The independent non-executive director: Origins, regulation and persistent challenges

• Citation: (2023) 9(1) JCCL&P 68
• DOI: https://doi.org/10.47348/JCCL/V9/i1a4
• Published date: 15 November 2023
• Pages: 68-91
• Author: Stoop-Koornhof, H.
• Date: 15 November 2023

https://doi.org/10.47348/JCCL/V9/i1a4 68

THE INDEPENDENT NON-

EXECUTIVE DIRECTOR: ORIGINS,

REGULATION AND PERSISTENT

CHALLENGES

HELENA STOOP-KOORNHOF†

Senior Lecturer, Commercial Law Department: University of Cape Town

ABSTRACT

The premise that non-executive directors acting independently from

management is essential to the integrity of the company board has

driven much of the corporate governance agenda for decades. This

is the case, despite conflicting empirical evidence of the value or

contribution of independent non-executives. In addition, the exact

meaning of ‘independence’ in the context of the corporate board

remains opaque, and expectations regarding the role and remit of the

office are far from settled.

This article elaborates on some of these themes. The discussion will

introduce the reader to the salient concepts and offer an overview

of the most prominent discourse and recent developments with

reference to approaches in the United States, the United Kingdom,

the European Union and other jurisdictions. Ultimately, the paper

contributes to the ongoing debate surrounding the efficacy of the

independent non-executive director as a critical oversight mechanism

in good corporate governance and the extent to which regulation

can and should scaffold the office.

Keywords: company law, corporate governance, non-executive

director

I INTRODUCTION

The premise that non-executive directors acting independently from

management is essential to the integrity of the company board has

driven much of the corporate governance agenda for decades, and

† LLB(Cum Laude)(Pretoria), LLM(Stellenbosch), PhD(Durham).

(2023) 9(1) JCCL&P 68

© Juta and Company (Pty) Ltd

69

THE INDEPENDENT NON-EXECUTIVE DIRECTOR: ORIGINS, REGULATION

AND PERSISTENT CHALLENGES

https://doi.org/10.47348/JCCL/V9/i1a4

the view seems to ‘gain momentum after each wave of scandals’.1

In fact, as an ostensible response to agency dilemmas,2 ‘the need

for active, independent boards has become conventional wisdom’3

and (perhaps hyperbolically) those who challenge or oppose the

institution of the independent director risk being labelled ‘heretics’.4

The office has become a staple of corporate governance regimes5

despite conflicting empirical evidence of the value or contribution

of independent non-executives.6 In addition, the exact meaning of

1 A Zattoni & F Cuomo ‘How independent, competent and incentivized should

non-executive directors be? An empirical investigation of good governance codes’

(2010) 21 Br J Manag 63 at 63. For an overview of a series of more recent scandals

where there is evidence that boards failed to see the warning signs see also:

C A Schipani ‘Improving board decisions: The promise of diversity’ (2021) 39

Law & Ineq 295–315.

2 An analysis of the agency dilemma in corporate governance falls outside

of the scope of this article. For a discussion of the salient issues see inter alia

M C Jensen & W H Meckling ‘Theory of the firm: Managerial behavior, agency

costs and ownership structure’ (1976) 3 J Financ Econ 305–360; J Kay ‘Theories

of the firm’ (2018) 25 Int J Econ Bus 11–17; P Ireland ‘Property and contract in

contemporary corporate theory’ (2003) 23 Legal Studies 453–9; W W Bratton

‘The “nexus-of contracts” corporation: A critical appraisal’ (1989) 74 Cornell LR

407–65; B Tricker Corporate Governance: Principles, Policies and Practices 3 ed (2015)

68–70; P M Vasudev ‘Law, economics, and beyond: A case for retheorizing the

businesscorporation’ (2010) 55McGill Law Journal 743 at 911.

3 The Harvard Law Review Association ‘Beyond “independent” directors: A

functional approach to board independence’ (2006) 119 Harv LRev 1553 at 1553;

S M le Mire ‘Independent directors: partnering expertise with independence’

(2016) 16 J Corp Law Stud 1–37.

4 This is well illustrated by the status quo in the United States, where governance

activists have propagated for boards on which independent directors make up a

‘substantial majority’. U Rodrigues ‘The fetishization of independence’ (2008) 33

J Corp Law Stud 447 at 457. And see generally: G Brown, A Kakabadse &F Morais

The Independent Director in Society Our Current Crisis ofGovernance andWhat todo

About It (2020).

5 See for example in the UK: FRC ‘The UK Corporate Governance Code’ (April

2016) available at https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-

a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf accessed

on 7 September 2023; in Australia: ASX CG Principles and Recommendations

(2014) 16; and in Institute of Directors Southern Africa ‘King Code IV Report

on Corporate Governance for South Africa 2016’, 1 November 2016, part 5.3,

Recommended Practice 8 available at https://cdn.ymaws.com/www.iodsa.co.za/

resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_

IV_Report_-_WebVersion.pdf, accessed on 29 August 2023. See also for example:

O C Aduma ‘Incorporating the independent-director concept into the Nigerian

company law: Challenges and prospects’ (2021) 2 LASJURE 44 at 44; P Hanrahan

& A Hargovan ‘Legislating the concept of the independent company director:

recent Indian reforms seen through Australian eyes’ (2020) 20 Oxford University

Commonwealth Law Journal 86-114.

6 The Harvard Law Review Association op cit note 3 at 1553 where the author gives

an overview of the evidence. See also J Jacques du Plessis, A Hargovan & J Harris

Principles of Contemporary Corporate Governance 4 ed (2018) where the authors

discuss the following conflicting studies: B Fraser Board Governance of Not for Profit

Superannuation Funds (16 February 2017) which concluded that independent

directors would not necessarily deliver improved governance; M-O Fischer &

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