Taiwan’s Great Governance Leap…Forward?

Taiwan has taken one small step forward in the name of corporate governance—but, at least for now, “small” is the key word.

This month, the Asian nation, always an economic dynamo, put into effect new amendments to its Securities and Exchange Act. The law now says that certain companies must have at least two independent directors on their boards, and that the number of independent directors must exceed 20 percent of the board’s total size. And, critically, the law also requires the creation of audit committees comprised entirely of independent directors.

Now, for governance enthusiasts, the bad news: The regulations only apply to financial-holding companies, banks, insurance companies, and listed companies with market capitalizations above about $1.5 billion. That exempts the vast majority of Taiwan’s companies, since the country remains dominated by small and medium-sized firms.

Fan

The requirement for an audit committee also might be vulnerable because the law says a company must appoint an audit committee or have a supervisory board. According to T.C. Fan, director of the research department at the Taiwan Corporate Governance Association, a supervisory board has none of the independence of an audit committee, and employing one indicates business as usual.

Fan believes that the corporate-law reforms were greatly weakened by industry lobbying, lamenting what he calls significant loopholes and gaps that remain in the legislation. “The government was under great pressure from the companies,” he says.

Like many Asian countries, Taiwan has a long history of lurching from one scandal or collapse to the next and has never blazed the trail for greater shareholder rights. Regardless, whenever a company fails in some spectacular manner, more laws are written. Albeit, those new laws may be watered down before they are enacted, but the overall climate of corporate governance has been improving slowly with each dramatic failure. The trend, observers say, is upwards.

“What has been going on for some time is an evolution in the way companies govern themselves,” says Thomas McGowan, an attorney at the Taipei offices of the law firm Russin & Vecchi.

McGowan also contends that public opinion is starting to play a role in corporate governance in Taiwan. While the average person in the country may not understand exactly what corporate governance is, citizens do understand scandal and tend to react swiftly and vocally when they feel as though their trust has been violated.

And since 2001, when the ruling Kuomintang party finally lost its grip on power after 52 years, Taiwan has become a far more freewheeling society, with sensationalist newspaper coverage and lively debates in Parliament. In this environment, the mood of the nation has started to lead to more regulation, and corporate governance is no exception.

Champion

“Corporate governance has taken on a life of its own,” says Steven Champion, president, CEO and portfolio manager of the Taiwan Greater China Fund. As a result, business executives have become aggressive in getting their corporate houses in order.

One issue that has attracted their attention, for example, is the use of “nominee shareholders.” It has long been standard practice for the chairman or main shareholder of a company to own a block or blocks of shares in that company secretly, via an offshore entity. This violates Taiwanese law, but has been tolerated since holdings via offshore entities are tough to police and a fairly low-ranking offense.

“What has been going on for some time is an evolution in the way companies govern themselves.”

— Thomas McGowan, Attorney, Russin & Vecchi

Recently, however, major shareholders have started to take the rules for disclosing nominees more seriously. Observers note that there haven’t been any dramatic change, just an increasing sense that hiding ownership may be wrong.

The activity of foreigners in the market also has played a role in motivating change. Recently, private equity groups began entering Taiwan in search of banks to acquire; as a result, many offshore financial and legal firms are now involved in local transactions. Those outsiders tend to follow the rules closely, fearing that they might be associated with illegal activities and lose business in Taiwan—or, worse, get kicked out of the country altogether.

“Financial intermediaries are getting jumpy because of franchise risk,” McGowan says. “They are worried that people will say ‘XYZ has been helping these bad guys.’”

More changes in Taiwan’s corporate governance laws may be coming soon. The failure of the Rebar Group, a conglomerate with interests in real estate, telecommunications, financial services, and other business lines, as well as the subsequent failure of Rebar’s main bank, has motivated the government into action once again. More legislation, and stronger enforcement of that which exists, is expected.

“They are talking about changing the law again,” Fan says.