The king reports, independent non-executive directors and firm valuation on the Johannesburg stock exchange

Abstract

South Africa (SA) has pursued corporate governance reforms in the form of the 1994 and 2002 King Reports. This paper examines the association between the presence of independent non-executive directors (INEDs) and market valuation of a sample of 169 firms listed on the Johannesburg Stock Exchange (JSE) in SA from 2002 to 2007. Our results suggest a statistically significant and positive relationship between the presence of INEDs and firm valuation. By contrast, we find no statistically significant association between the presence of non-executive directors (NEDs) and firm valuation. Our findings are robust across a number of econometric models that control for different types of endogeneity problems, non-linear associations and firm valuation proxies. Our findings have important policy and regulatory implications. Whereas our evidence that more independent corporate boards’ impacts positively on firm valuation provides support for the recommendations of the King Reports, it shows that to be meaningful, director independence has to be more carefully and strictly defined.