The Grand Families of Taiwan
Connected through marriage, Taiwan's ten richest clans have accumulated more than NT$6 trillion, about one quarter of the Taiex's market value. But how do their machinations affect ordinary people's lives?
The Grand Families of TaiwanBy Ching-Hsuan Huang, Hsiang-Yi Chang
From CommonWealth Magazine (vol. 462 )
On the evening of Nov. 29, the Grand Hyatt Taipei hosted yet another high society wedding banquet. In an effort to keep the curious public out, the hotel's side entrances were locked, while the prominent guests and dignitaries entered and exited through the heavily guarded main entrance under the media limelight. A dozen security guards in black were lined up at both sides of the huge glass doors. Once in a while they would tell reporters and onlookers in a polite yet firm voice, "Get out of the way, please."
Outside, foreign tourists were also curiously peeping through the crowd as chauffeured limousines continued to pull in the driveway. "Wow, another high society wedding," remarked a young couple who had walked over from across the street, obviously used to witnessing crowd-drawing celebrity events.
Wealth and Power Interbreed
The banquet on that evening celebrated another golden match between the scions of two banking families: Michael Hsu, vice president of Hua Nan Securities, and Cynthia Wu, a director of Shin Kong Financial Holding, had returned to Taiwan after exchanging formal wedding vows in Thailand. Lying in the background is the reality that the fathers of the bride and groom – Shin Kong Financial Holding chairman Tung Chin Eugene Wu and former Hua Nan Securities chairman Hsu Po-wei, who head two of the island's biggest banking dynasties – have also been joined in a bond of kinship.
Illustrious high society weddings keep grabbing the headlines. While outsiders enjoy the social gossip surrounding these grand events, all the glitz and splendor only conceal a sobering reality: Taiwan's leading industrialists, financiers and politicians have woven a dense, intricate network of kinship through marriages with other upper-class families.
Lee Zong-rong, assistant research fellow at the Institute of Sociology at Academia Sinica, spent two years combing through the thicket of intermarriages between Taiwan's entrepreneurial and political elites, using research done by investigative journalist and biographer Chen Jou-chin in 1999. He was surprised to find that Taiwan's upper class is "one big family" when it comes to blood relations, regardless of the individual families' political affiliation or business background, no matter whether they are rivals in the political arena or their respective industries.
In fact, Toyoko Yamasaki's novel The Grand Family, depicting clan politics and intermarriage between money and power, has long been taking place in Taiwan.
Ten Dynasties Control 1/4 of Taiex
The family is the most natural and the most common form of relationship in human society, East and West. Yet today, Taiwan's leading families exert economic influence on an unprecedented scale.
The latest CommonWealth Magazine statistics show that Taiwan's top ten business families control 13 of the island's financial groups and business conglomerates. The 77 companies – listed or traded over the counter (OTC) – under these business groups account for only 5 percent of the total number of listed and OTC companies, yet their combined market value exceeds NT$6 trillion, accounting for 25.7 percent of the stock market's total market value. (See Table.)
Overall, the conglomerates held by these ten business clans are mainly active in finance, basic infrastructure and the conventional industries. In other words, the money that ordinary citizens spend on their basic needs, such as food, clothing, housing, transportation and even leisure and entertainment, lines the pockets of these family conglomerates.
Impenetrable, Rampant Business-Politics Collusion
Of course, the influence of Taiwan's richest clans does not stop here.
Recently, a Court of First Instance ruled "not guilty" on a scandal involving the Second-stage Financial Reform Program – part of the corruption case against former president Chen Shui-bian and his family – triggering a public outcry. But leaving aside who is wrong and who is right, detailed statements by former first lady Wu Shu-chen in the indictment and in the ruling for the first time exposed the naked truth about political donations and influence peddling by the patriarchs of Taiwan's family conglomerates. Astronomical sums frequently changed hands in these deals.
