Alemayehu Yismaw

ADDIS ABABA UNIVERSITY
COLLEGE OF LAW AND GOOD GOVERNANCE

STUDY
LL.M Program in Business Law
By
Alemayehu Yismaw
Addis Ababa
April, 2014
MERITS AND DEMERITS OF INTRODUCING NON-SHAREHOLDER DIRECTORS
IN THE GOVERNANCE OF ETHIOPIAN SHARE COMPANIES
SUBMITTED IN THE PARTIAL FULLFILMENT OF THE REQUIRMENTS FOR THE

LL.M DEGREE IN BUSINESS LAW
BY
ALEMAYEHU YISMAW
ADVISOR- ZEKARIAS KENEAA (ASSOCIATE PROFESSOR)
APRIL, 2014
Declaration
I, Alemayehu Yismaw, hereby declare that this work is an original work and has not been
presented in any other institution before. All refereed materials are duly acknowledged.
Name of Author: Alemayehu Yismaw signature_____________________
Name of Advisor: Zekarias Keneaa signature ___________________
(Associate Professor)
Examiner/ Reader name : Tewodros Mihret signature____________________
Examiner/ Reader name : Binyam signature_____________________

Acknowledgment
First and foremost, praise is to the Almighty God without whom I would not have accomplished
this work. I am grateful to my advisor Ato Zekarias Keneaa for his selfless commitments, critical
and constructive comments at all stages of the research work. I have benefited much from his
patience in going through the preparation of this thesis. His insightful comments also contributed
so much for my work to reach at this stage. So, it is really honorable to be under his supervision
and receive his comments and advice. Finally, I would like to express my gratitude to my
families and friends for their unreserved support in one way or another for the successful
completion of my study.
ii
Table of Contents
Contents Pages
Declaration----------------------------------------------------------------------------------------------------i
Acknowledgment--------------------------------------------------------------------------------------------ii
Table of contents--------------------------------------------------------------------------------------------iii
List of acronyms-------------------------------------------------------------------------------------------viii
Abstract ------------------------------------------------------------------------------------------------------xi
Chapter One: Introduction
1.1. Back Ground of the Study and Literature Review--------------------------------------------------1
1.2. Statement of problems----------------------------------------------------------------------------------7
1.3. Research questions--------------------------------------------------------------------------------------9
1.4. Objectives of the study--------------------------------------------------------------------------------10
1.5. Methodology of the study-----------------------------------------------------------------------------10
1.6. Significance of the study------------------------------------------------------------------------------11
1.7. Scope of the study-------------------------------------------------------------------------------------11
1.8. Limitations of the study-------------------------------------------------------------------------------12
Chapter Two: General Overview on Companies
2.1. Companies-----------------------------------------------------------------------------------------------13
2.2. Formation of Companies------------------------------------------------------------------------------14
2.3. Distinguishing Features of Companies--------------------------------------------------------------17
2.4. Types of Companies------------------------------------------------------------------------------------18
iii
2.4.1. Share Companies ---------------------------------------------------------------------------------18
2.4.2. Private Limited Companies----------------------------------------------------------------------20
Chapter Three: Corporate Governance of Share Companies
3.1. Meaning and Nature of Corporate Governance----------------------------------------------------22
3.2. Significances of Corporate Governance-------------------------------------------------------------25
3.3. Principles of Good Corporate Governance----------------------------------------------------------29
3.4. Models of Corporate Governance--------------------------------------------------------------------32
3.4.1. A Shareholders’ Model of Corporate Governance --------------------------------------------32
3.4.2. A Stakeholders’ Model of Corporate Governance---------------------------------------------34
3.5. Organs of Corporate Governance and their Role---------------------------------------------------37
3.5.1. Shareholders----------------------------------------------------------------------------------------37
3.5.2. The Board-------------------------------------------------------------------------------------------39
3.5.3. The Manager ---------------------------------------------------------------------------------------39
3.5.4. Auditors ---------------------------------------------------------------------------------------------40
3.6. Board of Directors of Share Companies ------------------------------------------------------------39
3.6.1. Meaning and Nature of Board of Directors-----------------------------------------------------39
3.6.2. Board Composition and Independence----------------------------------------------------------41
3.6.3. Experiences of Foreign Countries on Board Composition with Particular Emphasis on

Including Non-shareholder Directors in Boards---------------------------------------------------------42
3.6.3.1. Non-shareholder Directors in the USA----------------------------------------------------45
3.6.3.2. Non-shareholder Directors in the UK------------------------------------------------------48
iv
3.6.3.3. Non-shareholder Director in France--------------------------------------------------------50
3.6.3.4. Non-shareholder Directors in China--------------------------------------------------------52
3.6.3.5. Non-shareholder Directors in South Africa------------------------------------------------54
3.6.3.6. Non-shareholder Directors in Francophone West African Countries (OHADA)----57
Chapter Four: Merits and Demerits of Introducing Non-shareholder Directors in the

Governance of Ethiopian Share Companies
4.1. Merits and Demerits of Introducing Non-shareholder Directors in the Governance of

Ethiopian Share Companies -------------------------------------------------------------------------------60
4.1.1. Merits of Introducing Non-shareholder Directors in the Governance of Ethiopian Share

Companies- --------------------------------------------------------------------------------------------------61
4.1.2. Demerits of Introducing Non-shareholder Directors in the Governance of Ethiopian

Share Companies---------------------------------------------------------------------------------------------75
4.2. Prospects and Challenges to Introduce Non-shareholder Directors in Governance of

