An Analytica Framework for Controlling Minority Structures and its Application to Taiwan
67 Pages Posted: 23 May 2006
Date Written: March 31, 2006
Abstract
The importance of corporate governance to East Asian firms was brought to the fore during the Asian financial crisis, and on-going reform efforts continue to this day. As East Asian firms are characterized by controlling minority shareholder structures and significant expropriation, an important issue of reform is how to regard such structures.
We find that when control is valuable, rational investors would seek to assemble control and capture private benefits of control regardless of the relative efficiencies of each ownership structure. Thus, in order to facilitate organizational competition, the value of control should be limited. Our proposed measures focus on limiting expropriation of minority shareholders, and to a more limited extent, the ability to leverage equity to incommensurate control. The latter is more limited in extent due to the potential of controlling minority structures to have countervailing benefits and thus raising the costs of such a structure should be treated with caution.
We then turn to the situation in Taiwan. We first highlight the novel Taiwanese approach of mandatory ownership concentration, which diverges from our framework. Next, we apply the reform measures derived from our framework to the case of Taiwan. As the corporate governance institutions and approaches of Taiwan display parallels with many East Asian countries, an application of our proposed reforms to a case study of Taiwan could provide interesting and useful lessons for countries similarly situated, and in particular those in East Asia.
Keywords: controlling shareholders, corporate governance, Taiwan
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