Board Independence, Investment Opportunity Set and Financial Performance of South African Firms

Abstract

South Africa, an emerging economy has evolved a relatively sophisticated code of corporate governance (CG). The latest iteration, King III, introduced in 2010 provides a laboratory for evaluation of the influence of a key element of CG, board independence (BI) on firms’ financial performance (FP). Prior studies produced mixed and weak results regardless of developed or developing economy and are likely compromised by endogeneity. Invoking the essentially exogenous investment opportunity set (IOS), modelling of cross-sections of data bracketing 2010 yields evidence for a synergistic, positive effect of BI and the IOS on FP for one measure of board independence, strength of non-executive board directorship, post-King III introduction. In contrast to earlier conjecture and evidence, no indication is found for a direct let alone negative influence of the IOS on FP. Some implications are drawn for strengthening of the CG regime in South Africa and the importance of CG in capital market functioning, notably attraction of foreign investment to emerging economies such in the Asia-Pacific.

Keywords: Board independence, Financial performance, South Africa, Corporate governance, , Investment opportunity set, Endogeneity

JEL Classification: G32, G34, O16