Studies on independent directors and corporate governance reforms in Taiwan

Taiwan introduced the institution of independent directors in early 2000s in order to deal with the ill-designed internal governance system in its Company Act. Although such an institution has long been advocated as a good governance practice by the U.S corporate conventional wisdom, how it would work and how it has been working in Taiwan is very debatable. Generally, the concept of independent directors remains relatively unfamiliar to most Taiwanese companies. Statistics data indicate that majority of Taiwanese listed companies have never hired independent directors, and almost no companies have independent directors to comprise a majority of boards of directors. These facts imply that such an institution has not been so desirable in practice. Theoretically, it is believed that independent directors will face some inherent limitations while carrying out their monitoring tasks. The most serious issue is true independence of independent directors from management, even with several mechanisms attempting to ensure their independence. Under Taiwan’s current laws and regulations, independent directors have few chances getting rid of controlling shareholders’ influence. Hence, it seems unrealistic to expect that independent directors will be able to work in a manner that detects and prevents the wrongdoing of controlling shareholders and their affiliates. In addition, some features of Taiwan’s capital market and the legal environment as a whole, will leave little hope for independent directors as effective monitors. However, this dissertation conducts an empirical project finding significant correlation between the presence of independent directors and firm performance in Taiwanese listed electronic companies, which suggests that independent directors may make positive contributions to companies on whose boards they serve. With the presence of block-holders, the regression results suggest that the presence of independent directors has significant and negative association with firm performance. This suggests that the coexistence of independent directors and block-holders may become a problem for companies. This is also consistent with the argument that independent directors are not likely to be effective monitors at the presence of controlling shareholders (or block-holders). In short, the ubiquitous presence of controlling shareholders in Taiwanese companies remains a difficult problem for Taiwan’s corporate governance. After the introduction of independent directors, how to make them effectively function as expected with the presence of controlling shareholders will be tremendously important. Taiwanese policymakers should take this into consideration in making future policy of independent directors for Taiwan. Currently, Taiwan is in an experimental stage regarding this institution, and has been trying to create a friendly environment for independent directors. It is unclear whether this institution will function as an effective monitor in a satisfying manner in the future. Taiwan has not been struck by serious scandals since the Reba scandal. Politically speaking, policymakers may not have much pressure from the voters as a kind of momentum for a more ambitious policy with respect to corporate governance, and it is likely that current policy of independent directors will be sustained for a while, unless another harmful scandal strikes Taiwan again