A series of scandals involving corporate corruption, breach of trust and money laundering have focused public attention on issues concerning corporate governance. This is a good time to scrutinize and rethink the duties and supervisory responsibilities of independent directors and consider how common it has become for companies to have the majority of their shares controlled by a handful of top executives, who tend to have a complex relationship with independent directors.
As part of corporate governance, the position of independent board directors needs to be strengthened to balance the power of controlling shareholders.
According to reports in the past two or three years by the Taiwan Institute of Directors and PricewaterhouseCoopers Taiwan on family-owned businesses in the Chinese-speaking world, more than 70 percent of the several thousand listed companies in Taiwan are family-owned. The reports also showed that the average lifespan of a family-owned business is about 30 years and the family on average owns more than 30 percent of all outstanding shares.
On Taiwan’s financial market, controlling shareholders generally control the business operations and the strategic direction of their companies. However, when it comes to making many important business decisions, such as the appointment and reappointment of members on the board of directors, executive compensation and internal audit, the board of directors — which is in charge of supervision and management — still needs to rely on independent directors whose job it is to provide rational and unbiased assessments of the business and its operations.
Nonetheless, many controlling shareholders in family-owned businesses in Taiwan not only control the day-to-day operations of their companies, they also enjoy considerable room to maneuver over the appointment and reappointment of board members, which in turn gives them power over the evaluation of the expertise of independent directors.
This is a loophole that has been left open and ignored by all corporate supervisory systems, laws and regulations as well as security listing guidelines. As a result, it has become necessary to take steps to enhance the role of independent directors in companies.
First, at the very least, smaller shareholders should have the power to veto decisions regarding the appointment and reappointment of independent directors made by controlling shareholders, and perhaps they could even be given the right to vote down controlling shareholders by simply outnumbering them, ignoring the number of shares they represent.
In addition, independent directors should be part of the key minority on the board of directors that are responsible for overseeing and reviewing important business decisions that could lead to conflicts of interest for the company’s controlling shareholders.
Examples of such decisions could be managing executive compensation and internal auditing. Controlling shareholders should not be able to intervene in the nomination, appointment, election and reelection of independent directors.
By introducing these changes, companies would be able to enhance the role of independent directors in overseeing important decisions.
Since strengthening the position of independent directors would mean that they could be appointed by the votes of a larger number of smaller shareholders, small shareholders would be able to prevent controlling shareholders from making biased decisions by voting against or vetoing them based on their own personal interests.
Major decisions that do not pose a conflict of interest for controlling shareholders can still be left to them and other top executives to decide. Overall, this would make the competition for power on the board of directors more balanced.
Andy Yeh is the chief financial architect of Brass Ring International Density Enterprise.
Translated by Tu Yu-an
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