Ethiopian Share Companies--------------------------------------------------------------------------------79
4.3. Subject Matters that Need Attention in Introducing Non-shareholder Directors in the
Governance of Ethiopian Share Companies--------------------------------------------------------------84
4.3.1. Selection and Appointment of Non-shareholder Directors-----------------------------------85
4.3.2. The Proportion of Non-shareholder Directors on Boards------------------------------------87
4.3.3. The Roles and Responsibilities of Non-shareholder Directors ------------------------------88
4.3.4. Remuneration of Non-shareholder Directors---------------------------------------------------90
4.3.5. Liability of Non-shareholder Directors---------------------------------------------------------93
Chapter Five: Conclusion and Recommendation
5.1. Conclusion ----------------------------------------------------------------------------------------------97
v
5.2. Recommendations ------------------------------------------------------------------------------------101
Bibliography-----------------------------------------------------------------------------------------------104
vi
List of Acronyms
ALI: American Law Institute
AMEX: American Stock Exchange
Art: Article
BIS: Bank for International Settlement
CEOs: Chief Executive Officers
CII: Confederation of Indian Industry
CSR: China Securities Regulatory Commission
D&O: Directors and Officers liability insurance policies
EPRDF: Ethiopian People Revolutionary Democratic Front
FDRE: Federal Democratic Republic of Ethiopia
GTP: Growth and Transformation Plan
IPOs: Initial Public Offer of shares
JSE: Johannesburg Stock Exchange
NASD: National Association of Securities Dealers
NBE: National Bank of Ethiopia
NYSE: New York Stock Exchange
OECD: Organization for Economic Cooperation and Development
OHADA: Organisation pour harmonisation en Afrique du droit des affaires
SEC: Securities and Exchange Commission
SOA: Sarbanes-Oxley Act
vii
SSE: Shanghai Securities Exchange
WTO: World Trade Organization
viii
Abstract
Share companies are practiced and operated in many sectors of the economy. They play
paramount role to satisfy the taste, demand and interest of human beings as well as to bring a
wide range of developments and structural transformations in a country. Their roles are also not
easily replaceable across places, economic statuses and political standings.
In Ethiopia, these days, the general public as well as the business community begins to come out
from kiosk mentality and engages in share companies which require cooperation and large
investment. The numbers of share companies which are being formed are dramatically increased.
They are also brought benefit to the people, the business community and the country in many
aspects. However, Ethiopian share companies are surrounded by many problems and their
relevance is not to the level expected. The Commercial Code and other relevant legislations
specify share companies to be managed by boards comprised of shareholder directors only. This
prevents share companies to be managed by qualified, skilled and professional independent,
stakeholders and non-executive non-shareholder directors. It also poses practical difficulty to
maintain and enhance sound corporate governance, values and performances of share companies
although there are scholars who argue that non-shareholders directors do negatively affect share
companies. Hence, the thesis tried to point out the legal as well as the practical problems; studied
different theories, research results, international documents and experiences of foreign countries;
and consequently assessed the merits and demerits that non-shareholder directors would bring to
Ethiopia share companies. Accordingly, the thesis recommended that non-shareholder directors
should be introduced in the governance of Ethiopian share companies to exploit the benefits
would be gained fully.
ix
Chapter One
1. Introduction
1.1. Background of the Study and Literature Review
Every person on the globe engages in different activities to get something for his life and remains
survive. Of these activities, she/he may work a business. A business is “an activity of providing
goods and services might be in financial, commercial or industrial aspects. It is an employment,
occupation, profession or commercial activity take on for gain, benefit, advantage or livelihood.
It is an enterprise in which a person willingly invests his/ her capital, time, labor, attention and
effort.” 1 A business may be formed and run either by a single person in a form of Sole
Proprietorship or by group of persons in a form of Business Organization. A business is run by a
sole proprietorship or trader if it is carried out by a physical person alone professionally and for
gain or livelihood. 2In a business run by a single person, all the assets, profits, losses, and risks
are in fact faced by the trader himself. 3
On the other hand, a Business Organization is a contractual association arising out of partnership
agreement made between two or more persons to bring in contribution with the view to carry out
a certain activity for profit. 4 Business Organizations, different from sole proprietorship, have
their own peculiar features. First, they, with the exception of joint venture, deem to have legal
personality. 5 That means they, like natural persons, do have their own independent existence,
property, right and duty. Second, Business Organizations are formed by partnership agreement
undertaken between two or more persons. 6 Article 211 of the Commercial Code defines
partnership agreement as a contract and hence shall be in conformity with Article 1675 and
followings of the general contact law. However, it is different from other types of contracts since
it involves the agreement of the parties to work together with cooperation typically shown in the
form of bringing in contribution. Besides, the agreement focuses on activities which have
1
Henry C. Black, Black’s Law Dictionary (5thed, West Publishing Co. St Paul, 1979)
2
Commercial Code of the Empire of Ethiopia, 1960, Extra Ordinary Issue, Nagaret Gazeta, Year. 19th , No. 3,
Art 5( herein after called Commercial Code)
3
Dennis Keenan and Sarah Riches, Business Law(8thed, Pearson Education Limited: England, 2007), p.75
4
Commercial Code, Art 210 and 211
5
Commercial Code, Art 10(2)
6
Commercial Code, Art 211
1
economic effects; rather than human rights, charities or religious activities. 7 The parties to the
agreement also share the profits gained and the loss incurred together. Third, Business
Organizations, with the exception of joint venture, shall be registered before the concerned
authority. 8
Business organizations are classified into partnerships and companies. Partnerships are
association of persons 9, not association of capital. They are firms established among persons
who have trust and confidence each other. They require intimate personal collaboration. Their
existence depend on the very existence of persons bring them into life, so that they dissolve
when one of the partners die or insolvent. 10 Partners are also agents for each other 11 and hence,
they are jointly and severally liable for the acts of each other. 12 They have also unlimited liability
to thirds parties’ claim against the firm. Partners may not transfer or assign their interests in
firms without the consent of other partners. According to Article 10, 212 and 213(1) of the
Commercial Code, Ordinary Partnerships, Joint Ventures, Limited and General Partnerships are
identified as partnerships in Ethiopia.
Companies, unlike partnerships, are associations of capital 13 and any intimate /personal relations
do not matter on the very existence and functioning of the firm. They do have their own
corporate existence different from shareholders. Companies do have their own property and may
sue or be sued by their names. Moreover, shareholders may transfer their shares freely without
getting permission from other members unless the Memorandum or Articles of Association
stipulates otherwise. 14 Companies are managed by board of directors, shareholders meeting and
auditors and hence, shareholders may not manage in their individual capacity unless they are
appointed as a director of the company. 15 In Ethiopia, according to Article 212 of the
Commercial Code, Private Limited and Share Companies are recognized. Although Private
Limited Companies are not allowed to engage in banking, insurance and other similar activities,
7
Ibid
8
9
The Association of Business Executives, Principles of Business Law, p.96
10
Alemayehu Fantaw and Kefene Gurmu, Law of Traders and Business Organizations: Teaching
Material(unpublished, JLSRI, 2009),p.44
11
Ibid
12
Fekadu Petros, Ethiopian Company Law (Fareast Trading: Addis Ababa, 2012), p.25
13
Ibid, p.36
14
Alemayehu Fantaw and Kefene Gurmu , Supra note 10, p. 45
15
Ibid
2
they are the most popular companies and found in greatest number than share companies. 16
Private Limited Companies do have their own corporate existence and bring limited liability to
their shareholders, but, on the other hand, shares may not be freely transferred or assigned
without the consent other members.
Share Companies are capitalized firms and whose capital shall be fixed before their formation
and compulsorily divided into shares. 17 Share Companies do have their own unique features.
First, they are legally formed when they are registered before the concerned authority and come
into being from the date mentioned on the certificate of incorporation. 18 Second, they are
artificial persons which do exist in the eye of the law, so that they may not act in their own. 19
They are managed by directors elected by shareholders. As stated in Bates Vs Standard Land Co
“the board of directors is the brains and the only brains of the company, which is the body and
the company can and does act only through them.” 20 Third, they have their own independent
legal personality. 21 They do have their own asset, rights, and duties and may sue or be sued
different form shareholders. 22 Fourth, they are created and dissolved by the law. Their existences
do not depend on the death, insolvency or retirement of shareholders. 23 They are perpetual. Fifth,
they bring limited liability to shareholders. 24 Hence, shareholders are liable up to the extent of
the face value of the share they subscribed, and creditors could not bring any direct claim against
shareholders. Sixth, unless otherwise stipulated in the Memorandum or Articles of Association,
shareholders may freely transfer their shares 25 and this is advantageous to the companies as well
as to the investors. Seventh, they are established by contribution of members. 26 However, Share
Companies do have their own independent corporate existence and property different form
16
Fekadu Petros, “Emerging Separation of Ownership and Control in Ethiopian Share Companies: Legal and Policy
Implication,” Mizan Law Review, Vol. 4, No.1 (2010), p. 13
17
18
Stephen Judge, Business Law (2nded, Macmillan Press Ltd: London, 1999), p.162
19
Ewan Macintyre, Business Law (2nd ed, Pearson Education Limited: England, 2005), p.479
20
Internet Source. Meaning, characteristics and types of a Company , p.4. Available at
≤http://wwn.ddegjust.ac.in/studymaterial/bba/abba-201.pdf ≥ visited on march 08, 2013
21
Ewan Macintyre, Supra note 19, p.475
22
David Kelly, Ann Holmes and Ruth Hayward, Business Law (4thed, Cavendish Publishing Limited: UK, 2002),
p.344
23
Stephen Judge, Supra note 18, p.169
24
David Kelly, Ann Holmes and Ruth Hayward , Supra note 22, p.343
25
Ibid , p.344
26
3
shareholders. So, they have the right to enjoy, control or dispose of their property. 27 Thus, Share
Companies are real persons vested with all of their properties.
In Ethiopia, Share Companies may be formed in two ways, i.e. among founders or by public
subscription. Share companies are formed among founders when the whole of the capital is
prefixed and divided in to share is fully and totally subscribed by the founders alone. 28 Share
Companies may also be formed through public subscription where the whole capital prefixed and
divide in to shares is fully subscribed by the public, 29 not only among founders only. In this
mode of formation, there would be an invitation to be made to the public with the view to have
the shares sold and raise the prefixed capital. Per Article 318 of the Commercial Code, this
invitation is made through a document known as prospectus.
Share Companies may not be expected to be run by shareholders in their individual capacity.
Rather; they do have their own corporate governance system and managed by different bodies
such board of directors, general assembly of shareholders and auditors. 30
Corporate governance was used for the first time by Robert Tricker in 1984. 31 Corporate
governance is a multidisciplinary concept and is used, in addition to the field of law, in
accounting, economics, finance, sociology and political science. 32 It is a fluid concept and is
defined from different perspectives. In Ethiopia, the term corporate governance is not defined in
the Commercial Code or in any other law. However, it is the system by which companies are
controlled and directed. 33 It is about
determining the vision, mission and strategies of the company in consistent with the terms and
conditions of memorandum of association; setting future directions and long term strategic
consideration of a company; formulation of policies; effective functioning and performance of a
company; providing ongoing professional direction and guidance; overseeing and superintending
27
David Kelly, Ann Holmes and Ruth Hayward , Supra note 22, p.344
28
29
Commercial Code, Art 317-322
30
Fekadu Petros, Supra note 12, p.53
31
Fekadu Petros, Supra note 16, p.3
32
Minga Negash, “Corporate governance and ownership structure in Sub Sahara Africa: The case of Ethiopia,”
Ethiopian Electronic Journal for Research and Innovation Foresight, Volume 5, No 1 (2013), p.4
33
Peter Zollinger, “Stakeholder Engagement and the Board: Integrating Best Governance Practices,” Global
Corporate Governance Forum, Focus 8(2009),P.5
4
of the activities of officers and agents; periodic reassessment of strategies of the company; seeing
a code of conduct is in place and adhered to. 34
Corporate governance is not about the day to day running of the company. It is also different
from corporate management which is about the running of the day to day affairs of the
company. 35
These days, in Ethiopia, a number of Share Companies are being formed. However, their
corporate governance is not efficient and supported by modern and workable share company
provisions. Regarding this, Hussein Ahmed Tura argues that “the Commercial Code does not
provide adequate legislative responses to the complex issues of the day and the new draft law has
not been finalized. Key international conventions, codes and standards are not ratified or
adequately incorporated in the proclamations and that the decrees and directives lack coherence
and foresights and at times suffer from poor drafting.” 36
Thus, the Commercial Code does not have sufficient provisions protecting the rights of
shareholders. 37 It does protect the rights of shareholders inadequately. 38It does not make
distinction between corporate governance and corporate management. It does not also properly
address the issues of board of directors. For instance, it does not specify whether the board is one
or two tier, separate the roe of CEO and board chair person, etc. The term director is not also
defined under the Commercial Code. However, an effort to define it is made under article 2(6) of
the Banking Business Proclamation 592/2008 which says “any member of the board of directors
of a bank, by whatever title he may be referred to.” But, this definition is irrelevant because it
focuses on nature of the office and duties as parameter to identify director.
Moreover, in Ethiopia, directors are inefficient, because they are less independent and face
interference from other government controlling agencies especially in financial sectors from the
National Bank of Ethiopia; i.e. appointment, remuneration, etc of directors. Directors do not also
receive proportional payment for their service especially in the financial sectors due to the
34
Zekarias keneea, Lecture note on Corporate Governance(Course on Company Law and Finance, Addis Ababa
University, Addis Ababa, January, 2013)
35
Ibid
36
Hussien Ahmed Tura,” Overview of Corporate Governance in Ethiopia: The Role, Composition and Remuneration
of Board of Directors in Share Companies ,” Mizan Law Review, Vol.6, No.1(2012), p.49-50
37
Ibid , p.50
38
Commercial code, Art 398 and 352.
5
draconian order of the National Bank of Ethiopia which states that directors are only eligible to
receive 50,000 birr annually and 2,000 birr monthly allowances.
Further, in Ethiopian Share Companies, it is only shareholders who can be elected as director. 39
Other outsiders and non-shareholders have not any chance to be appointed as a director yet. This
situation makes share companies to lose professionals who have well knowledge and experience
on the field. It could also affect the independence of the board too. Non-shareholder directors are
important to ensure sound corporate governance practices in Share Companies. For instance, the
OECD principles of corporate governance specify the role of incorporating non-shareholder
directors such as stakeholder, independent and non-executive directors on the board as core value
to ensure good corporate governance. 40 As we know Share Companies have always had
relationships with their stakeholders such as shareowners, customers, suppliers, employees,
regulators, and local communities. These stakeholders are affected or affect Share Companies, so
that they are necessary for the very existence of Share Companies. Hence, it would be difficult
for Share Companies to stay in business if they are not managed in the interests of these key
groups. Different researchers also evidenced the incorporation of independent directors on board
of directors would serve to maintain good governance and enhance corporate performance. 41
However, it does not mean that these all hold true. There are also different arguments and
theories which discourage the relevancy of introducing non-shareholder directors such as
stakeholders, independent and non-executive directors on board of governance.
There are also subjects need careful attention in introducing non-shareholder directors on boards
such as appointment, proportion, roles and responsibilities, remuneration and liability of non-
shareholder directors within share companies and their interaction with other member directors.
As it is known, non-shareholder directors have not shares in Share Companies. Thus, it is

difficult to fix the liability of a director who is not a member. There are also tough
disagreements on whether non-shareholder directors should incur out-of-pocket liability among
scholars and countries.
39
40
Peter Zollinger, Supra note 33, p.4
41
Renee B. Adams, Benjamin E. Hermalin, and Michael S. Weisbach, “The Role of Boards of Directors in
Corporate Governance: A Conceptual Framework & Survey,” (2009), p.45
6
The issue of remuneration is not easy too. To make non-shareholder directors perform the task
entrusted to them properly and formally, Share Companies have to provide fee proportional to
their service, but companies are reluctant and most often, the payment awarded to non-
shareholder directors is less than expected. 42 This situation discourages non-shareholder
directors to work effectively and enhance good governance. 43 There are also some companies
which recruit non-shareholder directors with lucrative remuneration and do make non-
shareholder directors to love to their position forgetting their main task of monitoring the
conducts of managers. 44
The number of non-shareholder directors on a board of directors’ also matters on the

effectiveness of the board to enhance company’s performance. Typically, it has been suggested
that when the number of non-shareholder directors increases, the board would be more efficient
and independent in running the day to day affairs of the company. However, there is no any
uniform guideline as what extent it is wise to incorporate non-shareholders on a board. The same
is true regarding the responsibilities to be assumed by non-shareholder directors within Share
Companies.
1.2. Statement of Problems
A board of directors is the ultimate managing body of Share Companies. It enjoys extensive
rights and powers as per the Commercial Code and Memorandum or Articles of Association. The
role of a board of directors becomes vital especially in Share Companies with dispersed
ownership because shareholders are unable to closely monitor, supervise and manage their
company for lack of information and resources. Thus, a board of directors fills the gap that exists
between the uninformed shareholders as principal and the fully informed executive managers as
agents in Share Companies. It is identified as vital to bring Share Companies effective and
enhance their performance. However, this does not mean a board of directors is always efficient;
rather, it may incur different challenges.
42
Peter J. Wallison, “All the Rage: Will Independent Directors Produce Good Corporate Governance?” ( January 06,
2006), p.2 . Accessed at ≤ http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en ≥ visited on
December 27, 2012
43
Ibid
44
Donald C. Clarke, “the Independent Director in Chinese Corporate Governance,” Delaware Journal of
Corporate Law, Vol. 31(2006), p.110
7
First, as stated under Article 347(1) of the Commercial Code, Share Companies are required to
comprise their boards’ with shareholders only. Thus, in Ethiopia, board of directors is a board of
shareholders. Although shareholder directors are efficient in managing companies in the interests
of shareholders and bring company performance, they have their own demerits at the same time.
They would forget the interests of stakeholders who are essential for the existence of share
companies too. Moreover, shareholder directors are insiders and do have strong ties with CEOs
and other officers, so that they lack independence, reluctant in performing activities which
benefit the community as well as the country economy, and prone to conflict of interests which
pull back Share Companies profitability and enhancement. However, it is possible to prevent or
reduce these evil effects by introducing non-shareholder directors on boards. Non-shareholder
directors enable share companies to be lead by professional outside experts. These can be learnt
from different, researches, theories, international documents and best practices. In fact, it is
difficult to hold non-shareholder directors are totally advantageous; they do have their own
demerits too. Thus, assessing the merits and demerits would follow from introducing non-
shareholder directors on boards of Ethiopian share companies is crucial.
Second, no matter how non-shareholder directors treated differently in different theories,

