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TSMC Chairman Morris Chang:

World-class Board Key to Ongoing Success


World-class Board Key to Ongoing Success


In this exclusive interview, one of Taiwan’s most legendary executives offers an inside look at Taiwan Semiconductor’s board of directors and its secrets to stable governance.



World-class Board Key to Ongoing Success

By Hsiao-Wen Wang
From CommonWealth Magazine (vol. 553 )

High on the wall of the reception room in Morris Chang's office suite hangs an oil painting by his wife Sophia. Rendered against a vermillion background like a Fauvist painting by Matisse is the TSMC chairman, seated in a corner, smoking a pipe and reflecting. A solitary figure that nonetheless commands attention – this is the image Chang has struck throughout his life.

Apart from his wife, only the seven other board members of TSMC (Taiwan Semiconductor Manufacturing Corp.) ever get to see the way this thinker turns things over in his mind.

It was his design, his deliberation, which helped TSMC take top honors in CommonWealth Magazine's Corporate Citizenship Awards, as well as the annual theme award for Corporate Governance.

In Taiwan, where reports of corporate bribery, executive insider trading and other malfeasance are all over the news, TSMC's corporate governance is especially worth emulating.

"Corporate governance is the way to robust strength, by regulating structural, organizational, and operational functions," offers Gordon Chen, former chairman of both the Financial Supervisory Commission and the OTC GreTai Securities Market (GTSM). Most important of all for achieving these ends is the corporate board of directors, and the operation of TSMC's board – from rights and responsibilities, nomination and selection of directors, to setting agendas – is clearly set out.

"Their board of directors has the most international standards of any in Taiwan," relates Albert Hsueh, PricewaterhouseCoopers Education Foundation chairman. The former CEOs of Texas Instruments (Thomas J. Engibous) and British Telecom (Sir Peter Bonfield) sit on TSMC's board, as well as Acer founder Stan Shih, noted for his management prowess. Other board members include legal expert Ms. Kok-Choo Chen, and economics authority Gregory C. Chow. This lineup of professionals ensures that the TSMC board makes high quality decisions.

Independent Directors Over Half of Board

Independent directors, who help the company overcome potential blind spots, account for five of the eight seats on the TSMC board, constituting a majority.

The secret to the board's operation is not inserting cronies to assert one's will. On the contrary, the Sunday evening prior to each full board meeting, Morris Chang hosts the five independent directors, each of them world-class figures in their respective fields, for a bit of work over dinner. Each investment project reaching into the billions of US dollars, every personnel program that impacts every facet of company operation, is complemented with steak, red wine, and elegant lighting. This "soft directors' meeting" impressed even former HP CEO Carly Fiorina.

As a company's power center, how should the board of directors operate? In a recent interview with CommonWealth Magazine, Morris Chang personally lifted the veil of mystery from TSMC's Board of Directors.

The Following are excerpts from our exclusive conversation:

Q: How does TSMC convene board meetings?

A: We meet once every quarter, for two days each. Actually, two days plus the night before. We choose Monday and Tuesday of the second week of the second month of each quarter.

The previous evening is critical. I sit down to dinner with our five independent directors for two to three hours. This working dinner alternates quarterly between the Hotel Royal Hsinchu and the Bel-Air Restaurant at the Grand Hyatt Taipei. We reserve private rooms in advance, and we go back and forth between the two.

Before inviting the directors we make it clear to them that two weeks in advance of the board meeting they will receive two huge stacks of material, one in Chinese and one in English. At the front is a detailed agenda, including management reports and business to be decided.

I tell them, if they plan to oppose anything or have any issues, they can call the board's secretary, or call or email me personally. If they have not provided any feedback before the scheduled date, their last chance is the working dinner on Sunday night.

So our board hardly ever votes, since the Board of Directors almost never has to vote on agenda items, making voting merely a formality. I have already gone over agenda items on company business, personnel, and investment item by item with the independent directors at the working dinner, so that when I bring up a motion at the board meeting we put it to a vote. "Seconded?" I ask, and everyone raises a hand. TSMC started this approach from the very beginning in 1987, and we've been doing it the same way ever since.

Q: Has anyone ever opposed you?

A: Over the first decade the board actually did oppose me many times. So I persuaded them. If I was unable to convince them, then I rescinded the motion for reintroduction at a later date. Over the course of more than 20 years, two or three motions were withdrawn in the first decade. Over the last five years, there have been voices of opposition too, but I've managed to persuade them.

Five years ago I wanted to significantly increase capital investment. Two independent directors were opposed and one was sitting on the fence. I said, obviously I can't convince you at this time, nor can you convince me. But in the final analysis, when you consider that I'm in charge of this company, you must defer to me.

Q: So did that quiet them down?

A: They are all good sports. A year ago one of them confided to me that he was glad he wasn't able to successfully oppose me (chuckles).

However, during the working dinner I put everything out on the table, speaking frankly and not holding back about company issues. For instance, when former Hewlett-Packard CEO Carly Fiorina was set to run for the US Senate from California she was no longer suitable as an independent director. During that final dinner, she told me she felt this kind of informal arrangement was the best, that she learned the most from it.

Q: Aren't you afraid of company secrets being leaked?

A: If I didn't trust them, I wouldn't have asked them to be independent directors. For instance, Thomas J. Engibous, former longtime chairman and CEO of Texas Instruments. He naturally has a lot of experience in semiconductors and was crucial to Texas Instruments' revival. He was also one of the ones opposed to my capital expenditure plan (laughs).

Q: How is director compensation calculated?

A: My philosophy is that, since the directors are the ones that appoint and fire the CEO, they should make at least the same day rate as the CEO. The executive level holds a lot of power, necessitating counterbalance and oversight mechanisms. The Board of Directors is there to oversee and check the executive management.

When I was an independent director of Goldman Sachs, I brought up this idea to Henry Paulson, then CEO of Goldman and later Treasury chairman. He scratched his head and said he disagreed, and that board members did not have the same kind of responsibility as the CEO. This also makes sense to me.

Q: So then who determines the CEO's compensation?

A: At TSMC we hold an Audit Committee meeting from 9:00 AM to noon on the first day. I don't attend this, because this is when they go over the company's books. At 2:00 PM that afternoon is the Compensation Committee meeting, at which I am a non-voting member. First the personnel department makes its report and all personnel issues are discussed, which takes around 20 minutes. Next, I make recommendations to the committee regarding profit-sharing for our 18 senior managers. Then, I excuse myself when it's time to decide my pay and profit-sharing.

Q: How do you balance the interests of the stakeholders?

A: Balancing the interests of the various stakeholders comes down to the chairman's sense of fairness. The board is also a group of people, so invariably it comes down to the chairman's gauge on things. Five or six years ago our Compensation Committee got into a debate on the size of the bonus dividend pool, with very divided opinions. That was a conflict of interest between the employees and the shareholders for you! Finally, I proposed the figure of 13.5 percent of net profits in order to balance out the interests of the shareholders and employees.

Q: How does the board maintain continuity?

A: I hope to systematize it, so that as long as the entire board isn't replaced at once, even if I leave my position, the Board of Directors' system and culture can continue on. (Compiled by Lu Yi)

Translated from the Chinese by David Toman