繁體中文 English
About LCP Attorneys Information Welcome
 
  How to Prevent and Handle Stowaways
 
  Arbitration - Taiwan - Overview
 
  Supreme Court Confirms Validity of Pre-arbitration Procedure Provisions
 
  Arbitral Awards Cannot be Vacated for Insufficient Reasoning
 
  Grounds for Vacation of Arbitral Award Must be Spelled Out from the Outset
 
  Awards Cannot be Vacated for Improper Application of Statutory Provisions
 
Corporate Governance ~ Focus on the Comparison of Independent Directors under American Corporate System and Supervisors under Taiwanese Corporate System
 
Corporate Governance ~ Focus on the Comparison of Independent Directors under American Corporate System and Supervisors under Taiwanese Corporate System
  By Aaron J. C. Chu
 

1. Introduction

In 1998, Taiwan suffered a financial crisis.  In order to prevent further aggravation of the crisis, the Taiwanese government invited numerous scholars to engage in research on issues regarding “corporate governance.”  The most crucial of these issues became whether the government should request the companies to set up the special committee (i.e. the audit committee) which is comprised of independent directors.  Many scholars believed that the most practical way to implement corporate governance in Taiwan is to enhance the power of independence in the companies.  Thus, they recommended that a board of directors of a public company should be composed of a substantial majority of independent directors and that the government should amend the Securities Exchange Act to achieve this goal.

However, some scholars advocated that under the U.S. legal system, U.S. companies do not have any internal “supervisor” and thus, they have gradually developed the independent director mechanism to strengthen the company’s internal control and supervision.  Participating in the audit committee, the compensation committee and the nominating committee, the role of these independent directors is to supervise the management of the company.  After analyzing the functions of independent directors in the U.S., these professors believe that the role of independent directors is very similar to that of the “supervisors” under Taiwanese corporate system.  Therefore, they concluded that the most effective way to restructure Taiwan’s corporate governance system would be to reinforce the professionalism and independence of Taiwan “supervisors,” rather than to adopt the independent director mechanism directly.

This article mainly discusses the functions of independent directors under American corporate system and the functions of supervisors under Taiwanese corporate system.  Then, it compares the functions between independent directors with supervisors.  Finally, it concludes whether the Taiwanese government should amend the Securities Exchange Act to request the Taiwanese companies to adopt independent director mechanism.

2. The Functions of Independent Directors under American Corporate System

2.1 What Is an Independent Director?

2.1(a) Independence Requirements under the Sarbanes-Oxley Act

The Sarbanes-Oxley Act section 301 requires that by April 26, 2003, each company which has securities listed on a national securities exchange or national securities association (such as NASDAQ) must have an audit committee of its board consisting entirely of independent directors.  Independence for purposes of the Act means that no member of the audit committee may be an affiliate of the company and no member may receive any consulting or advisory fees from the company other than director and committee fees.

The Securities Exchange Act 1934 section 10A (m) (3), describes the independence requirements as follows:

(a) In general

Each member of the audit committee of the issuer shall be a member of the board of directors of the issuer, and shall otherwise be independent.

(b) Criteria

In order to be considered to be independent for purposes of this paragraph, a member of an audit committee of an issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee accept any consulting, advisory, or other compensatory fee from the issuer; or be an affiliated person of the issuer or any subsidiary thereof.

2.1(b) Independence Requirements under the New York Stock Exchange Corporate Governance Standards

In order to tighten the definition of "independent director" for purposes of these standards:

(a) No director qualifies as "independent" unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either as a partner, shareholder or officer of an organization that has a relationship with the company).  Companies must identify which directors are independent and disclose the basis for that determination.

(b) In addition, a director is not independent if:

(i) The director is, or has been within the last three years, an employee of the listed company, or an immediate family member is, or has been within the last three years, an executive officer, of the listed company.

(ii) The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).

(iii) (A) The director or an immediate family member is a current partner of a firm that is the company's internal or external auditor; (B) the director is a current employee of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and who participates in the firm's audit, assurance or tax compliance (but not tax planning) practice; or (D) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the listed company's audit within that time.

