From double board to unitary board system: Independent directors and corporate governance Reform in Taiwan

Introduction This chapter reviews the regulatory strategies in corporate board reform and analyses the impact of introducing the institution of the independent director into Taiwan’s public companies. Taiwan’s corporate governance model has been strongly influenced by the German and Japanese models. A primary example of this can be seen in Taiwan’s Company Act, which traditionally has followed a double board system: the board of directors constitutes the company decision-making organ, 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 towards the regulation of the internal governance structure of public companies. Generally, Taiwan’s public companies could choose to either maintain a double board, 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 of the ambiguous distribution of authority between the different corporate organs. 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, on the other hand, independent directors 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, in December 2013, the Financial Supervisory Commission (FSC) of Taiwan mandated that all public companies with paid-in capital over NTD 2 billion (US $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 it was necessary to intervene in the internal governance of public companies and took a reformist approach to its corporate board reform. This chapter reviews the reform process since 2002 and critically analyses the challenges of an optional model, along with the legal transplantation process. Section II introduces the reform of the board structure and presents some statistics regarding the percentage of public companies with independent directors, as well as the occupations of independent directors in Taiwan.