Updates on Legal Amendments Concerning Corporate Social Responsibility, Social Enterprises and the Company Act (Taiwan)

2018.9.30
Fang-Wei Lin

I. Backgrounds

In view of global reflections upon the capitalist pursuit of maximum personal benefits in recent years, currently it is generally perceived that in addition to the pursuit of shareholders’ interest, a private company should also pay attention to its interactions with its surrounding environment, employees and other stakeholders to fulfill certain social responsibility.  Meanwhile, social enterprises, which address social problems through their business models, have become a global trend in recent years. Countries such as the UK and the US have certain provisions for social enterprises.

In recent years, Taiwan has seen prosperous development of social enterprises.  In the recent amendment of the Company Act, there were discussions concerning the formulation of a dedicated chapter, or even a dedicated law, for social enterprises.  However, ultimately only Article 1 of the Company Act was amended with the addition of provisions which stipulate that companies may act in manners that promote public benefits and fulfill corporate social responsibility.  No dedicated chapter or law was formulated.

In this essay, the concepts of “corporate social responsibility” and “social enterprise” are first differentiated with a brief introduction of the current law in Taiwan and of relevant provisions concerning corporate social responsibility under the Company Act as amended as well as their impact.  In addition, discussions concerning the formulation of a dedicated chapter or a dedicated law in the course of these amendments are also compared.

II. Differentiation of the concepts of “corporate social responsibility” and “social enterprises”

“Corporate social responsibility” means that an enterprise not only pursues maximum benefits for its shareholders but also takes into account the rights and interests of its stakeholders, including its employees, consumers, suppliers, communities and environment, which are the enterprise’s responsibilities in addition to the pursuit of profits.  Improving the work environment and welfare of the employees, paying attention to human rights, focusing on the quality of products and services, caring about a vendor’s performance of social responsibility and avoiding environment pollution are good examples.  For “social enterprise”, although there is no one uniform definition, it refers, in a broad sense, to an organization that addresses social problems through its business model and does not pursue maximum profit as its primary goal.[1]  The greatest difference between the two lies in whether the organization pursues profitability or resolution of social problems as its highest priority.

III. Relevant current legal regimes for social enterprise responsibility

There is currently no special requirement for social enterprises under Taiwan laws.  With respect to corporate social responsibility, only listed or OTC-traded companies are regulated.  The Taiwan Stock Exchange has formulated the Practical Guidelines for the Corporate Social Responsibility of Listed or OTC-traded Companies, requiring a listed or OTC-traded company to take note of the rights and interests of other stakeholders and recommending the appropriate measures that shall be taken when its social responsibility is fulfilled.  Although the guidelines merely contain ethical requirements and are not legally binding, still Article 10:4(5) of the Regulations Governing Information to be Published in Annual Reports of Public Companies stipulates that the annual reports of all public companies shall indicate the status of the company’s performance of its social responsibility and explain the reasons for the discrepancies, if any, between its performance and the requirements under the Practical Guidelines for the Corporate Social Responsibility of Listed and OTC-traded Companies.  This shows that such guidelines still have certain guiding effects on listed and OTC-traded companies.

In addition, the Taiwan Stock Exchange also compels listed or OTC-traded companies in specific industries or with a specific scale to prepare a corporate social responsibility report.[2]  Pursuant to the Operating Guidelines for Preparing and Submitting Corporate Social Responsibility Reports by Listed Companies and the Operating Guidelines for Preparing and Submitting Corporate Social Responsibility Reports by OTC-listed Companies, a corporate social responsibility report for the previous year[3] shall be prepared and submitted by a company required to prepare and submit the same in accordance with the standard released by the Global Reporting Initiatives (GRI).  In case of a company in a specific industry stipulated by the Taiwan Stock Exchange, an opinion issued by a certified public accountant shall also be obtained[4] with no compulsory requirement for the other companies to obtain third-party certification.

