C O R P O R AT E G R E E D

Cleaning up Corporate Governance

has been a buzzword for many years

around the globe and Taiwan is no exception. Although discussions focusing on corporate governance often seem less fierce in Taiwan particularly when compared with the US and Europe. But still it matters. And so let’s a take a brief look at why this is so and what the current state of the principal issues surrounding corporate governance are in Taiwan. Over the past two decades, in line with other Asian markets, the trend of ownership structures has moved steadily from family-owned businesses to those representing more widespread ownership. This

Taiwan has been rocked by recent financial scandals. But the fallout has resulted in a strengthening of corporate governance measures.

change has meant an increase in the problem of agency – whereby ownership and management are in separate hands. Such separation can be seen, for example, within the Rebar Group, in which management control often remains with the original founders (and exacerbates an already perilous problem). Coupled with changing ownership structures has been a raft of new developments in the Taiwan stock market due to recent upgrades made by international rating companies. This has led to massive increases of foreign shareholdings. Compared with the average individual and

b y N at h an K a i ser

arguably corporate domestic investor, foreign shareholders are both more active and have the resources to back up such shareholder activism. Alongside this equity-related development, debt also has a place in driving corporate governance practices forward. Gone are the days when international banks issued bonds for US$20 million for some shady steel company in Kaohsiung, whereby the same bonds would shortly thereafter be qualified as ‘wallpaper’ (worthless) by local financial analysts. Instead, Taiwan now has an unprecedented level of foreign players entering the banking scene.

EUROVIEW • AUGUST / SEPTEMBER 2007 • 25

C O R P O R AT E G R E E D

Last year, it looked like corporate governance practices took a back seat in the pursuit of profit. This recent flow of international players

wan may come from an unexpected new

board liability as stipulated in article 193

such notification obligations hardly need be

Historically, the limits put in place on

has invested in and taken over some of the

institutional investor on the block: Taiwan’s

of the Company Law.

placed high on the priority list when man-

Taiwan companies in terms of capital invest-

Criminal investigations by prosecutors

local banks that seemed ripe for the pick-

own massive pension fund.

aging a troubled company.

As for the protection of voting rights

and aggressive prosecutors.

ments or chip manufacturing in China have

are one top-down approach to force compa-

ing for many years. This foreign invest-

However, an investment limit in local

(i.e. protection of minority shareholders),

The upside for corporate governance

in fact been a challenge to good corporate

nies, and more to the point, its directors and

ment in the financial sector in turn leads to

stock market shares is set at around 20% for

Taiwan continues to see lively shareholder

is that the impact of the group’s fall has

governance. This is because commercial

top-level management to implement strict-

an increase in the levels of corporate gov-

the government pension fund because local

fights for board seats and consequently for

impressively shown the importance of

considerations have led some companies to

er standards of corporate governance. But

ernance among local banks since their cli-

corporate governance realities may well have

management control. While the Company

reporting requirements and transparency

disregard these limits in creative ways, thus

such heavy-handed approaches to corporate

ents and corporate borrowers will demand

spooked the government, which is keen to

Law does offer some minimal rights of rep-

within the tight network of cross-share-

foregoing regulatory compliance and trans-

governance remain the exception.

a higher level of good working practices.

avoid any investment mishaps.

resentation for minority shareholders with-

holdings, cross-credit, and cross-supply

parency towards shareholders.

But as long as Taiwan companies adopt

Of course, the new foreign shareholders

But could we soon expect a US CalP-

in the board, it has been said that current

arrangements within corporate Taiwan. In

Management of companies circumvent-

good corporate governance measures, ensur-

will enforce their own high home stand-

ERS-style corporate governance require-

listing rules, and more precisely its de-list-

the wake of the scandal corporate govern-

ing Taiwan rules risk ruining the reputation

ing that managers, directors and sharehold-

ards with a minimum of delay, raising the

ment from the Taiwan pension fund and

ing requirements, are a possible tool for a

ance is now regarded not only as a matter

of the company. They also run the risk of

ers also embrace the principles it will be

bar on standards.

its investment commission? Only time will

board to de-list a company against the will

to the small stakeholder or shareholder, but

the authorities making an example out of

good for business and investors.

Last year, it looked like corporate govern-

tell, but in view of the enormous amounts

and notably against the economic interests

also to other larger players. Indeed, the list

them. For example, the case of semiconduc-

of minority shareholders.

of companies directly affected by the fall

tor outfit UMC and its links to the China-

Nathan Kaiser is an attorney-at-law

of Rebar reads like a ‘Who’s Who’ of cor-

domiciled Hejian has shown the growing

at Wenfei Attorneys-at-Law in Taipei

porate Taiwan.

assertion of power by Taiwan’s authorities

and sits on the board of directors at the

ance practices took a back seat in the pur-

of cash it is holding, the impact could be

suit of profit. The 41, or thereabouts, local

substantial with regards to improving cor-

Remedies such as delisting thresholds

Taiwan banks suffered at the hands of the

porate governance standards. Pension funds

implemented by the Hong Kong Stock

‘credit crunch’ (‘crunch’ here meaning the

from the US and Europe have managed to

Exchange as a result of successful sharehold-

revenue crunch after write-offs and reduc-

flex their muscles through their sharehold-

er activism are worth highlighting. But this

tion in interests earned). The fallout from

ings of companies to ensure financial books

kind of action is still frowned upon in Tai-

this though has been positive with banks and

are as transparent as possible.

wan, largely defended by the somewhat sim-

their clients taking a hard-line on corporate

Still, the framework of Taiwan’s writ-

plistic arguments that it is not necessary and

governance practices. The recent impressive

ten law bodes well for the composition

maintenance and lowering of non-perform-

and functionality of the board of directors,

As far as communication and reporting

ing loan ratios in the banking sector is testi-

a key element of ‘good’ corporate govern-

are concerned, the catastrophic events of

mony to stronger management standards.

ance. This includes such crucial elements as

the Rebar Group scandal demonstrate that

the current safeguards are sufficient.

Corporate governance has also become

Taiwan’s listing rules requiring independent

much remains to be done. It started with

an issue within government-owned busi-

directors; and the Company Law based on

two Rebar subsidiaries ‘unexpectedly’ filing

nesses, and other entities with a govern-

the German two-tiered (dualistic) board

for bankruptcy protection where liabilities

ment stake. As long as political bickering

structure – including a supervisory board

had grown to over US$1.2 billion, seemingly

can be kept to the sidelines management

on top of the board of directors.

without anyone noticing for years. The delay

will have a clearer path to improving and

The former is an effective reflection of

in notification of the bailout request by the

raising the level of governance. However,

the growing awareness of corporate gov-

management to the Taiwan Stock Exchange

struggles between professional managers,

ernance principles – crucial for Taiwan’s

seems minor when compared to the ques-

civil servants, government and stakeholders

national competitiveness. As for putting

tion of the role of the boards of directors,

will continue for the foreseeable future. An

the law into practice, while in the past the

the boards of supervisors, and possibly of

example of this was Chunghwa Telecom’s

lion’s share of responsibility was borne by

external auditors with regard to the finan-

protracted privatization and the changing

the chairman in Taiwan, it can be observed

cial and communication holes.

of the Taiwan Post’s company name.

that fellow board members have come to

But in view of the resulting NT$50,000

But a possible boon for further improve-

shoulder a greater portion of the respon-

fine for delayed notification, according to

ment in corporate governance within Tai-

sibility in acquiescence to the principle of

media reports, it becomes apparent that

26 • AUGUST / SEPTEMBER 2007 • EUROVIEW