Corporate governance in Taiwan

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Corporate Governance in Taiwan

Introduction

Corporate governance in Taiwan has undergone significant evolution in recent decades, driven by economic liberalization, increasing foreign investment, and a growing awareness of the importance of investor protection. Initially, Taiwanese corporate governance structures were characterized by concentrated ownership, close relationships between companies and banks, and limited shareholder rights. However, reforms aimed at aligning Taiwan’s practices with international standards have progressively improved transparency, accountability, and the overall efficiency of the corporate sector. This article provides a comprehensive overview of corporate governance in Taiwan, outlining its historical development, current framework, key players, challenges, and future prospects. It will cover the legal and regulatory landscape, the role of institutional investors, and the impact on financial markets.

Historical Development

Prior to the 1990s, Taiwanese companies were largely family-owned and operated. Ownership was highly concentrated, with controlling families often maintaining a significant stake in their businesses through complex ownership structures involving holding companies and cross-shareholdings. Banks played a crucial role in providing financing, often with close ties to the companies they funded, leading to limited independent oversight. Shareholder rights were weak, and minority shareholders often lacked the ability to effectively challenge management decisions.

The 1990s witnessed a wave of economic liberalization and increasing foreign direct investment. This influx of capital brought with it pressure to improve corporate governance standards to attract and retain foreign investors. The 1995 amendment to the Company Act was a pivotal moment, introducing provisions aimed at strengthening shareholder rights and increasing transparency.

Further reforms followed in the 2000s, spurred by corporate scandals and the desire to integrate Taiwan’s capital markets with the global financial system. The establishment of the Taiwan Stock Exchange’s (TWSE) Corporate Governance Evaluation System in 2002 marked a significant step towards assessing and promoting good corporate governance practices. Subsequent amendments to the Securities and Exchange Act and the Company Act continued to refine the regulatory framework and address emerging challenges. The focus shifted towards independent directors, audit committees, and the protection of minority shareholder interests.

Legal and Regulatory Framework

The legal and regulatory framework governing corporate governance in Taiwan is primarily based on the following key laws and regulations:

Company Act: This act provides the foundational rules for the establishment, operation, and dissolution of companies in Taiwan. Recent amendments have focused on strengthening director duties, enhancing shareholder rights, and improving corporate transparency.
Securities and Exchange Act: This act regulates the securities market, including the issuance and trading of securities, and sets forth requirements for listed companies regarding disclosure, insider trading, and corporate governance.
Regulations Governing the Operation of Futures Trading: Governs the futures market, with implications for risk management and transparency. Futures Trading Regulation
Banking Act: Addresses corporate governance issues within the banking sector.
Financial Supervisory Commission (FSC) Regulations: The FSC is the primary regulator of the financial industry in Taiwan and issues various regulations and guidelines related to corporate governance, including those pertaining to independent directors, audit committees, and internal controls. FSC Website
Taiwan Stock Exchange (TWSE) Rules: The TWSE sets forth listing requirements and corporate governance rules for listed companies. These rules often go beyond the minimum requirements of the law and are designed to promote best practices. TWSE Rules
Corporate Governance Evaluation System (CGES): Developed by the TWSE, this system assesses the corporate governance practices of listed companies based on a set of criteria, providing a public rating that influences investor perception and access to capital. CGES Details

These laws and regulations are constantly evolving to adapt to changing market conditions and international best practices. The FSC plays a key role in monitoring compliance and enforcing these rules. Understanding these regulations is crucial for companies operating in Taiwan.

Key Players in Corporate Governance

Several key players contribute to the corporate governance landscape in Taiwan:

Shareholders: Shareholders are the ultimate owners of the company and have the right to vote on key decisions, such as the election of directors and approval of major transactions. However, as noted earlier, concentrated ownership structures can limit the influence of minority shareholders. Shareholder activism is slowly gaining traction in Taiwan, but remains relatively limited compared to other developed markets.
Board of Directors: The board of directors is responsible for overseeing the management of the company and ensuring that it operates in the best interests of shareholders. Increasingly, Taiwanese companies are required to have a majority of independent directors on their boards. Independent Director Roles
Independent Directors: Independent directors are expected to provide objective oversight and represent the interests of minority shareholders. The FSC has implemented stricter requirements for the independence of directors, including limitations on their ties to the company and its management.
Audit Committee: The audit committee is responsible for overseeing the company’s financial reporting process and ensuring the integrity of its financial statements. Audit committees are typically composed of independent directors.
Management: Management is responsible for the day-to-day operations of the company and implementing the strategies approved by the board of directors.
Financial Supervisory Commission (FSC): As mentioned previously, the FSC is the primary regulator of the financial industry and plays a crucial role in overseeing corporate governance practices.
Taiwan Stock Exchange (TWSE): The TWSE enforces corporate governance rules for listed companies and operates the Corporate Governance Evaluation System.
Institutional Investors: Institutional investors, such as mutual funds and pension funds, are becoming increasingly important in influencing corporate governance practices in Taiwan. They have the resources and expertise to actively monitor companies and engage with management on corporate governance issues. Institutional Investor Influence
Taiwan Corporate Governance Association (TCGA): A non-profit organization dedicated to promoting good corporate governance practices in Taiwan. TCGA Website

