Fighting the Good Fight

The Taiwan Stock Exchange Corp. is taking steps to improve board governance among listed companies.

Cooking oil scandals, chemical pipeline explosions, pollution exposés – a common thread runs through these headline-grabbing incidents in Taiwan in 2014. Beyond the lamentable suffering and social costs, they represent avoidable destruction of shareholder value that could have been mitigated with the effective oversight of an independent board of directors acting in the interests of all shareholders. Research suggests that there is a correlation among corporate governance, board effectiveness, and corporate performance. The Taiwan Stock Exchange Corp. (TWSE) is leading the effort to increase attention to board effectiveness and compliance in the ROC.

Where does Taiwan stand?

Since 2003, the Executive Yuan has been paying increased attention to corporate governance and has sought to direct policy and encourage voluntary adoption of best-practice principles of corporate governance, corporate social responsibility (CSR), and ethical management and conduct. The TWSE’s Corporate Governance Center over the past two years has put in place a Corporate Governance Evaluation System for Taiwan listed companies. The system involves a mandatory evaluation in which 92 yes/no questions explore five dimensions of governance:

  • Protection of shareholder rights
  • Equitable treatment of shareholders
  • Board composition and management
  • Information transparency
  • Protection of stakeholder interests and CSR

The outreach to Taiwan listed companies took place in Q1 2014 and the results are expected to be released this month. To ensure that company boards understand the evaluation criteria, the Taiwan-listed companies were encouraged to do a voluntary self-assessment. An independent task force established by the Stock & Futures Institute will also collect publicly disclosed information about all listed companies as the basis for determining the answers to the 92 questions.

In this first year of the evaluation, the Center has decided to “honor outperformers and encourage benchmarking” by releasing the results of only the top 20% of listed companies, highlighting and celebrating their compliance. “The goal is that right action will be taken by all listed companies to bring Taiwan in line with international standards and enhance transparency, investor involvement, and the quality of capital markets,” stressed Joe Cheng, senior vice president of the TWSE’s Corporate Governance Department. Over the coming years, the percentage of results released will be ramped up, reaching 100% in 2016.

Research conducted by Heidrick & Struggles and presented in the Asia Pacific Corporate Governance Report 2014 found that other APAC nations, with Australia in the lead, have well-established board governance and compliance regimes in place and are now starting to focus on the bigger question of improving board effectiveness. The Heidrick report showed consistently that the capabilities of “People, Vision, Leadership and Innovation” were the leading indicators of sound board effectiveness; four core drivers and five supporting drivers were also identified as necessary to promote change and deliver best practices.

The APAC survey respondents identified a balance of skills, knowledge, and experience on the board as the #1 core driver. Having this balance impacts the chairman, as well as the ability of the board to constructively challenge senior management on vision and corporate strategy and on the assessment of systemic risks and innovation rewards.


As shown in Table 1, Taiwan directors do not appear to be “over-boarded” and could afford to work on more boards. The concomitant cross-fertilization of ideas and best practices is seen as beneficial. Taiwan also lags behind the APAC average for the percentage of directors with previous CEO experience. Having such experience enhances the director’s perspective and credibility as a counterweight to the corporate CEO.

Empowered support of committees to help the board make decisions and share the workload came up in the Heidrick APAC survey as the second most important driver of board success. The role of committees has grown significantly in recent years as they have taken on important decision-making tasks and then reporting back to the board. This approach has been shown to have a positive impact on talent, vision, and innovation. David Pumphrey, partner emeritus at Heidrick & Struggles and one of the authors of the study, says the benefit extends beyond the Audit and Remuneration Committees. “High-performing committees provide better talent reviews and succession planning,” he observes. “They are generally clear on strategy and assessing the importance of innovation and risk scenarios.”

TWSE-table2Table 2 suggests that the average Taiwan-listed company is at the stage of just accepting board committees as required under the regulations for compliance, but not leveraging additional committees to enhance board and corporate performance. Remuneration Committees are required under the regulations, and Audit committees are required under the regulations for listed firms with more than NT$2 billion in paid-in capital, and the data shows that listed companies are merely complying with this stipulation. Within the region, listed companies have progressed beyond mere compliance to appoint committees focused on nomination, strategy, risk, CSR, and other areas. This is an important aspect in which Taiwan needs to catch up with regional trends.