"NT$100 million from Tsai Hung-tu of Cathay Financial Holdings, NT$200 million from Rudy Ma of Yuanta Financial Holding, NT$200 million from Jeffrey Koo Jr. of Chinatrust Financial Holding – those figures are just my impression... There were more people bringing cash to the Presidential Residence than I could count. The donation list covered five sheets of A4 paper," Wu is quoted as saying in the court documents.
The CEO of a high-tech company, who started out as a professional manager and worked hard for his subsequent career as accountant and entrepreneur, decries the collusion between business and politics: "Some political figures and business clans do nothing but work their connections with each other. It could be as small as taking part in a local construction tender, or as big as influencing government policy or gaining entry into a restricted industry. They do this over and over again, crowding out ordinary people who make efforts to get ahead and undermining opportunities for fair competition."
The CEO, once a partner in an accounting firm, points out that all of Taiwan's high-profile bribery scandals, ranging from the Tenth Credit Cooperative scandal in 1985 to the Rebar Group embezzlement scandal in 2006 and the most recent Second-stage Financial Reform Program scandal, share a common feature: "There is not one case that isn't related to collusion between money and power. And not one where society at large didn't have to foot the bill in the end."
Naturally, political and commercial elites also enter into marriages with one another as a "back-up plan" for future eventualities.
But ordinary office workers who do not have such an illustrious family background will rarely stand a chance of marrying into these exclusive circles.
One industry insider observes, "The concept of marrying into a family of equal standing is hard to change. In the 1950s and 1960s, almost all marriages were decided by the family patriarch, or arranged through matchmaking. Nowadays, you (the second or third generation descendants of the grand families) are allowed to freely find your partner, but when it comes to marrying, you definitely need to bring him or her home for approval."
At a private party, one third-generation business clan descendant, whose father once held an important position in the Young Presidents' Organization (YPO), incautiously revealed the true mindset in Taiwan's moneyed circles: "Day to day, it's okay for everyone to make lots of friends. But if you really want to seriously date someone, or even talk about marriage? Sorry, first they'll ask who your father is."
In the wake of the financial crisis, the gap between rich and poor in Taiwan has become wider than ever, according to statistics by the Directorate General of Budget, Accounting and Statistics. The annual income of Taiwan's 20 percent richest families is 8.22 times higher than that of the island's lowest-income families. Lee Zong-rong fears that social mobility will come to a standstill, given the exclusive nature of intermarriage between the political and commercial elites and kinship relations. Unless the government introduces relevant taxes on wealth and social welfare measures, the rich will keep getting richer and the poor poorer, ultimately creating "one Taiwan, two societies."
What is the correct approach to take regarding the runaway prosperity of Taiwan's elite business families? Solving this conundrum is a hard nut to crack for all parties involved, the government, ordinary citizens and the family conglomerates themselves.
Conglomerate Side: Structural Change the Biggest Challenge
Industry circles and scholars believe that a separation of management and ownership in family conglomerates would be the best way to go. That objective could be achieved through stronger corporate governance and a gradual transformation of the ownership structure. But such a transformation will only be possible if the family-owned business groups themselves undergo gradual transformation and if complementary legal measures are implemented.
In family-owned businesses the transformation of the shareholder structure is the greatest challenge.
"Taiwan's family conglomerates need to start transforming, particularly because now is the right time. But they often have problems when it comes to actual implementation," notes Ulyos Maa, former president and CEO of accounting firm KPMG Taiwan. But Ma, who used to deal with many of Taiwan's prominent industrial families, also points out that famous American family businesses such as the Rockefeller Group, J.P. Morgan Chase, and the Hilton Group kept corporate management in the hands of the family for four or five generations before adopting a modern, mature business model with the family as silent shareholders and professional managers running the day-to-day business. In contrast, Taiwan developed into a commercial society only some thirty or forty years ago.
Given that by now most Taiwanese family businesses have only been handed down to the second or third generation, Ma believes that these early successors "still want to be actively involved." In addition, the families generally still own the lion's share of company shares, so at this point it would be difficult to demand that the owner family completely withdraw from company management.
