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54 Taiwan Development Perspectives 2009 I. Introduction A spate of financial scandals occurred, threatening Taiwan’s economic development. The stability of the financial system is likely to protect bank depositors and investors in financial products. 1 The scandals resulted, by and large, from loose control over banking. The First Financial Holding Company was involved in insider trading. The board chairman of the Chung Shin Commercial Bank was charged with embezzlement. The Bank of Overseas Chinese could not cope with a mountain of non-performing loans. The Kuo Hwa Life Insurance went under because of its president Da-min Won’s breach of trust. The public is losing confidence in Taiwan’s financial system. Taiwan needs financial reform. The Financial Supervisory Commission (FSC) is considering reforming the banking industry. 2 The Organization of Economic Cooperation and Development (OECD) has established principles of corporate governance which can be used to ensure the stability of the financial system.3 Corporate govern- 1 See La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, "Investor Protection and Corporate Valuation," Journal of Finance. Vol. LVII, No.3. June 200 . 2 Under the Organic Act Governing the Establishment of the Financial Supervisory Commission Executive Yuan, the Financial Supervisory Commission, a single financial supervisory authority to consolidate the oversight of banking, securities, and insurance, was officially established on July 1, 2004 to meet the needs of Taiwan's financial holding companies operating in cross-sector businesses. See Richard Abrams and Michael Taylor, Issues in the Unification of Financial Sector Supervision, in RK Abrams, M Taylor, eds - Building Strong Banks: Through Surveillance and Resolution 146-179 (2002). 3 The threat of systemic risk in international financial markets necessitates the establishment of universal ance refers to the structures and processes for the direction and control of companies. Corporate governance smoothes the relationships among the management, board of directors, controlling shareholders, minority shareholders and other stakeholders in a company. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside financial markets. The OECD Principles of Corporate Governance identify the key practical issues: the rights and equitable treatment of shareholders and other financial stakeholders, the role of non-financial stakeholders, disclosure and transparency, and the responsibilities of the board of directors. The OECD Principles have gained acceptance throughout much of the world as an appropriate framework for analyzing the corporate governance environments of different markets and as a starting point for developing approaches to evaluate the effectiveness of governance of individual companies. The challenge for Taiwan is to take the OECD Principles as a model to set a pattern for best corporate governance for the benefit of the wide spectrum of client companies. Taiwan is facing the threat of systemic risk in financial markets. Universal standards for corporate governance of financial institutions have to be established to cope with that threat. This article addresses some important issues and concepts in the governance of multinational financial institutions. An important task for Taiwan’s financial supervisors and regulators is to ensure that incentives exist to encourage senior bank management to adopt good regulatory practices that approximate the economic risk exposure of the financial institution. An analysis of corporate governance within framework of international financial markets is attempted to find out how the stanstandards for corporate governance of financial institutions.
Corporate Governance in Taiwan’s Financial Institutions 55 dards of the OECD Principles can be applied in a way that can effectively reduce systemic risk to Taiwan’s financial institutions. II. Soundness of Financial System and Economic Development A well-developed financial sector could play a major role in promoting economic development characterized by sustainable economic growth. A financial institution is not only an intermediate but also a credit allocation to the public, which needs capital for private needs or corporate transactions. In addition, the relationship between economic development and financial institutions is interdependence. 4 In order to maintain a stable financial system, financial institutions are therefore among the most closely scrutinized businesses in the world. For example, the U.S. Sarbanes- Oxley Law passed in July 2002 was based for the most part on existing financial supervision regulations. However, the transformation of financial services has increased financial instability and presented challenges to financial authorities to maintain financial stability. III. Goal of Financial Supervision Financial stability at the top of the agendas is not just of financial supervisory authority but of public-policy makers generally. 5 Structures for financial regulation and supervision differ considerably from country to country. Nevertheless, the goal of financial supervision is to enhance the stability, reliability, transparency and efficiency of the financial sector, to reduce 4 See La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, "Investor Protection and Corporate Valuation," Journal of Finance. Vol. LVII, No.3. June 2007. 5 See Andrew Crockett, Why Is Financial Stability a Goal of Public Policy? In Jack Robin and Gleen L. Stevens, Handbook of Monetary Policy 68-86 (2001) systemic risk. In addition, financial supervision can prevent the abuse of the financial sector for criminal purposes, with a view toward protecting the interests of clients and investors by safeguarding their financial resources and supporting the stability of a national monetary system. In order to reach the goal of financial supervision, a supervisory system should carry out two functions. First, the supervision system should detect illegality and unsound practices and provide early warning of potential failure. Second, there is the need for the existence of an array of enforcement techniques available to enable financial regulators to rectify problems that have been identified. Financial stability requires vigilance in a number of dimensions. Individual financial institutions have to be managed on prudent lines, markets have to be open and transparent, and the financial supervision framework has to be robust. Specifically, the financial regulations are responsible for amending prudential financial supervisory regulations to promote a safe and sound financial market. The role of the regulatory environment in which financial institutions and capital markets operate should be viewed as regulators rather than participators. Most Asian countries have common problems in which private firms and financial institutions have a good relationship. The close relationship was one of the factors, which contributed to the Asian financial crisis in 1997. The role of the financial supervisory regulator should not focus on control and regulation, but mainly on encouraging and promoting self-regulation of the financial industry and on enabling the high standard of corporate governance. The supervision should also be subjected to the principle of differentiated regulation so that financial institutions with sound financial and operational status and good legal compliance will be able to carry out their business in a more liberalized environment. This is the way a more market-oriented and risk-based supervisory system must be established.
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CONTENTS Preface Overview ix xi Foc
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Agriculture and Fisheries Impact of
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CHUANG, Yih-chyi( 莊奕琦 ) Pro
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TAN, Ching-yu( 譚瑾瑜 ) Associ
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enth effort on the part of the Foun
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ills pertinent to parliamentary ref
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