When a significant operational crisis occurs in public companies, its effects will be expanded to the entire financial market. The study collects information on the database of Taiwan Economic Journal, the Market Observation Post System, the Securities and Futures Investors Protection Center from 2015 to 2017 and discusses whether independent directors of legal professional background in the listed companies will contribute to corporate governance in the hope that the results of the study will provide the Financial Supervisory Commission with an idea on how to regulate the members of the board of directors. By using logistic regression analysis, the study has found a negative correlation between the existence of independent directors of legal professional background in the listed companies is negatively related to the company’s litigation events. Although the results are not statistically significant, they are of economic significance in preventing or avoiding major litigations.
Corporate governance is an important issue for management of public companies because when a major operational crisis occurred, it will often involve the entire financial market. Independent directors play the role of company supervisors. Although China’s independent director system has been in operation for many years, there have been a number of litigations involving corporate governance happened recently. This article studies whether independent directors of legal professional background in the listed companies will contribute to corporate governance and achieve their function of overseeing the company, particularly in terms of litigation prevention, and expected to provide references to the Financial Supervisory Commission when it requires the public companies to set up independent directors and to consider how to regulate its member so as to effectively implement corporate governance.
MATERIALS AND METHODS
The study has collected information on the database of Taiwan Economic Journal, the Market Observation Post System, the Securities and Futures Investors Protection Center from 2015 to 2017, and adopted logistic regression analysis to prove the hypothesis: “Independent directors with legal expertise are positively related to avoiding the company’s risk of litigation.”
RESULTS AND DISCUSSION
“Independent directors with legal expertise are positively related to avoiding the company’s risk of litigation.”
Litigation＝ a+b1 Lawyer+b2 Seats +b3 Shareholding +b4 Pledge +b5 Corporate
The study has found through the logistic regression analysis that the results of the hypothesis are not statistically significant, but it can still be known that if an independent director of a listed company has a legal professional background, it may have the economic implications of avoiding major lawsuits.
The study analyzes the reasons for this statistical result. The reasons may be that the independent directors still rely on the information provided by the management of the company at the current corporate governance level, but seldom use the company’s external professionals, as a result, the information acquisition is mostly one-sided and uncompleted and has led to blind spots in making decisions. Therefore, independent directors should be able to make good use of the company’s external professionals when performing their duties so that independent directors can better obtain necessary information and effectively perform their obligation of supervision.
In addition, the independent directors in China have a good relationship with the management, so there is a doubt that if they can fulfill their responsibility for independent supervision when they perform their duties. However, in recent years, the Center for Securities Investors and Futures Traders Protection Center have filed civil claims against independent directors to the courts, which allowed independent directors to express their objections or reservations in the event of a dispute on the company’s board of directors. Therefore, after aggravating the legal responsibilities of independent directors, this deficiency should be effectively improved.
Accordingly, the study believes that if these phenomena can be improved, independent directors should be able to effectively give full play to their independent and professional functions and to monitor the operation of the company's board of directors in an impartial, objective and effective manner, improve the inherent weaknesses of the company’s internal supervision, protect the interests of shareholders and thus ensure the stable economic development and sound financial order of the country.