Decision-making matrix of governance mechanisms

In order to assist a firm’s managerial authorities as well as shareholders to determine firm position and to provide direction for improvement and investment, the decision-making matrix about managerial performance and the governance mechanism of Taiwan FHCs is designed for providing further exploration. First, we construct the governance scores of the FHCs in Taiwan, which employs principal component analysis (PCA), a method of multivariate statistical analysis, to calculate the governance scores. The goal of PCA is to identify a new set of a few variables, which explain all of the total variance of variables. Therefore, all determinant governance variables are transferred to a single indicator by PCA and the scores extracted from first principle component are regarded as the governance scores of the FHCs in Taiwan. Moreover, to express the degree of governance index simply and clearly, the results of the principal analysis are also converted into a range from 1 to 0, in which a larger score implies the firm has better operations in corporate governance while a small score means poor governance mechanism.

Therefore, the governance scores of the FHCs in Taiwan are evaluated and listed in Table 9.

As seen in Table 9, the mean governance level of all FHCs is getting better over time and First, Mega, and Cathay have better governance mechanisms. Second, by combining the scores of managerial performance and governance scores of Taiwan financial holding companies from the period covering 2007 to 2010, the decision-making matrix is designed.

In this matrix, the efficiency scores as the horizontal axis of the matrix represent a firm’s capability to create better performance, including profits, market value, and EPS. A higher score implies an effective utilization of resources and less urgency for managerial improvement, while a lower score means poor operation efficiency, which requires an urgent managerial strategy to improve a firm’s internal operation performance.

Table 9

On the other hand, governance scores are taken as the vertical axes that represent the ability of monitoring the firm’s operations, abating the agency problem, and enhancing self-protection for investors. Therefore, a FHC with a larger value has better corporate governance, which has higher capabilities to supervise poor investment decisions and increase firm as well as shareholder value. In contrast, a firm with a smaller value means it is inefficient in governance mechanisms and the abatement of agency costs.

The threshold of this matrix is the 80 percentile of managerial performance and governance score, respectively. According to the two criteria, the firms can be divided into four quadrants in the decision-making matrix as shown in Figure 3. This matrix can serve as a managerial tool for firm management and outside investors to provide further improvement direction and effort. The four groups of firms are described below.

Star quadrant: This quadrant indicates that the firm enjoys better performances both

in terms of contemporary managerial performance and corporate governance and is classified as a “Star”. Mega is included here, which can be regarded as the benchmark for others to achieve outstanding resource and profit generation in a managerial performance as well as superior corporate governance mechanism. Hence, taking the performance of a firm’s value-generation and the protection of investor’s right into account, Mega stays in a leading position. In contrast, for the management of other FHCs, they should further identify and reference the operational strategies and governance mechanism of Mega to enhance their firms’ performance and conduct investor value protection.

Sleeper quadrant: These firms experience better contemporary managerial performance, but have a decreasing variation in their governance mechanisms. They are classified as “Sleeper.” Two FHCs are included: Fubon and Jihsun. Firms located in this quadrant are relatively efficient in utilizing their resources to generate corresponding outputs in their value-generation process, but are inferior in corporate governance mechanisms. The results indicate that these firms should be prime candidates for governance improvement efforts and can be a potential “Star group” if they place more emphasis on activities that are aimed at improving governance mechanisms. In addition, from the perspective of monitoring mechanisms, although these firms are able to generate more value, however, their weak governance mechanism might lead to managerial expropriation of the firm and shareholder values. Thus, investors and shareholders should take some monitoring mechanisms to supervise these FHCs’ operations and protect their values and rights.

Dog quadrant: These firms have better corporate governance mechanisms, but low managerial performance. First is in this quadrant, which should adopt some operation strategies to improve resource utilization and enhance profitability for their operations and

marketability for investor values. Therefore, it should reference the operational strategies and administration skills from those of the Sleepers quadrant. Moreover, the results of efficient decomposition are employed to identify the key performance factors and weaknesses compared to other competitors. By maintaining their strengths and improving their weaknesses, firms in this quadrant are expected to increase their competitive advantages and create more value for their shareholders.

Question mark quadrant: The firms located in the bottom-left quadrant perform worse in terms of firm performance and governance scores. Of the 14 FHC firms, ten are included in this group. From the viewpoint of outside investors, they are problematic firms and have scope for improvement both in profit generation and resource utilization as well as governance mechanisms. Diagnostic actions should be taken to remedy their problems.

Hence, these firms should immediately adjust their corporate governance to be more efficient and then expand their profit generation.

Figure 3 Decision-making matrix of the governance mechanism for FHCs