Information Openness from a Corporate Governance Perspective

The Asian financial crisis of 1997-1999 was followed closely by the Enron meltdown and a long series financial scandals, all of which has contributed to making corporate governance a preoccupation in Asian societies nowadays.

The Connection between Corporate Governance and Information Openness

What is the origin of the whole corporate governance concept? As companies expand, ownership and management powers tend to diverge. When that happens, it is easy for the selfish motives of managers to cause ethical "crises" because their interests do not coincide with those of the people who fund their operations, and the end result is that the interests of capital providers get hurt time and again. The corporate governance concept gradually grew out of a desire to prevent this from happening. The hope is that a systematic approach to governance will help eliminate conflicts of interests between companies and their stakeholders. Put another way, the main objective of corporate governance is to avert the problems that arise in principal-agent relationships.

Information openness is a particularly important part of corporate governance. Consider the tempest over "landmine" stocks that hit Taiwan in 1998. Local companies had always been operated on a small- and medium-scale, family-run business model. This was so even if they were publicly listed companies, where control was maintained through crossholding shares or related parties. It is still a corporate structure commonly seen in Taiwan. In operations like these, where people play dual roles – player and umpire, you might say – decision-making is in the hands of a few people, and the actual operation of the company is beyond the abilities of average shareholders. If abuse occurs, it is extremely easy for it to harm small shareholders' interests. That being the case, information openness is promoted as a way to introduce oversight, prevent such abuse, and help ensure that a company's managers act in the best interest of shareholders. By providing checks and balances for management, it is possible to prevent illegal activity and achieve the company's operational objectives.

Unfortunately, to get real information openness, it seems that the force of legal constraint is needed to make managers transparently disclose the details of their companies' financial condition, performance, ownership and other significant matters. In the USA, the Sarbanes-Oxley Act (Sox) was signed into law in 2002, but only after a string of accounting fraud scandals that included Enron, WorldCom, Xerox and Tyco. To regain the public's confidence in the markets, Sox strengthened the hand of the SEC, set ambitions standards for corporate governance, accountant independence and the responsibilities of companies and their senior executives, and protected whistleblowers.

Article 404 is widely regarded as the most important part of the law. Article 404 is intended to strengthen requirements for information disclosure, oversight responsibility, internal control systems and external audits. It requires publicly listed companies to release regular, accurate and detailed financial reports, along with audited evaluations of their internal controls. The goal is no less than the reform of the financial system through the realization of an effective framework for corporate governance. The main principles behind this framework are informational openness and transparency, and the logic is that "sunshine is the best disinfectant".

Information openness is still the best means by which to prevent fraud. If information is not open, it is easy for investors to lose confidence, and investors may end up getting hurt. But if proper information is provided openly and transparently for investors or the general public, it can keep managers from committing fraud, and it can bolster investor confidence. This has positive repercussions for a company's long-term development, for the effectuation of corporate governance, and for the protection of investors' interests.

Information Openness Requirements in Taiwan

With profit-seeking as the purpose of business management, and economic satisfaction the main goal of investors, government, the business community and investors all have expressed an interest in improving corporate governance. The question is how best to do that. The problem is that each of these actors has their self-interest to consider. In order for government lawmakers to maximize social benefits, a balance must be struck between businesses and investors, using the state's powers to establish legal protections for investors who are in a relatively weak position when it comes to information.

In Taiwan, the following methods have been used to strengthen corporate governance disclosures and controls: (1) requiring that disclosures in annual reports and prospectuses include information on governance-related operations, professional knowledge of directors and supervisors, independence status and advanced governance-related training; (2) establishment of the Market Observation Post System which includes a corporate disclosure section with information on all board memberships held by independent directors, attendance at board meetings, etc.; and (3) setting up an information disclosure evaluation system, with the expectation that listed companies' disclosure evaluations will give investors a clearer understanding of which companies are winning and failing the effort to be more open and transparent, and hence better or worse at corporate governance.

In terms of legislation, the core of corporate governance norms in Taiwan is the Company Law. It establishes a three-way division of power between the shareholders, boards of directors and supervisors, hoping thereby to provide mutual checks and balances conducive to good governance. In addition, Article 36 of the Securities and Exchange Law and its enforcement rules bear upon governance by emphasizing the disclosure of financial information and its effect on shareholder interests. Since the transmission of financial information can frequently reveal the results and effectiveness of corporate governance, it increases stockholders' understanding of a company's circumstances and reduce the potential for harm and abuse.

More recently, Taiwan has taken cues from laws like Sarbanes-Oxley in the US and other advanced countries and formulated rules that require financial reporting to be signed off on by board chairpersons, supervisors and chief accountants, and they must include declarations that their contents are free of falsehood or concealment. At the same time, out of concern for the ability and integrity of accountants with respect to the quality and reliability of financial reporting, the governing authority was authorized to formulate qualification criteria and continuing education requirements for chief accountants. In addition, the Taiwan Stock Exchange and GreTai Securities established qualification criteria for independent board members and supervisors, providing concrete independence standards.

The Outlook for Corporate Governance in Taiwan

When the Asian Governance Association graded Asian countries and territories on various aspects of corporate governance, Taiwan came in last on accounting standards. Taiwan's government took this result quite seriously, and in rapid succession the official Accounting Research and Development Foundation of the ROC issued or amended statements of accounting standards on "Accounting for Long-term Equity Investments", "Consolidated Financial Statements", "Accounting for Asset Impairment", "Financial Instruments: Recognition and Measurement", and "Financial Instruments: Disclosure and Presentation". These are intended to harmonize Taiwan's standards with prevailing international standards and make local information disclosure conform to international norms.

To further boost the level of disclosure in Taiwan, the Securities and Futures Bureau requires public companies to file semi-annual consolidated financial statements in addition to annual consolidated statements, beginning in 2006. This is because, internationally, consolidated financial statements have become the main form of statement in use, unlike Taiwan where stand-alone parent company financial statements have heretofore been the preferred means of disclosure. But the ultimate objective of informational openness is to help develop the economy and provide safeguards for investors.

Since Taiwan joined the World Trade Organization, locally based enterprises have faced more intense global competition, and foreign investment and merger activity have increased inexorably. In order to help local firms remain competitive internationally and attract foreign investment, while at the same time protecting shareholders, it is imperative that the promotion of corporate governance continue. However, getting the most out of corporate governance in practice will still depend on the thinking of high-level managers and the complimentary measures they adopt, and corporate culture is a key factor in such decisions. In other words, the compulsion of laws and regulations is not the real precondition for bolstering governance mechanisms and getting the most from complimentary measures; it is the integrity and good moral values of managers at the highest level. If a company's managers can truly realize the importance and necessity of their governance system, and then execute it thoroughly, they will be able to exploit fully the synergies of different corporate governance mechanisms.