Insufficient Information Summary
Following the Asian financial crisis of 1997, Taiwan initiated an overall reform of its financial sector. According to the 2006 Wisconsin International Corporate Governance report, these initial reforms were later accompanied by improvements in corporate governance starting in 2002, which focused on greater independence of the board of directors, audit committees, and supervisory commissions. The report identified weaknesses in three areas relating to financial reporting, share-based compensations, and - more generally - the mechanisms for corporate control. Some of these issues have since been resolved, particularly with the 2005 and 2006 amendments to the Company Law and the Securities and Exchange Act. A 2007 Securities and Futures Institute (SFI) report on "Corporate Governance" noted that to enhance corporate governance for listed companies, the Taiwan Stock Exchange (TSE) and the SFI have issued Corporate Governance Best-Practice Principles for TSE/GTSM Listed Companies. Moreover, the SFI report claims that Taiwan is fulfilling the requirements of the Organization for Economic Cooperation and Development (OECD) principles of corporate governance through various regulations stipulated in the Company Law and the Securities and Exchange Act. However, apart from this information, there is insufficient publicly available information that directly address Taiwan's compliance with the OECD principles.
General Overview
The initial focus of the Taiwanese government in financial sector reform was on the banking sector and resulted in the Financial Institutions Merger Act of 2000 and the Financial Holding Company Law of 2001. Part of the reforms entailed reorganizing regulatory control. Consequently, the Financial Supervisory Commission (FSC) was established in 2004. Although all these initiatives impacted the corporate governance regime in Taiwan, it necessitated more specific improvements with regard to corporate governance for publicly held companies, according to the 2006 “Report on the Conference on "Corporate Governance and Taiwan's Capital Markets" organized by the Wisconsin International Corporate Governance Initiative (WICGI). The WICGI conference report notes that Taiwan took a number of steps, beginning in 2002, to improve the structure of the board of directors, audit committees, and supervisory commissions. More specifically, these reforms focused on greater independence for the board of director, audit committees and supervisory commissions.
A 2007 Securities and Futures Institute (SFI) report on corporate governance highlights that the legal framework for corporate governance in Taiwan is anchored in the Company Law, which lays down rules to protect present and future shareholders and creditors. The Company Law is supplemented by the Securities and Exchange Act which regulates the disclosure and transparency of listed companies. The SFI is sponsored by the Taiwan Stock Exchange Corporation and the Gre Tai Securities Market (GTSM). The SFI report claims that via above mentioned laws, Taiwan meets the principles of the Organization for Economic Cooperation and Development (OECD) principles of corporate governance. This information has not been independently verified, however. The Taiwan Stock Exchange (TSE) and the SFI have also established and promoted the “Corporate Governance Best-Practice Principles for TSEC/GTSM Listed Companies” since 2001, which were updated in 2003. Per the FSC's 2006 Annual Report, amendments to the Securities and Exchange Act in January 2006 focused on promoting corporate governance, setting out the following requirements for companies: (1) appointment of independent directors is optional, but the FSC can force companies to appoint independent directors; (2) at least five directors per company board; (3) independent directors and the audit committee do not carry veto power but a dissenting views need to be recorded; (4) audit committees should be composed of at least three independent directors. The WICGI conference report further noted that in September 2006, the FSC announced new regulations designed to improve financial transparency and "expand the FSC's review of financial institutions' mergers and acquisition applications" (p. 19).
As part of the amendment of the Securities and Exchange Act, the FSC issued a number of provisions to expedite the enforcement of corporate governance measures, while providing public companies with compliance requirements, the 2008 FSC annual report notes. Per the report, some of the provisions issued include the ‘Regulations Governing the Installation of Independent Directors of Public Companies and Related Compliance Matters, the Regulations Governing the Exercise of Powers by Audit Committees of Public Companies, and the Regulations Governing the Proceedings of Board of Directors Meetings of Public Companies. The FSC plans to hold conferences regularly, like the Taipei Corporate Governance Forum, to promote best practices in corporate governance. The 2008 annual report also mentions that the FSC, in its promotion of the efficiency of shareholder proxy and corporate governance, amended the Regulations Governing the Use of Proxies for Attendance at Shareholder Meetings of Public Companies “to strengthen supervision of persons that engage in proxy matters” (p. 28) in February 2008.