IV. Relevant discussions on legal amendment proposals concerning corporate social responsibility and social enterprises

As the number of enterprises pursuing social interest has gradually increased in recent years, the pursuit of economic benefits is no longer the only objective of a company.  The provisions of the Company Act (provisions before the three legislative readings on July 6, 2018) which require that a company shall be profit-oriented and maximize benefits for the shareholders no longer meet practical needs.  Therefore, different drafts were proposed by various parties based on the social intensity requirements of an organization during the process of amending the Company Act.  Because there were many different drafts proposed by various parties, this essay only intends to introduce the “draft of a dedicated chapter of the benefit corporation in the Company Act,”[5] the “draft Statute for the Development of Social Enterprises,”[6] and the “ultimately adopted draft amendments” prepared by the Executive Yuan.

1. Draft of a dedicated chapter of the benefit corporation in the Company Act

The draft of the dedicated chapter of the benefit Company Act references relevant provisions of corporation acts in the U.S. by adding a new company type – “benefit corporation.”  The draft provides that the articles of incorporation of a benefit corporation shall have a public benefit objective and the interest of stakeholders other than the shareholders shall be considered by the representative of the company in decision-making, and that regular preparation of a public benefit report and announcement of the same in the Company Registration Information System.  The draft of a dedicated chapter of the benefit corporation in the Company Act stresses that a “benefit corporation” is different from a “social enterprise,” which seeks to resolve specific social problems and limits its earning distribution.  Therefore, such company is not referred to as a “social enterprise.”  The specific purpose of this requirement merely seeks to break away from profit-orientation as the only purpose under the Company Act and specifically incorporates elements of corporate social responsibility into the business model of a company so that all companies with a social mission have a chance to choose the most appropriate organizational type to reflect their public benefit position.

2. Draft Statute for the Development of Social Enterprises

The draft Statute for the Development of Social Enterprises references the UK law, which sought to promote the development of the ecosystem for social enterprises through policy measures.  To accommodate corresponding policy measures, the draft specifically defines a “social enterprise” as an organization whose charter stipulates public benefit objectives and prepares public benefit reports regularly, which are the same as those required under the draft of the dedicated chapter of the benefit corporation, but also limits the percentage of annual earnings distribution by the social enterprise and requires that at least a fixed percentage of the annual revenue of the organization should be derived from the sales of goods or services.[7]  Regardless of organization types such as association, foundation, company or cooperative, the above specific requirements should be satisfied in order to meet the definition of a “social enterprise” in this draft.  The draft also designates the National Development Commission as the competent authority for social enterprises, and the competent authority is required to formulate a social enterprise development program, prepare a budget to set up a social enterprise development fund and provide incentive measures to help social enterprises obtain funding.

Although the above draft is well-intentioned, its plan to allow government policy intervention in the development of social enterprises, still gives rise to certain concerns.  Since the draft clearly defines what a “social enterprise” is and uses a series of accommodating policy measures to support the development of organizations that meet the definition of “social enterprises,” this raises the concern that other organizations that do not meet the definition will be crowded out and the resources for other social welfare institutions will be eroded.[8]  In addition, the practice of limiting earnings distribution of the organization also triggers significant debates in the social enterprise circle.[9]

3. Draft amendments adopted by the Executive Yuan

As compared with the creation of a dedicated chapter in the Company Act or a dedicated law by the above two drafts, the draft introduced by the Executive Yuan is relatively conservative and specifically incorporates corporate social responsibility by merely adding Paragraph 2 to Paragraph 1 of the Company Act, which provides: “A company shall comply with laws and regulations as well as business ethics in its business operation and may engage in acts that promote public benefits to fulfill its social responsibility.”  Hence, a company is permitted not to pursue maximum shareholders’ benefits as its sole purpose.  This is the version adopted when the Company Act was amended this time.  According to its legislative explanation, “a company may donate a reasonable amount of resources for public welfare, humanitarianism and charity” to fulfill its social responsibility.  After the new law goes into force, if the representative of a company may include considerations of social responsibility in the decision-making process, the duty of loyalty of the company’s representative will no longer be determined solely by the maximization of shareholders’ profits and may also take into account the benefits of other stakeholders.  However, to what extent can a company’s representative consider social responsibility in his/her decision-making?  What is a reasonable amount of donated resources?  How can the performance of a donation be tracked and evaluated?  All these require other accommodating measures.  It is still necessary to observe the practices and interactions between companies, the competent authority and judicial practices in order to assess the impact from the incorporation of corporate social responsibility provisions into these amendments to the Company Act.[10]

