In the previous section, we talked about that in Taiwan, in order to protect the minority shareholders interests, they result to the independent directors and the investment protection center. In this section, we're going to introduce you how independent directors function in Taiwan. Take a look at this site first. Around the world there are actually different ways of structuring the company's structure. They are so called one-tier board and two-tier board. The so-called one-tier board is mainly implemented in, for example, the United States and the United Kingdom, while the two-tier board is mainly implemented in the continental Europe, and Asian countries. For the one-tier board structure, it basically works like this. It is the management team of a company that runs the company while the board of directors of the company plays the so-called supervisory role in supervising the management team and the board of directors acts in the interests of the shareholders. So in the power structure, the shareholders elect the board of directors and the board of directors elects the management team. To that extent, at least structurally speaking, the board of directors have some power over the management team because it determines their appointment, their removal, and even their compensation. To that extent, the board of directors also has some teeth in supervising the management team. For the two-tier board, it means that there are two boards in the company. The first board is the supervisory board, and the second board is the so-called management board. It is the management board of the company that actually runs the company while the supervisory board is supervising the managing board. To that extent, the supervisory board plays the role in supervising the management board by, for example, determining their appointment, reappointment, removal, or even compensation. You can feel that it's pretty similar. The difference is in the name, but in terms of the function, they are essentially equivalent. The board of directors in the one-tier board and the supervisory board in the two-tier board basically plays the supervisory role while the management team in the one-tier board and the management board of the two-tier board basically plays the role of the manager. Although the name differs, the function is equivalence, there are managers and there are supervisors. Generally speaking, the supervisors are structurally capable of supervising the manager based on their right to elect, remove, and compensate the management team. That is basically how one-tier board and two-tier board works around the world, but Taiwan is different. According to the traditional company act of Taiwan, it's basically a two-tier board system. But this two-tier system is different with the two-tier board system that you witness in continental Europe, especially in Germany. In Taiwan, again, we do have board of directors and we do have somebody called the so-called supervisors, which sounds like those supervisory board, but structurally speaking, they are different. The structure works like this. It is basically the shareholders who have the power to elect both the board of directors and supervisors, and then board of directors gets to elect the management and the management controls that employees. The major difference here is that the supervisors, which are assumed to play the role of supervisory function do not have the teeth. The teeth is absent here because here the board of directors are not elected by the supervisors. The board of directors is not elected by the supervisors, and the supervisors are not able to remove the board of directors as well. When it comes to the compensation, the salary of the board of directors it is, again, not determined by their supervisors. Generally speaking, in Taiwan, the supervisors have no teeth. Although they are named as supervisors and although they do have some power to supervise the function of the board of directors, they do not have to teeth to implement their supervisory function. What they can do is basically like audit the financial statements of the company or maybe represent the company in conducting a related party transaction between the board of director and the company. But again, they do not have strong, powerful vehicle or tools to remove or to dismiss or to discipline the board of directors. Another separate problem is that because both the board of directors and supervisors are elected by the shareholders while shareholders, especially the shareholding structure in Taiwan, are mainly the concentrated or at least the minority controlling shareholding structure, so in fact, it is basically the controlling shareholder that lacks the board of directors and the supervisors. As we mentioned before, in a company with concentrated ownership structure, the major agency problem is not about a management team, it is about that controlling shareholder. If you really want some discipline or supervision, what you try to do should be introduce some discipline over the controlling shareholder. But here under Taiwan's two-tier board, you can imagine that nobody can supervise the controlling shareholders. Although you imagine that the supervisor's supervise the board of directors, but essentially speaking, these two people are basically from the same person, that is the controlling shareholder. Essentially speaking, there are no check, and balance at all. Under this two-tier board system. There's the corporate governance problem. In order to address this problem, we need to envisage other ways to improve, or strengthen the corporate governance function of Taiwanese companies. People started to focus on, the Board of Directors. As we mentioned, for a developmental state, like Taiwan, they prefer the director primacy principle. They would also think of the board of directors, if they want to improve the function of the corporate governance. Then we see a functional change of the board of directors. At the very beginning, which we term it as, a Board 1.0, the board of directors plays an advisory role in the sense that, this board of director members advice the company management in running the company. It is the management team that runs the company, but those board of directors, that can provide some useful insight, or advice, or business networks for the company to use. To that extent, the board of directors does not really discipline or supervise the management team. Instead, they work hand in hand with the management team, in order to improve the performance of the company. To that extent, you don't really need a very supervisory-focused board of director members. What you need is some board of director members that are able to create value for the company, or create useful advice or experience for the company. In that period of time, the board of director members are typically, some people who are good at managing the businesses. Sometimes they are comprised of the management team as well. Basically, the board of directors or people are the management team. To that extent, you don't really have a supervisory function in the board of directors. But as the company gets bigger and bigger and as people has, been aware of the need to monitor the management team, we have proceeded into the second error called a Board 2.0 error. Here we are looking at some monitoring board in the sense that the board of directors, not only plays the advisory role, but also the monitoring role, monitoring the management team of the company. If you really want this monitoring function to work, then you can't have a board of directors, which is comprised of the management team. You need somebody else to serve on the board seat, so that you can have different group of people to supervise the management team. To that extent, we need some qualification for the board members and the concept of independent directors, has started to attract people's eyes. An independent directors means that we will impose