2016 TSMC Annual Report

TSMC Annual Report > 2016 > Corporate Governance > Board of Directors

Board of Directors

Board Structure

TSMC’s Board of Directors consists of eight distinguished members with a great breadth of experience as world-class business leaders or professionals. We rely on them for their diverse knowledge, personal perspectives, and solid business judgment. Five of the eight members are independent directors: former British Telecommunications Chief Executive Officer, Sir Peter Bonfield; Co-Founder, Chairman Emeritus of the Acer Group, Mr. Stan Shih; former Texas Instruments Inc. Chairman of the Board, Mr. Thomas J. Engibous; former Chairman of National Performing Arts Center and former Advisor of Executive Yuan, R.O.C., Ms. Kok-Choo Chen; and former Chairman of Applied Materials, Inc., Mr. Michael R. Splinter. One of the members of the Board Directors is female. The number of Independent Directors is more than 50% of the total number of Directors.

In February 2017, TSMC’s Board of Directors determined the number of directors to be ten and approve the election of two additional directors at TSMC’s 2017 Annual Shareholders’ Meeting; and authorized the Chairman to nominate Dr. Mark Liu and Dr. C.C. Wei as candidates for directors to stand for election at TSMC’s 2017 Annual Shareholders’ Meeting.

Board Responsibilities

Under the leadership of Chairman Morris Chang, TSMC’s Board of Directors takes a serious and forthright approach to its duties and is a dedicated, competent and independent Board.

In the spirit of Chairman Chang’s approach to corporate governance, a board of directors’ primary duty is to supervise. The Board should supervise the Company’s: compliance with relevant laws and regulations, financial transparency, timely disclosure of material information, and maintaining of the highest integrity within the Company. TSMC’s Board of Directors strives to perform these responsibilities through the Audit Committee and the Compensation Committee, the hiring of a financial expert for the Audit Committee, and coordination with the Internal Audit department.

The second duty of the Board of Directors is to evaluate the management’s performance and to appoint and dismiss officers of the Company when necessary. TSMC’s management has maintained a healthy and functional communication with the Board of Directors, has been devoted in executing guidance of the Board, and is dedicated in running the business operations, all to achieve the best interests for TSMC shareholders.

The third duty of the Board of Directors is to resolve the important, concrete matters, such as capital appropriations, investment activities, dividends, etc.

The fourth duty of the Board of Directors is to provide guidance to the management team of the Company. Quarterly, TSMC’s management reports to the Board on a variety of subjects. The management also reviews the Company’s business strategies with the Board and updates TSMC’s Board on the progress of those strategies, obtaining Board guidance as appropriate.

Selection and Election of Directors

TSMC envisions the membership of its esteemed Board of Directors to be composed of highly ethical professionals with the necessary knowledge, experience and understanding from diverse backgrounds. TSMC envisions its Board to be composed of as many independent directors as possible, and the independence of each independent director candidate is also considered and assessed under relevant laws. Based on the above selection criteria, TSMC composes its Board with world-class candidates who are/were international or local business leaders in the high-tech industry, prestigious academics or other professionals excelling in their chosen field of expertise.

Directors shall be elected pursuant to the candidates nomination system as specified in Article 192-1 of the R.O.C. “Company Law”. The tenure of office for Directors shall be three years. The independence of each independent director candidate is also considered and assessed under relevant law such as the Taiwan “Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies”. Under R.O.C. law, in which TSMC was incorporated, any shareholders holding one percent or more of our total outstanding common shares may nominate their own candidate to stand for election as a Board member. This democratic mechanism allows our shareholders to become involved in the selection and nomination process of Board candidates. The final slate of candidates are put to the shareholders for voting at the relevant annual shareholders’ meeting.

There are no limits on the number of terms that a director may serve. We believe the Company benefits from the contributions of directors who have over their years of dedicated service acquired unique insights into the operations and financial developments of the Company. The Company reviews the appropriateness of each director's continued service to ensure there are new viewpoints available to the Board.

Transition of Responsibilities

In November 2013, following nomination by Chairman Dr. Morris Chang and approval by the Board of Directors, Dr. Mark Liu and Dr. C.C. Wei assumed duties as Presidents and Co-Chief Executive Officers of TSMC, reporting directly to the Chairman. Demonstrating TSMC’s steady and deliberate transition of responsibilities, the Board of Directors approved in April 2017 the nomination of Dr. Liu and Dr. Wei to serve as members of the Board, and they will stand for election to the Board at the TSMC Annual General Meeting to be held in June 2017.

