In our forthcoming Chapter, Hsin-Ti Chang, Ying-Hsin Tsai and I, review the regulatory strategies in corporate board reform and analyse 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 February 2013, 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, or to 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. Our Chapter reviews the reform process since 2002 and critically analyses the challenges of an optional model, along with the legal transplantation process.
We conclude 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 any significant shift with regard to 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 fulfil their intended purpose — but are far too often overlooked.
Yu-Hsin Lin is an Assistant Professor at City University of Hong Kong School of Law and a guest contributor to the Oxford Business Law Blog.