international documents and experiences of countries, there might be different situations in
Ethiopia. There might be situations which facilitate and create conducive environment to
introduce non-shareholder directors on boards of Ethiopian share companies. For instance,
Ethiopia scores one of the fastest economic growing on the globe, the 1960 Commercial Code is
under revision, Ethiopia filed an application to join WTO, etc. At in the same, there might be
circumstances which challenge this system not to be introduced in the country such as the trend
of the business community, the newness of the concept and the fear it would create, etc. So, it
wise to pay attention to all prospects or challenges surrounding the introduction of non-
shareholder directors on boards of Ethiopian share companies.
Third, although non-shareholder directors are introduced in Ethiopia, there might be fear among
shareholders on their loyalty to manage companies because they have not any share/ interest
within those firms. Moreover, determination of the liability of non-shareholder directors is
difficult too. On this issue, there are two extreme poles. The first side is stipulating non-
shareholder directors to assume out-of-pocket liability and this is discouraging and hard to find
8
any non-shareholder director willing to assume directorship. The other side is specifying non-
shareholder directors to incur near zero personal liability and this is also not promising because
they may be reluctant and ineffective to manage companies.
Fourth, how the remuneration of non-shareholder directors shall be addressed is the other
problem. As it is known directors of Ethiopian share companies are not awarded fee proportional
to their service. It has been observed especially in the financial sector, the remuneration of
directors is fixed by National Bank of Ethiopia. Thus, it is easy to cast what would happen to
non-shareholder directors.
Finally, the proportion of non-shareholder directors on boards is still the other issue which needs
attention. It has been said that a more non-shareholder director included on a board, there would
be a more independent and effective board that would enhance company performance. Thus, it is
vital to set the proportion of non-shareholder directors which shall be included on boards.
1.3. Research Questions
 What is the status of non-shareholder directors in the governance of Ethiopian share

companies? Did the concept of non-shareholder directors recognize under the
Commercial Code and other relevant legislations?
 What are the merits of introducing non-shareholder directors in the governance of
Ethiopian share companies?
 What are the demerits of introducing non-shareholder directors in the governance of
Ethiopian share companies?
 Are there prospects which are helpful to change the present situation and facilitate the
introduction of non-shareholder directors in Ethiopian share companies or challenges, if
any?
 What are the experiences on non-shareholder directors in foreign countries and what we
learn from them for Ethiopian share companies?
 If we shall introduce non-shareholder directors in Ethiopian share companies, how we
have to introduce it?
 What standards should be employed to appoint non-shareholder directors and what kind
of non-shareholder directors are needed?
9
 To what extent the number of non-shareholder directors on a board should be?
 How the roles and responsibilities of non-shareholder director should be determined?
 How the remuneration of non-shareholder directors within share companies to be settled
and rewarded?
 How the liabilities of non-shareholder directors shall be determined?
1.4. Objectives of the Study
The general objective of this research is to assess the merits and demerits of introducing non-
shareholder directors in the governance of Ethiopian share companies taking national laws and
practices as well as theories, research results, international documents and best experiences in to
account. Within this general objective, the research has the following specific objectives:
 To examine national laws and practices on non-shareholder directors in Ethiopian share

companies;
 To provide information on the practices and experiences of foreign countries on non-
shareholder directors in share companies;
 To assess the merits and demerits that non-shareholder directors would bring to Ethiopian
share companies specifically and to the economy of the country in general;
 To recommend how non-shareholder directors shall be introduced and integrated with the
domestic system to be workable and farther the performance of Ethiopian share
companies;
 To suggest what standards shall be set to appoint non-shareholders in share companies;
and
 To enquire the roles, responsibilities, remuneration, liabilities and composition of non-
shareholder directors shall be in Ethiopian share companies.
1.5. Methodology of the Study
The research emphasized on qualitative research approaches. Thus, it uses reasons, justifications
or logical arguments on practices and laws of both Ethiopia and foreign countries on non-
shareholder directors and their respective merits and demerits qualitatively. It also used different
foreign or national literatures, internet sources, survey, interviews of experts from Ministry of
10
Trade and National Bank of Ethiopia, interviews of directors as well as shareholders of different
share companies found in Ethiopia.
1.6. Significances of the Study
This research examined issues related with introducing non-shareholder directors in the
governance of Ethiopian share companies and its consequent impact on the efficacy of share
companies. It assessed the merits and demerits of introducing non-shareholder directors in
Ethiopian share companies in the view of national laws and practices as well as different
theories, research works, foreign country experiences and international documents. In addition,
this study recommended the way non-shareholder directors should be introduced and integrated
with the corporate governance system of Ethiopian share companies and other related issues.
Thus, it would have contribution to different stakeholders. It offers a chance to appreciate the
current trend towards non-shareholder directors in Ethiopia, foreign countries and international
laws. It may contribute much for the forthcoming amendment of the Commercial Code of the
country on introducing non-shareholder directors and other related issues. It provides relevant
and research based information for judges, practitioners as well as for academician. It creates
awareness for those who are interested to invest in the area of share companies. It will also serve
as a basis and may call the attention of those who want to conduct further research in the field.
1.7. Scope of the Study
As mentioned above, the research assessed the merits and demerits of introducing non-
shareholder directors in the governance of Ethiopian share companies. Thus, the research is all
about share companies engage both in financial or non-financial activities and more specifically
about the composition of board of directors. It recommended boards of Ethiopian share
companies to be composed of non-shareholder directors too; rather than being consisted of
shareholders only. Hence, it delimited its scope to non-shareholder directors like professional
and experienced outside, non-executive, stakeholder or independent directors. In addition, the
research addressed issues related with the manner of integrating and introducing of non-
shareholder directors and examined the issues of standard of appointments of non-shareholders
directors, roles and responsibilities, remuneration and liabilities of non-shareholder directors.
11
The experiences of some selected foreign countries on the issue of non-shareholder directors in
share companies are made part of the research. Thus, the experiences of USA, Great Britain,
France, China, South Africa and the Francophone West African countries (OHADA) have been
dealt with. The international laws such as OECD are also get part of the study. The research, for
the purpose of clarification, also came across concepts such as Business Organization and its
types, corporate governance and board of directors both internationally and in Ethiopia as well.
However, geographically the research is limited with share companies situated in Addis Ababa.
1.8. Limitations of the Study
The research emphasized on a recent issue of introducing non-shareholder directors on boards of

share companies. Thus, it is obvious that it would be challenged by diverse ups and downs.
Initially, it was difficult to have published materials especially on Ethiopian part. The only way
was to search for electronic sources and even in this case majority of the materials are not freely
accessible. The other serious limitation was the focus of this research is new to Ethiopia, inter
alia, not recognized and had not any established legal frame work. Thus, there was no published
book or article deals on this phenomenon. The study also aimed at collecting different data and
information through interviews of experts, public officials, directors and shareholders of share
companies. But, it was impossible to have access to this information and data to the extent
needed may be because of fear, lack of motive or knowledge of these persons.
12
Chapter Two
2. General Overview on Companies
Introduction
Human beings do have individual taste, demand and interest on objects so far as they exist on the
globe. For that, they engage in different business activities. A business is an institution organized
and operated to provide goods and services to the society in financial, commercial or industry
aspects with the objectives of earning profits, benefits, advantages or livelihoods. It is “an
incorporeal movable consisting of all movable property brought together and organized for the
purpose of carrying out any of the commercial activities specified in Art.5 of Commercial Code.”
Companies are one aspects of businesses in which human beings engage to earn profits, benefits,
advantages or livelihoods. Hence, under this chapter an attempt is made to discuss the meaning,
nature, distinguishing natures, formation and types of companies.
2.1. Companies
Companies are the mostly known and frequently operated forms of business organizations. They
are also named as ‘corporations’. However; they are named differently, companies are separate
entities and different from partnerships. Companies are defined as “an artificial being, invisible,
intangible and existing only in contemplation of law.” 45 They are artificial organizations created
by the law; are separated from their owners and managers; have their own rights, duties and
powers; and have the capacity to exist perpetually. 46 They are business entities owned by
individuals or juristic bodies and operate with names different from their owners. They own
property, may conclude contract and commit crime. Companies are “the succession or collection
of persons having at law an existence, rights and duties, separate and distinct from its members
who vary from time to time.” 47
45
Angela Schneeman, The Law of Corporations and Other Business Organizations(5thed,Cengage Learning: USA,
2010), p.246
46
Peter Nayler, Business Law in the Global Marketplace (Elsevier Butterworth-Heinemann: UK, 2006), p.148
47
Charles Wild and Stuart Weinstein, Smith and Keenan’s Company Law(14thed, Pearson Education Limited:
England, 2009), p.2
13
When we see the Commercial Code, it is hard to find any provision which defines what
companies are. However, companies are set up by Partnership Agreements of two or more
persons, i.e. in Ethiopian case they need at least five persons to establish share companies 48 and
two persons to form private limited companies. 49 The agreement between the partners shall be to
join together, to bring in contributions and share losses and profits. Companies are also the
association of capital. This can be understood from the readings of Article 304 which says “a
Company whose capital is fixed in advance and divided into shares and whose liabilities are met
only by the assets of the company” and Article 512 of the Commercial Code. So, the Article of
Associations of companies focus on bringing together capital and do not target the identity of the
contributors (which is the case in Partnership business). Companies operate and exist perpetually
irrespective of the death, incapability and bankruptcy of the shareholders.
2.2. Formation of Companies
Companies are formed due to certain arrangements done by promoters. 50In fact, the role of
promoters or founders in the formation process of companies is essential and critical. It is
difficult to have a single acceptable definition of who are promoters? However, promoters are
“persons who undertakes to form a company with reference to a given project and to set it going
and who take the necessary steps to accomplish that purpose.” 51
It is obvious that companies which are on the way to formation have no any legal ground to enter
in to juridical acts and perform activities necessary for their formation. 52 It is promoters who
replace companies under formation and perform what is necessary for their formation. According
to Article 307(2),(3)&(4)of the Commercial Code, promoters(founders) prepare the legal
documents of the firms such as the Memorandum and Article of Association, nominate initial
directors, issue shares, and enter in to pre-incorporation contracts, etc.
48
Commercial Code, Art.307(1)
49
Ibid , Art.510(2)
50
The 1960 commercial code of Ethiopia uses this term with a different name called ‘founder’. However, I do not
see any distinction on the meaning of the two terms and possible to use them interchangeably.
51
Cuckburn CJ said in Twycross v garnt(1872) 2 CPD 469, cited in Janet Dine, infra note 53 , p.86
52
Ibid, p.87
14
Founders are not agents to the companies they are setting up. 53 However, they assume duties
analogous to agents owe to their principals. They do have fiduciary duties that are similar to the
duties owed to unborn child as no company is formed yet. 54 Thus, founders are required to fully
disclose the whole profits, either collateral or direct profit, gained in the arrangement of the
formation of companies to shareholders, actual or potential, or as alternative to the companies’
directors. 55 This requirement prevents promoters from engaging in fraud and other wrongful
activities that would affect companies and future shareholders. 56
However, promoters may sometimes fail to observe their fiduciary duties and in such case
companies can reverse (rescind) the contract, i.e. give back the property or money. 57 Article 309
of the Commercial Code provides that “the founders shall be jointly and severally liable to the
company as well as the third parties for any damage in connection with the subscription of the
capital and the payments required for the formation of the company; for the contributions in
kind as provided under Art. 315; and for the accuracy of statements made to the public in respect
of the formation of the company.”
So far I indicated that companies are come in to existent by certain arrangements performed by
founders. This includes:
First, the founders should inquire the business idea to be carried out and it’s economic feasibility,
and bring together the human and material resources necessary to run the business. 58 However,
the founders to bring together the required human and material resources for the company, they
may perform promotional activities through broadcast, print, or others medias. 59 They may enter
in to pre-incorporation contracts with investors, accountants and others. 60 An invitation to pre-
incorporation of contracts have often been made via a document known as prospectus and it
informs the investors perfectly about the natures as well as prices of shares, debentures or other
53
Janet Dine, Company Law (4thed, Palgrave: New York, 2001), p.87
54
Ibid
55
Nicholas Bourne, Principles of Company Law(3rded, Cavendish Publishing Limited: UK, 1998), p.26
56
Janet Dine, supra note 53, p.87
57
Nicholas Bourne, supra note 55 , p.27
58
Seyoum Yohannes, “On Formation of a Share Company in Ethiopia”, Journal of Ethiopian Law, Vol.22 ,No.1
(July,2008), p.102
59
Roger Leroy Miller and Gaylord A. Jentz, Business Law Today text and cases: E-commerce, Legal, Ethical and
Global Environment (8thed,Cengage Learning: USA, 2010), p.776
60
Ibid
15
securities issued and about the company under formation. As stated under Article 318 of the
Commercial Code, we do observe the same in Ethiopian Companies which are formed through
public subscription.
Second, the founders shall also prepare the constitution of the company, i.e. Article and
Memorandum of Association. These documents regulate the relationships of companies with
outside world or shareholders. 61
A Memorandum of Association is a basic document for incorporation of companies and includes

