environment in Taiwan
Taiwanese listed companies are typically family-controlled
Characteristics of the listed market in Taiwan The absence of effective audit committees Low institutional ownership An inactive market for corporate control Independent directors may not independent
29 June 2007 The Asian Family Enterprise Forum
Family Control in Taiwan: Evidence in 1994 & 1995
For a 208 Listed Companies Sample in Taiwan 51.44% of the listed companies in Taiwan are
controlled by the Family Average shareholding by the largest family is 26%
Focus on the control rights, not the cash flow rights The sum of direct and indirect ownership by the largest
family shareholder exceeds the firm’s critical control share level
Family member serves as the CEO, Chairman or hold more than half of board of directors
29 June 2007 The Asian Family Enterprise Forum
Family Control in Taiwan: Evidence in 1997 & 1998 (1)
For a 251 Listed Companies in Taiwan Using the 20% control cut-off criteria, 58.2% of the
listed companies in Taiwan are controlled by a family
Under the family-controlled listed companies, the control rights and cash flow rights diverge more than for other types of ultimate control structures
The stock collateral ratio is highest in the family-controlled listed companies The more serious agency problem in the family-
controlled listed companies
29 June 2007 The Asian Family Enterprise Forum
Family Control in Taiwan: Evidence in 1997 & 1998 (2)
For a 251 Listed Companies in Taiwan Higher cash flow rights are associated with higher
market value, while deviation of control from cash flow rights reduces corporate value, especially for companies under family control
The higher the collateralization of stock shares of the controlling shareholders, the more severe the agency problem and the lower the corporate value
The expropriation of minority shareholders is more serious in the family-controlled listed companies
29 June 2007 The Asian Family Enterprise Forum
1998 Family Control in The Listed Companies in Taiwan
*Source: Yeh, Ko, & Su, 2003, “Ultimate control and expropriation of minority shareholders: New Evidence from Taiwan”, Academia Economic Papers, 31(3): 263-299.
29 June 2007 The Asian Family Enterprise Forum
1998 Enhancement Mechanism by Controlling Shareholders in TaiwanUltimate Control Family
Control Other
Control Widely Control
Sample No. 146 30 75 Control (%) 38.34% 39.29% 11.15% Cash100 (%) 31.69% 38.48% 9.66% Cash 0 (%) 19.39% 35.86% 6.25% Cash 100/Control 0.81 0.97 0.89 Cash 0/Control 0.5 0.89 0.58 Cross-shareholding 0.48 0.23 0.32 Pyramid Structure 0.29 0.23 0.15 Participative Management 0.54 0.43 0.39 Stock Collateral Ratio (%) 32.82% 5.69% 27.86% *Source: Yeh, Ko, & Su, 2003, “Ultimate control and expropriation of minority
shareholders: New Evidence from Taiwan”, Academia Economic Papers, 31(3): 263-299.
29 June 2007 The Asian Family Enterprise Forum
Family Control in Taiwan’s Listed Companies: Evidence and Findings (1)
The critical shareholding level of family control is inversely related to the company’s size
Families can gain effective control over larger companies with lower levels of shareholding The average control by the largest family is 26%, and
that families need only 15% control, on average, to control a firm effectively for a 208 sample of Taiwanese listed companies in 1994 & 1995
29 June 2007 The Asian Family Enterprise Forum
Family Control in Taiwan’s Listed Companies: Evidence and Findings (2)
No performance difference between family and non-family companies in 1994 & 1995 However, Family-controlled companies that have
low levels of control have lower relative performance than both family-controlled companies with high levels of control and widely held companies
In family-controlled companies with higher shareholding, expropriation is less desirable because the family bears more of the costs
29 June 2007 The Asian Family Enterprise Forum
Family Control in Taiwan’s Listed Companies: Evidence and Findings (3) The expropriation of minority shareholders is
more serious in the family-controlled listed companies in the 1997 & 1998 Sample The deviation of control and cash flow rights
is greater in the family-controlled companies than other type companies
The collateralization of stock shares is greater in the family-controlled companies than other type companies
29 June 2007 The Asian Family Enterprise Forum
Family Control in Taiwan’s Listed Companies: Evidence and Findings (4)
The more serious the expropriation of minority shareholders, the lower the market value
The 1997 & 1998 sample implies that the family-controlled listed companies have the lower market value
Family Control perform worse than other types of listed companies in the 1997 & 1998 sample
29 June 2007 The Asian Family Enterprise Forum
Family-controlled Business Groups in Top 100 Business Groups
Year 1988 1992 1994 1996 1998 2000 2002
Manufacturing
68 65 69 67 48 40 33
Service 14 17 18 18 27 22 20
Others 1 1 1 1 1 1 1
Total 83 83 88 86 76 63 54
*Source: China Credit Information Service, 1990 to 2004, 1990 to 2004 Business Groups in Taiwan
29 June 2007 The Asian Family Enterprise Forum
Business Name
Industry Trait Family Controlled
Number of Affiliates
Succession or not
Formosa Chemical & Plastic Manufacturing
○ 17 1st Generation
Cathay Financial Service ○ 7 1st GenerationShin Kong Financial Service ○ 20 1st GenerationChina Trust Financial Service ○ 15 1st GenerationFar East Textile, Apparel &
Leather Manufacturing○ 22 1st Generation
Hualon Textile
Textile, Apparel & Leather Manufacturing
○ 9 1st Generation
Tatung Electronic & Household Appliances
○ 35 1st Generation
Yulon-Motor Transportation Manufacturing
○ 11 1st Generation
Tuntex Textile, Apparel & Leather Manufacturing
○ 19 2nd Generation
