Economy & Business
Targeting the corporate fat cats
The FSC plans to expand mandatory compensation disclosure requirements for listed company directors and executives but will Taiwan’s so-called “fat cat” remuneration disclosure amendment make any real difference?
By Paul Shelton
Rising inequalities have become a distinctive feature of the global economy over recent decades. International organisations, researchers and world leaders across the globe acknowledge the threat posed by inequality to the prosperity of nations.
An unequal distribution of any kind of resources, particularly income or wealth, is associated with a decline in trust, life and job satisfaction and happiness, in turn leading to lower growth. However, despite government efforts to tackle inequality of various kinds, the problem is still persistent both in developed and developing countries and Taiwan is not immune from these issues.
Three years of Covid-19 has battered the global economy, especially in terms of wealth distribution. The World Bank’s Poverty and Shared Prosperity 2022 report released at the end of last year stated that the pandemic has triggered the most pronounced setback in the global fight against poverty since 1990.
The poor have been the hardest hit during the pandemic. Average incomes of the bottom 40% in 2020 declined by 4% compared with 2019. In contrast, average incomes of the top 40% only dropped by less than 2%. In 2021, despite the pandemic, Taiwan triumphantly increased its GDP per capita to more than US$30,000, which is the most stringent criterion for developed economy status.
However, even as the Taiwanese people take pride in these GDP per capita developments, many must wonder “Why has my salary not gone up? Why am I still poor?”
How do these questions then sit with the announcement on 1 August by the Financial Supervisory Commission (FSC), that the mandatory disclosure of individual director compensation for listed and OTC companies will be expanded further? The expanded conditions now include:
- Firstly, companies that are profitable but haven't given raises to their frontline employees.
- Second, companies that are experiencing profit decline but are still increasing director compensation.
- Third, companies ranked in the bottom 35% of corporate governance evaluations.
This expansion by the FSC is expected to encompass an additional 253 listed and OTC companies with well-compensated directors. When considering the existing mandatory disclosure cases, it is estimated that a total of 905 directors of well-compensated companies will be exposed next year.
The Securities and Futures Bureau noted that a 60-day notice for the amendment is given. The earliest application will be during the 2024 shareholders' meetings and the announcement of the 2023 annual reports.
According to current regulations, as long as companies meet six criteria, they must mandatorily disclose individual director and supervisor compensation for listed and OTC companies, rather than using a tiered disclosure approach.
Last year's shareholders' meetings and annual reports already saw 652 companies under mandatory disclosure.
The original six criteria include:
- Accumulated losses over the past three years.
- Directors holding shares for less than three months.
- Directors and supervisors having an average pledge ratio of over 50% for three consecutive months.
- Total remuneration of directors and supervisors accounting for more than 2% of the company's post-tax profits.
- Corporate governance evaluation ranking in the lowest tier.
- Average salary of frontline employees being less than NT$500,000.
In order to enhance the transparency of director and supervisor remuneration information, guide profitable companies to share their success with employees, and promote the rationality of director remuneration in relation to employee salaries, the FSC announced amendments to the "Guidelines for Items to be Disclosed in Public Issuers' Annual Reports" and the "Guidelines for Items to be Disclosed in Public Offering Prospectuses of Securities Issued by Companies."
The major highlight is the expansion of the scope of individual director remuneration disclosure with the addition of two new criteria while one criterion will be revised.
The two new criteria are as follows:
- Companies listed or traded on the stock market that have increased their post-tax net income by more than 10% in the most recent fiscal year, but the average annual salary of full-time non-managerial employees has not increased. In simple terms, this refers to companies making profits but not raising the salaries of their frontline employees. According to last year's data, this would result in an additional 47 listed or traded companies disclosing the remuneration of individual directors.
- Companies that have experienced a decline of more than 10% and over NT$5 million dollars in post-tax profits in the most recent fiscal year, and where the average remuneration of each director (excluding compensation for concurrent employment as employees) has increased by more than 10% and over NT$100,000. In simple terms, this refers to companies experiencing profit decline while directors receive salary increases. This would affect an additional 16 companies.
The revised criterion targets existing regulations and extends the mandatory disclosure of well-compensated directors and supervisors from companies ranked in the lowest tier of corporate governance evaluation to also include companies ranked in the second-to-last and third-to-last tiers. This would impact an additional 190 companies. In other words, companies ranked in the lowest 35% of corporate governance evaluation will be required to disclose the remuneration of their well-compensated directors.
In summary, 652 listed and traded companies met the original criteria for mandatory disclosure of well-compensated directors. 253 companies are expected to be affected by the amendments based on the 2024 shareholders' meetings and the announcement of the 2023 annual reports, meaning that a total of 905 listed and traded companies will be required to disclose the remuneration of individual directors and supervisors. It would be of great interest to establish just how many directors and supervisors make up the boards of those 905 listed and traded companies, so as to really understand the impact of the new regulations. It would not be a staggering number.
Whilst improved disclosure and transparency is always welcome, what should we make of the FSC’s amendments? Companies are under no regulatory obligation to allocate wages fairly. There is nothing to stop executives from earning even higher remuneration. There may be some argument that the greater disclosure of egregious disparity between executive compensation and employee remuneration will make those companies less attractive to investors. However there is no discussion of that possibility in the FSC announcement.
Although policymakers have continued to call for listed firms to share profits with employees and raise wages, it remains unknown how big the effect of these so-called “fat-cat amendments” will be. It is also very important to understand that this only applies to listed and traded companies. It is therefore imperative to understand that fact and compare it with the announcement by the Ministry of Economic Affairs that as of 2021, Taiwan boasted more than 1.59 million small and medium enterprises (SMEs), according to the White Paper on Small and Medium Enterprises in Taiwan, 2022. These SMEs account for more than 98% of all enterprises, an all-time high. Further, SMEs employed 9.2 million people, representing more than 80% of the total workforce. This SME factor alone skews any possibility for real change in Taiwan.
