TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY 

Taiwan Semiconductor Manufacturing Company (TSMC) is the world's largest dedicated independent semiconductor foundry. It posted annual sales of $5.3 billion ($US) in 2000 and currently employs over 14,000 people worldwide.

November 2001

Excerpted from the Summary Report of the "Asian Business Dialogue on Corporate Governance 2001", Hong Kong, November 1, 2001, a conference organized by the Asian Corporate Governance Association (www.acga-asia.org).

Harvey Chang, Senior Vice President and Chief Financial Officer of TSMC, gave a frank account of the efforts that his company has made to inculcate corporate governance into its culture.

"When TSMC was founded in 1987, we set an ambitious goal of growing ourselves into a world-class company. We wanted to begin with the right foot. We wanted to operate as a world-class company and tried not to become entangled in many of the very common Asian company practices.

TSMC's corporate philosophy is based upon the following principles:

Integrity

Integrity is essential because in the semiconductor foundry business you are entrusted with the design secrets of competing companies. We must have the integrity to hold that information confidential and be accountable for it. Treating all customers fairly means we need to apply the same standards to all stakeholders, particularly shareholders.

Board independence

We set up a fairly independent board of directors from the start: independent in the sense that individual shareholders could not manipulate the board behind the scenes. This means that the influence of our two major shareholders-the Taiwanese government and Philips-has been limited and they enjoy no special privileges. Philips was unable, even during boom times in the cyclical semiconductor business, to get extra allocation of production capacity from us. And in contrast to most companies set up with state assistance in Asia, government involvement in our company has been minimal. The government never gets its hands into our operation and that's one reason why we are able to grow so fast.

Structural simplicity/Shareholder value

Unlike many large companies in Taiwan and Asia, we opted to remain as one company. We did not form into a business group or engage in cross-shareholdings, cross-guarantees, and so on. All the profits that we generate are for all the shareholders. There's no preferential treatment and there's no particular group of shareholders who will benefit from a certain subsidiary of our's.

We do not believe in diversifying for the sake of it. Basically, either we will hold cash, or we use that cash to expand the company. This is also a practice very different, I think, from most other companies in Taiwan.

Financial transparency

We very much believe in financial transparency and TSMC was the first company in Taiwan to disclose its quarterly earnings. More than 400 people attend this briefing, and in the evening we host a conference call to answer questions from overseas investors.

Low leverage

In order to grow, while weathering the ups and downs of the semiconductor cycle, we maintain a very low financial leverage profile. We always maintain a very strong balance sheet and try to hold quite a bit of cash on hand. This is similar to most leading semiconductor companies around the world, but in Taiwan terms it is unique.

Our cash reserves have even prompted questions from Taiwan's regulators, who ask why we are not doing anything with them. But our response is that the cost of building a new fab plant is extremely high-around US$3 billion-and that we are keeping the money for future investment.

Benefits

What are some of the benefits we gain from this? TSMC's price earnings (PE) and price-to-book (P/B) ratios have consistently outperformed Taiwan's high-tech sector over the period 1997-2000. During that time, we had an average PE of about 35, which was 22% higher than our nearest competitor and 59% above the high-tech sector as a whole. Our average P/B ratio was about seven times, which represented a 100% premium over both our nearest competitor and the high-tech sector. Whereas a few years ago our market capitalization was only about 50% greater than our nearest competitor, today it is close to three times as high. I think that because of the difference in our corporate governance practices, the market has rewarded us with a very high premium.

High corporate governance standards, as well as plaudits for being "the best company in Taiwan" (as rated by Commonwealth magazine), have helped us to attract highly talented employees.

Challenges

In Taiwan, as in many other places, entrepreneurs and large investors who sit on boards believe that it is acceptable to influence a company's decision-making in their favour. We have had to educate our directors to understand that decisions must be made for the benef it of all shareholders. This is a continuing process, and even when dealing with some of our major shareholders, it's a challenge.

The appointment of directors is quite different in Taiwan, however, from other countries. Only shareholders can be elected as directors (which limits the pool of potential board members). Unlike the US, where the chairman has the ability to create an independent board, in Taiwan this is more challenging. We have one independent shareholder who holds a very small number of shares and was elected as a board member, giving us effectively one independent director on a board of seven people. Already this was very difficult to achieve.

Another challenge-and one perhaps unique to TSMC-is the adverse effect of trying to be transparent in a less than transparent market. What you end up with is your competitor quoting some of the numbers you have disclosed and misusing them by talking to your customers and saying, "this is what they're doing and this is what we're doing". But if you go back and look at what they are disclosing, they are not disclosing anything, so you don't know how to reconcile that. We have had to modify, and to a certain extent reduce, the level of information that we give out. But we try other means to help investors understand how we operate.

Although it is sometimes hard to predict the result of implementing good corporate governance, we are certainly happy that we began on the right foot. We will keep listening to our stakeholders, particularly investors, on how we can improve our corporate governance regime."