Okay, so let's proceed to the second part of our lecture. So in this part, we will discuss the debate over the corporate objectives and which is one of the major topic related to the corporate governance. So, before we move into this specific debate, let's talk about the concept of corporate governance first. So what does the term corporate governance mean? While, according to the description made by the G20 and OECD in 2015, it describes corporate governance as a set of relationship between a company's management, it's board, its shareholders, and other stakeholders. So it's something about relationship, but what exactly does that mean? Well, the second part of the description goals. So corporate governance provides the structure to which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined. So in other words, corporate governance is something about a structure, a structure that portrays the relationship between different groups of people, and that structure aims to decide the objective of the company and decide the means for achieving that objective. So generally speaking, corporate governance refers to a set of relationship or a set of structure that helps the company to determine its objective and to determine the means of achieving its objective. So to some extent, corporate governance is basically a kind of governance that allows a company to be better. And what does the better means? Well that means that you are able to more achieve your objective. So corporate governance helps the company to set its objective and to determine the means of achieving that objective, that goes into our topic. So what is the objective of the company? Well, you can easily imagine that this is a very philosophical question. So just like when I ask you what is your life objective? Well, this is a very tough question, some people want happiness, some people want money, some people want comfortable nous, some people want pleasure etcetera and etcetera and etcetera. Companies are similar, but what is different between company and human beings are that, well, company except fiction. So which means that company is comprised of a group of people instead of a single people. So how do you determine the objective of this group of people? While for a single person, for a single human being, you decide your own objective. But when it comes to a group of people, how do you determine the objective of this group of people? Different person have different objective, right? So you can easily imagine that this is not an easy thing. So that means that we need a structure, corporate governance structure in order to set this objective. And that goes into our debate about how to determine the objective of a company and what normally speaking or legally speaking, a corporate objective should be. So when we discuss the corporate objectives, well there are several options. So for a company, you can imagine that at least least groups of people have bearing or have interest in this company, shareholders, creditors who make loans or landings to the company. Customers, consumers, employees, suppliers, or other business partners, or the community that the company is located at, or even other public welfare like the environment, the society, the government, any public welfare that you can imagine so, a lot of people have interest in a company. Well, that is imaginable, right, shareholder wants the company to serve its interests, employee also want the company to serve their interests, consumers also want the company to serve their interests. Then how do we determine which interest, which objective that the company should pursue? So that goes into an everlasting debate between the so called shareholder primacy and the so called stakeholder theory. So, according to the shareholder primacy argument, they argue that shareholders are the sole person that the company should take care of, should pursue should satisfy. While stakeholder theory argues that, well, it's not the case, shareholders is not the king of the company. You need to make a balance, you need to strike a balance between different interest groups. You need to strike a balance between shareholders interests and employees interests, and consumers interests, and even the government's interests, etcetera, etcetera. So that is the debate. So let us take a look at how they make their arguments. So for the stakeholder theory, people, they argue that the company shall pursue all the stakeholders interest in a balanced manner. While there are at least several threats of arguments, the first one relates to the public welfare. They argue that well in today, a lot of companies are very big, they are very influential and they can affect a lot of people's happiness. So it's not only the state, the government that needs to be public oriented. A lot of big company also have to be public oriented because companies are powerful enough, they are influential enough, so they have to act like some public entities as well. While you have more power, then you have to be more responsible to the society. You get this power from the society, so you need to return to the society. Well, that is some kind of reciprocal argument. On the other hand, they also argue that well, stick into the stakeholder theory is beneficial for the company itself as well. Well, they try to argue that for a company, one of your major objective should be to sustain in the long run, which we call it sustainable development or sustainable growth. So, in order to sustain in the long run, a company cannot be very short sightedness. They have to take care of all the interests. They have to balance all the interests so that people can accept your existence. So they argue that while the argument of stakeholder theory is not only in the interest of the public, it is also in the interest of the company, the company is also a social creature. It is created by the society, it is chartered by the state, so if you do not want to take into account the public interest, then the public will abandon you, the society will punish you, the government will not tolerate you. In that way, this company cannot survive for long. So for the company's interests, they also have to take into account other interests. Not only the shareholders interests, not only the profits, they also have to take into account for example, environmental