Family Business in Taiwan: Current and Future Challenges

Family Business in Taiwan:Current and Future Challenges Kuang S. Yeh, Ph.D. Hsi-Mei Chung, Ph.D. Family Businesses Research Center 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 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. 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. 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 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 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 rightsdiverge 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 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 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. The Asian Family Enterprise Forum

1998 Enhancement Mechanism by Controlling Shareholders 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. 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 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 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 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 The Asian Family Enterprise Forum

Family-controlled Business Groups in Top 100 Business Groups *Source: China Credit Information Service, 1990 to 2004, 1990 to 2004 Business Groups in Taiwan The Asian Family Enterprise Forum

The Profile of the Top 10 Business Groups in 1988 Source: China Credit Information Service, 1990, 1990 Business Groups in Taiwan The Asian Family Enterprise Forum

The Profile of the Top 10 Business Groups in 2002 The Asian Family Enterprise Forum *Source: China Credit Information Service, 2004, 2004 Business Groups in Taiwan

The Profile of the Top 10 Manufacturing Business Groups in 2002 The Asian Family Enterprise Forum *Source: China Credit Information Service, 2004, 2004 Business Groups in Taiwan

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 managersare 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 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 moreCEO 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 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 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 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 decreasingafter 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 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 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 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 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 The Asian Family Enterprise Forum

Thank You for Listening The Asian Family Enterprise Forum

Family Business in Taiwan: Current and Future Challenges