The Movement Toward Independent Directors on Boards: A Comparative Analysis of Sweden and the UK

• Author: Katarina Østergren,Daniel Johanson
• Date: 01 November 2010
• Published date: 01 November 2010
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00813.x

The Movement Toward Independent Directors

on Boards: A Comparative Analysis of Sweden

and the UKcorg_813527..539

Daniel Johanson* and Katarina Østergren

ABSTRACT

Manuscript Type: Conceptual

Research Question/Issue: The aim of this research study is to theorize about the antecedents of the “board independence

norm” (BIN), def‌ined as the standard of having independent directors on corporate boards. The research approach is a

comparative analysis of two governance settings – Sweden and the UK.

Research Findings/Insights: The UK governance system uses a BIN of power balance from a shareholder perspective, while

the Swedish governance system uses a BIN of social connectedness from a stakeholder perspective. However, our f‌indings

also suggest that exogenous variables such as pressures to conform to global “best practice” are antecedents of the BIN in

the governance codes.

Theoretical/Academic Implications: Any global theory of board independence must integrate differences in board struc-

ture and ownership patterns, as well as social connectedness in corporate networks. Furthermore, in addition to economic

welfare, social welfare and stakeholder balance should also be considered. A synthesis of the “Varieties of Capitalism” and

“New Institutional” perspectives considers that corporate governance is embedded in economic, cultural, and social

contexts, yet also addresses institutional forces of conformity that are exogenous to the governance system. This seems to

be a more promising framework for comparative governance research than “Contingent Agency Theory.”

Practitioner/Policy Implications: Multi-national regulative frameworks should focus on general principles of board inde-

pendence. Local standard setters might then focus on developing a BIN thatf‌its the specif‌ic institutional setting. We provide

suggestions about how standard setters in Sweden and the UK can make their BINs more consistent with their settings.

Keywords: Corporate Governance, Corporate Governance Codes, Board Composition, Institutional Theory, Sweden,

United Kingdom

INTRODUCTION

Corporate governance regulation, as well as academic

research, have increasingly come to focus on the role of

independent board members on corporate boards (Daily,

Dalton, & Cannella, 2003; Hermalin & Weisbach, 2003;

Hermes, Postma, & Zivkov, 2006; Higgs, 2003). Mainstream

corporate governanceresearch and codes of best practice are

often based on the assumption that independent boards are

vital for ensuring sound f‌inancial reporting and preventing

fraud (Beasley, Carcello, Hermanson, & Lapides, 2000;

Cadbury, 1992; Cohen, Krisnamoorthy, & Wright, 2002;

Higgs, 2003). The concept of “board independence” was a

cornerstone in the inf‌luential Cadbury Report (1992) in the

UK and it now occupies a central position in the corporate

governance codes of European countries (Hermes et al.,

2006). In the US, the corporate scandals of the early 2000s

(e.g., Enron, WorldCom) fortif‌ied the perceived importance

of independent boards. Both the NYSE and NASDAQ now

require a board composed of a majority of independent

directors.

This study is concerned with the board of directors and the

focus is on the norm of board independence. In this study, the

“board independence norm” (BIN) is def‌ined as the stan-

dard of having independent directors represented on the

board of directors. An independent board is a board with

independent directors.1What constitutes an “independent

director” follows from def‌initions in leading codes of best

practice. Although the independence of corporate boards

*Address for correspondence: Department ofAccounting, Auditing, and Law,Norwe-

gian School of Economics and Business Administration, Helleveien 30, NO-5045

Bergen, Norway. Tel: +47 55 95 93 11; Fax:+47 55 95 93 20; E-mail: daniel.johanson@

nhh.no

527

Corporate Governance: An International Review, 2010, 18(6): 527–539

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00813.x