Directors' Compensation

According to our Articles of Incorporation, not more than 0.3 percent of our annual profits (defined under local law) after recovering any losses incurred in prior years, if any, may be distributed as compensation to our directors. In addition, directors who also serve as executive officers of the Company are not entitled to receive any director compensation.

Directors’ Professional Qualifications and Independent Analysis

According to the relevant requirements set by Taiwan’s Securities and Futures Bureau, the professional qualifications and independence status of the Company’s Board members are listed in the table below.

Criteria Name	Meet the Following Professional Qualification Requirements, Together with at Least Five Years Work Experience			Criteria (Note 1)										Number of Other Taiwanese Public Companies Concurrently Serving as an Independent Director
Criteria Name	An Instructor or Higher Position in a Department of Commerce, Law, Finance, Accounting, or Other Academic Department Related to the Business Needs of the Company in a Public or Private Junior College, College or University	A Judge, Public Prosecutor, Attorney, Certified Public Accountant, or Other Professional or Technical Specialists Who Has Passed a National Examination and Been Awarded a Certificate in a Profession Necessary for the Business of the Company	Have Work Experience in the Area of Commerce, Law, Finance, or Accounting, or Otherwise Necessary for the Business of the Company	1	2	3	4	5	6	7	8	9	10
Morris Chang Chairman			V	V	V		V	V	V	V	V	V	V	0
F.C. Tseng Vice Chairman			V	V			V	V	V	V	V	V	V	1
Johnsee Lee Director	V		V	V	V	V	V	V	V	V	V	V		4
Sir Peter Leahy Bonfield Independent Director			V	V	V	V	V	V	V	V	V	V	V	0
Stan Shih Independent Director			V	V	V	V	V	V	V	V	V	V	V	0
Thomas J. Engibous Independent Director			V	V	V	V	V	V	V	V	V	V	V	0
Kok-Choo Chen Independent Director	V	V	V	V	V	V	V	V	V	V	V	V	V	0
Michael R. Splinter Independent Director			V	V	V	V	V	V	V	V	V	V	V	0

Note:	Directors, during the two years before being elected and during the term of office, meet any of the following situations, please tick the appropriate corresponding boxes: Not an employee of the company or any of its affiliates; Not a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary, as appointed in accordance with the laws of Taiwan or with the laws of the country of the parent company or subsidiary; Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of one percent or more of the total number of issued shares of the company or ranks as one of its top ten shareholders; Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the above persons in the preceding three subparagraphs; Not a director, supervisor, or employee of a corporate/institutional shareholder that directly holds five percent or more of the total number of issued shares of the company or ranks as of its top five shareholders; Not a director, supervisor, officer, or shareholder holding five percent or more of the shares of a specified company or institution that has a financial or business relationship with the company; Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof, provided that this restriction does not apply to any member of the compensation committee who exercises powers pursuant to Article 7 of the “Regulations Governing the Establishment and Exercise of Powers of Compensation Committees of Companies whose Stock is Listed on the TWSE or Traded on the GTSM”; Not having a marital relationship, or a relative within the second degree of kinship to any other director of the company; Not been a person of any conditions defined in Article 30 of the Company Law; and Not a governmental, juridical person or its representative as defined in Article 27 of the Company Law.

Note:

Directors, during the two years before being elected and during the term of office, meet any of the following situations, please tick the appropriate corresponding boxes:

Not an employee of the company or any of its affiliates;
Not a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary, as appointed in accordance with the laws of Taiwan or with the laws of the country of the parent company or subsidiary;
Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of one percent or more of the total number of issued shares of the company or ranks as one of its top ten shareholders;
Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the above persons in the preceding three subparagraphs;
Not a director, supervisor, or employee of a corporate/institutional shareholder that directly holds five percent or more of the total number of issued shares of the company or ranks as of its top five shareholders;
Not a director, supervisor, officer, or shareholder holding five percent or more of the shares of a specified company or institution that has a financial or business relationship with the company;
Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof, provided that this restriction does not apply to any member of the compensation committee who exercises powers pursuant to Article 7 of the “Regulations Governing the Establishment and Exercise of Powers of Compensation Committees of Companies whose Stock is Listed on the TWSE or Traded on the GTSM”;
Not having a marital relationship, or a relative within the second degree of kinship to any other director of the company;
Not been a person of any conditions defined in Article 30 of the Company Law; and
Not a governmental, juridical person or its representative as defined in Article 27 of the Company Law.

Audit Committee

The Audit Committee assists the Board in fulfilling its oversight of the quality and integrity of the accounting, auditing, reporting, and financial control practices of the Company.