The cynic might conclude that the recent additional FSC disclosure requirements are a mere drop in the ocean of Taiwan’s economy. The requirements are certainly unlikely to dispel the controversy over pay imbalances in Taiwan, as several loss-making listed companies still paid huge salaries and bonuses to their directors last year, with flat-panel maker AUO Corp leading the way by paying NT$22.82 million per person on average. Meanwhile, Hotai Motor Corp, which posted the largest losses among listed firms on the Taiwan Stock Exchange last year with losses per share of NT$35.39, paid NT$3.35 million to each of its directors on average.
More measures are needed to raise people’s awareness and generate broader debate in Taiwan’s society and therefore magnify the effect of dealing with the fat-cat salaries and the unfair pay phenomenon. Over the past three years, Taiwan’s income distribution has indeed worsened.
Even though Taiwan raises its basic wages every year, nominal wage growth is eaten away by inflation. Real wages have in fact shrunk for two years in a row. In November 2022, the average nominal regular monthly wage went up 2.86% to a 22-year high of NT$44,371 (US$1,484).
However, this was no match for an inflation rate of 2.97%. From January to November last year, real regular wages went down by 0.11%. This figure shrank by 0.05% in 2021, the first contraction since 2017.
Whilst the authorities announced that Taiwan’s median annual income in 2021 grew to NT$506,000 (NT$42,000 per month), about NT$5,000 more than the previous year with over 50% of employees in Taiwan receiving a monthly wage of less than NT$42,000, an average family household could easily be deemed as living in poverty, especially in high-cost Taipei.
A recent report highlighted the plight of forty-seven assistants working for Kaohsiung City's council members and township representatives who have vowed to fight for better pay, given that rates have been frozen for 23 years. These assistants make on average NT$35,000 (US$1,100) a month, with no overtime compensation. During the election season and for cultural events, their working time per day usually exceeds 15 hours. Consider that for one moment, pay frozen for 23 years.
Taiwan’s widening income gap is also related to industry transformation. Economic growth is largely driven by capital, and the much-lauded high-tech industry is extremely automated. This means that the industry has a low demand for manual labourers and mostly seeks highly paid engineers. The pandemic has dealt a big blow to the tertiary service sector, with low- and mid-level employees in tourism and catering bearing the brunt. Numerous small businesses also collapsed, worsening the income distribution.
So, how does this situation compare with the US and Europe? Is Taiwan an outlier in this issue?
Conditions in the United States
A report in 2022 concluded that income and wealth inequality in the US is substantially higher than in almost any other developed nation, and it is on the rise, sparking an intensifying national debate. The 2008 global financial crisis, the slow and uneven recovery, and the economic shock caused by the Covid-19 pandemic have deepened these trends and challenged policymakers to respond.
Economists say the causes of worsening inequality are complex and include a failure to adapt to globalisation and technological change, shifting tax policy, reduced bargaining power among workers, and long-standing racial and gender discrimination.
The effects of inequality are similarly varied, and they have exacerbated crises such as the pandemic and deepened societal divisions. Whilst President Joe Biden has pledged to reduce economic inequality with new social spending financed by higher taxes on the wealthy and corporations, he faces strong opposition from those who say his plans go too far.
According to the nonpartisan Congressional Budget Office, income inequality in the US has been rising for decades, with the incomes of the highest echelon of earners rapidly outpacing the rest of the population. Even among high earners, income gains have been heavily skewed toward the top of that bracket.
The growth of CEO pay is illustrative of this trend. In 1965, a typical corporate CEO earned about twenty times that earned by a typical worker; by 2018, the ratio was 278:1, according to the Economic Policy Institute, a progressive think tank. Between 1978 and 2018, CEO compensation increased by more than 900% while worker compensation increased by just 11.9%. Inequality in the US simply outpaces that of other rich nations.
Conditions in Europe
There are technically 50 countries within Europe making it a bit more complicated for comparison purposes. However, within Europe, economic inequality has risen gradually since the mid-1980s. With the increased adoption of market-oriented policies in sectors such as education and health, divergences in quality and accessibility of social services have also increased. Inequalities have risen in some countries in recent decades, due to factors such as globalisation, technological change, taxation policy, the Covid-19 pandemic, and the economic crisis. There is also a persistent high level of poverty in Europe.
In simple terms of inequality, London and Madrid have some of the highest levels of inequality and economic segregation. Amsterdam, Vienna, and Budapest occupy the middle ground. Bulgaria is regarded as the country with the highest level of inequality among European countries.
There is really no reason to celebrate that Taiwan is not an outlier in terms of inequality or disparity. Pointing fingers at other countries serves little purpose. Taiwan should and must look after “its own” (this includes all residents of Taiwan) and work proactively to reduce the gap between the “haves and the have nots”. But there seems little positive hope for action in the near future.
The Ministry of Labor (MOL) said, on Tuesday (22 August), it had scheduled the annual meeting to determine the 2024 minimum wage decision for 8 September. At that meeting government representatives, academics, employers’ and labor organisations will discuss the need for changes to the official minimum wage. The MOL said the decision about a hike in 2024 would be based on inflation, which economists predicted would stay above 2% for this year. Taiwan’s large business groups have typically opposed minimum wage hikes, but this year is different, with only the size of the increase likely to cause debate, reports said. However, employer groups have already said that weak export figures should be a cause to keep the level of wage increases “reasonable”.
Taiwan’s road to reduced inequality and disparity will be a long one.
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.