V. Conclusions

Since all members of the society still have doubts about whether a dedicated chapter or a dedicated law should be formulated for social enterprises, the Company Act as amended merely encourages but does not compel all companies to fulfill their corporate social responsibility and does not contain different requirements for the organizational types of social enterprises.  However, when the time is right in the future with more prosperous development of social enterprises in the society of Taiwan, it will also be possible to extend the drafts introduced during the discussions on legal amendments and to formulate a dedicated chapter or law.

[1] In reference to the definitions of the OECD and the Social Enterprise Insights: OECD/European Commission, Policy Brief on Social Entrepreneurship – Entrepreneurial Activities in Europe (2013): “The Organisation for Economic Co-operation and Development (OECD) defines social enterprises as ‘any private activity conducted in the public interest, organised with an entrepreneurial strategy, but whose main purpose is not the maximisation of profit but the attainment of certain economic and social goals, and which has the capacity for bringing innovative solutions to the problems of social exclusion and unemployment’ (OECD, 1999).”; the website of the Social Enterprise Insights (http://www.seinsights.asia/aboutse): “social enterprise” refers to an organization that addresses a specific social or environmental problem through its business model, e.g., the provision of products/services that fulfill social responsibility or promote environmental protection or create jobs for the socially disadvantaged, and procurement of goods or services provided by the socially disadvantaged or marginalized.  The organization may exist in the form of a profit-seeking or non-profit organization with revenues and earnings.  The earnings are primarily used to invest in the social enterprise itself or in continued resolution of such social or environmental problem, not in the maximum benefits of the capital contributors or owners.

[2] Article 2, Paragraph 1 of the Operating Guidelines for Preparing and Submitting Corporate Social Responsibility Reports by Listed Companies:

A listed company shall prepare and submit a corporate social responsibility report in Chinese pursuant to the Guidelines if it is subject to any of the following circumstances:

1. It is in the food, chemical or finance and insurance industries as of the end of the last accounting year pursuant to the Key Points of the Taiwan Stock Exchange for Classifying and Adjusting Categories of Industries of Listed Companies.

2. The revenue from food and beverage operation accounts for at least 50% of its total operating revenue according to the financial report of the last accounting year as submitted in accordance with Article 36 of the Securities and Exchange Law.

3. ts capital stock reaches NT$5 billion according to the financial report of the last accounting year in accordance with Article 36 of the Securities and Exchange Law, provided that if the capital stock falls short of NT$10 billion, the application may commence in 2017, and if its annual financial statement indicates any cumulative loss, the application may commence in 2019.

Article 2, Paragraph 1 of the Operating Guidelines for Preparing and Submitting Corporate Social Responsibility Reports by OTC-traded Companies:

An OTC-traded company shall prepare and submit a corporate social responsibility report in Chinese pursuant to the Guidelines if it is subject to any of the following circumstances:

1. It is in the food, chemical or finance and insurance industries as of the end of the last accounting year pursuant to the Key Points of the Taipei Exchange for Classifying and Adjusting Categories of Industries of OTC-traded Companies.

2. The revenue from food and beverage operation accounts for at least 50% of its total operating revenue according to the financial report of the last accounting year as submitted in accordance with Article 36 of the Securities and Exchange Law.

3. Its capital stock reaches NT$10 billion according to the financial report of the last accounting year as submitted in accordance with Article 36 of the Securities and Exchange Law.