An objective regular board evaluation is the third core driver of optimum performance, since it is only possible to identify areas of potential improvement in board effectiveness when there is a systematic review of performance. This need also dovetails with the fourth core driver, identifying board improvement opportunities. Data is not available as to how often board evaluations were conducted in Taiwan in past years or by whom. But going forward, the Corporate Governance Evaluation System will take place as an annual, formal exercise, ensuring that Taiwan listed companies reach 100% in this metric, versus the 53% average in the region. This achievement will be an admirable milestone.

Of equal or greater importance, however, is the objectivity of the evaluation and who on the board has ultimate responsibility for conducting it. On average, 46% of listed companies in the six APAC countries studied retain an external consultant to evaluate the board at least once every two years. The scope is likely to cover the composition of the board (profiles of skills and competencies); its processes, structures, and culture; and its behaviors and team dynamics. “After conducting a thorough board evaluation process with Heidrick, our clients have told us it was well worth the investment,” noted Graham Poston, Regional Practice Managing Partner for the Heidrick CEO and Board Practice in Asia Pacific. “They feel they are more confident not only that they are driving improved governance and compliance, but also that they are contributing more effectively to the strategic direction of the company in the interests of shareholders and stakeholders.” In Taiwan, the board is not required to sign off on the self-evaluation submitted to the TWSE, and the SFI Task Force will conduct its objective evaluation independently. Progressive boards may want to get ahead of the curve in driving self-evaluation and board improvement or bringing in experts to help.


Achieving an appropriate balance between executive and non-executive directors was identified in the study as having a supportive, but not a core, impact on board effectiveness. It does have a positive impact on leadership and team dynamics on the board. The percentages and trend observed in Taiwan and APAC are similar (see Table 3), with around 70% of boards made up of non-executive directors. The decline over time in APAC is attributed to the trend to include CFOs on the board.

TWSE-table4The holding of regular board meetings (see Table 4) is seen as a supporting driver of board effectiveness. Too few meetings and the board does not have an opportunity to establish effective debate and an esprit de corps. Too many, poorly planned, or numerous ad-hoc crisis meetings, however, detract from board effectiveness. “A combination of the right number of meetings per year and thorough preparation and attention to detail by directors improves the relationships between board members and the quality of their discussions,” notes Pumphrey. “In our experience – and as we stated in our study regarding Singapore and Hong Kong – it is difficult for a board to deal effectively with both regular compliance and emergent ad-hoc issues with the 7.2 average meetings per year in Taiwan.”

While board members themselves may not (understandably) cite the need for clear criteria for board member replacement as a supporting driver to improving effectiveness, the conclusion of external observers is that it deserves inclusion. The Heidrick survey suggests that such clear criteria have a positive and objective impact on top talent performance and clarity of vision. Some of the metrics used to measure board turnover are average age and average time on the board. The average age in APAC for board directors is 60.3 years. Taiwan does not require boards to report the age of directors, so comprehensive information on this score is not available from TWSE. However for those boards that have reported their directors’ ages, the average is 63.2, older than in any of the other six countries surveyed. Taiwanese respect for ones’ elders notwithstanding, this fact becomes a worry, especially when cases exist such as one of Taiwan’s largest companies, otherwise famous for corporate governance and compliance, which has an average age for board members of well over 70 and no nomination committee.

TWSE-table5The average time on a board (Table 5) is an important measure in APAC, and in the region the trend is a reduction in the number of years. In Taiwan, however, there has been a significant increase. We can only speculate whether this difference is due to a shortage of qualified people in Taiwan to serve as directors, or a propensity to engage only a small population of individuals well known to the management. A guideline of nine years as the maximum length of tenure is now becoming the norm for non-executive directors in APAC; after that they are regarded as “non-independent.” In Taiwan, the number of directors serving over nine years is significantly greater than the average in APAC, and – worryingly – it is on the rise.