interests, societal interest, employees interests. For example, take a very short example, if a company only pursues the prophet and sacrifice of the employee's salary, then you can imagine that employees will not be willing to work at this company anymore. So in the long run, this company will lose a lot of talents in the labor markets. So maybe in the short run, this company gets a lot of profit by reducing the labor salary, but in the long run you won't have talents to operate the company for you, then you will lose your competitiveness. Take another short example, if this company simply pursue their own profits and sacrifice of the consumers is interest, and in the short run you might be profitable, but the consumer will punish you because they will not trusting you anymore. So your reputation, your credits will be lost in the long run, then you cannot make profits anymore. So, that is how the stakeholder theory tries to argue. They argue that, balancing the interests between all the stakeholders is crucial not only for the public, but also for the company. In contrast, the shareholder primacy theorists argue in a very different way. Firstly, they argue that well, pursuing shareholder primacy is crucial for shareholders and which means the investors of the company argue that the company is definitely obliged to obey all the laws of the orders from the government, that is for sure. But other than that, the company should pursue the shareholders interest. If the public wants the company to perform some public duties, then make loss, make orders, make it through a democratic way, so as to impose obligations on the company. Otherwise, the company is not under any duty to the public. The company should pursue the investors interest. And their argument is based on the following rationale. They argued that, if we want to take into account all the interests of all the stakeholders, essentially that means that, the company is under no duty to anyone. So, whenever a party claims liability against a company, the company can resort to another person, then nobody can pursue the duty of the company, especially the company's management. So, think about this. So, if a company's management fails to perform very well such that the company is losing money and when investors challenge the management, the management said that, well, the reason why we are losing money, we are not making profits is because, we are very concerned of employees interests. So, that is why we cannot reduce the salary of the employees. That is why we cannot lay off employees even if they are not competitive. That is why we cannot make profits. Our employees are taken very well. So, well, they are not motivated to perform well for the company. If the management argues in this way, this sounds like a stake of the theory argument. This sounds like a so called corporate social responsibility argument. But in this way, investors cannot pursue or cannot motivate or even cannot punish the management. So, for the shareholder primacy arguments, they try to lay out and observation that, in order to incentivise, or in order to motivate the management of the company to increase their efficiency in managing the company, you need some accountability. If you allow the management to take into account all interests, then such accountability will be very weak. So, in order to strengthen this accountability, you need to have a very clear defined duty layer. You cannot have a clearly defined duty if you want to balance all the interest. You can understand that, if we resort to weigh and balance there no clear liability or no clear line is there? So, in order to have a clear line to discipline the management, you need to have a very clear objective, a sole objective. And that sole objective should be shareholder's interesting. And why is that? If you really have to have one single objective, then why is that the investors, the shareholder's interest? While the shareholder primacy people argue that, this is because shareholder's interest is more aligned or is the most of lined one with the company's interests? They argued like this way. Take a look at the balance sheet of the company. In the balance sheet of the company, the shareholder's interest is the so called residual claimants ones. Which means that shareholders can get the interest from the company only after other people's interests are satisfied. That may make a short example. So, compare the interest of the shareholders with the interests of the creditors or employees. So, for creditors or for employees of a company, they have a fixed claim against a company. So, the company is under a duty to repay a fixed amount of money to these people. So like employees, while the company is obliged to pay a fixed amount of salary to these employees, no matter whether the company earns or loses right? For creditors, that's basically the same case. Only when the company has repaid their duties to the creditors and the employees and other people, would shareholders get the remaining interest of the company. And that setting for the shareholders, they would argue that, their interests are more aligned with the company's interest. Because the bigger the company's interest, the bigger the shareholder's interest. For creditors, for employees who received relatively fixed amount of claims against the company, whatever the company is big or small, their interests are basically stable. So, it is not the case that the bigger the company's interest is, the bigger the creditors interest is. No, it's not, there is a ceiling layer, but that is not a case for shareholders. The bigger the company's interest is, the bigger the shareholder's interest is. So, shareholders argued that our interests are more alike with companies interests. To that extent, if we only can choose one single metric for determining the company objective than shareholders interests is a bit of proxy. That doesn't mean that shareholder's interests in all occasions is the best proxy. But on balance, it is a better one compared to other interest groups. So, for these shareholder primacy theorists, they try to argue that, that is stick to the shareholders interests and to discipline the management. This will create more benefits for everybody. To some extent, they try to advertise an idea that is, if the shareholder's interest can be