African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4180

Full Length Research Paper

Improving company credit ratings by reinforcing the quality of independent directors

Hsiangtsai Chiang
Department of Accounting, Feng Chia University, Taiwan, China. 
Email: [email protected]

  •  Accepted: 05 May 2011
  •  Published: 30 September 2011


The independent, director-related, provisions of Taiwan’s Securities Exchange Act of 2006 was stipulated in an effort to enhance supervision efficiency and strengthen internal governance through the independence and expertise of independent directors. However, it has not been determined whether the academic expertise, professional experience, and competence of independent directors can enhance supervision efficiency and improve a company’s credit ratings. We collected primary and secondary data from databases and found that independent directors’ competence is negatively related to credit rating and that independent directors that have served in a company longer improve the company’s credit ratings. Classifying the sample according to the seat ratio of independent directors to non-independent directors in the board of directors revealed that companies with independent directors with more experience or longer average terms, have better credit ratings when there is a high percentage of independent directors. When there are a low percentage of independent directors, academic expertise is positively related to credit ratings. This finding is in conflict with the purpose of the law, which was implemented so that independent directors with expertise would improve corporate governance. To clarify the unexpected discrepancy, we conducted multiple tests of expertise and competence and found that the credit ratings of a company will be worse if its independent directors have academic expertise, but only when there is a high percentage of independent directors on the board. Independent directors with a combination of academic expertise and competence can help improve the company’s credit ratings. This study found that seat ratio is the most important factor in order for the expertise of independent directors to play a role. Although independent directors have legal rights to oversight, the enhancement of corporate governance is limited in companies with a low seat ratio of independent directors, as they cannot control the vote in board proceedings if their opinions differ from those of the internal directors and managers. The study also found that independent directors should have a combination of academic expertise and competence. The independent directors are expected to help businesses with their professional knowledge. However, since independent directors are professionals from outside of the company, their competence is the key factor in their ability to use their professional knowledge to serve the company. The longer an independent director serves a company, the better his or her understanding of the risks facing the company will be and the more likely his or her suggestions will be to improve the governance environment to a degree that will influence the credit rating agencies. The findings of this study can provide a reference indicator for governmental agencies in amending relevant regulations and for enterprises in selecting independent directors.


Key words: Corporate governance, independent director, credit rating.