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QIC Inside Investor Relation Series (18): Independent directors and board oversight

Contributed by QIC 0

Foxconn founder Terry Gou. Credit: DIGITIMES

Taiwanese companies have been adding more and more independent directors to their boards and increasing the overall level of board independence during recent years. Is this contributing to the overall effectiveness of board oversight and performance of Taiwanese companies? Or are these independent directors reticent to challenge management over fear of losing their board position?

Many global organizations and institutional investors advocate an independent majority on the board of directors. Proponents suggest that an independent majority board is better able to foster independent decision-making and will consider the best interests of all shareholders, reducing conflicts of interest. Although an independent majority board may be more common for US-based corporations it is still very rare to have more than 50% of a board classified as independent in most Asian countries.

Currently in Taiwan only 4% of listed-companies have a majority-independent board of directors. The International Corporate Governance Network (ICGN) explains independence as those "who are able to exercise independent judgement free from any external influence." The ICGN guidelines suggest that a director would generally be not considered independent if he/she was recently a former employee, worked for a material supplier/customer, was paid outside remuneration by the company for services other than the directorship or is a reasonably significant shareholder.

These are standard requirements that are echoed by many organizations and regulators in their varied definitions of independence. The ICGN goes further to highlight that independence may also be compromised if the director has or had close family ties with any of the company's advisers, directors or senior management; holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; and is or has been a nominee director as a representative of minority shareholders or the state.

In Taiwan, candidates for independent directors can be nominated by minority shareholders. Taiwan's regulations are quite supportive in protecting minority shareholders rights with the requirement of cumulative voting for directors, something which is uncommon in other regions. Minority shareholders holding 1% of shares outstanding can nominate a candidate or a full slate of candidates to the board during the nomination period.

In Taiwan, a seat on a board of directors can sometimes be won with as little as 2% shareholder support or could require as high as 12% during a contested election. Does this mean that candidates nominated by shareholders are less independent than those nominated by the management? Not necessarily, independent directors have a fiduciary duty to help to ensure that decisions are made in the best interest of the corporation.

The ability for a director to participate effectively on the board is dependent on many factors such as financial acumen, relevant experience, communication skills and strength of character. Independent directors can contribute to the boards by monitoring management but also by leveraging their relevant expertise in board discussions and strategic decision-making.

The independent directors play a very important role in board oversight in Taiwan by participating on the Audit Committee, Remuneration Committee and other special committees formed to review transactions. Regulations in Taiwan allow shareholders holding 50% of shares for at least 3 months to freely call an Extraordinary Shareholder Meeting (EGM). There is also the option, in theory, for a shareholder who has held 3% of shares for at least a year to call for an EGM, but this requires regulatory approval which could be difficult to receive.

Independent directors in Taiwan have also been given the power to call EGMs if he or she feels that is necessary to do so, generally in the interest of better corporate governance. In principle, this is an important means to hinder decisions being made at board level that are only beneficial to a smaller group of shareholders or are not in the interests of the majority of stakeholders.

In practice, some EGMs have been called by independent directors to ensure shareholder approval for important issues that affect all shareholders but it has also been used to call early board elections, remove directors from the board, or seek management control changes which are not always in the best interests of advancing shareholder value.

Should an EGM only be convened by an independent director when all independent directors approve? This could be a limitation to the key objective of holding management to account. If the result of a board election would also mean current independent directors being removed, it may be harder for these independent directors to be impartial.

Are there may be other ways to ensure better oversight but to safeguard that this power is used for the best interests of the company and not abused? In the global investment community there is increasing support for boards to appoint a Lead Independent Director. This role currently exists in markets such as the UK, US, Australia and Singapore when the Chairperson and CEO are held by the same person or a non-independent chair.

The Lead Independent Director (LID) can help to maintain a counterbalance on the board and also helps in areas such as overseeing communications with shareholders, offering input to the board agenda and providing leadership to other independent directors. In the Taiwan market there are more than 500 listed companies where the Chairperson also retains the title of CEO.

Editor's note

To give our readers a more in-depth and comprehensive knowledge about investor relations from the investor's perspective, DIGITIMES has invited QIC as a contributing partner to share their insights. The article is the 17th part of the QIC Inside Investor Relations Series, which was originally published on QIC website.)

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