Current Corporate Governance Practices

Current corporate governance practices in Taiwan are characterized by a mix of progress and challenges.

Increased Independence of Boards: The requirement for a majority of independent directors on the boards of listed companies has led to greater objectivity and oversight.
Strengthened Audit Committees: Audit committees are becoming more effective in overseeing the financial reporting process.
Improved Disclosure: Companies are required to disclose more information about their corporate governance practices, including the composition of their boards, the qualifications of their directors, and the remuneration of their executives.
Corporate Governance Evaluation System (CGES): The CGES has incentivized companies to improve their corporate governance practices in order to achieve a higher rating.
Focus on Internal Controls: Companies are increasingly focusing on establishing robust internal control systems to prevent fraud and ensure compliance with regulations. COSO Framework
ESG Integration: There's growing attention to Environmental, Social, and Governance (ESG) factors, with companies beginning to incorporate ESG considerations into their strategies and reporting. SASB Standards

Despite these improvements, several challenges remain:

Concentrated Ownership: Concentrated ownership structures continue to limit the influence of minority shareholders and can lead to conflicts of interest.
Family Control: Family-controlled companies often prioritize the interests of the controlling family over those of other shareholders.
Lack of Shareholder Activism: Shareholder activism remains relatively limited in Taiwan, making it difficult for minority shareholders to challenge management decisions.
Enforcement Challenges: Enforcement of corporate governance regulations can be weak, particularly in cases involving powerful or well-connected companies.
Complexity of Cross-Shareholdings: Complex ownership structures involving cross-shareholdings can obscure the true ownership of companies and make it difficult to hold management accountable. Cross-Holding Explained

Challenges and Future Prospects

Taiwan faces several ongoing challenges in its pursuit of improved corporate governance. The persistent issue of concentrated ownership, often stemming from historical family-controlled businesses, continues to hinder the full exercise of shareholder rights. The effectiveness of independent directors is sometimes questioned, particularly concerning their ability to challenge the dominant influence of controlling families. Furthermore, the regulatory framework, while improving, requires continuous refinement to address emerging risks and ensure effective enforcement.

Looking ahead, several key areas will be crucial for further enhancing corporate governance in Taiwan:

Strengthening Shareholder Rights: Further empowering minority shareholders through mechanisms such as cumulative voting and class action lawsuits.
Promoting Shareholder Activism: Creating a more favorable environment for shareholder activism, including reducing barriers to participation and providing greater protection for activist investors.
Enhancing the Independence of Directors: Strengthening the requirements for director independence and providing directors with the resources and training they need to effectively fulfill their duties.
Improving Enforcement: Increasing the resources and authority of the FSC to enforce corporate governance regulations effectively.
Simplifying Ownership Structures: Encouraging companies to simplify their ownership structures and reduce cross-shareholdings.
Embracing Digital Governance: Utilizing technology such as blockchain to enhance transparency and efficiency in corporate governance processes. Blockchain in Governance
Greater ESG Integration:’'’ Continued adoption of ESG principles, driven by investor demand and regulatory pressure. UN Principles for Responsible Investment
Addressing Related Party Transactions: Stricter regulation and oversight of transactions between a company and its related parties to prevent self-dealing and conflicts of interest. Related Party Transactions
Improved Risk Management: Implementing robust risk management frameworks to identify and mitigate potential risks to the company and its stakeholders. ISO 31000 Risk Management

The Taiwanese government and regulatory authorities are committed to continuing to refine the corporate governance framework and promote best practices. The ongoing modernization of the legal and regulatory environment, coupled with increased investor awareness and activism, is expected to contribute to a more transparent, accountable, and efficient corporate sector in Taiwan.

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Company Law Securities Regulation Financial Markets Investment Risk Management Shareholder Rights Board of Directors Independent Directors Audit Committee Financial Supervisory Commission ```

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