Weak independent directors, strong controlling shareholders : do independent directors constrain tunneling in Taiwan?

One of the most important challenges to modern corporate governance is to constrain controlling shareholders from tunneling corporate resources at a cost to non-controlling shareholders. Related Party Transactions (RPTs) have been proved by empirical studies as a major channel for tunneling. OECD has also stressed the challenge of abusive RPTs to Asian corporate governance. This dissertation serves an initial attempt to empirically assess the extent to which independent directors in Taiwan constrain tunneling. Taiwan serves as an appropriate jurisdiction for research in that private benefits agency problem is prevalent among Taiwanese public companies and that independent directors were newly introduced to Taiwan's corporate boards, which traditionally follow dual-board system. Nevertheless, the results are daunting. RPTs among Taiwanese public companies are common but rarely monitored by the board. Interview results further confirm this finding. Overall, independent directors' oversight on RPTs or tunneling is generally weak. In addition, most RPTs that are sent for board review are explicitly required by the law to do so. The law plays a decisive role in constraining RPTs. Self-regulation by firms of self-dealing transactions is rare. The value of independent directors in reconciling conflicts of interest matters has not been recognized by Taiwanese public companies. The existence of statutory supervisor, which is the traditional corporate monitors under dual-board system, further weakens the monitoring function of independent directors. Furthermore, there exists tremendous information asymmetry between independent directors and controlling shareholders, in particular, the shareholder managers. The information needed to uncover abusive RPTs is among the hardest to obtain. To overcome information asymmetry, independent directors in Taiwan generally choose to join a board with which they are familiar. The interview results reveal that independent directors generally maintain close social relationships with the controlling shareholders. Thus, there is concern that bias arising from the social ties could hinder the independence of directors. Finally, this Dissertation evaluates the effectiveness of legal transplantation of independent directors from a single board system to a dual board system. Transplantation is a long process where new legal measures grind against pre-existing local conditions. Taiwan is still in a transition period where one-third of listed companies operate under a dual board system with independent directors on the board. Independent directors were put on an advising board for some monitoring tasks while there exists another institution, the statutory supervisor, still in charge of corporate oversight. In addition, without complementary judicial deference to the decisions of independent boards, the value of independent directors to the firm greatly diminished. All these existing local conditions present challenges to the new legal device and hinder the transplantation process.

Keywords: Law.
Corporate governance > Taiwan.
Related party transactions > Taiwan.
Theses > California > Stanford.