some independence requirements, on the board of director members. Especially we would want the qualification of the board of directors to be at least free from the capture, of the people to be supervised, maybe the management team, maybe the controlling shareholder. A lot of requirements has been detailed. For example, if you want to become an independent director, you cannot at the same time be an employee of the company of the controlling shareholders. You have to be free from the capture of the controlling shareholder. Or for example, if you want to be an independent director, you cannot serve a management position in the company, otherwise, you will not supervise yourself. This is the independent director system, under which the directors are under some qualification requirements, especially the independence requirements. In addition to that, people have realized that to make the monitoring board function, we also need some specific committees in order to help or assist the monitoring board to function. Depending on the affairs, people have come up with different types of subcommittees, under the Board of Directors. Take a look at this site. Generally speaking, people will think of at least free typical type of subcommittees. The first one is the Audit Committee. Its role is basically to audit the financial statements, of a company. You can understand that the financial statement of a company basically describes the company's operation, both in financial terms and descriptive terms. You can understand the performance of a company based on, their financial statement. If a management team does not perform well, then one of the way for them to conceal their malpractice, is to manipulate or to right a wrong financial statement. This will mislead the investors and this will also make the supervision over the management team difficult. In order to impose enough monitoring power over the management team, you definitely need somebody to audit the financial statements in order to a certain, the true performance of the management team. Audit is important, and since it is important, is should be done by a very expert group of people which is independent, of the capture of the management team. You need an audit committee, which is comprised of independent directors to focus on the auditing works. You also need a Compensation Committee. The compensation committee decides the compensation of the management team. This is a very crucial way to discipline the management if they perform bad. Maybe it is not about any wrong behavior, but we still need to impose some discipline so as to impose some motivation for the company executives. Compensation committee is in charge of the determination of the compensation for the executives. This also introduce some discipline over the management team. In order to make this discipline real, you have to have an independent group of people who are free from the capture of the management team in charge of the compensation committee. Again, we will require the compensation committee to be comprised of independent directors. The third one is the nominating committee. The nominating committee determines the nomination of the management team and the board of director members. It's very crucial for a company to have the independent group of people serving on a board of directors. Otherwise you won't have real independent directors to serve all these roles. But how do you ensure that the board is independent enough if the candidate to be on the board is nominated by the management team? You also need a separate entity that is separate from the management team to be in charge of the nomination. The nominating committee steps in. Again, it is comprised of the independent directors who are at least free from the capture of the management team. By this way, the nominating committee can nominate somebody, that is free from the capture of the management team, and the whole board can be independent enough. Nominating committee is also important as well. In addition to these free conventional types of subcommittees, you can think of other ones. For example, some company will have a related party transaction committee so as to ensure that the related party transaction between the management team and the company is reviewed and approved by an independent group of people. Or some company will have a special litigation committee. Because sometimes company might sue their management team, or sometimes the company might need to sue their board of director. To that extent, you need some people that are independent enough to be in charge of this role. On and on you will have different committees. Now, what about Taiwan? In Taiwan, in the past we only have supervisors who are nominated and elected by the shareholders to act this monitoring role. But as we mentioned before, the supervisors are not able to appoint, dismiss, or compensate the board of directors and their management team. The supervisors lack the teeth. In order to change this dilemma, Taiwan underwent a series of board of director reform. The first step is trying to introduce some independent directors into the board of directors. Generally speaking, this is still a two tier board structure under which supervisors and board of directors play the two tier board. But at least we have a board of director that is more independent, because at least now we have some board members that are independent. Well, our requirement is not very strong. We only require two independent directors on the board, but at least that's a start. Based on that start, we try to introduce a separate one that is basically a one tier board system. Under this one tier board system, you can see that the supervisors are basically canceled. For these large companies, they had no longer establish supervisors. Instead, they only have the board of directors with a significant amount of independent director to sit on the board. Essentially speaking, this is a one tier board system and we also require the establishment of the audit committee. This audit committee basically undertakes all the role from the supervisors and play this auditing role. Taiwan is shifting from the two tier board system toward a one tier board system. Taiwan is introducing the independent director requirement. Taiwan is also introducing the auditing committee. To be sure, Taiwan not only has auditing community, Taiwan has also introduced the compensation committee as well, and Taiwan also have other subcommittees. But one thing that I wish to highlight here is that right now Taiwan still has a mandate, the nominating committee. To some extent, the independent level of the board of directors of Taiwanese companies cannot be that guaranteed. Because again, the candidate of the board of directors of Taiwanese companies are mostly nominated by the controlling shareholder. How can you ensure that they can be independent enough that are free from the capture from the controlling shareholder. That would be a hurdle, but that is a separate problem. To sum it up, right now Taiwan is shifting toward independent directors which are implemented around the world. This independent directors would foreseeably play a huge role in balancing all the interests. On the one hand, they are expected to monitor the company's performance so as to monitor the minority controlling shareholders, and to serve the interests of the retail investors. On the other hand, since they are independent directors on the board, they are also expected to not only take care of the shareholders' interests, but also other stakeholders' interests. To some extent they are playing a very challenging role here. They are here to balance all different interests, sometimes conflicting with each other. But that is what we expect from the independent directors. That is one of the major movement in Taiwan in the recent years, that is the independent directors reform. We need to see how the independent directors function in the future.