TWSE-table6Board diversity (Table 6), both diverse gender and nationality mix, has received significant attention from the world press and academics, but was deemed less important by survey respondents, one of whom said: “So-called ‘governance best practice’ is too preoccupied with appearance and issues such as gender diversity, and not enough with the effectiveness of the board as a whole.” Taiwan encourages gender diversity on the board to improve effectiveness, but it is not a regulated requirement. The results are mixed. While the average percentage of female board members is higher in Taiwan than in APAC, the percentage of boards with no female directors is also much higher.

The TWSE requires reporting of foreign nationalities on local boards but does not release these statistics. Starting with 2014 annual reports, Taiwan listed companies will be required to lift the veil on this factor to give investors more insight into board composition. In an increasingly tightly interconnected global village, where news, trends, technologies, and disruptions can rapidly cross national boundaries and have significant business impacts, best practice embraces the concept of “diversity of thinking” in which a board is comprised of a mix of ages, nationalities, genders, and functional backgrounds to bring a more holistic approach to director selection.

TWSE-table7The final supporting driver of high-performing boards is the representative number of independent directors (Table 7), as opposed to non-executive directors (who may or may not meet the criteria of being “independent”). Independence is deemed to be important to foster integrity, a balanced focus on shareholder interests, the freedom to objectively challenge management, and the integration of diverse business experience in weighing innovation and risk. The United States is an outlier in this area, since the preference around the world is for the chairman to be independent and separate from the CEO. It should be noted that the definition of an independent director is not universally agreed upon among regulators from different jurisdictions or among different boards. The Heidrick survey highlighted six indicators used to assess independence. The director:

  • Has no significant commercial contracts with the group
  • Is not currently employed by the company
  • Has no cross non-executive role (a non-exec director and a CEO who sit on each other’s board)
  • Is not a reference shareholder (major direct shareholder, such as a founder or family member) or employee shareholder representative
  • Has not been an executive of the company in the last five years
  • Has not been on the non-executive board for nine years or longer


The Financial Supervisory Commission requires the inclusion of no fewer than two independent directors, comprising not less one-fifth of the total number of directors, and the evaluation system encourages companies to exceed these requirements. Its guidelines say: “Independent directors shall possess professional knowledge and there shall be restrictions on their shareholdings and the positions they may concurrently hold. They shall maintain independence within the scope of their directorial duties, and may not have any direct or indirect interest in the company.” Companies are also required to use only independent directors on the audit committee, provide them with special administrative support, have their opinions specifically noted in meetings, and other distinctions.

The average number of independent directors on Taiwan boards is both increasing and reaching the level encouraged by the regulators in their best-practice principles. This trend is an encouraging sign. The number of boards in which the chairman and CEO are the same person is high, but still less than in the United States where over 50% of S&P500 boards have this arrangement. However, given that Taiwan boards have fewer independent board committees providing oversight and objective reference, this concentration is a cause for concern.

As the late U.S. Supreme Court Justice Louis Brandeis, an ardent proponent of transparency, once said: “Sunlight is said to be the best of disinfectants.” By creating the Corporate Governance Evaluation System and shining a bright light in 2015 on the best, most compliant 20% of listed companies in Taiwan, the TWSE will enable investors to gain insight into the cleanest companies. Capital flows can be expected to follow, and market forces will encourage the remaining 80% of companies to bolster their governance regime. In the 21st century, best-practice boards bring both oversight and focus to the complex forces driving change, not just compliance – and that will be the next step for Taiwan’s boards.

Notes on Methodology

  • The Asia Pacific Corporate Governance Report 2014 (“Foundations and Building Blocks for High-Performing Boards”) draws on data from 170 publicly listed companies on stock exchanges across six countries in Asia Pacific – Australia, China, Hong Kong, India, New Zealand, and Singapore.
  • The author expresses his gratitude to the TWSE Corporate Governance Department for help in extracting the Taiwan data, which is based on 780-853 TWSE listed companies from 2011 to 2014.