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The corporate governance regulatory framework for Hong Kong-listed issuers mainly consists of the Companies Ordinance (Cap.622) (CO), the Securities and Futures Ordinance (Cap.571) (SFO) and the Rules Governing the Listing of Securities (Listing Rules) on the Stock Exchange of Hong Kong (SEHK), particularly the Corporate Governance Code (CG Code) contained in the Listing Rules.

The CO provides a modern legal framework for the incorporation and operation of companies in Hong Kong, aiming to, among other things, enhance corporate governance and ensure better regulation. For instance, the CO has codified the directors’ duty of care, skill and diligence in discharging the directors’ functions. The SFO is the principal legislation for regulating the securities and futures industry in Hong Kong, containing regulations pertaining to financial products, the securities and futures market and industry, and protection of investors. The Listing Rules provide the requirements for listing applicants and continuing obligations for issuers listed in Hong Kong. The CG Code contained in the Listing Rules is the primary source of corporate governance principles and practices for listed issuers.

Corporate Governance Code

Hong Kong-listed issuers are guided by the principles of good corporate governance set forth in the CG Code. The CG Code also sets out provisions to help issuers apply good corporate governance principles. The code provisions operate on a “comply or explain” basis. Issuers must state whether they have complied with the code provisions in their annual and interim reports but may deviate from any code provisions provided that they explain how the principles are otherwise achieved. The CG Code also provides certain recommended best practices that issuers are encouraged to adopt on a voluntary basis.

The SEHK periodically reviews the corporate governance framework to ensure it remains fit for purpose, continues to promote governance quality and aligns stakeholder expectations with international best practice. The latest update to the CG Code (2022 update), effective on 1 January 2022, focused on aligning corporate culture with the company’s purpose, values and strategy, enhancing board independence and diversity, and elaborating the linkage between corporate governance and environmental, social and governance (ESG) measures.

Several main areas of the CG Code are discussed below:

Corporate culture. A healthy culture is crucial for good governance. Hence, the SEHK introduced a new code provision in the 2022 update requiring the board to establish the issuer’s purpose, values and strategy, and ensure their alignment with the issuer’s culture. In addition, all directors must act with integrity, lead by example and promote the desired culture. Such culture should instil and continually reinforce values of acting lawfully, ethically and responsibly across the organisation.

To this end, the board should monitor and evaluate the issuer’s culture and pay attention to hints of potential cultural weaknesses. The board must ensure effective communication channels are in place to convey its message throughout the organisation with management support. Furthermore, appropriate training, incentives and accountability mechanisms should be scrutinised to ensure optimal alignment with and promotion of the desired culture.

Since building the right culture is an iterative process, regular evaluations involving internal and external stakeholders are essential for providing the organisation with positive reinforcement for things done right and directions for improvement.

Board effectiveness. The establishment and stewardship of a healthy corporate culture and governance framework is best achieved by an objective and independent board with access to diverse perspectives that can withstand mutual scrutiny. The following requirements under the CG Code and the Listing Rules concerning the independence and diversity of the board are of particular importance:

1. Board independence. An issuer should establish mechanisms to ensure independent views and input are available to the board, and the implementation and effectiveness of such mechanisms shall be reviewed by the board annually;
2. Board refreshment. Independent non-executive directors (INEDs) with long board tenures risk losing their independence and objectivity due to their growing familiarity with the issuer’s management. Consequently, the CG Code requires the reappointment of an INED who has served for more than nine years on the board, i.e. “long-serving” INEDs, to be approved by a separate resolution of shareholders, and requires disclosure of the factors considered, process, and the board or nomination committee’s discussion in arriving at the determination that the INED is still independent and should be re-elected. Furthermore, where all people on the board are long-serving INEDs, their individual tenures must be disclosed in the shareholders’ circular and a new INED must be appointed at the next annual general meeting;
3. Board diversity. A diverse board benefits from diverse perspectives and is less vulnerable to “group think”. The Listing Rules require an issuer to have a diversity policy. Pursuant to the CG Code, the board should annually review the implementation and effectiveness of the diversity policy. Furthermore, to promote gender diversity, the SEHK will not consider diversity to be achieved with a single gender board. Hence, issuers must have at least one director of a different gender by 31 December 2024 to comply with the Listing Rules.

Risk management. A robust risk management and internal control system (RM-IC system) is fundamental to the efficacy, legality and culture of a business in pursuit of its long-term goals. Hence, the CG Code requires the board to oversee the issuer’s RM-IC system on an ongoing basis and ensure that its effectiveness is reviewed at least annually. An issuer should have proper policies and procedures in place to assist the board in identifying, evaluating and managing all material risks.