The Audit Committee is responsible to review the following major matters:

Financial reports;
Auditing and accounting policies and procedures;
Internal control systems and including related policies and procedures;
Material asset or derivatives transactions;
Material lending funds, endorsements or guarantees;
Offering or issuance of any equity-type securities;
Derivatives and cash investments;
Legal compliance;
Related-party transactions and potential conflicts of interests involving executive officers and directors;
Ombudsman reports;
Fraud prevention and investigation reports;
IT security;
Corporate risk management;
Performance, independence, qualification of independent auditor;
Hiring or dismissal of an attesting CPA, or the compensation given thereto;
Appointment or discharge of financial, accounting, or internal auditing officers;
Assessment of Committee Charter and fulfillment of Audit Committee duties; and
Assessment of the Committee's performance, etc.

Under R.O.C. law, the membership of Audit Committee shall consist of all independent Directors. TSMC’s Audit Committee satisfies this statutory requirement. The Committee also engaged a financial expert consultant in accordance with the rules of the U.S. Securities and Exchange Commission. The Audit Committee annually conducts self-evaluation to assess the Committee’s performance and identify areas for further attention.

TSMC’s Audit Committee is empowered by its Charter to conduct any study or investigation it deems appropriate to fulfill its responsibilities. It has direct access to TSMC’s internal auditors, the Company’s independent auditors, and all employees of the Company. The Committee is authorized to retain and oversee special legal, accounting, or other consultants as it deems appropriate to fulfill its mandate. The Audit Committee Charter is available on TSMC’s corporate website.

Compensation Committee

The Compensation Committee assists the Board in discharging its responsibilities related to TSMC’s compensation and benefits policies, plans and programs, and in the evaluation and compensation of TSMC’s directors of the Board and executives.

The members of the Compensation Committee are appointed by the Board as required by R.O.C. law. According to TSMC’s Compensation Committee Charter, the Committee shall consist of no fewer than three independent directors of the Board. Currently, the Compensation Committee is comprised of all five independent directors; the Chairman of the Board, Dr. Morris Chang, is invited by the Committee to attend all meetings and is excused from the Committee’s discussion of his own compensation.

TSMC’s Compensation Committee is authorized by its Charter to retain an independent consultant to assist in the evaluation of CEO, or executive officer compensation. The Compensation Committee Charter is available on TSMC’s corporate website.

Compensation Committee Members’ Professional Qualifications and Independent Analysis

According to the relevant requirements set by Taiwan’s Securities and Futures Bureau, the professional qualifications and independence status of the Company’s Compensation Committee members are listed in the table below.

Criteria Name Title	Meet the Following Professional Qualification Requirements, Together with at Least Five Years Work Experience			Criteria (Note 1)								Number of Other Taiwanese Public Companies Concurrently Serving as a Compensation Committee Member in Taiwan
Criteria Name Title	An Instructor or Higher Position in a Department of Commerce, Law, Finance, Accounting, or Other Academic Department Related to the Business Needs of the Company in a Public or Private Junior College, College or University	A Judge, Public Prosecutor, Attorney, Certified Public Accountant, or Other Professional or Technical Specialists Who Has Passed a National Examination and Been Awarded a Certificate in a Profession Necessary for the Business of the Company	Have Work Experience in the Area of Commerce, Law, Finance, or Accounting, or Otherwise Necessary for the Business of the Company	1	2	3	4	5	6	7	8
Stan Shih Independent Director			V	V	V	V	V	V	V	V	V	-
Sir Peter Leahy Bonfield Independent Director			V	V	V	V	V	V	V	V	V	-
Thomas J. Engibous Independent Director			V	V	V	V	V	V	V	V	V	-
Kok-Choo Chen Independent Director	V	V	V	V	V	V	V	V	V	V	V	-
Michael R. Splinter Independent Director (Note 3)			V	V	V	V	V	V	V	V	V	-

Note:	Compensation Committee Members, during the two years before being elected or during the term of office, meet any of the following situations, please tick the appropriate corresponding boxes: Not an employee of the company or any of its affiliates; Not a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary, as appointed in accordance with the laws of Taiwan or with the laws of the country of the parent company or subsidiary; Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of one percent or more of the total number of issued shares of the company or ranks as one of its top ten shareholders; Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the above persons in the preceding three subparagraphs; Not a director, supervisor, or employee of a corporate/institutional shareholder that directly holds five percent or more of the total number of issued shares of the company or ranks as of its top five shareholders; Not a director, supervisor, officer, or shareholder holding five percent or more of the shares of a specified company or institution that has a financial or business relationship with the company; Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof; Not been a person of any conditions defined in Article 30 of the Company Law.

