Page 206 - 臺大管理論叢第32卷第2期

Directors’ and Officers’ Liability Insurance and Corporate Social Responsibility

Directors’ and Officers’ Liability Insurance and Corporate Social
Responsibility

Wan-Yin Cheng, Department of Finance, National Changhua University of Education
Yuan Chang, Department of Finance, National Changhua University of Education
Kun-Hsin Chen, Department of Finance, National Changhua University of Education

1. Purpose/Objective

Directors’ and Officers’ Liability Insurance (DOLI) has the merits of protecting the
directors and management of firms against litigation risks (Bhaget, Brickley, and Coles,
1987; Holderness, 1990; Daniels and Hutton, 1993). Corporate Social Responsibility (CSR)

performance of a firm helps itself to build reputational capital and reduce the degree of
harm when negative events occur (Peloza, 2006; Godfrey, Merrill, and Hansen, 2009;
Minor and Morgan, 2011; Lins, Servaes, and Tamayo, 2017; Jia, Gao, and Julian, 2020).
While greater coverage of DOLI implies a firm attaches greater importance to the litigation
risk of its directors and management, it may also encourage the firm to engage more in

protecting stakeholders’ interests and promoting CSR performance to even mitigate risks
in other aspects. Therefore, the degree of DOLI coverage and CSR performance present
a positive relationship. However, some other existing research holds the opposing view

and indicates that DOLI also transfers part of legal and financial liabilities of directors
and the management to the insurers, which may lead to moral hazard of directors and the
management and encourage their opportunistic behaviors under asymmetric information
(Core, 1997; Gutierrez, 2003; Baker and Griffith, 2007). In other words, the protection of
DOLI may induce directors and the management to neglect risks and put less efforts on

the protection and promotion of benefits of stakeholders, thereby reducing the firm’s CSR
performance. In this case, the association between the degree of DOLI coverage and a
firm’s CSR performance becomes negative.

In Taiwan, the security authorities (the Financial Supervisory Commission) have
issued several guidances and regulations on required DOLI coverage and CSR disclosure
for publicly-traded firms in last twenty years. In this research, to examine the above two
opposing views which is valid, we employ the data of 1,532 non-financial firms listed

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