the name of the original investors who initially subscribe the shares of companies 62 This
document defines the relationship between companies and the outside world and specifies the
scope (objectives) of companies, so that it is not possible for companies to depart from this
document and enter into juridical acts. It is, traditionally, required to include five clauses such as
the name of companies, the location of the registered office/s, the objectives of companies, the
liability of the members and the total shares of companies, the number of shares and the manner
how profits and dividends are distributed. 63
An Article of association is subordinate to Memorandum of Association. It focuses on internal

management of companies affairs. 64 It accepts the conditions set up under a Memorandum of
Association and defines various rights, powers and duties of members involved in the Company.
For instance, it incorporates rules on issuance, allotment and transfer of shares and basic
regulations and procedures on general meeting, the voting rights of members, rights and duties of
shareholders, directors and distribution of dividends and profits. 65
Third, the founders shall register and publicize the company under formation. The Ethiopian
Commercial Code requires both the Memorandum and Article of Association to be deposited in
the commercial registrar. 66 It also requires the notice to be published in a newspaper circulating
at the palace where the head office is situated. 67 However, the requirement of publication in a
61
Denis Keenan, Law for Business (12th ed., Pearson Education Limited: England, 2003), P. 49
62
Commercial Code, Art.313and 517
63
Ibid, Art.313 and.517
64
Denis Keenan, supra note 61, P. 49
65
Commercial Code, Art .314 and 518
66
Ibid, Art 219(2)(b), 221, 323 and 520
67
Ibid, Art 87 ,219, 220, 223,224 and 323(3)
16
newspaper has now been abolished and a company shall acquire legal personality by being
registered in the commercial register. 68
2.3. Distinguishing Features of Companies
Companies have their own distinct features which makes them different from partnerships and
sole traders. So, a business person who is interested to form a company has to consider these
distinguishing features.
Accordingly, companies have their own legal personality apart from their owners. Their identity
is different from the identity of owners. So, if something wrong has been done by companies, it
is the Companies which are questioned, not the owners and vice versa. 69Companies, like natural
persons, have their own properties, rights, and duties. They also incur liabilities and all of their
liabilities are met by their assets as specified under Article 304(1) of the Commercial Code.
Shareholders of companies are also incurred limited liability. 70 This limited liability follows
from separate legal personality of companies. 71 Thus, shareholders, different form partners of
partnerships, are not jointly and severally liable to each other. They have limited liability to
satisfy the whole debts and obligations of the companies’ business. It is companies themselves
which are obliged to satisfy their debts and obligations. 72 So, the creditors shall not bring and
pursue their claim against the shareholders 73
The other essential characteristic of companies is perpetual succession. Companies are

association of capital and not an association of persons. They do also have their own legal
existence and identity apart from their shareholders. Thus, companies exist and operate for a long
period of time despite the death, incapability, bankruptcy or the transfer of shares by
shareholders. 74 These situations do not bring companies to an end because their assets remain
68
Commercial Registration and Business Licensing Proclamation No 686/2010, supra note 69
69
David Sagar, Larry Mead and Philippa Foster Back, Fundamentals of Ethics, Corporate Governance and Business
Law (Elsevier Ltd: USA, 2006), p.182
70
Commercial Code, Art.304(2) and 510(1)
71
John E. Moye, The Law of Business Organizations (6th ed, Delmar Cengage learning: USA, 2004), pp.158-159
72
Richard A. Mann and Barry S. Roberts , Smith and Roberson’s Business Law ( 15th ed., Cenegage
Learning: USA, 2011), p.669
73
Keith Owens, Law for Non-Law Students( 3rd ed, Routledge-Cavendish: London, 2001), p.654
74
William F. Blake, A Basic Private Investigation: A Guide to Business Organization, Management and Basic
Investigation Skills for the Private Investigator( Charles C Thomas Pub Ltd, 2011), p.17
17
intact 75. To say more, in western countries, the shares of large companies are sold and bought in
stock markets every minute, but that does not alter the ownership of assets of companies. Their
existences remain perpetual due to the succession of new persons who replace those who die,
became incapable, go bankrupt or transfer their shares.
Due to the public policy of preserving and protecting the interests of third parties and
maintaining a safe transaction system, the laws of government seriously regulate the capital of
corporations. 76 So, the law requires companies to be established with a minimum capital as
opposed to partnerships and sole proprietors (which are not required to have minimum capital
because the partners owe unlimited liability). 77 For instance, the Commercial Code under its
Articles 306(1) and 512(1) fixes the minimum capital for share companies to be 50,000 Birr and
for private limited companies to be 15,000 Birr.
Shares of companies are also freely transferable and can be sold or purchased. This is one of the
reasons why people prefer to form companies than partnerships. Transferability of companies’
shares adds advantages both to the institution of the company as well as to the investors.
Companies’ share capital becomes permanent and stable because shareholders cannot withdraw
anything out of it.
2.4. Types of Companies
Companies are classified in to different forms. However, the experience of countries on

