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Editorials: Promoting corporate accountability

The legislature's finance committee last week passed the first reading of amendments to the Securities and Exchange Law (證券交易法), which aims to introduce independent board directors into the business world to strengthen corporate governance. If legislators request no further discussion of the amendments, the draft revisions will soon be subject to a second reading and may pass their final review during this legislative session.

The amendments were initiated in response to a series of high profile corporate scandals and accounting abuses that began last year at listed companies including Procomp Informatics Co (博達), Infodisc Technology Co (訊碟), Summit Computer Technology (皇統) and Pacific Electric Wire and Cable Co (太電). The amendments are also intended to address perceived shortcomings in existing laws and regulations in a number of areas, notably corporate governance, superintendence, financial reporting and auditing.

Take the Procomp Informatics case. The firm filed a restructuring plan with a local district court after defaulting on corporate bond payments in June last year. But it was later found to have a case to answer for over a lack of capital, insider trading allegations and false financial reports. The scandal highlighted the need for independent directors on company boards -- Procomp's board only included family members and close friends of its chairwoman -- and greater accountability among certified accountants.

The draft amendments stipulate that the Financial Supervisory Commission may demand that listed companies -- trading on the Taiwan Stock Exchange or the over-the-counter GreTai Securities Market -- reserve at least two seats or no less than one-fifth of the total board for independent directors. Additionally, the draft amendments require these directors to sit on the company's audit committee.

To further protect the interests of shareholders and, where appropriate, other stakeholders, the proposed legislation also requires certified public accountants to be held legally accountable for ensuring the accuracy of listed companies' financial reports that they have certified, unless they can prove in cases of fraud that they have fulfilled their duties and had no prior knowledge of illegal conduct.

While the law aims to eventually have independent directors make up a substantial majority of seats on a board, the amendments only require Taiwan's firms to have at least one-fifth of all seats occupied by independent directors, fewer than the US' minimum of one-half and Japan's minimum of one-third.

But it is encouraging to see the government has started to make an effort to modernize company laws and enhance corporate governance.

The proposed legislation, if approved, will take effect on Jan. 1, 2007, and will be implemented in stages across various business sectors. Since the requirements of this important legislation are new to many of Taiwan's companies -- the introduction of independent directors in particular -- the government should provide corporate governance education to both investors and company management, thereby enabling them to know more about the role of independent representatives as well as why it is important that these directors have the ability to challenge management decisions.

The draft legislation takes important steps toward reforming corporate governance in this country, and may change the way business is conducted in Taiwan for the better. But it should be said that ensuring compliance with the law is just a first step; for better corporate governance and development, it is still the responsibility of management and employees to act honestly and with integrity. People always play a more important role in any system of checks and balances.
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