The Influence of Cross Ownership on Corporate Governance Mechanisms – A Case Study on The Rebar Group Event

• Main Authors: Te-Kai Hung, 洪得凱
• Other Authors: 陳貴端
• Format: Others
• Language: zh-TW
• Published: 2010
• Online Access: http://ndltd.ncl.edu.tw/handle/95449742694286517549

碩士 === 逢甲大學 === 會計所 === 98 === Owing to the centralized ownership structure of Taiwanese public companies, many corporate stakeholders adopt cross ownership as a means of consolidating operating concessions and determining power over the company. Although cross ownership is multifaceted and has the capacity to facilitate stable business development, it also has an equal number of negative effects. It only takes a slight amount of carelessness, or intent, to become an implement for embezzlement and cause companies and investors to incur operating crises and suffer losses in their rights and interests. This is especially the case with vertical cross ownership and unlisted offerings ; furthermore, subsidiary companies that carry out cross ownership without the transparent disclosure of information, inevitably leave behind the most extensive damage. Since 1998, in Taiwan, there have been numerous cases of major financial fraud resulting from cross ownership and they continue to occur today. Some examples include: The Hanyang Group, The New Magnitude Group, The Kuangsan Enterprise Group, The Typhone Group, Taiwan Fertilizer Company, and Pacific Electric Wire and Cable Co., Ltd., and the The Rebar Group Event, which shocked the nation. The Rebar Group Event is the most exemplary of the above fraud cases, and it could be said that it stands as the epitome of all the fraud cases brought about by cross ownership. The major technique used was to have subsidiary companies sold as unlisted companies to implement vertical cross ownership. It could be said that during this incidence, the Rebar Group’s external and internal corporate governance mechanisms had completely broken. Furthermore, before the event even took place the institutions of public authority, with the most strength were nearly incapable of intervening, this article attempts to probe into the influence of cross ownership on corporate governance mechanisms through the Rebar Group Event. During the Rebar Group Event, it can be seen that consolidating operating concessions through cross ownership was not a good phenomenon for corporate governance mechanisms and it covered up the existing asymmetric information and moral hazards between corporate administrators, investors and stakeholders, and any action would produce enormous influences on investors and stakeholders. Previously, to safeguard the rights and interests of investors and stakeholders it was necessary to invest in every type of restraining mechanism in order to monitor a balanced mechanism of power. However, cross ownership can easily break down corporate governance mechanisms in institutions other than government institutions f public authority and lead to a thorough loss of efficacy for companies’ internal supervisory mechanisms of power and external market monitoring mechanisms. If corporate administrators make use of establishing subsidiaries in cross ownership networks that are bound through unlisted offerings, and small companies have vague information disclosure, then government public authority institutions will lose their stronghold of being able to create additional controls for monitoring and intervention. In such cases, where corporate administrators make flawed decisions and even secretly engage in illegal practices, all the means for monitoring balanced mechanisms of power lose their efficacy and the consequences they bring about are extremely negative. On the other side, cross ownership does hold some merit. If there is some value to total repudiation, it is that it is unbiased. However, in order to bring that positive strength into full play, methods must be devised to take precautions against the abuses that cross ownership brings about. From a corporate governance viewpoint, the biggest harm of cross ownership lies in enabling corporate administrators to evade monitoring and permanently control companies. Therefore, if we desire to fully utilize the more favorable points of cross ownership and not allow it to destroy corporate governance’s balanced mechanism of power, we must add protective controls against these areas. The points raised in this paper are recommended for the consultation in establishing legal regulations and are as follows: 1. Emulate the concepts that developed nations, such as the United States, Germany, and Japan recommend for substantial controls and redefine the regulations for the scope of subsidiaries as stipulated according to Taiwan’s Companies Law Article three hundred sixty-nine Sections two and three. 2. Legislate restrictions on voting rights for holding company shares at vertical cross ownership subsidiaries. Add restrictions regardless of whether they are currently legal and without exception. As for horizontal cross holding, cross holdings between mutual investment companies for subsidiaries that have yet to be regulated, should have a proportion of voting rights that can be reduced. Also regulate the number of public offering companies that can exist between ordinary mutual investment companies. Rather than prohibit companies from exercising their voting rights for electing the board and directors of mutual investment companies; instead enact precautions that prevent company administrators of mutual investment companies from utilizing cross holdings to consolidate one another’s operating concessions. 3. Abolish Companies Law Article twenty-seven Section two, , which permits legal persons who are counted as representatives to simultaneously hold positions on both the board and as a supervisor. 4. Emulate the Sarbanes-Oxley Act and formulate an auditor rotation clause. It should also obligate accountants to submit a report when they discover that audited companies are engaged in illegal activity. In addition, legislate a “Whistleblowers Protection Act” agreement and establish monetary rewards for whistleblowers. Moreover, award bonus incentives to whistleblowers for any information and or fraud cases that result in a trial brought about though investigation by public prosecutors. 5. Unusual circumstances, such as when cross ownership networks are excessively complex and subsidiaries are mostly public offering companies etc., are included in Taiwan’s Statements on Auditing Standards number forty-three ,“The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements”, Appendix one, “List of Fraud Risk Factors,” and Appendix three, “Situations When Fraud May Occur,” and to an extent, public accountants act in accordance with these acts when auditing industrial and financial groups and holding companies. 6. Revise the Securities and Exchange Act, which stipulates that when the number of shareholders for ordinary companies and capital (or total assets) reaches a specific threshold, they are obligated to provide a set date and publicly provide information on their financial affairs. In addition, regulate subsidiaries of public offering companies, and regardless of whether or not they are public holding companies, require them to accept monitoring from higher and more competent authorities, together with the parent company. Also for regulations concerning the disclosure and verification etc., of financial information, they too are subject to the same regulations and procedures as the parent company. Strengthening the monitoring capabilities of government agencies will make lawless p eople have to pay a greater price for committing crimes.