Taiwan has a two-tier structure that consists of Board of director, supervisors, and shareholders. Directors and supervisors are elected by Shareholder's Meeting, and the 2007 SFI report notes that the shareholders are empowered to reshuffle directors found abusing their discretionary powers. Furthermore, the majority firms in Taiwan are small- and medium-sized enterprises (SMEs), comprising over 90 percent of total companies. Also, board members in SMEs tend to be family members, implying that Taiwanese companies do not have adequate representation of shareholders outside the family. The SFI report pointed out that the Taiwan Stock Exchange (TSE) and the computerized over-the-counter market, the GTSM are "extremely liquid and volatile" (p. 4). According to the World Federation of Exchanges website, as of November 2009, there were 740 firms listed on the TSE, 8 of them foreign.
Since 2003, in order to promote greater transparency and disclosure of Taiwanese listed companies, the SFI launched the “Information Disclosure and Transparency Rankings System”(IDTRS). Companies were evaluated along the following criteria: (1) compliance with the mandatory disclosures; (2) timeliness of reporting; (3) disclosure of annual report; (4) disclosure of financial forecast; and (5) corporate website disclosure. The 2008 full-year ranking results were released in June 2009. Of the combined 1,118 listed companies of TSE and GTSM, 37 companies were ranked as “Grade A+,” 325 companies were ranked as “Grade A,” 639 companies were ranked as “Grade B,” 105 companies were ranked as “Grade C,” and 12 companies were ranked as “Grade C-.”
In the area of financial reporting the WICGI conference report identified weaknesses and stated that Taiwanese financial reporting requirements, as of the time of the assessment, did not require the "right kind of information in a fashion understandable to the international investment community" (p. 19). Since 1999 Taiwan, however, has been making efforts to converge national standards with the International Financial Reporting Standards (IFRSs). Finally, on June 5, 2009, the Accounting Research and Development Foundation of the Republic in Taiwan (ARDF) released its “Roadmap toward IFRS Adoption in Taiwan,” announcing its plan to fully adopt IFRSs in Taiwan using a phased-in approach. According to the Roadmap, in Phase I, listed companies and financial institutions supervised by the FSC (except for credit cooperatives, credit card companies, and insurance intermediaries) will be required to adopt Taiwan-IFRSs starting 2013, with early adoption permitted in 2012 for certain types of companies. In Phase II, other companies, including unlisted public companies, credit cooperatives, and credit card companies will me mandated to apply Taiwan-IFRSs starting from January 1, 2015, with earlier application permitted from January 1, 2013.
The WICGI report disclosed that share-based compensation is a "contentious" issue in Taiwan. The FSC has taken steps to limit the amount of shares distributed and to strengthen the disclosure and transparency public companies are required to provide about share distribution in their annual report and prospectuses. The conference report recommended establishing benchmarks for improved corporate governance and adoption of best practices in line with international requirements. It also recommended reforming shareholders' voting procedures, effectiveness of directors, and market for corporate control.
In its Doing Business in 2010 report, the World Bank rates investor protection in Taiwan as being on par with the regional average. The Investor Protection Index is a subcomponent of the World Bank's 2010 Doing Business Indicators, and consists of three aspects of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indices range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and therefore, better investor protection. Taiwan scores 7.0 in the disclosure index, against a regional average of 5.1 and an OECD average of 5.9. It scores 4.0 in the Director Liability Index, against a regional average of 4.6 and an OECD average of 5.0; and it scores 5.0 in the Shareholder Suits Index, against a regional average of 6.3 and an OECD average of 6.6.