Chung-Shing Textile
Textile, Apparel & Leather Manufacturing
○ 11 1st Generation
The Profile of the Top 10 Business Groups in 1988
Source: China Credit Information Service, 1990, 1990 Business Groups in Taiwan
29 June 2007 The Asian Family Enterprise Forum
Business Name
Industry Trait Family Controlled
Number of
Affiliates
1988 Top 10
Succession or not
Cathay Financial Service ○ 31 ○ 2nd GenerationMega Holdings
Financial Service × 24 × --
Formosa Chemical & Plastic
Manufacturing
○ 105 ○ 1st & 2nd Generation
China Trust Holdings
Financial Service ○ 143 ○ 1st & 2nd Generation
Hua Nan Holdings
Financial Service × 13 × --
First Holdings
Financial Service × 14 × --
Shin Kong Holdings
Financial Service ○ 102 ○ 2nd Generation
Fubon Holdings
Financial Service ○ 46 × 2nd Generation
Far East Textile, Apparel & Leather
Manufacturing
○ 139 ○ 2nd Generation
Sino-Pac Holdings
Financial Service ○ 45 × 2nd Generation
The Profile of the Top 10 Business Groups in 2002
*Source: China Credit Information Service, 2004, 2004 Business Groups in Taiwan
29 June 2007 The Asian Family Enterprise Forum
The Profile of the Top 10 Manufacturing Business Groups in 2002
Business Name
Industry Trait Family Controlled
Number of
Affiliates
1988 Top 10
Succession or not
Formosa Chemical & Plastic ○ 105 ○ 1st & 2nd Generation
Far East Textile, Apparel & Leather
○ 139 ○ 2nd Generation
UMC Electronic × 93 × --TSMC Electronic × 14 × --China Steel
Steel × 88 × --
Quanta Electronic × 29 × --Yulon Motor
Transportation Manufacturing
○ 147 ○ 2nd Generation
Walsin Lihwa
Electronic Wire & Mechanics Equipment
○ 124 × 2nd Generation
President Food ○ 202 × 1st & 2nd Generation
Kinpo Electronic × 75 × --*Source: China Credit Information Service, 2004, 2004 Business Groups in Taiwan
29 June 2007 The Asian Family Enterprise Forum
Family Control Business Groups in Taiwan: Evidence and Findings (1) Family-Controlled groups are decreasing after
2000 The industry transition in Taiwan before and after
2000 Percentage of family directors and family
managers are decreasing However, Percentage of institutional directors are
increasing Family-controlled groups often use “pyramidal
structure” and “cross-shareholding” to handle the needs for growth and control
29 June 2007 The Asian Family Enterprise Forum
Family Control Business Groups in Taiwan: Evidence and Findings (2)
Evidence from 30 Family-controlled groups for the past 14 years (1988-2002)
If the family members occupy more CEO or board of directors seats within the group, this family-controlled group is less likely to diversify into related and the unrelated product fields
The inverse relationship between family control and product diversification
Family control limits the growth of strategic change in family-controlled groups
29 June 2007 The Asian Family Enterprise Forum
Family Control Business Groups in Taiwan: Evidence and Findings (3)
Family Controlled Groups have to include more non-family professional managers to deal with the growth need However, Family members still dominant in the inner circle
Family control would be helpful for the group’s performance after the market-oriented transition Comparing 1973-1988, and 1988-1996 two time periods;
After 1988, during the market-oriented transition, family and prior ties would improve group performance
The performance implications of family tie is inversed U shape
29 June 2007 The Asian Family Enterprise Forum
Family Control Business Groups in Taiwan: Evidence and Findings (4)
Comparing the family and non-family controlled groups Family-controlled groups are less likely to
diversify internationally than the non-family controlled groups
Family-controlled groups are more likely to cross-sharing within groups than the non-family-controlled groups
29 June 2007 The Asian Family Enterprise Forum
Family Business in Taiwan: Evidence (1) Family control still dominant the listed
companies in listed market Family-controlled groups are decreasing after
2000 The dominance of electronic business groups The number of family controlled groups in the
electronic industry is lower than ones in other industries
Family-controlled groups and listed companies are likely to use “pyramidal structure” and “cross-shareholding” to control the enterprises
29 June 2007 The Asian Family Enterprise Forum
Family Business in Taiwan: Evidence (2)
Family control does not significantly influence the listed company’s performance in the 1994 & 1995 sample
The expropriation of minority shareholders is more serious in the family-controlled listed companies in the 1997 & 1998 sample
The 1997 & 1998 sample implies that the family-controlled listed companies have the lower market value
29 June 2007 The Asian Family Enterprise Forum
Family Business in Taiwan: Evidence (3)
Family control and ties are helpful for the business group’s performance after the market-oriented transition (after 1988), but the positive effect will attain a threshold after reach a certain point The possible new evidence of the family control
on group’s performance after 1996, or even after 2000
29 June 2007 The Asian Family Enterprise Forum
Family Business in Taiwan: Research and Challenges (1)
Very few systemic research in the area Succession issues in family enterprises in
Taiwan Corporate governance issues after family
businesses go public Transition from family to professional
managed enterprise
29 June 2007 The Asian Family Enterprise Forum
Family Business in Taiwan: Research and Challenges (2) International expansion of the family
enterprises in Taiwan More researches to provide evidence on the
linkage between the competitive advantage and family control
Comparison between Taiwan and other East Asia Region’s family business is lacking
29 June 2007 The Asian Family Enterprise Forum
Thank You for Listening