Note:

Compensation Committee Members, during the two years before being elected or during the term of office, meet any of the following situations, please tick the appropriate corresponding boxes:

Not an employee of the company or any of its affiliates;
Not a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary, as appointed in accordance with the laws of Taiwan or with the laws of the country of the parent company or subsidiary;
Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of one percent or more of the total number of issued shares of the company or ranks as one of its top ten shareholders;
Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the above persons in the preceding three subparagraphs;
Not a director, supervisor, or employee of a corporate/institutional shareholder that directly holds five percent or more of the total number of issued shares of the company or ranks as of its top five shareholders;
Not a director, supervisor, officer, or shareholder holding five percent or more of the shares of a specified company or institution that has a financial or business relationship with the company;
Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof;
Not been a person of any conditions defined in Article 30 of the Company Law.

Director and Committees Members’ Attendance

Each Director is expected to attend every Board meeting and the committees meeting on which he or she serves. In 2016, the average Board Meeting attendance rate was 90.63% and the attendance rate for the Audit Committee and Compensation Committee’s Meetings were 92% and 90% respectively.

Board of Directors Meeting Status

Dr. Morris Chang, the Chairman of the Board of Directors, convened four regular meetings in 2016. The directors’ attendance status is as follows.

Title

Name

Attendance
in Person

By Proxy

Attendance Rate
in Person (%)

Notes

Chairman

Morris Chang

100%

None

Vice Chairman

F.C. Tseng

100%

None

Director

National Development Fund, Executive Yuan Representative: Johnsee Lee

75%

None

Independent Director

Sir Peter Leahy Bonfield

100%

None

Independent Director

Stan Shih

100%

None

Independent Director

Thomas J. Engibous

75%

None

Independent Director

Kok-Choo Chen

100%

None

Independent Director

Michael R. Splinter

75%

None

Annotations:

A. (1) Securities and Exchange Act §14-3 resolutions:

Meeting Dates	Resolution	Any Independent director had a dissenting opinion or qualified opinion
2016 1st Regular Meeting February 1 & 2,	approving the establishment of a wholly owned subsidiary in Nanjing of China with capital injection not exceeding US$1 billion, subject to approval from the Investment Commission of Taiwan’s Ministry of Economic Affairs, to set up a 12-inch fab and a design service center with a total capital investment not to exceed US$3 billion	None
2016 2nd Regular Meeting May 9 & 10	approving amendments to TSMC’s internal control related policies and procedures
2016 4th Regular Meeting November 7 & 8	approving the proposed 2017 service fees and out-of-pocket expenses for Deloitte & Touche, TSMC’s independent auditor
2017 1st Regular Meeting February 13 & 14	approving amendments to TSMC’s “Procedures for Acquisition or Disposal of Assets”

(2) There were no other written or otherwise recorded resolutions on which an independent director had a dissenting opinion or
qualified opinion in 2016.

B. Recusals of Directors due to conflicts of interests in 2016: Directors recused themselves from the discussion and voting of their compensation resolution.

C. Measures taken to strengthen the functionality of the Board:

—	Five of the eight Directors are Independent Directors. The number of Independent Directors is more than 50% of the total number of Directors; the Chairman and Vice Chairman of the Board of Directors are not executive officers of the Company.
—	TSMC Board delegates various responsibilities and authority to two Board Committees, Audit Committee and Compensation Committee. Both the two Committees consist solely of the five Independent Directors. Each Committees chairperson regularly reports to the Board on the activities and actions of the relevant committee.

Audit Committee Meeting Status

Sir Peter Bonfield, Chairman of the Audit Committee, convened four regular meetings and one special meeting in 2016. The Committee members and consultant’s attendance status is shown in the following table. In addition to these meetings, the Committee members and consultant participated in four telephone conferences to discuss the Company’s Annual Report to be filed with the Taiwan and U.S. authorities and investor conference materials with management.

