The Taiwan Banker

Large publicly traded multinationals emerged in the 1930s. Since their major investors do not necessarily manage the companies, the interests the management may not necessarily align with that of the shareholders. They have their own personal interests to consider, giving rise to a principal-agent problem. Alleviating the agency cost between corporate investors and management is the core issue of corporate governance. Based on past experience, however, shareholders hold the disadvantage in company information. Thus, shareholder interest protection has gradually evolved from passive protection for shareholders to allowing shareholders to actively exercise their rights to participate in corporate affairs – known as shareholder activism. Generally speaking, the corporate legal system has always allowed shareholders to participate in corporate affairs and supervise management. The Company Law includes provisions on shareholders’ rights for voting, election, candidates’ nomination, proposals, and convening meetings, etc. The effectiveness of these measures is limited by asymmetric information, as well as a lack of incentives for exercise of shareholders’ rights. The Securities and Exchange Act, on the other hand, introduced internal controls in 2002, an independent director and audit committee system in 2006, and a requirement to set up a remuneration committee in 2010, etc., strengthening internal checks and balances in order to protect shareholders' interests. In addition to legislative approaches to corporate governance, the Financial Supervisory Commission (FSC) also regularly publishes corporate governance blueprints which have repeatedly included promotion of shareholder activism. Dialogue with shareholders Further reviewing the specific contents of these blueprints, in order to encourage shareholders to participate more actively, and to assist corporations to better understand the views of their shareholders and stakeholders, the FSC recommended that management establish mechanisms to encourage dialogue with minority shareholders. Before that, the Corporate Governance Code for Listed OTC Companies was amended in September 2016 to add Article 13-1, stipulating that the board of directors is responsible for establishing mechanisms for interaction with shareholders, in line with the international trend of stewardship codes. As for dialogue and interaction between the management and shareholders, in addition to board meetings, annual reports, financial reports, and material information disclosures, etc., the directors and managers should work together to understand the board’s views and clearly explain the company’s policies to gain shareholder support. Of course, in addition to applying the requirements mentioned above, financial holding companies and banks should also abide by the Corporate Governance Code for Financial Holding Companies and Banks stipulated by the Bankers Association. In fact, the Bankers Association revised its Corporate Governance Code in October 2022 with the purpose of strengthening the management of financial holding companies and bank shareholders, adding provisions for communication and interaction between banks and their controlling shareholders, which should go through a representative appointed by the shareholders and elected as a company director. If the director representative has suggestions for board resolutions or business decisions, they exchange their opinions with the board of directors or a functional committee. The shareholders are obliged to keep any important company information they learn confidential. Legal amendments to prevent shareholders from being overly involved In contrast to general industries, finance is a chartered industry highly supervised by the government. Its success is not only related to the country’s financial stability, but also affects the rights and interests of the general public. Therefore, the government has formulated several laws to regulate various aspects of their operations. However, in recent years, the FSC has discovered through daily supervision or financial inspection that controlling shareholders of domestic financial holding companies or banks have failed to prove that their qualifications have been maintained, or have improperly interfered with decision-making or hindered operations. Therefore, draft amendments to some provisions of the Financial Holding Company Act and Banking Act were announced in April 2023 with related accountability mechanisms. The draft amendments imposed severe administrative sanctions for the above activities. If the perpetrator fails to improve after being punished, the FSC would require disposal of shares held or controlled within a time limit. However, privately held company shares are protected by property rights under Article 15 of the Constitution, since they have a certain property value. When a company profits from its operations, shareholders have the privilege to participate in the distribution of dividends and bonuses. Shareholders who hold ordinary shares also have the right to participate in voting, thus indirectly participating in operation and governance. In addition, after nearly four months of broad discussions, most stakeholders were opposed to the intensity of administrative discretion. In August, the FSC finally adjusted the direction of its revision to delete these punitive measures. Lessons from foreign experience Judging from foreign legislative experience, including the US, Japan, Singapore, and Hong Kong, interaction between corporate management and shareholders is frequent for both general enterprises and financial institutions, which reflects the great importance these countries attach to the fiduciary duty between shareholders and the board of directors, which means that the directors have good intentions, focus on the interests of the company, and make appropriate judgments in accordance with company procedures. Banks in the US disclose shareholder contact information in corporate governance guidelines, and their boards of directors use shareholder letters and shareholder meeting reports as communication channels. Japan requires banks to actively communicate with investors, which can be conducted in various forms throughout the year. Singapore and Hong Kong require banks to formulate shareholder communication policies, but the former does not force disclosure of those policies. The legislative design in these countries is consistent with the purpose of the Banking Association's revision of the Corporate Governance Code. However, there is no administrative penalty provision for shareholders to be punished when they participate excessively in the company’s decision-making. In practice, after a financial holding company or its subsidiaries are subject to administrative sanctions, it can seek compensation from the responsible perpetrators in accordance with the law. If it cannot reach the shareholders who are determined by the regulator to have interfered with decision-making or hindered operations, when their actions cause financial consequences, it can still pursue civil liability. It can request compensation from the shareholder, so administrative discretion does not erode shareholders’ right to participate in corporate management. The author is an assistant researcher at the Financial Research Institute of TABF.