Ma suggests that the patriarchs of Taiwan's family conglomerates follow the examples of mature family enterprises abroad. Taking advantage of the fact that they still control their companies, they should pool family shares in a holding company or trust fund to safeguard family interests. At the same time, a mature, fair mode of designating a family representative (to serve as chairman or supervisor) and his or her remuneration should be established, while a professional management team should join the board of directors. If the interests of the family representative (such as the chairman), the family shareholders and the management team are given equal consideration, internal power struggles and friction can more likely be avoided and shareholder interests are less likely to be affected.
Legal Side: Achieving Information Transparency
As Taiwan's family conglomerates have become even more influential, they have triggered controversy for their cozy ties with the political establishment and their monopolization of public assets. This trend is particularly pronounced in the financial industry. This longstanding problem can only be solved through bold and decisive legal reforms.
The Financial Holding Company Act, adopted in late 2001, was intended to facilitate the merger of financial institutions to put a break on excessive competition that had undermined the soundness of the domestic financial industry. Subsequently, financial holding companies strongly tied to certain clans bought up a number of banks, both public and private, and a number of corruption cases erupted that tarnished the Second-stage Financial Reform Program. Meanwhile, the public has become highly critical of family-run financial groups and unwilling to accept their taking over state-run banks. The sweeping restructuring of Taiwan's domestic financial industry has therefore been in a stalemate for many years. Now that the cross-strait financial market has been opened up, Taiwanese banks would prefer to expand their domestic business before launching their advance into the Chinese market. Yet with industry consolidation on hold in Taiwan, their China ambitions are hard to realize.
Following the financial reform scandals, "things have reached such a stage that if the companies don't really tone down the involvement of owner families, and the government doesn't boldly take responsibility and set up bank merger regulations that are acceptable to both bankers and the public, the financial holding approach really will become unfeasible," a manager at one of Taiwan's top five financial holding companies states gravely.
Yin-hua Yeh, a member of the government's financial watchdog the Financial Supervisory Commission (FSC), cannot help sighing in exasperation when discussing the botched Second-stage Financial Reform Program: "The financial industry is using ordinary people's money, and their operations are highly leveraged. Of course we need to have higher standards for supervision and regulations. We also need to reduce owner family involvement, that's how it's done in other countries," Yeh notes.
Yet Yeh knows that the owner families are not likely to renounce their control of the financial holding companies. "Running a financial institution is just too tempting," Yeh concludes. As long as existing law does not explicitly demand so, no one will be ready to give up the right to allocate and utilize the assets of a financial company and its influence on other industries," Yeh predicts.
However, what the FSC actually could do, Yeh suggests, is to enforce the independent director system for financial holding companies. This would cause decision-making on the boards of directors of these family-controlled financial holding companies to become more transparent, and it would strengthen financial supervision, causing those who are actually in charge to have corresponding rights and obligations.
Yeh does not rule out that private banks take over state-run financial institutions in future mergers. But he cautions that the acquiring bank must meet stricter financial standards and corporate governance criteria, or else public misgivings will be hard to dispel. "The buyer definitely needs to use hard money for the acquisition and must not operate with high financial leverage," Yeh warns.
Furthermore, a veteran legal expert notes that the financial reform scandals have shown that there is a legal grey zone in Taiwan that allows political and business circles to trade interests. Laws against economic crimes and money laundering in the United States and Europe follow the principles of identifying who has actual control and who is the actual beneficiary of a transaction to determine legal responsibility. Unless Taiwan carries out major legal reforms that introduce these principles instead of dwelling on highly controversial terms in the existing law such as "quid pro quo relationship" or "legal rights and obligations," a tangible improvement of the situation is unlikely, warns the expert.
The Republic of China will soon celebrate its 100th anniversary, marking a century of trials and hardship. Yet while Taiwan does not yet boast century-old companies, its "grand families" have been around for more than one hundred years.
There's nothing wrong with members of these extended families supporting each other and doing whatever they can to further family interests. However, we need to give it some thought how these family conglomerates can be prevented from standing on the opposite side of the greater public good as they thrive and prosper in pursuit of lasting business success.
Translated from the Chinese by Susanne Ganz