[3] Article 3, Paragraph 1 of the Operating Guidelines for Preparing and Submitting Corporate Social Responsibility Reports by Listed Companies:

A listed company that meets the requirements of Article 2 shall publish a corporate social responsibility report each year for the previous year in reference to the most recent Sustainability Reporting Guidelines released by the Global Reporting Initiatives (GRI), supplementary guidelines for industries and other applicable standards referenced and adopted according to the characteristics of the industries, disclose the major economic, environmental and social considerations identified by the company, management guidelines, performance indexes and the methodology for measuring the indexes.  At the very least, a listed company shall comply with the core compliance options under the Sustainability Reporting Guidelines.

Article 3, Paragraph 1 of the Operating Guidelines for Preparing and Submitting Corporate Social Responsibility Reports by OTC-traded Companies:

An OTC-traded company that meets the requirements of Article 2 shall publish a corporate social responsibility report each year for the previous year in reference to the most recent Sustainability Reporting Guidelines released by the Global Reporting Initiatives (GRI), supplementary guidelines for industries and other applicable standards referenced and adopted according to the characteristics of the industries, disclose the major economic, environmental and social considerations identified by the company, management guidelines, performance indexes and the methodology for measuring the indexes.  At the very least, an OTC-traded company shall comply with the core compliance options under the Sustainability Reporting Guidelines.

[4] Article 5, Paragraph 1 of the Operating Guidelines for Preparing and Submitting Corporate Social Responsibility Reports by Listed Companies:

For a corporate social responsibility report prepared by a listed company in the food industry under Article 1, Paragraph 1, Subparagraph 2, an opinion issued by a certified public accountants pursuant to the standard released by the Accounting Research and Development Foundation shall be obtained, and the scope of the opinion shall cover the performance indexes disclosed pursuant to Article 4, Paragraph 1, Subparagraph 2.

Article 5, Paragraph 1 of the Operating Guidelines for Preparing and Submitting Corporate Social Responsibility Reports by OTC-traded Companies:

For a corporate social responsibility report prepared by an OTC-traded company in the food industry under Article 1, Paragraph 1, Subparagraph 2, an opinion issued by a certified public accountants pursuant to the standard released by the Accounting Research and Development Foundation shall be obtained, and the scope of the opinion shall cover the performance indexes disclosed pursuant to Article 4, Paragraph 1, Subparagraph 2.

[5] Draft dedicated chapter of the benefit Company Law, December 14, 2016, Legislator Proposal No. 20015, Legislative Yuan Proposal Documentation Yuan-Zhong-618

[6] Draft Statute for the Development of Social Enterprises, May 10, 2017, Legislator Proposal No. 20698, Legislative Yuan Proposal Documentation Yuan-Zhong-1775

[7] Same as Footnote 6.  Article 2, Paragraph 1 of the draft provides: “The social enterprises set forth in this Statute shall refer to juristic persons duly organized and registered pursuant to this Statute, established pursuant to law, and meeting the following requirements:

1. Their social objectives are specified in their organizational charter or relevant written documents.

2. At least fifty percent of their net operating income is committed to the realization of their social objectives with less than three percent of distributable net income.

3. At least fifty percent of their annual revenue should be derived from the sales of goods or services.

4. They shall regularly release social impact assessment reports on their pursuit of social objectives as well as financial reports.

5. The requirement may be appropriately relaxed by fifteen percentage where Statute may apply mutatis mutandis in case of failure to comply with Subparagraphs 2 through 4 of this paragraph but with the promotion of the development of social enterprises recognized by the competent authority.”

[8] Yuan-yi Fang, Legislation of Social Innovation and Deregulation of the Company Law in Support of Social Enterprises, May 15, 2018 (http://www.scocar.org.tw/announcement/148)

[9] “Half of Net Income Committed to Social Praxis,” Debates within Social Enterprise Circle Triggered by A Dedicated Law Introduced by DPP Lawmakers, reported by the Up Media on August 21, 2017

[10] Ying-chao Lai, Seeds of Corporate Social Responsibility, July 9, 2018, Special Column of the Economic Daily News