As a crucial component, an issuer’s anti-corruption and whistleblowing systems work in tandem to detect and deter misconduct. The CG Code requires issuers to establish:

1. policies and systems that support anti-corruption laws and regulations, and
2. a whistleblowing policy and system for employees and other stakeholders to raise concerns, in confidence and anonymously, with the audit committee (or any designated committee comprising a majority of INEDs) about possible improprieties related to the issuer.

An effective anti-corruption policy should establish clear guidelines for identifying, preventing and addressing corrupt practices, while outlining the company’s zero-tolerance stance, roles and responsibilities, and reporting mechanisms. Complementing this, a robust whistleblowing policy should outline confidential reporting channels, anonymity protocols, investigation procedures and measures for protection against retaliation.

ESG. Governance of ESG matters is integral to good corporate governance. Hence, as part of the 2022 update, the SEHK elaborated this link between corporate governance and ESG, and included ESG risks within the risk management framework.

To align with global baseline sustainability reporting standards of the International Sustainability Standards Board published in June 2023, the SEHK has proposed to mandate issuers to make climate-related disclosures (New Climate requirements) in their ESG reports, which will be implemented in phases subject to certain implementation relief. Under the phased approach,

1. All issuers will be required to disclose scope 1 and 2 greenhouse gas emissions on a mandatory basis for financial years commencing on or after 1 January 2025; and
2. All Main Board issuers are required to report in accordance with the New Climate requirements on a “comply or explain” regime for financial year 2025, while
3. Large Cap issuers (i.e. issuers that are Hang Seng Composite Large Cap Index constituents) will be subject to mandatory climate reporting for financial years commencing on or after 1 January 2026.

As such, issuers are advised to enhance their ESG and climate-related governance and reporting mechanisms to ensure compliance with the New Climate requirements.

In view of the critical role of boards in overseeing and driving corporate sustainability, accountability, and long-term value creation, issuers should aim to go beyond mere compliance with minimum requirements to better align themselves with the spirit of the regulations. Only by doing so could issuers demonstrate their commitment to responsible business practices, build trust and safeguard the organisation’s long-term prosperity.

JINGTIAN & GONGCHENG
Suites 3203-3207, 32/F, Edinburgh Tower
The Landmark, 15 Queen’s Road Central
Hong Kong, China
Tel: +852 2926 9300
Email: jingtianhk@jingtian.com

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Recent corporate governance developments in Japan

Corporate governance of Japanese public companies has been dramatically enhanced through a series of policy initiatives announced by the authorities in Japan, namely the Financial Services Agency (FSA), the Ministry of Economy, Trade and Industry (METI), and the Tokyo Stock Exchange (TSE). Among those were the TSE’s Corporate Governance Code (2015, as updated) (CGC) and the FSA’s Stewardship Code (2014, as updated) (SC). Seeking to comply with the CGC, the vast majority of TSE-listed issuers have tried to diversify their boards through the election of multiple independent outside directors and have established board committees for director nomination and compensation. The SC encourages institutional investors to act to satisfy their fiduciary duties to their client investors as a result of which high-quality corporate governance was sought at their investee companies, and also require them to disclose how they exercised their voting rights at shareholders meetings.

Takeover guidelines

One of the most recent and critical policies, in 2023 the METI released the “Guidelines for Corporate Takeovers – Enhancing Corporate Value and Securing Shareholders’ Interests” (Takeover Guidelines). The Takeover Guidelines have drastically changed the M&A market in Japan. Prior to the release, it was long considered taboo to pursue “hostile” takeovers to which the target company’s board of directors did not consent or solicit. The purpose of the Takeover Guidelines was to present principles and best practices focusing on M&A transactions where an acquiror obtains control over a listed company.

The Takeover Guidelines have the following three basic principles:

1. Whether an acquisition is desirable should be determined on the basis of whether it will enhance corporate value and shareholders’ common interests;
2. The rational intent of shareholders should be relied on in matters involving the control of a target company; and
3. The acquiring party and the target company should proactively provide information useful for shareholders’ decision making and ensure transparency.