classification of companies reveals that there are different traditions on categorizing companies.
In most western countries, we find that companies, traditionally, are classified as public and
private. But the Commercial Code of Ethiopia specifies two types of companies, i.e. share and
private limited companies. Herein below each company is discussed.
2.4.1. Share Companies
Most of the times, share companies are appropriate for business activities which are capital
intensive. The history of formation of share companies also proves this practice. The same
concept is also found under the statement made by prof. Escara, who is one of the drafter of the
75
Richard A. Mann and Barry S. Roberts , supra note 72, p.669
76
Fekadu Petros, supra note 12, p.37
77
Ibid
18
1960 Commercial Code and argues” I recommend a minimum capital in order to reserve share
companies for important transactions.” 78 Share Companies are defined under Article 304 (1) as,
“the companies whose capital are fixed in advance and divided into shares and whose liabilities
are met only by the assets of the companies.” Thus, Share Companies are the association of
capital and this capital shall be fixed in advance and divided into shares. They are not the
association of persons. Their existent do not depend on the identity of shareholders, so that they
remain function despite the death, became incapability, etc of shareholders. Share Companies
have their own legal existent and identity apart from the identity of their shareholders. Like other
forms of companies, share companies involve shareholders who have limited liability. 79 As
stated under Article 304(1) of the Commercial Code, the debts and liabilities of the companies
are met by the assets of companies.
Share Companies have their own unique natures. Share Companies are most often involved in
capital intensive business activities. So, share companies require more capital than private
limited companies. For instance, Article 306 of the Commercial Code requires share companies
to be established with a minimum 50, 000 Birr, but the minimum capital for private limited
companies is 15,000 birr. 80 Further, we can see the minimum and maximum number of
shareholders required to form and operate the business, i.e. at least five 81 and no maximum limit
in share companies and two to fifty in private limited companies as stated under Article 510 (2).
Share Companies are capitalized organizations whose capital are fixed in advance and divided
into shares that can be easily transferred to third parties or to another shareholder as stated under
Article333of the Commercial Code. Hence, the identity of shareholders who form share
companies may be changed over time. Share companies may collect capital necessary for its
formation and operation through different mechanisms including issuing debenture
bonds. 82When we come to formation, Share Companies may be formed in two ways. i.e.
formation by public subscription and formation as between founders.
78
Peter Winship(ed), Background Document of The Ethiopian Commercial Code of 1960(Artistic Printers: Addis
Ababa, 1974), p.61
79
Commercial Code, Art.304(2)
80
Ibid , Art.512
81
Ibid , Art.307(1)
82
19
2.4.2. Private Limited Companies
Private limited companies are largely appropriate for small and medium size business activities.
When we come to the Commercial Code, it is hard to find any provision that deals with the
definition of private limited companies. However, they are companies subject to the formation of
Business Organizations. Private limited companies have both company and partnership natures. 83
In fact, the provisions of the Commercial Code show that private limited companies are
capitalized organization. 84 So, they do share the unique features of companies. But, the
maximum number of shareholders in private limited companies may not exceed fifty. This makes
people to focus on their identities to form private limited companies and this is one of the natures
of partnerships. 85 Thus, private limited companies are capitalized organizations and at the same
time they are enterprises set up on the basis of the intimate bond of members. To sum up, private
limited companies are formed and operated with less capital; need not to be run by a board of
directors; are not required to be subject to audit unless the numbers of members is over twenty;
and are regulated less rigorously than share companies. 86
83
Le Gall, French Company Law( Oyez publishing Ltd: London ), p. 43
84
Betre Dawit, The Law of Business Organizations: A Comparative Study of General Partnerships and Private
Limited Companies (1991, Unpublished, AAU Law Library, faculty of law, Addis Ababa University), p.36
85
Nigussie Tadesse, Major Problems Associated With Private Limited Companies in Ethiopia: The Law and Practice
(March 2009,unpublished, Library, Faculty of Law, Addis Ababa University ), p.35
86
Commercial Code, Art.512(1), 532 and 538
20
Chapter Three
3. Corporate Governance of Share Companies
Introduction
Although the history of corporate governance is complex and hard to get its definitive
treatment, 87 it comes into picture as a result of corporate failures and systematic crisis. 88 So, it
evolved over centuries and has been in existence since the time when modern corporations came
in to existence. 89 However, it appeared in academic literatures for the first time in 1984. 90
Corporate governance is a multidisciplinary concept and does not have any single acceptable
definition. 91 In Ethiopia, the Commercial Code does not define the term corporate governance.
Neither does it clearly address it. Corporate governance issues in Ethiopian share companies are
dealt with under different laws; however, the Commercial Code is the primary one. Corporate
governance is concerned with issues involving shareholders rights, powers and liabilities of
directors, financial reporting, transparency and audit. However, these issues are inadequately
dealt by the Commercial Code as well as other legislations on corporate governance of share
companies. They are not addressed in compliance with best international documents and
practices. 92 Further, these days, the idea of non-shareholder directors system has stirred a
worldwide interest and is adopted in different jurisdictions. However, in Ethiopia, the
Commercial Code and other relevant laws prohibit share companies from being comprised of
non-shareholder directors.
In this chapter, discussion will come first on cross cutting issues about the conceptual overview
of corporate governance such as meaning, significances, principles and models of corporate
87
Brian R. Cheffins, “ The History of Corporate Governance,” ECGI Working Paper Series in Law , No.
184(2012), p.1
88
International Finance Corporation, Corporate Governance Manual ( 2nded, Hanoi, Vietnam: BACSON, 2010), p.9
89
Brian R. Cheffins, supra note 87, p.1
90
According to Professor Andrew Chambers (2003) Tottel’s Corporate Governance Handbook, Tottel Publishing,
Haywards Heath Cited in Alan Calder, Corporate Governance: A Practical Guide to the Legal Frameworks and
International Codes (London: Kogan Page Limited, 2006), p.10
91
A. C. Fernando , Corporate Governance: Principles, Policies, and Practices (Pearson Education,
2006), p.12
92
USAID, Ethiopian Commercial Law and Institutional Reform and Trade Diagnostic (January,
2007), pp.19-20
21
governance. Finally, discussion will be made on board composition and independence in
Ethiopian share companies and the experiences of foreign countries on composition of boards
with particular emphasis on introducing non-shareholder directors on boards.
3.1. Meaning and Nature of Corporate Governance
Corporate governance is one of the most commonly used phrases in recent businesses and
commercial life. The term was used for the first time by Robert Tricker in his work ‘International
corporate governance’ in 1984. 93However, corporate governance is a multidisciplinary concept
and does not have any single acceptable definition.
The OECD principles of corporate governance (2004) states “corporate governance involves a
set of relationships between a company’s management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure through which the objectives of
the company are set, and the means of attaining those objectives and monitoring performance are
determined.” 94 Bob Garrat argues that corporate governance involves “the appropriate board
structures, process and values to cope with the rapidly changing demands of both shareholders
and stakeholders in and around their enterprises.” 95Parkison expresses corporate governance as
“the process of supervision and control intended to ensure that the company’s management acts
in accordance with the interests of shareholders.” 96Tricker argues that “the governance role is not
concerned with the running of the business of the company per se, but with giving overall
direction to the enterprise, with overseeing and controlling the executive actions of management
and with satisfying legitimate expectations of accountability and regulation by interests beyond
the corporate bodies.” 97 Cannon on his part provided that “the governance of enterprise is the
sum of those activities that make up the internal regulation of the business in compliance with
the obligations placed on the firm by legislation, ownership and control. It incorporates the
trusteeship of assets, their management and their deployment.” 98Shleifer and Vishny also
93
94
Organization for Economic Co-operation and Development (OECD), Principles of Corporate Governance (2004)(
herein after , I used it as OECD)
95
Bob Garratt, Thin on Top: Why Corporate Governance Matters and How to Measure and Improve Board
Performance (London: Nicholas Brealey Publishing, 2003), p.12
96
Parkinson( 1994) cited in infra note 101, p13
97
Tricker( 1984) cited in infra note 101, p13
98
Cannon( 1994) cited in infra note 101, p13
22
mention that corporate governance “deals with the ways in which supplier of finance to
corporations assure themselves of getting a return on their investment.” 99 Finally, David Larcker
and Brain Tayan define corporate governance as “the collection of control mechanisms that an
organization adopts to prevent or dissuade potentially self-interested managers from engaging in
activities detrimental to the welfare of shareholders and stakeholders.” 100
These definitions of corporate governance are either broad or narrow. A definition is narrow if its
focus is on the relationship between a company and its shareholders or it is broad if it includes
employees, customers, suppliers and other stakeholders in addition to the relationship between a
company and its shareholders. 101 Certainly, the narrow definition stands on the traditional agency
theory and the broad definition involves the proposition of stakeholder theory. 102
Moreover, from the above definitions, we can learn that accountability is one of the basic
characteristics of corporate governance. 103 So, the narrow definitions focus on the accountability
of companies to shareholders whereas the broad ones focus on ensuring the accountability of
companies to stakeholders. The definitions also show that protecting shareholders’ interests, 104
stakeholders’ interests 105 and enhancing companies’ performance 106 are also the purposes of
corporate governance. However, these objectives can be achieved only when there is good
107
corporate governance and exercised within the limit of mandatory rules such as national laws,
99
Benton E. Gup (ed), Corporate Governance in Banking: A Global Perspective (UK: Edward Elgar Publishing
Limited, 2007), p.18
100
David Larcker and Brian Tayan, Corporate Governance Matters: A Closer Look at Organizational Choices and
Their Consequences (New Jersey: Pearson Education, Inc., 2011) , p.8
101
Jill Solomon and Aris Solomon, Corporate Governance and Accountability (England: John Wiley & Sons Ltd,
2004), p.12
102
Ibid, p.12
103
Ibid, p.14
104
Ahmed Nacri (ed), Corporate Governance Around the World (London: Routledge, 2006), p.3. See also Benton
E.Gup (ed), Corporate Governance in Banking: A Global Perspective (UK: Edward Elgar Publishing Limited,
2007),, p.22
105
Charles P. Oman (ed), Corporate Governance in Development: The Experiences of Brazil, Chile, India and South
Africa( center for international private enterprise and OECD development center, 2003), p.3
106
Ibid
107
Dan A. Bavly, Corporate Governance and Accountability: What Role for the Regulator, Director and
auditor?(London; Quorum Books,1999), p.3
23
regulations and self-regulatory rules reflecting the economic goals and expectations of
shareholders and stakeholders. 108
In Ethiopia, the Commercial Code does not define the term corporate governance. Moreover, it
does not deal clearly with the concept of corporate governance. It instead deals with corporate
management. However, corporate governance is different from corporate management and has
its own functions.
Corporate governance is concerned with setting appropriate policies, initiatives, strategies, plans,
practices and directing companies to meet their visions, missions, and objectives and develop
their infrastructures. 109It ensures accountability and transparency within companies as well as
works to the effect that shareholders and stakeholders are kept informed about the business
affairs of companies including the financial status of companies, their level of profitability,
etc. 110Governance manages risks, conflict of interests and ensures the integrity of companies
through independent auditors. 111Corporate governance is all about “doing the right thing.” 112
On the other hand, corporate management focuses on the day to day operation of companies and
is concerned with performing appropriate activities within companies; rather than setting right
policies, guidelines and directions. 113It is about “doing things right” or running companies in
conformity with their policies, strategies or process. Management works with tools required to
operate the business affairs of companies, so that it involves functions of executive management
like making decision, control and other operational management activities. 114
108
Catherine Turner, Corporate Governance: A Practical Guide for Accountants (Oxford: Elsevier Ltd, 2009), p.10
109
Governance versus Management, p.1. Accessed at http://www.health.qld.gov.au/health-reform/docs/factsheet-
govn-mgnt visited on august 13, 2013
110
Jonathan Lister, Functions of Corporate Governance accessed at http://www.ehow.com/info_8044296_functions-
corporate-governance.html visited on august 13, 2013
111
Ibid
112
Robert I. Tricker, 1998, Pocket Director, p. 8 cited in Governance and Management, p. 81. Accessed at
http://siteresources.worldbank.org/EXTGLOREGPARPROG/Resources/grpp_sourcebook_chap12.pdf visited on
august 13, 2013
113
Ibid
114
International Finance Corporation, supra note 88, p.15
24
3.2. Significances of Corporate Governance
Corporate governance is an effective policy instrument used to exacerbate diverse economic

activities. It has become an issue of global importance, so that policy makers, companies,
shareholders and investors are now aware of its contribution to the economy. 115 It also attracted
the attention of scholars and popular presses on the globe. 116
Good corporate governance is essential to share companies these days, particularly, due to
separation of ownership and control, control of block shareholders as opposed to minority
shareholders and decision making processes, 117and relationships among participants such as
institutional investors, creditors, employees and other stakeholders in the governance system. 118
A good practice of corporate governance is an essential instrument to create trust and confidence
in share companies. 119 Following the formation of share companies with dispersed shareholders,
the ownership and control of share companies is separated. Consequently, shareholders
(principals) delegate the management of share companies to managers (agents), expecting that
the managers act in the best interests of shareholders. But, the managers may engage in some
wrongful or fraudulent activities forgetting the interests of shareholders. So, shareholders require
assurance that the managers run companies in their interests 120and this can be achieved through
good corporate governance. 121 This is because good corporate governance establishes different
legal and institutional mechanisms which facilitate shareholders to monitor the actions of the
managers and make strategic decisions that reduce the potential losses of shareholders. So, good
corporate governance helps to generate trust and confidence in share companies. 122It also
provides proper incentives for managers to pursue the objectives that are in the interests of
shareholders.
115
OECD
116
Fernado cited in Fekadu Petros, supra note 12, p.51
117
OECD
118
Ibid
119
Ajith Nivard Cabraal, “Importance of Corporate Governance for the Banking and Financial Sector”( 24-25
February, 2007)p,3 . Accessed at ≤http://www.bis.org/review/r070314c.pdf?frames=0≥ viewed on December 3,
2013
120
Ibid, p,1
121
Ashenafy Beyene Fanta, Kelifa Srmolo Kemal and Yodit Kassa Waka,” Corporate governance and impact on
bank performance,” Journal of Finance and Accounting, Vol.1, No.1(2013), p.1
122
Ibid
25
Sound corporate governance is also crucial to address ownership issues. 123 Controlling
shareholders, who may be individuals, family holdings, bloc alliances, or other corporations
acting through holding companies or cross shareholdings, can significantly influence corporate
behavior. However, good corporate practice is essential to overcome the ill-effects of
concentrated ownership through diverse mechanisms, i.e. regulatory limits on ownership in share
companies. 124
Good corporate governance is important to prevent corporate scandals and frauds, and maintain
financial system stability. 125The massive corporate scandals and failures that rocked the business
world, namely Enron, World Com, etc in the dawn of 21st century were mainly caused by weak
corporate governance. 126In fact, weak corporate governance reduces the capacity of share
companies to determine and manage their business risks and leads to financial instability. 127
Practicing good corporate governance helps to enhance the reputation of share companies
through making them more attractive to customers, investors and suppliers. 128Recent research
works also reveal that investors are more interested to invest their capital in share companies that
practice good corporate governance and have good reputation. 129
A good system of corporate governance enhances the capacity of countries to attract

