Are all regulatory compliant independent director appointments the same? An analysis of Taiwanese board appointments

Globally many regulators adopted a rules-based approach to independent director appointments stipulating ‘independence’ criteria. This paper investigates whether partitioning a regulatory compliant sample of independent director appointments by prior affiliation to the board influences the relationship between ownership and control rights, and performance. We report a significant positive relationship between board independence and controlling shareholders' cash-flow rights for firms where the appointee had prior affiliation to the board, but no performance improvement. Firms where the regulatory compliant independent directors had no prior-affiliation to the board experienced significant improvement in firms' next period Return-on-Assets. Appointing affiliated directors is indicative diminished board quality, which is consistent with the empirical evidence that controlling shareholders determine board quality to accommodate tunneling to extract the private benefits of control to compensate for significant additional costs associated with concentrated ownership (Yeh and Woidtke, 2005; Luo et al., 2012; Liu et al., 2015). The positive association between performance and unaffiliated independent directors suggests a desire to introduce expertise to receive benefits via improved firm performance which is consistent with the literature, mostly from studies of emerging markets, reporting a causal link from independent directors to firm performance (Choi et al., 2007; Dahya et al. 2008; Liu et al., 2015).