Moreover, the Takeover Guidelines set out in detail how the board of directors of a target company should respond to a takeover proposal, and to what extent and how the target company can use anti-takeover measures against an unsolicited takeover attempt. Most importantly, the Takeover Guidelines expressly require the board of directors of a target company to give “sincere consideration” if the proposal by a potential acquiror is a “bona fide offer”, even if it was unsolicited, instead of declining to review the proposal. The Takeover Guidelines is a “soft” law, but nonetheless it has become standard practice to look at its principles when faced with a possible transaction.

Shortly after the Takeover Guidelines were published, Nidec Corporation, the largest motor manufacturer in the world and a strategic acquiror, proposed an unsolicited acquisition of Takisawa. Since this type of acquiror hardly ever attempted an unsolicited acquisition in the previous M&A market, this transaction dramatically changed the game. Nidec repeatedly referred to the concepts contained in the Takeover Guidelines and successfully closed its acquisition. Since then, there has been an increasing number of unsolicited acquisition attempts, such as with one of Japan’s largest life insurance companies, Dai-ichi Life’s prevailing offer in a bidding war over Benefit One. (TMI Associates has been involved in a variety of these transactions, including representing Nidec in the Takisawa acquisition.)

TSE request

In 2023, the TSE issued a request to take “Action to Implement Management that is Conscious of the Cost of Capital and Stock Price”. In this announcement, companies listed on the TSE’s Prime and Standard sections were requested to manage themselves using indicators of the cost of capital and taking into consideration their market share price, rather than the historically customary focus on gross sales and level of profits.

Like the Takeover Guidelines, this TSE guidance is also not legally binding on listed companies, but it has had a significant impact, especially on listed companies with a price book-value ratio below 1.0 or a return on equity below 8%. Pursuant to this request, listed companies should evaluate their own capital costs and their capital profitability; consider plans for improvement, if appropriate; and update their improvement plans through dialogue with shareholders.

Together with the Takeover Guidelines, there now is a realistic possibility that listed companies with inefficient profitability can easily become a target of unsolicited acquisition proposals. This, in turn, has raised the awareness of company management on the need to focus on capital cost efficiency.

Other developments

1. Reduction of factors blocking “healthy” takeovers

Previously in Japan, there were many listed subsidiaries with parent companies. This had been criticised because of the threat that the parent company may pursue its own interests by harming the interests of minority shareholders of the listed subsidiary. As a result of the CGC and other policies, there has been a notable decrease in the number of listed subsidiaries, as well as a reduction in cross-shareholdings between companies that are friendly to each other’s management. Further, companies which had implemented takeover defence measures (Japanese poison pills) when there was no imminently threatened hostile action (as compared to adopting defence measures when faced with an actual takeover threat by an acquiror) are now abolishing their pills.

These trends encourage healthy takeovers by new potential owners who can better serve to improve the company’s corporate value and shareholders’ common interests.

2. Diversified board composition

As a result of the CGC, most listed companies are also intentionally trying to diversify their board composition in terms of skills, gender and nationality, among other factors.

3. Management incentive compensation

Traditionally, remuneration of Japanese companies’ management was comprised of fixed monetary compensation and an annual bonus. In contrast, as of 2023, approximately 75% of all listed companies have adopted incentive compensation arrangements such as through the award of restricted stock, incentivising the management to increase the mid- to long-term corporate value of the company.

4. Disclosure of sustainability and other non-financial information

Sustainability and other non-financial information effecting a company, such as climate change, gender and diversity, human rights, intellectual property, human capital, suppliers, business challenges and management risks, are considered basic items to be constructively discussed with a company’s stakeholders. Based on an amendment of the ordinance regarding corporate disclosures in 2023, listed companies are required to enhance disclosure of such information in their securities reports.

Expected developments in 2024-25

1. Major reformation of tender offer rules and large shareholding reports

In March 2024, a major reformation bill aimed at the tender offer rules and the large shareholding report system was adopted. This amendment will take effect within two years (the exact date has yet to be determined).

Through this reformation, the tender offer rules will apply to a broader range of transactions that have a material impact on the controlling ownership of companies to enhance its transparency and fairness. Also, the large shareholding report system, which obligates investors with more than a 5% stake in a listed company to disclose their identity, the purpose of the investment (including if they intend to make important proposals to the company, if applicable) and other information, will be revised so that this disclosure obligation does not unduly discourage collaborative engagement by institutional investors.

2. Improvement in quality of independent outside directors

Now that most listed companies elect independent outside directors, nominating director candidates that have requisite quality and abilities should lead to further promotion of corporate governance. Efforts are being made to suggest best practices of the independent outside directors, including through publications and revisions of guidelines by the METI and TSE on this topic.

