29 June 2007The 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 2007The 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 2007The 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):

29 June 2007The 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):

29 June 2007The 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 2007The 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 2007The 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 2007The 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 2007The Asian Family Enterprise Forum 1998 Family Control in The Listed Compan ies in Taiwan *Source: Yeh, Ko, & Su, 2003, “Ultimate control and expropriation of minority shareholders: New Evidence from Taiwan”, Academia Economic Papers, 31(3):

29 June 2007The 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):

29 June 2007The 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 2007The 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 2007The 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 2007The 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 2007The Asian Family Enterprise Forum Family-controlled Business Groups in Top 100 Business Groups Year Manufa cturing Service Others Total *Source: China Credit Information Service, 1990 to 2004, 1990 to 2004 Business Groups in Taiwan

29 June 2007The 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

29 June 2007The Asian Family Enterprise Forum The Profile of the Top 10 Business Groups in 2002 *Source: China Credit Information Service, 2004, 2004 Business Groups in Taiwan

29 June 2007The Asian Family Enterprise Forum The Profile of the Top 10 Manufacturing Business Groups in 2002 *Source: China Credit Information Service, 2004, 2004 Business Groups in Taiwan

29 June 2007The 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 2007The 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 ( ) 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 2007The 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 , and 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 2007The 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 2007The 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 2007The 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 2007The 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 2007The 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 2007The 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 2007The Asian Family Enterprise Forum Thank You for Listening