investment. 130Sound corporate governance practices have marginal advantage in attracting
international capital because they set clear minimum standards of responsibility, governance,
inspection and thereby produce a lower market risk. 131 It assures to investors that their
123
Ajith Nivard Cabraal, supra note 119, p, 2.
124
Ibid .
125
Frederick D. Lipman and L Keith Lipman, Corporate Governance Best Practices: Strategies for Public, Private,
and Not-for-Profit Organisations(2006) at 3 cited in Hussien Ahmed Tura, “Approaches to Reform Corporate
Governance in Transition Economies: The Case of Ethiopia,” p, 5. Available at SSRN:≤
http://ssrn.com/abstract=22933031 ≥ viewed on November, 11, 2013)
126
Ibid, p, 4
127
Ajith Nivard Cabraal, supra note 119, p, 3
128
Frederick D. Lipman and L. Keith Lipman, Corporate Governance Best Practices: Strategies for Public, Private,
and Not-for-Profit Organizations(New Jersey: John Wiley & Sons, Inc., 2006), p.3
129
Felton, F. R., Hudnud, A. and van Heeckeren, J. (1996) cited in , Frederick D. Lipman and L. Keith Lipman,
supra note 128, p.3
130
Shingirirayi Gona, The Role of the Independent Director in Maintaining Good Corporate Governance (2009,
unpublished , library, University of Cape Town), p.7
131
Lutgart Van den Berghe and Liesbeth De Ridder, International Standardization of Good Corporate Governance:
Best Practices for the Board of Directors(Springer Science+ Business Media Dordrecht, 1999), p.17
26
investment will be secured and efficiently managed in a transparent and accountable process. It
obliges share companies to respect the rights of creditors, bondholders and non-controlling
shareholders, so that individual and institutional investors are committed to invest their
capital. 132 On the other side, we can also say that investment is paramount importance to
encourage good corporate governance practice in share companies. 133
Sound corporate governance improves economic efficiency and growth. 134 The practice of good
corporate governance, within individual companies and across the economy as a whole, helps to
provide a degree of confidence that is necessary for the proper functioning of a market economy.
It lowers the cost of capital and encourages firms to use resources more efficiently and there by
underpins growth. It creates competitive and efficient companies which are essential to create
wealth.
Although share companies do not primarily rely on foreign sources of capital, practicing
corporate governance in accordance with internationally accepted principles increases access to
external financing or widens the sources of capital. 135 So, sound corporate governance practices
enable share companies to reap the full benefits of global capital market and attract long-term
patient capital. 136
The presence of effective corporate governance in transition economies brings more effective
privatization of state-owned share companies 137and the development of vibrant private sectors
with fewer problems. It helps share companies whose shares are traded on the stock market 138 to
raise their capital by selling shares at a price worthwhile to their owners by devising mechanisms
132
Justine Tumuheki, Towards Good Corporate Governance: An Analysis of Corporate Governance Reforms in
Uganda(2007, unpublished , library, University of Cape Town), p.6
133
Shingirirayi Gona, supra note 130, p.7
134
OECD. see also Ashenafy Beyene Fanta, Kelifa Srmolo Kemal and Yodit Kassa Waka, supra note 121
135
Ashenafy Beyene Fanta, Kelifa Srmolo Kemal and Yodit Kassa Waka, supra note 121, p.1
136
OECD
137
Alexander Dyck, “Privatization and Corporate Governance: Principles, Evidence and Future Challenges”(2000),
p.2. Accessed at ≤http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.202.286&rep=rep1&type=pdf ≥ viewed
on November 12, 2013
138
Justine Tumuheki, supra note 132, p.7
27
which subject them to observe their promise, respect mandatory laws and to pay incentives to the
managers. 139
Finally, good corporate governance also helps to establish an appropriate legal, economic and
institutional environment that allows firms to organize, grow and survive as an institution. 140 It is
an essential instrument to establish an effectively organized management structure and activity
system in share companies to meet the needs of shareholders, stakeholders and the society.141
But, it needs state to put in place and maintain an environment that enables efficient and well-
managed companies to grow, thrive and survive in contrast to environment that permits
government related firms or rent seeking firms to work and survive.
Although corporate governance has much significance, it was not considered as important in
developing countries so far. It remained invisible and ignored in those countries for a long period
of time. However, recently, developing countries began to consider their poor corporate
governance systems and the problems of crony capitalism basically due to the East Asian
Financial Crisis of 1997-1998. 142 Developing countries are now working to improve their
corporate governance as the threat to global financial markets has risen. But, there are countries
especially the small and the poor ones that have given little attention to corporate governance till
now. 143
The tendency to ignore the quality of corporate governance in the developing world is a mistake
because good corporate governance matters in national development. 144 It plays an important
role in the long term process of development of a country. Moreover, corporate governance
creates competitive and efficient companies, efficient and effective use of limited resources, 145
etc. The research works carried out in Brazil, Chile, India and South Africa show that effective
corporate governance is essential to increase the flow of financial capital to share companies in
139
Ibid
140
Private Sector Initiative for Corporate Governance, Principles for Corporate Governance in Kenya and a Sample
Code of Best Practice for Corporate Governance(2012)
141
Sanjay Anand, Essentials of Corporate Governance (New Jersey: John Wiley & Sons, Inc., 2008), p.87
142
Charles P. Oman (ed), Supra note 105 , p.2
143
Ibid
144
Stijn Claessens, Corporate Governance and Development,( The World Bank: Washington DC, 2003), p.1
145
Private Sector Initiative for Corporate Governance, supra note 140, p.3
28
developing countries as well as to improve financial development of those countries. 146 These
researches also specify that corporate governance is crucial to attain continued productivity
growth in developing countries’ real economies. 147 So, corporate governance has become an
issue of worldwide importance and is the engine of growth. It is of a national importance, and
"the government must explicitly adopt the policy that commercial competitiveness is a national
priority and that an effective governance system is a necessary precondition." 148
Ethiopia, like other developing economies, has now recognized that good corporate governance
is an essential instrument for prosperity and growth. It specified corporate governance under the
GTP as a crucial element to eradicate poverty in the country. So, Ethiopia also enjoys a number
of significance of good corporate governance discussed above.
3.3. Principles of Good Corporate Governance
It is hard to find uniform principles of good corporate governance on the globe. The basic
principles of good corporate governance vary from country to country, even among firms within
a country. So far, a number of codes of corporate governance principles have been enacted
worldwide. 149 However, none of these codes are complete and most of them focus on board of
directors. 150 They do not also include uniform principles. This variation on basic principles of
good corporate governance may be attributed to the legal, economical, socio-cultural structures,
political perception, companies’ structures and 151 fluid concept of corporate governance. So, it
seems quite difficult to have similar principles that can be applied to all countries.
The OECD principles of corporate governance, which was published in 1999 and revised in
2004, accepts this difficulty of formulating uniform principles stating that “one does not fit
all”. 152However, OECD, considering the problem of not speaking common language and its
consequence, 153 it determines basic principles that would address both policy makers and
146
Charles P. Oman (ed), supra note 105 , p.1
147
Ibid
148
Lutgart Van den Berghe and Liesbeth De Ridder, supra note 131, p.16
149
150
Ibid
151
Selim Serbetic, Corporate Governance: Manufacturing Companies; Performance During the Financial Crisis in
Turkey (Saarbrucken, Germany; LAP LAMBERT Academic publishing Gmbh and Co.KG, 2011), p.22
152
Ibid
153
Ibid
29
154
businesses. The principles focus on the entire governance frameworks (shareholders rights,
stakeholders, disclosures and board practices). They may also be applied in every country and in
fact, they have been used widely as a framework and reference point for corporate governance.
The principles are:
First, OECD requires ensuring the basis for an effective corporate governance framework. 155
This principle focuses on establishing appropriate and effective legislations, regulations, self-
regulatory arrangements, voluntary commitments and business practices up on which all market
participants can rely in establishing their private contractual relations. 156 The corporate
governance frameworks established should maintain and strengthen the market integrity and
economic performance. For that, it would be wise to conduct an effective continuous
consultation with the public, consider the need for and the results from international cooperation
and dialogue, take in to account the interactions between different elements of corporate
governance and its ability to enhance ethical and transparent corporate governance practices. 157
Second, OECD requires the rights of shareholders and key ownership functions to be recognized
and protected. 158 Shareholders as investors in firms do have certain property rights. So, the
corporate governance framework should protect and facilitate the exercise of shareholders rights.
It shall entitle shareholders the right to transfer their shares, participate in the profits of the
corporation, information, participation at general shareholders meetings and voting, etc. 159
Third, OECD requires equitable treatment of shareholders. 160 The corporate governance
framework shall ensure equal attitude and treatment towards all shareholders holding same
category of shares, 161 including minority and foreign shareholders. It shall adopt mechanisms
that provide for shareholders, particularly for minority shareholders, to bring law suit or initiate
administrative proceedings when they have reasonable grounds showing that their rights are
154
155
OECD, principle I
156
Annotation to OECD , Principle I
157
Ibid
158
OECD, principle II
159
Annotation to OECD , Principle II
160
OECD, principle III
161
NASDAQ OMX RIGA, Principles of Corporate Governance and Recommendations on their
Implementations(2010), p.5
30
violated. 162 The corporate governance framework shall also protect the rights of shareholders
from misuse or misappropriation by the managers. All shareholders shall also have the
opportunity to obtain effective redress for violation of rights. 163
Fourth, OECD requires the role of stakeholders in corporate governance to be recognized. 164
Stakeholders are vital for growth, competitiveness and sustainability of firms. 165 They contribute
much in firms-specific human and physical capital. They also provide wide range of valuable
resources to companies. So, the corporate governance framework shall recognize the rights of
stakeholders established by commercial law or mutual agreements. 166They must be able to
access to adequate, accurate and regular information.
Fifth, OECD requires efficient disclosure and transparency mechanisms. 167 A strong disclosure
regime promotes transparency; enhances the ability of shareholders to exercise their ownership
rights on an informed basis; attracts capital; maintains confidence; and improves public
understanding of the structure, activities, policies and performances of firms. 168 So, the corporate
governance framework shall ensure that a timely, accurate, honest and independent disclosure 169
is made on all material matters regarding firms. However, disclosure shall neither bring any
unreasonable administrative cost or burden nor does it requires the revelation of information that
may endanger the competitiveness of companies. 170
Finally, the desired corporate governance framework shall clearly and expressly determine the
responsibilities and authorities of boards, thereby ensuring a successful work of boards. 171 The
corporate governance framework shall clearly specify the responsibilities of boards to exercise
an objective and independent judgment as well as to oversee firms observe laws and
standards. 172 It shall ensure the strategic guidance of companies and the effective monitoring of
162
Annotation to OECD , Principle III
163
Ibid
164
OCED, principle IV
165
Selim Serbetic, supra note 151, p.42
166
Ibid
167
OECD, principle V
168
Annotation to OECD , Principle V
169
Selim Serbetic, supra note 151, pp.42-43
170
Supra note 168
171
OECD, principle VI
172
Annotation to OECD , Principle VI
31
managements by boards. 173The corporate governance framework shall also devise mechanisms
that make boards work in the interests of shareholders and give due regard to other
stakeholders. 174
3.4. Models of Corporate Governance
So far, I have discussed the multi significances of corporate governance. Sound corporate
governance is a powerful instrument to enhance the growth, competitiveness and sustainability
of companies as well as to bring overall economic development. However, what is not measured
cannot be improved, so we need to develop a model to measure the quality of corporate
governance or a model that evaluates how the crafted principles are applied to the logic of
governance. 175 But, as we can learn from experiences, there are two models of corporate
governance practiced all over the world due to differences in political perception, firms’
structure, and corporate governance culture of countries. These two models of corporate
governance are the shareholders’ and stakeholders’ model of corporate governance.
3.4.1. A Shareholders’ Model of Corporate Governance.
A shareholders’ model of corporate governance is practiced widely in Anglo-Saxon polities. 176