3. Information disclosure in English

In February 2024, the TSE announced that, effective April 2025, companies listed on its Prime section will be obligated to disclose their financial statements and make timely disclosures in the English language, and are encouraged to do the same for other information, for the sake of the needs of international investors.

Remarks

Through these corporate governance developments, it is anticipated that Japanese public companies will be managed pursuing further enhancement of their corporate value and shareholders’ common interests, as well as to accelerate their dialogue with institutional investors.

TMI ASSOCIATES
23/F, Roppongi Hills Mori Tower
6-10-1 Roppongi, Minato-ku
Tokyo – 106-6123, Japan
Tel: +81 3 6438 5511
Email: info_general@tmi.gr.jp

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Malaysia’s moves to keep directors above board

Corporate governance in Malaysia has seen significant efforts to advance transparency, integrity and sustainability within companies. This article discusses three key areas of focus in the context of corporate governance:

• Conflict of interest requirements among listed companies;
• Balancing compliance process for shareholders’ approval and business efficacy; and
• Measures to combat greenwashing.

These initiatives underscore Malaysia’s commitment to fostering a robust governance framework that can instil investor confidence and ensure long-term business sustainability.

Conflict of interest

To enhance transparency and governance among listed companies, Malaysia’s stock exchange – the Bursa Malaysia – has issued a Guidance on Conflict of Interest. The guidelines introduce stringent measures to mitigate potential conflicts that could compromise integrity or fairness in decision-making processes ? a significant concern in markets with a prevalence of overlapping interests among business sector individuals.

A key highlight of the guidelines is a requirement for listed companies to disclose not only actual matters of conflict but also potential conflicts involving directors, key senior management, legal representatives of listed corporations, management companies and/or trustee-managers of collective investment schemes.

The disclosure requirements cover both direct and indirect financial and non-financial interests. Examples of non-financial interests include favouritism, animosity, commitment and competing loyalties or duties – all of which highlight the regulator’s expectations for audit committees to rigorously review and monitor potential conflicts.

Another highlight of the exchange’s expanded expectations on conflicts of interest encompasses monitoring potential conflicts that have not yet materialised but may arise due to existing relationships or circumstances.

One example provided by the bursa is of a director of a listed company who also has a family-owned business operating in a different state. The director could face a situation where their director’s duty to act in the best interest of the listed entity conflicts with their personal interests, particularly if the listed entity intends to expand into the territory of the director’s family business. The director would be obligated to disclose the nature and extent of these conflicts of interest.

Auditing to avoid. Audit committees of listed entities are responsible for ensuring comprehensive governance of conflicts of interest. This duty includes identifying, assessing, reporting and monitoring to resolve, eliminate or mitigate conflicts. Given these expectations, audit committees must undertake additional steps – such as enhanced background searches – and implement measures to monitor ongoing, persistent or potential conflict risks.

As this represents a new reporting requirement, it will be intriguing to observe how listed entities manage their disclosures to meet the minimum requirements, ensuring there are no material omissions while balancing the privacy rights of individuals involved in conflict of interest issues.

These requirements underscore the bursa’s commitment to reinforcing corporate integrity and investor confidence through enhanced governance practices. While the expanded scope of conflict of interest reporting may appear stringent, the intention is clear: to emphasise the importance of sound governance in the operation of listed entities, ensuring objectives are met impartially and effectively.

Balancing compliance and business

The Companies Act 2016 provides for a company’s business and affairs to be managed by, or under the direction of, a board of directors. The board has all the necessary powers for this role, subject to modification, exception or limitations contained in the act or the company’s constitution – two avenues that grant power to shareholders. Among the main mechanisms for shareholder control can be a requirement for a board to obtain shareholder approvals or waivers for specific matters.

In connection with such a requirement, the Federal Court case of Dato’ Azizan Abd Rahman & Ors v Concrete Parade Sdn Bhd & Ors and other appeals [2024] provides welcomed clarity on the compliance mechanism pivotal to the corporate governance landscape in Malaysia. The following supports the adoption of a practical approach to achieve balance between compliance and business efficacy, focusing on the true objective of the relevant requirements.

Shareholder approval. Section 223(1) of the act prohibits directors from entering into or effecting any arrangement or transaction for substantial acquisition or disposal, unless:

• The entering into the arrangement or transaction is made subject to the approval of the company by way of resolution; or
• The carrying into effect of the arrangement or transaction has been approved by the company by way of resolution.

