TAIPEI (Taiwan News) — All directors of a Taiwanese company have fiduciary duties, including a duty of care and a duty of loyalty.
This fiduciary obligation is a global concept and fiduciary duty is simply the obligation of a party to act in another party's best interest. In this case, one party is the director and the other party is the company itself.
It has been generally accepted in Taiwan that directors also owe a further fiduciary duty, the duty of good faith.
Under the duty of care, a director ought to know or ascertain, the conclusions which he or she ought to reach and the steps which he or she ought to take in any given situation. The level of that care is that of a reasonably diligent person. A director needs to have skill, be experienced, and diligent.
A director’s obligations under duty of loyalty and that of good faith are to obey the constitution and decisions of the company which bind the director; to promote what he or she calculates in good faith to be likely to promote success for shareholders’ benefit; and to take account of the factors which he or she believes in good faith to be relevant for that purpose.
Becoming a director in 2023 must not be seen as some form of "golden handshake" retirement package, it comes with all aspects of fiduciary duties and the real prospect of personal liability in the event of a failure to perform those duties.
With Taiwan’s listed companies now obliged to include environmental, social, and governance (ESG) statements in their annual reports, “governance” takes on renewed importance as a fiduciary obligation, that of understanding not only the general concept of ESG but also, importantly, what their company is doing in relation to ESG.
A recent international survey reported that nearly half of board members report lacking skills and expertise in their organizations for addressing climate-related or ESG issues. Most directors acknowledged that a strong ESG strategy can lead to better financial outcomes, according to a survey by advisory, broking, and solutions company WTW and the Nasdaq Center for Board Excellence.
In the Fostering Corporate Governance and Enhancing Board Effectiveness Survey, WTW and Nasdaq surveyed 349 board members across 44 countries. At the time of publication, it was unclear if Taiwan was included in the survey. Nevertheless, the survey’s outcomes are undoubtedly relevant to Taiwan’s listed companies.
The survey found that most board members recognized value in sustainability-focused initiatives. The overwhelming majority of directors agreed that a coherent ESG strategy helps to create sustainable organizational value and stronger financial outcomes. Other respondents to the survey prioritized ethical reasons for adopting ESG factors and also identified additional factors such as long-term value creation, reputation, and risk mitigation.
Interestingly, the concept of the need for regulatory compliance did not place highly in the survey responses. If that view applies to Taiwan, then Taiwan’s local regulators would seem to have their work cut out for them to embed the obligatory importance of ESG’s regulatory reporting. ESG reports are not just a “nice to have.” They are a regulatory obligation.
Good governance scored well but rather disturbingly, environmental and climate factors were not leading imperatives for directors. Further review of that outcome is warranted.
Despite acknowledging the value of a strong ESG strategy, many board members willingly admitted that their company does not focus enough on sustainability issues. Many also questioned the amount of time and resources dedicated to the “governance” of ESG priorities at the board level. This seems a disturbing result and hopefully not one that is played out in the board meetings of Taiwanese companies.
Board meetings and corporate governance were for many years simply viewed as “rubber stamp” meetings. Regulators and investors, particularly professional investors, are no longer willing to accept this approach. Board meetings must be robustly conducted, with a proper agenda, fulsome discussion of issues and minutes which reflect the discussion and the actionable items.
However, it must be applauded that board oversight of ESG issues does appear to be evolving, with an expectation for more specialist responsibilities in the future. Taiwanese companies are appointing specialist officers to oversee ESG or corporate responsibility programs.
Boards should also consider the use of appropriately staffed ESG committees in addition to full board oversight. The creation of dedicated ESG committees allows the board to gain the benefit of professionals with strong ESG credentials, who in turn can help educate and guide the board in its ESG journey.
But again, the board cannot just adopt any findings from a dedicated ESG committee. The board must question, consider, adjudicate and, where necessary, implement the findings of the committee.
Taiwan is not awash with specialist officers and professionals with strong ESG credentials. Nevertheless, boards of Taiwanese companies must invest in such resources.
This may mean looking outside of Taiwan and investing in foreign talent. Not something that is widely practiced in Taiwan at present, but as the need arises, solutions need to be found.
Taiwanese companies must act now
Now is the time for Taiwan’s listed companies to address any skill or knowledge gaps in dealing with ESG. The board must determine if it is spending sufficient time and resources on governance risks.
Set up committees if necessary and ensure that future leaders of the company have skills sets that will meet ESG reporting requirements. If necessary, boards must evaluate reporting techniques, such as adopting FinTech solutions and leverage external and/or international expertise to meet their ESG “governance” obligations.