Title

Name

Attendance
in Person

By Proxy

Attendance Rate
in Person (%)

Telephone
Conferences

Attendance Rate
of Telephone
Conferences (%)

Notes

Chair

Sir Peter Leahy Bonfield

100%

None

Member

Stan Shih

100%

None

Member

Thomas J. Engibous

80%

100%

None

Member

Kok-Choo Chen

100%

None

Member

Michael R. Splinter

80%

100%

None

Financial Expert

J.C. Lobbezoo

100%

None

Annotations:

A. (1) Resolutions related to Securities and Exchange Act §14-5:

Meeting Dates	Resolution	Any Independent director had a dissenting opinion or qualified opinion
2016 1st Regular Meeting February 1	approving the 2015 annual financial statements approving 2015 Statement of Internal Control System	None
2016 2nd Regular Meeting May 9	approving the proposed 2016 service fees to Deloitte & Touche for Nanjing fab approving amendments to TSMC’s internal control related policies and procedures
2016 3rd Regular Meeting August 1	approving the 2016 second quarter financial statements
2016 4th Regular Meeting November 7	approving the proposed 2017 service fees and out-of-pocket expenses for Deloitte & Touche approving the permitted non-audit services to be performed by Deloitte & Touche
2017 1st Regular Meeting February 13	approving the 2016 annual financial statements approving the amendments to TSMC’s “Procedures for Acquisition or Disposal of Assets” approving 2016 Statement of Internal Control System

(2) There was no other resolutions which was not approved by the Audit Committee but was approved by two thirds or more of all
directors in 2016.

B. There were no recusals of independent directors due to conflicts of interests in 2016.

C. Descriptions of the communications between the independent directors, the internal auditors, and the independent auditors in 2016 (which should include the material items, channels, and results of the audits on the corporate finance and/or operations, etc.):

(1)

The internal auditors have sent the audit reports to the members of the Audit Committee periodically, and presented the findings of all audit reports in the quarterly meetings of the Audit Committee. The head of Internal Audit will immediately report to the members of the Audit Committee any material matters. During 2016, the head of Internal Audit did not report any such material matters. The communication channel between the Audit Committee and the internal auditor functioned well.

(2)

The Company’s independent auditors have presented the findings of their quarterly review or audits on the Company’s financial results. Under applicable laws and regulations, the independent auditors are also required to immediately communicate to the Audit Committee any material matters that they have discovered. During 2016, the Company’s independent auditors did not report any irregularity. The communication channel between the Audit Committee and the independent auditors functioned well.

The communications between the independent directors, the internal auditors, and the independent auditors are listed in the table below.

Meeting Dates	Communications between the Independent Directors and the Internal Auditors	Communications between the Independent Directors and the Independent Auditors
2016 1st Regular Meeting February 1	reviewing report on SOX 404 self-testing results for the year 2015 reviewing the Internal Auditor’s report (closed door) reviewing and approving 2015 Statement of Internal Control System	reviewing any audit problems or difficulties and management’s response in connection with 2015 annual financial statements (closed door) reviewing regulatory developments reviewing external auditor relationship (i.e. qualification, performance and independence)
2016 2nd Regular Meeting May 9	reviewing the Internal Auditor’s report (closed door) reviewing and approving amendments to TSMC’s internal control related policies and procedures	reviewing any review problems or difficulties and management’s response in connection with 2016 first quarter financial statements (closed door) reviewing regulatory developments reviewing the result of CPA evaluation questionnaire
2016 3rd Regular Meeting August 1	reviewing the Internal Auditor’s report (closed door)	reviewing any review problems or difficulties and management’s response in connection with 2016 second quarter financial statements (closed door) reviewing regulatory developments
2016 4th Regular Meeting November 7	reviewing the Internal Auditor’s report (closed door) reviewing and approving the 2017 internal audit plan	reviewing any review problems or difficulties and management’s response in connection with 2016 third quarter financial statements (closed door) reviewing regulatory developments
2017 1st Regular Meeting February 13	reviewing the Internal Auditor’s report (closed door) reviewing report on SOX 404 self-testing results for the year 2016 reviewing and approving 2016 Statement of Internal Control System	reviewing any audit problems or difficulties and management’s response in connection with 2016 annual financial statements (closed door) reviewing regulatory developments
Result: all of above matters were reviewed and approved by the Audit Committee whereupon independent directors raised no objection.

Compensation Committee Meeting Status

Mr. Stan Shih, Chairman of the Compensation Committee, convened four regular meetings in 2016. The Committee members’ attendance status is as follows:

Title

Name

Attendance
in Person

By Proxy

Attendance Rate
in Person (%)

Notes

Chair

Stan Shih

100%

None

Member

Sir Peter Leahy Bonfield

100%

None

Member

Thomas J. Engibous

75%

None

Member

Kok-Choo Chen

100%

None

Member

Michael R. Splinter

75%

None

Annotations:

—	There was no recommendation of the Compensation Committee which was not adopted or was modified by the Board of Directors in 2016.
—	There were no written or otherwise recorded resolutions on which a member of the Compensation Committee had a dissenting opinion or qualified opinion.