In the above-mentioned federal court case, the minority shareholder submitted a “tramline” approach, requiring two sets of shareholder approvals for the same transaction – one during the execution of the agreement and another during the effecting stage of the transaction.

Giving a practical construction, the Federal Court highlighted that the true intent and purpose of section 223 was to ensure that shareholders are aware of and approve proposed corporate transactions that may materially affect a company; shareholders’ approval need not be obtained twice. Directors have flexibility to put into writing conditional contracts which are subject to shareholder approval, provided that the approval is obtained at a later stage before effecting the transaction.

Express explanation/consent. In dealing with the pre-emptive rights conferred to shareholders by section 85(1) of the act, modified by the company constitution which subjected it to “direction to the contrary by the company at general meeting”, the federal court held, against the imposition of conditions that unwarrantedly expand its intent and purpose, that the above-mentioned does not require explanation in the resolution or otherwise of the pre-emptive rights, or express statement consenting to the disapplication of pre-emptive rights from shareholders, who are expected to be aware of their rights with sufficient knowledge to approve or reject the relevant corporate exercise involving issuance of new shares.

Greenwashing

Greenwashing is the use of false or misleading claims or marketing to give an impression of a company’s commitment to environmental protection and sustainability. This deception can range from overstating the environmental impact of products to selectively disclosing favourable data while ignoring harmful practices. The concern with greenwashing lies in its potential to mislead investors and consumers, thereby creating an uneven playing field where companies genuinely committed to sustainability are overshadowed by those merely paying lip service.

As of July 2024, there is no official regulation issued by the Securities Commission Malaysia, or the bursa, that explicitly addresses greenwashing. Nevertheless, the commission and the bursa have made significant strides in introducing elements of sustainability in corporate governance, indirectly addressing greenwashing.

Under the bursa’s Main Market and ACE Market requirements, listed issuers are required to provide a sustainability statement in their annual reports. This necessitates a company making a narrative statement on the management of economic, environmental and social risks and opportunities.

To ensure the accuracy and transparency of these sustainability statements, the bursa’s Sustainability Reporting Guide 2022 mandates the disclosure of 22 common sustainability indicators across 11 sustainability matters. Examples of sustainability matters include requiring listed issuers to disclose information on greenhouse gas emissions, energy consumption, water usage, waste management and employee health and safety. These disclosures must present both positive and negative aspects of company performance, thereby mitigating the risk of greenwashing.

Meanwhile, the securities commission has propagated environmental, social and governance (ESG) requirements through two main avenues. First, the Malaysian Code on Corporate Governance mandates asset managers incorporate ESG risks into their investment processes and active ownership practices. Second, the commission’s Sustainable and Responsible Investment Guidelines require that sustainable and responsible investment funds adopt one or more sustainability strategies, such as the UN Global Compact Principles. These measures aim to promote sustainability among asset managers regarding their ESG claims.

Significant gaps remain in Malaysia’s regulatory framework concerning greenwashing. One major gap is the lack of standardised sustainability indicators. Companies can comply with bursa requirements using different standards, such as the Global Reporting Initiative standards, Sustainability Accounting Standards Board standards, or Taskforce on Climate-related Financial Disclosures recommendations. This variability means that one company’s sustainability indicators may not be comparable to those of another company that uses a different standard, complicating efforts to accurately assess the prevalence of greenwashing.

Another gap is the lack of accountability measures for failure to report accurate sustainability targets. While the bursa can take enforcement action against listed issuers for not providing sustainability statements, monitoring sustainability performance is often done sporadically and informally. This lack of rigorous oversight undermines the sustainability goals of the bursa and the securities commission.

ZAID IBRAHIM & CO (in association with KPMG Law)

Level 19, Menara Millennium,

Jalan Damanlela,

Pusat Bandar Damansara,

50490 Kuala Lumpur, Malaysia

Tel: +603 2087 9999

Fax: +603 2094 4888/4666

Email: info@ziclegal.com

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Beyond compliance: Corporate governance in the Philippines

In a global economic landscape where company transparency, accountability and sustainability are gaining significant attention from local and foreign investors, both private and public companies making investment decisions are faced with the increasing pressure of raising their overall corporate governance standards as part of their strategic planning.

Starting in the early 2000s, different jurisdictions have adopted their corporate governance codes to codify corporate governance principles and best practices, and to regulate the governance of primarily publicly listed companies.

In the Philippines, the Revised Corporation Code has introduced provisions to improve corporate governance practices, such as the appointment of independent directors and enhancing financial reporting and disclosure transparency.

