From Double Board to Unitary Board System: Independent Directors and Corporate Governance Reform in Taiwan
Independent Directors in Asia: A Historical, Contextual and Comparative Approach, Dan W. Puchniak, Harald Baum & Luke Nottage eds. (Cambridge University Press, 2017)
32 Pages Posted: 9 Jun 2016 Last revised: 6 Aug 2018
Date Written: May 12, 2016
This Chapter reviews the regulatory strategies in corporate board reform and analyses the impact of introducing the institution of independent directors to Taiwan’s public companies. Taiwan’s corporate governance model has been strongly influenced by the German and Japanese models. For example, the Taiwan’s Company Act traditionally follows a double board system: the board of directors constitutes the decision-making institution, and the statutory supervisor monitors the company. However, in the past decade, Taiwan’s corporate governance has also been influenced by the Anglo-American model; consequently, independent directors, along with the unitary board model, have been introduced. Before February2013, Taiwan’s regulatory authority took a minimalist approach to the regulation of the internal governance structure of public companies. Generally, Taiwan’s public companies could choose either to maintain a double board, switch to a unitary board, or adopt a hybrid structure. To enhance board independence, the regulatory philosophy was to mandate the introduction of independent directors in stages, starting with the largest companies. This state of affairs triggered various problems because the distribution of authority between the different corporate organs was ambiguous. On the one hand, the introduction of independent directors was intended to resolve the problem of statutory supervisors’ failing to effectively monitor boards of directors. However, independent directors also had insufficient incentives to fulfil their duties, and their true independence remains highly questionable without the existence of a corresponding effective system of judicial review. To further enhance corporate governance and streamline the governance structure of public companies, the Financial Supervisory Commission (FSC) of Taiwan mandated in December 2013 that all public companies with paid-in capital over NTD 2 billion (USD 60 million) were to abolish the double board model and switch to the unitary board structure. A decade after the introduction of the institution of independent directors to Taiwan’s corporate governance, the government felt that the time was ripe to intervene in the internal governance of public companies and took a reformist approach to corporate board reform. This Chapter reviews the reform process since 2002 and critically analyses the challenges of an optional model, along with the legal transplantation process. Section II introduces the reform of the board structure and presents some statistics regarding the percentage of public companies with independent directors, as well as the occupations of independent directors in Taiwan. In particular, this section analyses the problems with each corporate governance structure option, along with the main functions of corporate directors in Taiwan. As of 2014, 66.34% of Taiwan Stock Exchange (TWSE)-listed and Over-The-Counter (OTC)-traded companies have independent directors on their boards. However, this means that 33.66% are still resisting this change. According to a new rule promulgated in December 2013, the 33.66% of companies that do not currently have independent directors will be required to introduce at least two independent directors to their board by the end of 2017. The effect of this regulatory policy is yet to be seen. However, it is clear that Taiwan is definitely switching from a double board system to a unitary board system. Section III builds on this analysis by discussing the incentives that drive independent directors in Taiwan. In particular, it explores the balance that has been struck between the risk of liability and reward of remuneration for the burgeoning class of independent directors in Taiwan. It is noteworthy that the Taiwan’s Company Act applies the same standard of fiduciary duties to both inside directors and independent directors. However, we have observed that, in some decisions the court will take into account the position, information, time, knowledge, and other factors to reduce or exempt independent directors from liability. Moreover, we observe that to attract highly skilled and qualified people to serve as independent directors, the availability of appropriate Directors and Officers Liability Insurance (D&O insurance) is essential. As of 2014, only 62.51% of TWSE-listed companies provided D&O insurance for their directors. With the introduction of the new rule that requires all listed companies to have independent directors by 2017 and the uncertainty of the liability regime, the government should encourage more companies to provide D&O insurance for their directors. With respect to truly independent directors in Taiwan, research studies have shown that substantial social ties exist between controlling shareholders/insiders and independent directors. Absent effective judicial review or regulatory monitoring mechanism, the impartiality and monitoring function of independent directors will be substantially impaired. Section IV concludes by asserting that Taiwan has clearly made a formal change in its corporate governance by legislating the adoption of independent directors. It is far less certain, however, that this formal change has caused a significant shift in how Taiwan’s corporate governance actually functions. Ultimately, we suggest that for significant functional change to occur, Taiwan must do more than merely ensure there are “independent directors” in its boardrooms. Rather, the key to real functional change appears to reside in changing the complimentary institutions that are discussed in this chapter, which are critical to ensuring that independent directors can fulfill their intended purpose—but are far too often overlooked.
Keywords: Independent Director, Board Structure, Corporate Governance
JEL Classification: K22, K42, G38
Suggested Citation: Suggested Citation