Institutional Divide, Political Ties, and Contested Corporate Governance Reform in Taiwan

Abstract This study attempts to address the question of under what conditions political ties buffer firms from, or bind firms to, political pressure. We draw attention to the institutional divide between the executive and legislative branches of a presidential democracy. Using the case of Taiwan, a ‘third wave’ democracy with relatively strong state intervention, we argue that the two branches differ in their respective institutional roles, basis of legitimacy, and resources in a context in which the regime is seeking to fulfil its national agenda and please floating voters. We posit that corporate ties to these respective branches exert divergent influence on the adoption of government‐initiated but highly contested corporate governance reforms. Ties to the executive branch push firms to reform because they depend on the government for resources, while ties to the legislative branch act as a buffer to reform as legislators court the support of firms in pursuit of electoral gains. Empirical analysis of reforms to enhance board independence from 2002 to 2005 supports our thesis. Our study contributes to research on corporate political strategy and corporate governance reform, revealing how the structural fragmentation of the state can give rise to conflicting roles of political ties to different branches.