What Influences Independent Board Member Appointments when Ownership is Concentrated?

Abstract

In this paper the extent to which ownership structure and board characteristics influenced Taiwanese firms’ decision to enhance board independence by appointing independent directors and supervisors is investigated. Our first finding supports the incentive-alignment hypothesis where ownership (cash-flow-rights) significantly increases the likelihood of Grey appointments. Consistent with the entrenchment-hypothesis directors’ pledge ratio was significantly negatively correlated with the propensity of firms to appoint both Grey and Independent directors and supervisors. For both samples we report a nonlinear (concave-quadratic) relationship between board size and the propensity to appoint. Change in performance significantly increased the likelihood of Independent appointments and for this sample of firms those with dual leadership structure were found to have, consistent with the substitution hypothesis, a significantly higher proportion of Independents on the board.

Keywords: Directors, Supervisors, Ownership Structure, Board Size, Taiwan

JEL Classification: G32, G38