(iv) The director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the listed company's present executive officers at the same time serves or served on that company's compensation committee.

(v) The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the listed company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company's consolidated gross revenues.

2.2. The Functions of Independent Directors in Board Committees

2.2(a) Board committees

Board structure and practice will, over time, significantly impact the ability of the board to exercise its powers and discharge its obligations effectively to benefit and advance corporate objectives.  In determining board composition, consideration should be given to both personal qualities and experience of the individual directors and the over mix of experiences, independence, and diversity of backgrounds.

Aboard of directors normally conducts its business through a well organized committee structure that partitions the work of the board and allows directors to make maximum use of their expertise.  Many issues are too complicated to be dealt with by the entire board.  It is a matter of time and efficiency as well as expertise.  The board can delegate certain policy or issue decisions to the relevant committee or can ask the committee to complete a detailed study of the issues and come back to the entire board with recommendations.  Each committee should have a clear charge, or set of duties, and their report become part of the board’s minutes as they report at appropriate board meetings.

Most boards have the following standing committees in some form:

-the executive committee;

-the audit committee;

-the compensation committee;

-the nominating/corporate governance committee; and

-the other standing committees.

2.2(c) Independent Directors in the Compensation Committee

As executive compensation has become a topic of widespread public discussion and shareholder concern, the role of the compensation committee has received greater attention.  Section 301 of the Sarbanes-Oxley Act requires a public company's audit committee to be composed entirely of independent directors, as independence is defined in the Act.  Such complete independence is not required by the SEC for any other board committee.  However, a superior board would require such total independence of its other important committees as well, such as the compensation committee and the nominating/corporate governance committee.  This would insure that such matters as executive compensation, stock options, and selection of future outside directors were determined without undue influence from management or insiders.  Thus, NYSE requires that listed companies must have a compensation committee composed entirely of independent directors.

Independent directors in the compensation committee are required to:

-establish or recommend to the board the compensation and benefits of the chief executive officer and senior executives;

-establish and periodically review executive compensation programs and take steps to modify any executive compensation program;

-evaluate the performance of the chief executive officer and senior executives in light of the goals and objectives of the company;

-review all employment and consulting agreements with executive officers and directors;

-make recommendations to the board with respect to incentive compensation and equity-based plans; and

-establish and periodically review policies in the area of senior management perquisites.

2.2(d) Independent Directors in the Nominating/Corporate Governance Committee

The board committee known in the past as “nominating committee” has been transformed into the “nominating/corporate governance committee” or the “corporate governance committee”.  This reflects the expanded concerns of corporate principles and practices.  Like the compensation committee, independence is not required by the Sarbanes-Oxley Act for the nominating/corporate governance committee.  However, the NYSE requires that each of its listed companies have a nominating/corporate governance committee composed entirely of independent directors.  The purpose of this committee is to identify individuals qualified to become directors and to select director nominees.  The NYSE also requires the committee to develop and recommend to the board a set of corporate governance principles applicable to the company.

Independent directors in the nominating/corporate governance committee are required to:

-identify and review the qualifications of prospective nominees for director and recommend to the board the slate of nominees for inclusion in the company's proxy statement and for election by the stockholders at the annual meeting.  In evaluating candidates for nomination to the board, the committee will take into consideration the factors and criteria as it deems appropriate;

-review the performance of the board annually and the performance of board members before nominating them for re-election;

-periodically review the composition of the full board to determine whether additional board members with different qualifications or areas of expertise are needed to further enhance the composition of the board;

-review and make recommendations to the full board with respect to succession planning; and

-develop and recommend to the full board a set of corporate governance guidelines, review such guidelines annually and recommend any modifications thereto.

3. The Functions of Supervisors under Taiwanese Corporate System

3.1 What Is a Supervisor under Taiwanese Corporate System?

Directors and supervisors are both elected by shareholders under Taiwanese corporate system.  However, directors and supervisors perform opposite functions in a company.  Directors decide the firm policies, which will be carried out by the management.  The term “supervisor” is self-explaining: supervisors monitor the conducts of directors and the management.  A company should at least have one supervisor, but for a public offering company there must be two or more supervisors.

