Board independence, investment opportunity set and performance of South African firms

• Deals with the influence of board independence on firm performance following the change corporate governance code in South Africa.
• Models the joint effect of the investment opportunity set (IOS) and board independence-type measures on ROE.
• Interaction of board independence and the IOS has a positive influence on firm performance in the era following introduction of King Report III code.
• Firms with substantial increases in both independence and growth opportunities experience in increases in financial performance.

This study examines the association of firm performance and board independence, in concert with growth options for South African firms. It is motivated by the recent reform of the King regime of corporate governance, King III, in 2010. Archival data for firms listed on the Johannesburg Stock Exchange in both the pre-King III (2008–2009) and post-King III (2011–2012) eras are used. Cross-sectional levels and difference analyses are employed to determine whether change in board independence conjoint with growth status has a performance effect for firms. Transition from pre-to post-King III has had a positive impact on the relationship of independent non-executive directorship jointly with growth potential for firms' performance. The current study implies board independence is important. It is relevant for the attraction of foreign investment in economies such as those in the Asia-Pacific, worthy of stressing by corporate regulators and of cognizance by investors. Prior studies relating board independence to firm performance have had mixed and compromised results. This study overcomes limitations of earlier literature and addresses a key feature of corporate governance reform in a developing country.