The Principles
IIPrinciple I: Ensuring the Basis for an Effective Corporate Governance Framework
According to the 2007 SFI report, the legal framework for corporate governance in Taiwan is primarily based on the Company Law, which lays down rules for the protection of shareholders and creditors. Furthermore, certain deficiencies in the Company Law were addressed in the 2001 and 2005 amendments. The Company Law is supplemented by the Securities and Exchange Act, which regulates disclosure and transparency of listed companies. Per the FSC's 2006 Annual Report, amendments to the Securities and Exchange Act in January 2006 focused on promoting corporate governance, expanding the business scope of securities firms, introducing an independent director and audit committee system, preventing market manipulation and insider trading, and establishing closer cooperation with foreign authorities. However, the above cited information does not directly address Taiwan's compliance with this principle.
IIPrinciple II: The Rights of Shareholders and Key Ownership Function
According to the SFI report on corporate governance, prior to 2001 the Company Law lacked provisions prohibiting cross shareholding between parent and subsidiary companies and failed to restrict representatives of the same institutional shareholders from being elected director and supervisor. These inadequacies could lead to the "manipulation" of the legal framework. The 2001 and 2005 Company Law amendments, however, resolved some of these issues. As explained in the SFI report, "a company shall have no voting power in respect of the share issued by itself and in its own possession" (p. 7). Furthermore, the January 2006 amendment to the Securities and Exchange Act contained provisions to strengthen director and supervisor independence. However, the report observed that Taiwanese corporations suffer the risk of cross-shareholding and passive role of institutional investors, because most of these are family-controlled businesses. Moreover, inadequate control mechanisms could lead to exploitation of the minority shareholders, the report noted. The WICGI conference report noted that in September 2006, the FSC announced new regulations to expand FSC's review of merger and acquisition applications by financial institutions. However, the above cited information does not directly address Taiwan's compliance with this principle.
IIPrinciple III: The Equitable Treatment of Shareholders
The 2007 SFI report observed that Taiwanese corporations suffer the risk of cross-shareholding and passive role of institutional investors since most of these are family-controlled businesses. Moreover, inadequate control mechanisms could lead to exploitation of the minority shareholders. As explained in the report, "the disadvantage is companies, dominated by one businessman or one family, tend to grant the right of governance over the company for the benefit of their own interests and abusing minority shareholders" (p. 5). However, the above cited information does not directly address Taiwan's compliance with this principle.
IIPrinciple IV: The Role of Stakeholders in Corporate Governance
According to the 2006 Taipei WTC report, share-based compensation is one of the "most contentious" issues in Taiwan. In 1983, employee profit sharing and stock ownership (EPSSOPs) was introduced, but the FSC dealt with the dilution problem by limiting the amounts of shares distributed. Annual reports and prospectuses are required to provide more information on share distribution. Additionally, the WICGI conference report notes that, starting in January 2007, EPSSOPs would be booked as an expense. However, the above information does not directly address Taiwan's compliance with this principle.
IIPrinciple V: Disclosure and Transparency
According to the SFI report, in accordance with the Company Law and Securities and Exchange Act, Taiwanese public companies must provide and disclose timely, accurate and relevant information to investors. The report further noted that this was in line with the OECD principle on timely and accurate disclosure on matters relating to the company's financial situation. Additionally, all public companies are required to disclose employee bonuses distribution and integrate all the risk-related information evaluation. However, the above cited information does not directly address Taiwan's compliance with this principle.
IIPrinciple VI: The Responsibilities of the Board
The SFI report noted that the Company Law grants broad powers to the board and all matters are decided by resolutions of the board of directors unless stated otherwise in law. Furthermore, the Board is responsible for ensuring compliance with laws and regulations, avoiding conflict of interest, and supervising the management performance. The 2006 Securities and Exchange Act amendments also require the Board to review/assess the following: internal control processes, directors/supervisors conflict of interests, transfer or transaction of material assets, major borrowing, etc. Additionally, the listing rules of the TSE/GTSM were amended in 2002 requiring public companies applying for listing to have at least two independent directors and one independent supervisor, the report noted. Also, the 2006 amendment of the Securities and Exchange Act mandates that at least one-fifth of the Board's directors should be independent for all public companies. The Taipei WTC report further explains that independent directors and audit committee do not have veto power over important corporate resolutions, and recommended that Taiwan work towards creating "a culture of accountability where the directors are responsible to all of the shareholders" (p. 21). However, the above cited information does not directly address Taiwan's compliance with this principle.