Its’ concept is associated with the agency theory. 177 A shareholders’ model of governance stands
that companies are the extension of their owners, and so that share companies shall be run to the
interests of shareholders. 178 It holds that corporate governance must reflect shareholders
ownership in terms of both means and end. It states that companies must be owned by
173
Ibid
174
Selim Serbetic, supra note 151, p.43
175
Yilmaz Arguden, “A Corporate Governance Model: Building Responsible Boards and Sustainable Business”,
Private Sector Opinion, Issue 17, p.5
176
Mihaela Ungureanu, “Models and Practices of Corporate Governance Worldwide”, CES Working Paper, pp.
626-627
177
Gerard Charreaux, “Corporate Governance Theories: From Micro Theories to National Systems Theories”(2004),
JEL Classification : G300 ; P500, p.6
178
Stefan Andreasson, Shareholder and Stakeholder Interests: the Politics of Corporate Governance
Reform in South Africa (2006), p.4 . Accessed at
≤http://bisa.ac.uk/index.php?option=com_bisa&task=download_paper&no_html =1&pass ≥ viewed on December 6,
2013
32
shareholders, and then must be run in the interests of shareholders. 179It stands on the inviolability
of private ownership of companies. 180
A shareholders’ model of governance entrusts shareholders the ownership of companies, and an

exclusive rights to determine how and for what purposes the companies’ property may be used as
well as the right to determine companies’ priorities and profits that may generate. 181 Further, it
holds that the pursuit of shareholders’ interests is the only end of corporate governance and on
this issue Friedman says “there is one and only one social responsibility of business - to use its
resources and engage in activities designed to increase its profits so long as it stays within the
rules of the game, which is to say, engages in open and free competition without deception or
fraud…” 182 But, it is wise to consider that the interests of shareholders may not always limited
to wealth maximization. 183 It may go beyond wealth maximization which includes charitable
conducts or notions of justice. 184
To sum up, a shareholders’ model of governance insists that, as Adolph A. Berle says,
companies exist only to make profit for their shareholders 185 and “all powers of the management
are at all-time exercisable only for retable profits of all the shareholders as their interest
appear”. 186 It mandates companies’ managements to devote their energies to the advancement of
shareholders interests, so that they should disregard any stakeholders’ interest that is in conflict
with one of the objectives of the companies. 187It is also a model followed in the corporations in
which shares are owned by dispersed shareholders. 188
3.4.2. A Stakeholders’ Model of Corporate Governance
179
Julian Velasco, “Shareholder Ownership and primacy,” University of Illinois Law Review, No.3(2010), p.944
180
Stefan Andreasson, supra note 178, p. 4
181
Ibid
182
Daniel K. Saint and Aseem Nath Tripathi, “the Shareholder and Stakeholder Theories of Corporate Purpose.” P.2
. Accessed at ≤http://www.knowledgeworkz.com/samatvam/newsletter/The%20Shareholder%20and%2≥ viewed on
December 9, 2013.
183
Julian Velasco, supra note 179, pp.945-946
184
Ibid
185
See generally D. Gordon Smith, “The Shareholder Primacy Norm”, Journal of Corporation Law. Vol.23, No.2
(1998).
186
Adolph A. Berle, “Corporate Powers as Powers in Trust,” Harvard Law Review(1931), p. 1049
187
D. Gordon Smith, supra note 185, p.282
188
Yuan Dujuan, “Inefficient American Corporate Governance under the Financial Crisis and China’s Reflections,”
International Journal Law and Management( 2009), pp. 140-141
33
A stakeholders’ model of corporate governance is common in social market polities such as
Germany and Japan. Its’ concept is also based on stakeholder theory. A stakeholders’ model of
corporate governance, unlike a shareholders’ model of governance, holds companies as a social
entities that are accountable to stakeholders beyond shareholders. 189 It takes shareholders as one
set of stakeholders and does advocate companies to be operated in the interests of all
stakeholders. 190 It involves the vision of social responsibility of firms, so that it takes the whole
society as stakeholders. 191
A stakeholders’ model of governance is interested that corporate governance frameworks to be