3.2 The Authority of Supervisors under Taiwanese Corporate System

The authority of supervisors is as follows:

-supervising the business operations of the directors and the management;

-investigating the operational and financial conditions of the company;

-examining the financial statements and various documents prepared by the board of directors for submission to the meetings of shareholders, producing a report thereof, and submitting such report to the meetings of shareholders;

-attending the meetings of the board of directors and expressing their opinions;

-requesting the directors or the management to report to them;

-in case any director violates the laws, regulations, and the articles of incorporation, the supervisors shall inform the board of directors of such violation and shall cease such act; and

-calling a meeting of shareholders if the board of directors will not or cannot do so.

4. The Comparison between Independent Directors with Supervisors

Many scholars object to adopting independent director mechanism under Taiwanese corporate system on the ground of the following:

(i)the role of supervisors is very similar to that of independent directors, and thus, it is not necessary to have a parallel internal control system under the current Taiwan legal system;

(ii)Taiwanese corporate law mainly adopts the spirit and structure of Japanese corporate law rather than American corporate law, and thus, it is not suitable to adopt American corporate model under the current Taiwanese legal system; and

(iii)if the government amends the Securities Exchange Act to request the board of directors of a public company to be composed of a substantial majority of independent directors, there must be a great demand for independent directors and hence a shortage thereof.

However, there are also weaknesses in the above objections:

(i)The role of supervisors is not exactly the same as that of independent directors.  There are still some functions of independent directors that are not covered by those of supervisors.  To explain, by comparing the functions of independent directors and supervisors, it is obvious that Taiwanese supervisors perform the authority which is only similar to that of independent directors in the “audit committee”.  However, independent directors also participate in the “compensation committee” and “nominating/corporate governance committee,” the power of which is missed in the authority of supervisors. 

(ii)Japan has already adopted independent director mechanism.  When Japan amended the corporate law in response to Asian financial crisis around 1997, there was proposal for adopting independent director mechanism, which was not accepted in the amendment.  However, in the face of the worsening economic environment and the demand for overall financial revolution, the Japanese government accordingly amended the corporate law by requesting publicly held companies to phase in the independent director mechanism.

(iii)Shortage of qualified candidates is not an excuse to the establishment of a new system.  Furthermore, Taiwanese government does not ignore the demand.  The Securities Future Commission, Taiwan securities regulator, has established “Database for Independent Directors” in March 2003.  Therefore, publicly held companies may select independent directors either by themselves or by searching the database.

5. How to Adopt Independent Director Mechanism under Taiwanese Corporate System?

According to the analysis above, I advocate that independent director mechanism should be adopted under Taiwan corporate system.  How to adopt independent director mechanism under Taiwanese corporate system?  Taiwan Securities Exchange (TSE) and GreTai Securities Market (GTSM; over-the-counter market of Taiwan) require every publicly held company applying for Initial Public Offering (IPO) should have at least two independent directors since 2002.  However, this rule applies only to a company applying for IPO, not to all publicly held companies.

In addition, TSE and GTSM have set up “Taiwan Corporate Governance Best-Practice Principles for TSE/GTSM Listed Companies.”  It recommends the listed companies to have an audit committee and other special committees which are composed of independent directors.  However, this principle is not mandatory.  Under these circumstances, I believe that independent director mechanism should be adopted though the amendment of the law.

6. Conclusion

The Asian financial crises and American corporate scandals provide lessons for Taiwanese government to esteem the importance of corporate governance.  The main purpose of corporate governance is to enhance internal control mechanism of companies, so as to protect the interest of shareholders.  I believe that the most crucial way to improve corporate governance in Taiwan is to enhance the independence of the board of directors in the publicly held companies.  That is, a board of directors of a publicly held company should be composed of a substantial majority of independent directors.  I also believe that amending Securities Exchange Act is the best and effective way to achieve this goal.

   
   
地址: 103 台北市大同區民權西路104號7樓之1。 Tel: 886-2-2557-3036 Fax: 886-2-2557-3035
Copyright © 2011 Liu , Chang & Partners . All Rights Reserved