Family Business and Corporate Governance: A Case Study of ShinKong Synthetic Fibers Corporation

The battle of corporate control of ShinKong Synthetic Fibers Corporation occurred in August 2004 induced a wide scope of public attention and conversation over the issues of family business and corporate governance. The complexity involving both family power structure and corporate control provides a fruitful ground for academic research from various perspectives. Based on a thorough review on all the events occurred during August and December of 2004, this research proposes several key questions to study; they are: (1) How is the applicability of the principle of the separations of corporate ownership and operational control within the context of family business, (2) How to audit the behavior of family-linked board members on behalf of the shareholder’s benefit? (3) How effective is the corporate governance system within the context of family business? (4) How to enforce the considerations of social responsibility within the framework of corporate governance, especially in a family business?

This research finds that there are three shortcomings of the corporate governance system within the context of family business: 1). There are significant conflicts of applying the principle of the separations of corporate ownership and operation controls within the context of family business; 2) There is a flaw of designated board director system which provide opportunities for a conglomerate to achieve minority control? 3). The auditing mechanism of shareholders needs to be strengthened and the minority participation to the board decision making shall be further enforced. In addition, there are two issues to be discussed: 1) The usefulness of independent board director system will be discounted if we don’t have a clear definition on the auditing functions of the board; 2). Corporate social responsibility is hardly realized in the current system.

To reply to these issues, we suggest that it seems not practical to fully apply the principle of the separations of corporate ownership and operational controls to the family business. Instead, building up effective auditing mechanisms may be even more important. In other words, for family businesses, we shall enforce the functions of elected director-auditors and adequately expand the rights for minority shareholders. More critically, we shall strengthen the auditing functions in the board structure before inducing the system of independent board directors. Finally, family businesses shall take social corporate responsibility into serious considerations in their decision making before these companies can become built-to-last ones.