The Philippine Securities and Exchange Commission (SEC) has released several issuances that aim to further strengthen good corporate governance in the private sector. The most recent and controlling issuances are:

1. SEC Memorandum Circular No. 6, series of 2009, or the Revised Code of Corporate Governance; and
2. SEC Memorandum Circular No. 19, series of 2016, or the Code of Corporate Governance for Publicly Listed Companies.

These were intended to raise the bar on good corporate governance. The Revised Code of Corporate Governance is generally applicable to public companies and companies with secondary licences from the SEC, while the Code of Corporate Governance for Publicly Listed Companies covers companies that are listed on the Philippine Stock Exchange.

Other regulators such as the Philippine Central Bank, or the Bangko Sentral ng Pilipinas (BSP) and the Insurance Commission (IC) have also issued their own regulations to strengthen the corporate governance in their respective supervised institutions.

In general, regulations on corporate governance in the Philippines mandatorily apply to publicly listed companies or holders of secondary licences from the SEC, BSP and IC. Other private companies may, of course, voluntarily adopt the principles and rules that are included in the available issuances and embody institutional best practice.

Good corporate governance

In the Philippines, corporate governance is generally defined as the framework of rules, systems and processes that govern the performance of a corporation’s board of directors and the management of their respective duties and responsibilities to the stockholders.

But what does “good corporate governance” mean?

There are several factors or components which may be considered as an indication of good corporate governance. Below are some of the key factors to consider:

1. Existence of internal governance frameworks. There is no “one size fits all” framework when it comes to corporate governance, and the adoption of corporate governance principles and best practices would ultimately depend on the size, risk profile, nature and complexity of a company’s operations. The existence of an internal governance framework shows a company’s commitment to at least be guided by a set of principles to ensure:
   1. competency, commitment and independence of the board of directors,
   2. board of directors who are well-informed about their roles and responsibilities,
   3. effective internal control and risk management systems, and
   4. accountability to shareholders and other stakeholders, among others.
2. Regular board evaluation and training of directors. It is important for directors to stay up to date with relevant developments in the laws, rules and regulations that are applicable to the company’s industry. Under Philippine corporate governance regulations, first-time directors are suggested to have an eight-hour orientation programme and to attend an annual continuing training programme for at least four hours. This aims to promote effective board performance and continuing qualification of the directors in carrying out their duties and responsibilities.
3. Company transparency and disclosure. Transparency is one of the core principles of good corporate governance. A company with clear policies and procedures on financial and non-financial disclosures to regulators and other shareholders shows accountability to its stakeholders. This, in turn, ensures the company’s stakeholders are well-informed and have confidence in the decision-making processes.
4. Promotion of shareholder rights. Another key factor in determining whether a company adheres to good corporate governance is the establishment of policies to provide a mechanism on the protection and enforcement of the rights of its stakeholders. Especially when the rights of stakeholders are not covered by legislation or administrative issuances, a company’s voluntary act to adopt and implement policies and programmes in dealing with stakeholders shows its commitment to promoting and protecting the rights of its stakeholders.

Why corporate governance matters

Corporate governance is important because it guides a company’s approach to different aspects of its business. Corporate governance shapes policies and programmes within an organisation which, in turn, influences the individual and collective behaviours of the board of directors, management, employees and other stakeholders. This is essential for effective decision-making and better performance as an organisation.

Improved decision-making increases the trust and confidence of stakeholders including shareholders, employees, customers, suppliers, investors, creditors, government agencies, regulators, competitors and the community as a whole. Various independent studies confirm that corporate governance has an effect on improving a company’s reputation.

Furthermore, adopting effective corporate governance mitigates financial risks because it establishes a system where an organisation can understand its level of risk tolerance, and can proactively determine how to avoid, manage or mitigate those risks.

A reputable company is highly likely to be a successful company. Consumers and third-party partners are attracted to reputable brands and organisations known for high governance standards. Being able to show compliance with governance standards also attracts investors who are getting stricter in reviewing a company’s corporate governance practices.

Reforms and raising the bar

Locally, while there are available guidelines in place, these do not provide guidance suitable or appropriate for private companies or companies that do not have secondary licences from regulators. In addition, implementation and enforcement of corporate governance principles continue to be major challenges in the Philippines.

The private and public sectors must remain open to reforms to raise the bar in corporate governance in the Philippines.