satisfied, then everybody's interest can be satisfied. Because, if shareholders is interests are satisfied, that means that, this company is becoming bigger and bigger and stronger and stronger. And stronger company can contribute to the society as well, so everybody benefits. So, that is the shareholder primacy theorists argument. So, you can see that, there is a debate here between the shareholder primacy and the stakeholders here, and how does that play out in Taiwan? I would say that it is quite different with how that was play out in other jurisdictions. For example, in the United States or in the United Kingdom, they would tend to have more tendency to wear the so called shareholder primacy. They want to secure the interests of the investors more. But the context is a little bit different in Taiwan. So in Taiwan you can try to strike up scale here. So if you want to support the shareholder primacy that basically benefits shareholders and who are the shareholders in Taiwan? While we said that right, there are major shareholders, big shareholders in Taiwan, these are the so called entrepreneurs, typically family, and there are also a lot of retail investors, like ordinary people who also took or accounted for a huge amount of source of capital in Taiwan. So those are the shareholders in Taiwan and those are the people who should benefit more from the shareholder primacy theory. But on the other hand, who are the stakeholders under the stakeholder theory, in Taiwan or creditors? And in Taiwan, creditors are banks meaning banks, right, and consumers, ordinary people, labour, ordinary people, and other public interest. So, in Taiwan, if we try to draw a picture here, you can see that the scale is a little bit tilt toward the stakeholder theory. Why? Well, we said that Taiwan is a developmental state in which the government plays a huge role in guiding the bank and the bank plays a huge role in guiding the corporations. Retail investors matter. They are ordinary people, but employees are ordinary people as well, consumers are ordinary people as well. They also represent some type of public interests for the state, for the government and for the bank, who is the leading role in Taiwan's economy. They basically belong to the camp of the stakeholder theory and to secure their own interests, they definitely favor a little bit the stakeholder theory. So, in the developmental state like Taiwan, you can imagine that the shareholder primacy theory will be the second best choice. The stakeholder theory is the prioritized one, and that has laid out in Taiwan's Company Act. So starting from 2001, Taiwan made a big overhaul of Taiwan's Company Act. And in Article 23 paragraph 1, which lays down the fiduciary duty of Taiwan's responsible persons like management teams, like board of directors, it stipulates that while these responsible persons of the company shall be liable for the damages to be sustained by the company, they're from their failure to exercise due care of a good administrator or their failure to exercise the loyalty. What does that mean? While there is a very tiny, delicate detail here. So instead of being liable to the shareholders, the act requires these responsible person to be liable to the company. So this is a conscious decision, it makes a distinction between the company and its shareholders and the Act clearly prioritized the company instead of the shareholders. This somehow reflects that Taiwan does not that favor the shareholder primacy theory. They want the company's management people to take into account the interests of the company itself, not the shareholders. And what is the interest of the company itself? Well, you have different ways to interpret that, and that leads to the second overhaul of Taiwan's Company Act in 2008. So in 2001, we have established the principle that this is a very company centered instead of shareholders centered viewpoint. In 2018, we further amended our Article 1 of the Taiwan's Company Act. So this is the old version of Taiwan's Company Act. It only contains one paragraph that is like this. So they said that, well, company is a corporate juristic person organized and incorporated in accordance with this Act, for the purpose of profit making. A lot of people argue that well, this means that the company should abide by the principle of shareholder primacy, because, well it said that it is for the purpose of profit making, the purpose of the company. The objective of the company is for profit making. But in 2018, we add the second paragraph. This paragraph states that, well when conducting the business, every company should not only comply with the laws and regulations, they should further take actions which will promote the public interests in order to fulfill its social responsibilities. This is very clear and the legislative reasons made it very clear that adding the second paragraph means to introduce the so called corporate social responsibility into Taiwan's Company Act. So from now on, you won't argue that Taiwan's company has a sole purpose in making profits because according to this second paragraph, they may also take actions which will promote the public interest in order to fulfill it's social responsibilities. This is an explicit acknowledgement of the so called stakeholder theory. So, unlike in other jurisdictions like the United States or the United Kingdom, you can see that Taiwan face relatively little resistance in moving toward the path of the stakeholders theory, and I would argue, and I would say that this has to do with the economic structure of Taiwan. Taiwan is a developmental state. The state plays a leading role in Taiwan's economy, and definitely when it comes to corporate governance, the state would not want the company to simply pursue its own interest. The state would want the company to also share its burden in pursuing some public interest or at least cooperate with the state in promoting some public interests. That is totally not surprising for developmental state, and since Taiwan is a developmental state, its government definitely has a priority towards stakeholder theory, and that is what we observed in 2018, the statue to rise the stateholder theory into the Company Act. So this is the second part of our introduction, and later we will go into further details about the corporate governance structure.
