In recent years, Taiwanese businesses have increased the number of independent directors on their boards and the total level of board independence. Does this improve the performance of Taiwanese companies’ boards of directors generally? Or are these independent directors afraid of losing their board positions that they are hesitant to question management?
An independent majority on the board of directors is supported by numerous international organizations and institutional investors. An independent majority board, according to proponents, is better able to promote independent decision-making and will take into account the interests of all shareholders, which will lessen conflicts of interest. Even though US-based firms may have independent majority boards more frequently, it is still extremely uncommon in most Asian nations for a board to include more than 50% of independent members.
Only 4% of Taiwan’s listed corporations currently have a majority-independent board of directors. Independent thinkers are people “who are able to exercise independent judgment free from any external influence,” according to the International Corporate Governance Network (ICGN). According to the ICGN guidelines, a director is generally not regarded as independent if they have recently held a position of employment, are currently employed by a material supplier or customer, have received outside compensation from the company for services other than serving as a director, or are a reasonably significant shareholder.
In their many definitions of independence, numerous organizations and regulators recite these standards. The ICGN goes on to emphasize that a director’s independence may also be jeopardized if they hold cross-directorships or have close relationships with other directors through participation in other organizations. They may also be compromised if they have served as nominee directors on behalf of minority shareholders or the government.
Minority shareholders may propose candidates for independent directors in Taiwan. With the necessity of cumulative voting for directors, which is unusual in other regions, Taiwan’s legislation are extremely helpful in preserving the interests of minority shareholders. During the nomination period, minority shareholders who own 1% of the outstanding shares may propose one or more candidates for the board of directors.
In Taiwan, a seat on a board of directors can occasionally be secured with as little as 2% of the backing of shareholders or as much as 12% in a contested election. Does this imply that management- and shareholder-nominated candidates are less independent than one another? Not always; independent directors have a fiduciary responsibility to ensure that choices are made with the corporation’s best interests in mind.
A director’s capacity for effective board participation depends on a variety of elements, including financial savviness, appropriate expertise, communication abilities, and moral fortitude. In addition to participating in board meetings and contributing their pertinent experience, independent directors can help the boards by keeping an eye on management.
By serving on the Audit Committee, Remuneration Committee, and other special committees established to examine transactions, the independent directors contribute significantly to board governance in Taiwan. Taiwanese law permits shareholders to freely call an extraordinary shareholder meeting if they have held 50% of the company’s shares for at least three months (EGM). Theoretically, a shareholder who owns 3% or more of the shares for at least a year may also call for an EGM, although doing so requires regulatory approval and may be challenging to get.
In Taiwan, independent directors now have the authority to convene EGMs when they deem it essential, usually to promote greater corporate governance. In theory, this is a crucial way to prevent board decisions from being made that benefit a smaller number of shareholders or are not in the best interests of most stakeholders.
In actual practice, independent directors have called some EGMs to ensure shareholder approval for significant matters that impact all shareholders, but they have also been used to call early board elections, remove directors from the board, or seek management control changes, none of which are always in the best interests of increasing shareholder value.
Should an independent director only call an EGM with the consent of all other independent directors? Holding management accountable may be limited as a result of this. It might be more difficult for current independent directors to be impartial if the outcome of a board election also called for their removal.
There may be various ways to provide better monitoring while ensuring that this authority is used ethically and not exploited. There is growing support for boards appointing a Lead Independent Director among the international investment community. When the Chairperson and CEO are held by the same person or a non-independent chair, this function is currently present in markets like the UK, US, Australia, and Singapore.
The Lead Independent Director (LID) can aid in preserving a balance on the board and also provides assistance in matters like supervising shareholder communications, contributing to the agenda of the board, and mentoring other independent directors. There are more than 500 listed businesses in the Taiwanese market where the chairperson also serves as the CEO.
In order to provide our readers with a more thorough understanding of investor relations from the investor’s perspective, DIGITIMES has asked QIC to contribute as a partner. The piece is the seventeenth installment of the QIC Inside Investor Relations Series, which debuted on QIC website .)