Companies, whether regulated or not, must have the initiative to champion best practices in good corporate governance. While short-term objectives and profits should be considered, they must not be the focus.

Long-term value creation must also be an objective of companies and must be embedded within the organisation. Regulated and listed companies must go beyond compliance through submission of written reports, as they should also actually implement these governance principles in their business operations.

On the other hand, while not mandatory, private and non-listed companies should assess how they can adopt the established corporate governance principles, recommendations and best practices.

Regulators have a responsibility to ensure proper standards and practices are in place, developed and being applied by the organisations within their regulatory purview. They may consider the issuance of a manual or code that comprehensively covers corporate governance best practices for private companies, which could include incentives for market players to follow the issuance.

They may also consider creating and adopting clear objectives and reporting principles that will not only cover financial inputs and outputs but also non-financial objectives and social impacts of the companies.

The SEC, BSP and IC must continue to receive feedback from stakeholders to ensure a more comprehensive and accurate view of the current and developing corporate governance landscape in the Philippines.

While studies see a trend in increasing adoption of corporate governance principles by companies in the Philippines, and efforts are being established and promoted by different stakeholders, the ever-evolving economic environment created by global challenges requires a continuous development of existing corporate governance practices. So much more needs to be done in working towards a more mature corporate governance environment in the Philippines.

GORRICETA AFRICA CAUTON &
SAAVEDRA
15/F Strata 2000, F Ortigas Jr Road Ortigas
Centre, Pasig City, 1605 Philippines
Tel: +63 2 8696 0687/8696 0988
Email: counselors@gorricetalaw.com

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Corporate governance in Taiwan: An international overview

Understanding corporate governance is critical to ensure the long-term success and sustainability of an organisation, but also to build an effective corporate structure that manages the roles, responsibilities and risks of the business and its investments. In recent years, the Taiwan government has made significant steps in enhancing its corporate governance, driven by regulatory reforms and market demand for higher standards of corporate conduct to promote transparency and accountability.

A thorough understanding of common issues in managing a corporation in Taiwan ensures compliance with regulatory requirements and mitigates legal risks from misunderstandings. For corporate executives, a grasp of corporate governance and recurring issues are essential for navigating regulatory landscapes and contributing to the organisation’s health and prosperity. This article sets out commonly seen queries from foreign investors relating to corporate governance in Taiwan.

Entity formation

Forming a business entity in Taiwan is a straightforward process. Commonly established types of entities include companies limited by shares, limited companies and branch offices. Each of these types can be readily incorporated by following prescribed legal and regulatory procedures.

Tax implications associated with each entity type can influence the decision of which type to establish, as different structures offer varying benefits and obligations, especially for foreign enterprises. It is advisable for foreign investors to conduct a thorough assessment of the tax treatment and regulatory requirements applicable to each type of entity before proceeding with incorporation.

Investment review

All foreign investments in Taiwan require approval from the Department of Investment Review (DIR), a government body responsible for regulating and reviewing all foreign investment. The DIR wields significant authority over various aspects of foreign-invested entities in Taiwan. Its authority begins from the initial entry of foreign investment and extends to subsequent actions such as capital increases, share and equity transfers, and other corporate activities. The DIR has the discretion to require detailed information concerning the ultimate shareholding and equity structure of any foreign enterprise seeking to enter the Taiwanese market.

To ensure compliance and facilitate approval, foreign investors should be prepared to provide comprehensive disclosures and maintain, through local legal experts, transparent communication with the DIR. In particular, local legal experts can guide clients by anticipating potential documents and information that may be required by the authority in advance, expediting the review process and enhancing communication, and also better navigating the approval process in meeting all regulatory requirements.

Local representatives

Unlike other Asian jurisdictions, foreign-invested enterprises are not mandated to have a Taiwanese director on their board under Taiwanese law. Consequently, most foreign enterprises have the flexibility to appoint their own trusted officers to these positions.

Because the establishment of a Taiwanese enterprise necessitates a capital injection, which requires the opening of a bank account in Taiwan, most banks mandate the physical presence of a legal representative during the account opening process, given global heightened anti-money laundering measures.

When appointing a legal representative, it is essential to consider this requirement and the associated travel obligations. Foreign enterprises should ensure that their chosen legal representative is available to comply with this process to avoid delays in incorporation and commencement of business.

Authorisation

While the use of corporate seals is rare in most parts of the world, it remains a primary method in formal applications and contract executions in Taiwan. Both the corporate chop and the legal representative’s chop are regularly used in ordinary business transactions of a Taiwanese entity. Given their frequent use, it is imperative that these chops are carefully secured to prevent unauthorised access and misuse.

Global enterprises that favour centralised management – where high-level executives rather than the CEO manage certain business functions – may encounter challenges in the local requirement of a board resolution to approve such authorisations. To deal with the need for a legal representative’s chop, a comprehensive list of signing authorities approved by the board is advisable.

This list states which executives are authorised to enter into certain contractual arrangements or business dealings with the use of the corporate chop and his/her signature, ensuring that business operations can proceed while maintaining control, security and efficiency. Implementing such a system allows for efficient delegation of authority while aligning with corporate governance standards.

Employee protection

A challenging aspect of corporate governance for enterprises operating in Taiwan is managing local employees, given the extensive protections afforded to them under Taiwanese labour laws. Taiwanese courts generally exhibit a strong tendency to favour employees in disputes concerning termination, job transfers and other employment-related issues, even in cases where the employee may be at fault. The evidentiary and procedural threshold that employers must meet to prevail in such disputes is notably high.

Establishing clear, comprehensive employment policies and work rules, and maintaining meticulous records of employee performance and conduct can help mitigate risks. It is prudent for enterprises to engage local legal counsel to navigate the complexities of Taiwanese labour law and to develop strategies that ensure compliance and minimise conflict.

By taking proactive measures and fostering a fair and respectful workplace, enterprises can better manage their workforce and uphold robust corporate governance standards in Taiwan. This approach not only aligns with ESG-related requirements but also enhances an enterprise’s ability to attract talent, and support sustainable and ethical practices while conducting corporate operations.

Joint ventures

Joint operations with other Taiwanese entities or individuals are popular, especially in industries where local parties are crucial to the successful operation of the business. These collaborations leverage local expertise, networks and resources that are vital for achieving business objectives in Taiwan’s market.

However, it is also due to this that parties must carefully consider and articulate their exit strategies from the outset. These strategies should be clearly documented in writing within the joint venture/operation agreements to ensure predefined, mutually agreed on procedures for scenarios where one party needs to disengage from the joint operation, whether due to strategic shifts, market conditions or other reasons.

Thoroughly thought-out exit clauses help mitigate potential disputes and provide a clear roadmap for dissolving the partnership or transitioning responsibilities. By doing so, parties can enter joint operations with confidence, knowing their strategic and operational interests are safeguarded.

Data privacy

Data protection is a critical issue given rapid technological advancements and the increasing prevalence of personal data sharing and transfer. Taiwan has implemented the Personal Data Protection Act (PDPA) to address key compliance measures involving the use, process, transfer, etc., of personal data, establishing a legal framework to protect such data. Given the rising importance of digital data and AI in recent years, special attention must be afforded to the collection, use and transfer of personal data and information.

Enterprises that comply with the General Data Protection Regulation (GDPR) of the EU will generally find that they also meet the requirements of Taiwan’s PDPA under most circumstances, as both legal frameworks contain similar principles and standards concerning data protection and obligations.

Nonetheless, it is essential for enterprises operating in Taiwan to understand the specific requirements of the PDPA, stay informed about any updates or amendments to the law, and ensure that their data protection policies and practices are fully aligned with Taiwanese regulations.

Reorganisation/deregistration

The need for global corporations to reorganise their operations, whether to consolidate business units or adapt to shifts in business focus, is a recurring one. When it comes to intra-group reorganisation involving foreign-invested entities in Taiwan, certain legal processes must be undertaken.

Even for wholly owned Taiwanese subsidiaries, the reorganisation may require approval from the DIR, as mentioned earlier. Although intra-group reorganisations typically do not face significant obstacles, it is crucial to factor in the time required to obtain approval to ensure that global restructuring efforts proceed without unnecessary delays.

Deregistration of a foreign-invested entity in Taiwan, while straightforward in the application process, is notably lengthy. Completing the deregistration process can take a minimum of six months to a year even in the simplest cases, which should be considered in any strategic planning of the winding down of operations.

While navigating these issues requires comprehensive understanding of legal requirements and experience with managing the expectations of the relevant authorities, spotting these issues is sufficient to facilitate engagement with experienced legal experts for detailed guidance and support to ensure effective compliance with the law, while adequately protecting the interests of the corporation, thereby fostering efficient corporate management.

LCS & PARTNERS
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Taipei City, Taiwan
Tel: +886 2 2729 8000
Email: inquiry@lcs.com.tw

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