designed in the way to make firms to be run in the interests of all stakeholders beyond economic
value creation for shareholders alone. 192 It says the interests of all stakeholders must be
integrated into the very purposes of firms, and stakeholders relationships must be managed in a
coherent and strategic fashion. In fact, a stakeholders’ model of governance accepts that
companies shall be operated primarily to maximize wealth. However, it believes that wealth
production shall not be in the interests of shareholders alone. It insists wealth production to be in
the interests of all stakeholders. 193
A stakeholders’ model holds equal treatment among stakeholders and opposes any stakeholder
group to receive preferential treatment. 194Dodd also argues that the objective of companies
should not be limited to making of money to shareholders; rather, it should be extended to
providing social services and securing job for employees, quality services and products for
189
Steve Letza and Xiuping Sun, “ Corporate Governance: Paradigms, Dilemmas and Beyond,” Leeds Law School,
Vol. 2, No.1(2002),pp. 49-50
190
Alberto Chilosi and Mirellla Damiani, ”Stakeholders vs Shareholders in Corporate Governance”(2007), P.2.
Accessed at http://mpra.ub.uni-muenchen.de/2334 /
191
Ibid
192
Daniel K. Saint and Aseem NathTripathi, supra note 182, P.5
193
Donna Card Charron, “Stockholders and Stakeholder: The Battle for Control of the Corporation,” Cato Journal,
Vol.27, No.1 ( 2007), p.10
194
Ibid
34
customers, and welfare to the society. 195 Moreover, a stakeholders’ model does not accept
shareholders as the owner of companies with rights to control. 196
The central idea of a stakeholders’ value theory is that business organizations are dependent
upon stakeholders for success, and stakeholders have some stake in organizations. 197 So, the
managers are required to pursue interests that go beyond shareholders and care for the interests
of others involved in the activities of companies. 198The roles of managers are limited to keeping
the support of all stakeholders, balancing their interests and making companies a place where
stakeholders’ interests can be maximized. 199
To sum up, a stakeholders’ model of corporate governance provides a single strategic framework
flexible enough to deal with any changing environment and a strategic management deals with
how the environment affect companies and vice versa. 200 It also works for the survival of firms
and encourages managements to develop strategies that manage and integrate the relationships
and interests of all stakeholders. 201 It is characterized by close relationships between the
corporations and its capital providers, including shareholders and bankers and other financial
institutions.
195
E. Merrick Dodd, “ For Whom are Corporate Managers trustee?,” Harvard Law Review, Vol. XLV, No.7
(1932)
196
Steve Letza and Xiuping Sun, supra note 189, p.51. Ownership is by definition where the owner has exclusive
rights of possession, use, gain and legal disposition of a material object. Yet shareholders merely own their shares in
a company and trade their shares with others in the stock market. They do not have rights to possess and use the
assets of the company, to make decision about the direction of the company, and to transfer the assets of the
company to others. The residual claims of the shareholders are determined by the company and if the company’s
performance does not satisfy the shareholders requirements, the shareholders are left with a single option of ‘exit’
rather than ‘voice’ as shareholders in general are in no way able to monitor the management effectively and neither
are they interested in running corporate business. In this sense, the assumption that the corporation is owned by the
shareholders is in fact meaningless.
197
R. Edward Freeman and Robert A. Phillips, “Stakeholder Theory: A Libertarian Defense,” Business Ethics
Quarterly, Vol. 12, No.3(2002),p.333
198
Elena F. Perez Carrillo, “Corporate Governance : Shareholders’ Interests’ and Other Stakeholders’ Interests’,”
Corporate Ownership and Control, Vol.4, No.4(2007), p.99
199
R. Edward Freeman and Robert A. Phillips, supra note 197, p.333
200
R. Edward Freeman and John McVea, “A Stakeholder Approach to Strategic Management,”(2002), p. 9 .
Available at SSRN : http://papers.ssrn.com/paper.taf?abstract_id=263511
201
Ibid, p. 10
35
A close examination of share company’s provisions on corporate governance in Ethiopia show
that Ethiopian share companies are following the shareholders system of corporate governance. I
argue so for a number of reasons:
First, there is no Law, Memorandum or Articles of Association which endorses departure from a
profit maximizing objective and empowers firms to engage in corporate social responsibility
activities. Second, share companies provisions have entirely failed to address the interests of
employees, suppliers, customers, the community and environment. In fact, some rights of
creditors are recognized under the Commercial Code. However, these rights of creditors are not
sufficient. Moreover, Article 347(1) of the Commercial Code allows only shareholders to
manage companies. Article 5 of the Ethiopian National Bank Directives No.SBB/49/2011 also
unequivocally prohibited bank employees from being represented in boards. 202 Further, there are
no substantive or procedural rights set for stakeholders, so that they may not involve in corporate
governance of Ethiopian share companies. Third, the Commercial Code provisions on share
companies provide that directors are accountable to the general meetings of shareholders, not to
stakeholders. Directors are appointed, replaced, removed by general meetings of shareholders.
They do have a duty to submit an annual report of companies operation including financial
statement to the meetings of shareholders. 203 The remuneration of directors is also determined by
204
general meetings of shareholders. All these provisions incorporated in the Commercial Code
seem to ensure share companies to be run for the benefits of shareholders. So, the rights of
stakeholders are not recognized and hence they may not claim companies to be operated in their
interests.
However, this situation needs to be changed. Share companies provisions should recognize the
roles of stakeholders and allow them to participate in the corporate governance system of share
companies. If so, it could be possible for share companies to generate wealth, secure job for
employees, produce quality product and service for customers, maximize shareholders profit and
ensure financial stability.
202
Directives No.SBB/49/2011, Licensing and Supervision of Banking Business, Limits on Board Remuneration
and Number of Employees Who Sit on Bank Board Directives, NBE.
203
204
36
3.5. Organs of Corporate Governance and their Role
Share companies, once they are registered, have their own independent legal existence and
identity separate from the identity of shareholders. They have their own assets, rights and duties
and may sue or be sued. But, share companies are artificial persons, 205 and do not natural
persons. So, they cannot exercise their own rights, satisfy their obligations and operate their
business by themselves. Rather, share companies are functioning through the actions of natural
persons. For that, they do have their own management structure that involves shareholders,
directors, managers and auditors.
3.5.1. Shareholders
Shareholders are persons who subscribe shares of a company. 206 These shareholders may be
individuals or juristic persons and shall have a relationship with a company that emanates from
partnership agreement which is different from other forms of contracts shareholders may have
with a company. 207 So, they are owners of a company. However, shareholders due to lack of
information, time, resource and other reasons may not be in a position to closely follow up the
acts of the managements of their firm. This situation would make the mangers to use the assets of
the company to farther their interests. In order to avoid this agency cost and maintain trust on
shareholders, the Commercial Code of Ethiopia specifies provisions which enable shareholders
to participate in the management of their companies. Accordingly, shareholders have the right to
information, 208the right to inspect documents 209 the right to participate and vote at the
shareholders meetings, 210 the right to appoint and remove directors as well as determining their
remuneration, etc 211
The Commercial Code also recognizes one share on vote system. 212However, the weight
accorded to each share depends on the amount that share represents in the capital of the company
205
Stephen Griffin, Company Law: Fundamental Principles (4th ed, Pearson Education: England, 2006), p.1
206
Angela Schneeman, supra note 45, p.364
207
Ibid, pp. 364-365
208
Commercial Code, Arts 392(1-3) , 395 and 396
209
Commercial Code, Arts 406, 417, 422 and 427
210
Commercial Code, Arts 389, 407, 419(1), 400, 408,409, 336(3) and 342(7)
211
Commercial Code, Arts 350(2), 351(2), 354, 368(1), 369(1&2), 371 , 353(1), 372 and 419(2)
212
Commercial Code, Arts 345(3) and 407(2)
37
according to Art 347(1) of the Commercial Code. If limitation on the number of shares which
shareholders exercise in a meeting is necessary, it must be equal to all shareholders without
distinction according to Art 408 of the Commercial Code. In fact, there are also shareholders
who have not the right to vote at shareholders meetings. 213
In addition, shareholders have rights specified under the Commercial Code that includes the right
to authorize or prohibit directors to be partner with joint and several liabilities in competitor
companies or to compete against the company on their own behalf or third parties, 214 the right to
prior approval on director’s direct or indirect business transactions with the company approved
by boards, 215the right to pass a resolution to institute proceedings against directors whether such
issue was on the agenda or not, 216 the right to share the profits or proceeds of the company; 217
and the right to transfer of shares or withdraw of the company, etc. 218
The Commercial Code also specifies provisions which aim to protect shareholders, particularly,
minority shareholders from other shareholders. Accordingly, Art 352 of the Code provides for
minority shareholders to elect at least one representative on boards of directors where there are
several groups of shareholders with different legal status.
3.5.2. The Board
The board is the other organ which is in charge of managing share companies. It fills the gap that
exists between shareholders as principals and managers as agents by closely follow up the
conducts of managers. It is central to share companies and works to meet their vision and goals.
For that, the Ethiopian Commercial Code recognizes the board as the governing organ and full
responsibility is placed on directors for leading the company. So, directors do have the duty to
act with due care and diligence in their overall directing of the company as powers given by the
law, company’s statutes and decisions made by the general shareholders meetings. 219 They are
213
Commercial Code, Art 336(3), 342(7) and 409(1)
214
215
216
217
Commercial Code, Arts 345(1&2)and 458
218
Commercial Code, Arts 333and 463
219
Commercial Code, Arts 363 and 364
38
220
also responsible to prepare management and meeting minutes, to keep accounts and books, to
convene meetings of shareholders, to set reserve funds required by law and statutes, to apply to
the court in case where the company failed to pay its debts. 221 However, the board when it
discharges its duties, it has to be independent and free from the influence of CEOs. This version
of the board is discussed deeply in the next section under the board of directors.
3.5.3. The Manager
A manager is a person who is appointed by share companies to run and perform the day to day
activities. The Ethiopian Commercial Code does not deal sufficiently with the managers. Art
348(3) of the Code specifies that “a general manager shall be appointed by the board.” Art
348(4) states that “the general manger is an employee of the company and the general manager
may not be a director.”
So, the Code fails to specify the rights, powers, duties of managers and their relationship with
the company. However, since they are employees, it seems that they would be governed by the
terms of employment contract.
3.5.4. Auditors
Auditors are appointed by the company to perform an audit activity. The appointment,
remuneration and removal process of auditors are similar to directors. 222However, there are some
issues of auditors separately addressed by the Commercial Code. So, auditors have the duty to
audit the company’s account, certifying and preparing reports which are submitted to
shareholders general assembly. 223 They have also the duty to inform to shareholders or public
prosecutors for directors’ breach of legal and statutory obligations 224 and the duty to convene
shareholders meetings in directors’ failure. 225
3.6. Board of Directors of Share Companies
220
Commercial Code, Arts 445-447
221
222
Commercial Code, Arts 368, 369, 371 and 372
223
Commercial Code, Art s 374 and 375
224
225
39
3.6.1. Meaning and Nature of Board of Directors
The Ethiopian Commercial Code does not define what board of directors is. But, Board of
Directors is central and performs many essential functions to meet the vision and goals of Share
Companies. It is a governing body and thereby monitors the conducts of the managements to
make sure that they are carrying out their legal and financial obligations in the right way. 226
Board of Directors is one of the constituent parts in corporate governance arrangements and its
performance affects the supervision and operation of share companies. Board of Directors is “the
link between the people who provide capital (shareholders) and the people who use the capital to
create value (the managers)” 227or it is “the liaison between concentrated or dispersed
shareholders of different identities (individuals, funds, companies, banks, so on) who exert the
residual rights and executives who, as a matter of fact, constitute the powerful group that runs
and controls the company.” 228
Board of Directors is also defined as governing body comprising of directors who “have control
over the direction, conduct, management or superintendence of the affairs of the company.” 229
Directors are individuals who are appointed and their powers are determined by law,
Memorandum or Article of Association, or resolution of general meetings of shareholders. 230
Board of Directors has different core powers and performs diverse types of functions. It is also of
paramount importance in the operation of share companies to enhance performance. The Bank
for International Settlement (BIS) states that:
the Board should ensure that senior management implements policies that prohibit activities and
relationships that diminish the quality of corporate governance, such as conflicts of interest, self-
dealing and preferential dealings with related parties. Board should set and enforce clear lines of
responsibility and accountability throughout the organization. Keeping in view their oversight
226
Sanjay Anand, supra note 141, p.40
227
Monks and minnow(2004), cited in Guler Aras and David Crowther (ed), Handbook of Corporate Governance
and Social Responsibility (England : Gower Publishing Limited, 2010), p.154
228
Roe(1994), cited in Guler Aras and David Crowther(ed), supra note 227, p.154
229
Hussein Ahmed, supra note 36, p.56
230
Internet source. Duties of Directors (2006). P.1. Accessed at
http://www.deloitte.com/assets/DcomSouthAfrica/Local%20Assets/Documents/za_audit_directorsduties07_140507
viewed on December 28, 2013.
40
role, Board of Directors should feel empowered to recommend sound practices, provide
231
dispassionate advice, and avoid conflict of interests.
The UK Combined Code also stipulates that “every company should be headed by an effective
Board, which is collectively responsible for the success of the company.” 232
Thus, share companies need to have an effective Board comprised of honest, hardworking, loyal
and interested directors to maintain good corporate governance practices, preserve the interests
of shareholders and stakeholders and enhance performance. So, they have to adopt diverse codes
and principles which are in conformity with best international documents such as OECD and
international best practices.
3.6.2. Board Composition and Independence
In recent periods, there is an inclination in different countries and share companies towards
introducing non-shareholders on the composition of board of directors in addition to
shareholders. However, the situation is different in Ethiopia. The idea of non-shareholder
director is unknown and has not been practiced so far. On the top of that the Commercial Code
and other relevant laws prohibit share companies from establishing boards that comprised of
non-shareholders. For instance, Article 347(1) of the Commercial Code states that “only
members of a company may manage the company.” Hence, boards are obliged to be constituted
of shareholders only, and non-shareholders directors are not recognized. Moreover, the
Commercial Code does not clearly specify additional competitive qualifications which have to be
satisfied to appoint shareholders as directors. The only requirement specified in the Commercial
Code is being a shareholder. So, there are cases in which incompetent shareholders may assume
directorship in Ethiopian share companies. This is too bad and pushes us to argue apparently that
it would better to appoint external professional, senior employees and experts having technical,
financial and legal knowledge or specialization in the sector. 233 Further, the Commercial Code
231
Basel Committee on Banking Supervision, Principles for Enhancing Corporate Governance, (Bank for
International Settlement (BIS), Oct. 2010), Available at<http:/www.bis.org/pub/bcbs/68.pdf> Last visited on
December 13, 2013.
232
London Stock Exchange (LSE): Committee on Corporate Governance, Hampel: The Combined Code, Section
1A, Main Principle, (London, July
2003).<http://www.frc.org.uk/documents/pagemanager/frc/Web%20Optimised%20Combined%20Code%203rd%20
proof.pdf> December 13, 2013.
233
Hussein Ahmed, supra note 36, p.65
41
does not stipulate any provision to ensure the independence of boards from influences of CEOs
and block shareholders. In fact, Article 348(4) of the English version of the Commercial Code
states that “the general manager may not be a director.” However, this article is in discrepancy
with the equivalent Amharic version of the Code which says “አስተዳዳሪም ላይሆን ይችላል.” But, the
Amharic version is the authoritative one, and Article 348(4) is not mandatory and managers may
be appointed as director of companies simultaneously.
When we come to the financial sectors particularly Banks, the situation becomes more rigorous
and no possibility of thinking to introduce non-shareholders on boards. In the financial sectors, in
addition to the Commercial Code, there are Proclamations and Directives which provide for
shareholder directors only. For instance, the NBE enacted Directives No SBB/49/2011 which
prohibits employees of Banks from being members of boards of directors of any other banks.
Actually, this directive works to alleviate “conflict of interests; apply appropriate chain of
command; and check and balance.” 234 But, the Commercial Code, the Proclamations as well as
the Directives of the NBE have to be updated and take current situations and practices seen on
the globe in to account. This unduly disregarding of non-shareholders from the membership of
board of directors results in share companies to lose the services of professional and experienced
experts and other crucial benefits. 235 Further, the Draft Commercial Code of the Federal
Democratic Republic of Ethiopia does not recognize non-shareholders to be member of board of
directors of share companies. 236
3.6.3. Experiences of Foreign Countries on Board Composition with Particular Emphasis

on Including Non-shareholder Directors in Boards
Traditionally and in many countries it is stockholders who are eligible to be appointed as

directors. But, these days, it has also become common to see non-stockholders assume
directorship in firms. The term ‘non-shareholder’ is more tied with the status a person has in
relation to a company. The status is determined on the basis of whether a person owns stock in a
firm or not. If a person owns stock in a firm, he or she is a shareholder; otherwise, he or she is
234
Capital, (Addis Ababa), February 26, 2011 cited in Hussein Ahmed, supra note 36, p.64
235
Ibid , p.65
236
Article 347(1) of the draft commercial code of the Federal Democratic Republic of Ethiopia specified that “only
members of company mange the company.” This shows that there is no any amendment to the existing commercial
code and is a direct copy paste.
42
designated as non-shareholder. Hence, non-shareholder director is a director who assumes
directorship and monitors the conducts of managers in a firm in which he or she does not own
any share. Non-shareholder director takes diverse names in different countries such as non-
executive director, stakeholder director, independent director, etc. However, I would like to
remind readers that I used the designation ‘non-shareholder director’ in this paper to mean
‘qualified, expertise and professional stakeholder, non-executive or independent director’. But,
here it would be wise to give some clue on the meaning of stakeholder, independent or non-
executive directors as stated below.
The word ‘stakeholder’ has been used for the first time in 1930’s by prof, E.Merrick Dood when
he worked on the groups of stakeholders, but first appeared in academic literatures and
237
discussions at the Standard Research Institute in 1963. Different academicians tried to define
the word stakeholder from different angles and perspectives. It is also observed that diverse
definitions are given to this word by same scholars. For instance, in 1984, Freeman defined
stakeholder as “any group or individual who can affect or is affected by the achievement of the
organization objectives”. 238 Again, in 2004, he defined stakeholder as “those groups without
whose support the organization would to cease to exist” and later on, he modified this one and
put a statement as” those groups who are vital to the survival and success of the organization.” 239
Stakeholder is also defined by Peter Zollinger as “those groups who have a stake in the company
and have the possibility of gaining benefits or experiencing losses or harm as result of a company
operation”. 240 Silvia Ayuso and Antonio Argandona also defined stakeholder in their paper as
“individuals or constituencies that contribute , either voluntarily or involuntarily, to the
company’s wealth creating capacity and activities, who are therefore company’s potential
beneficiaries and /or risk bearers.” 241
237
Peter Zollinger, “Stakeholder Engagement and the Board: Integrating Best Governance Practices,” Global
Corporate Governance Forum, Focus 8(2009), p.5
238
Amy J. Hillman, Gerald D. Keim and Rebecca A. Luce, “Board Composition and Stakeholder Performance: Do
Stakeholder Directors Make a Difference?”,Business& Society, Vol. 40 No. 3(2001), p.299
239
Charles Fontaine, Antoine Haarman and Stefan Schmid, “The Stakeholder Theory,” Stakeholder Theory of the
MNC(2006),p.6
240
Peter Zollinger, supra note 237, P.5
241
Silva Ayuso and Antonio Argandona, “Responsible Corporate Governance: Towards a Stakeholder Board of
Directors?,” IESE Business School – University of Navarra, WP no 701(2007), p.2
43
To sum up, there are, including the above definitions, more than seventy five definitions of
stakeholder, and of these definitions, twenty of them share common logic with the first definition
of Freeman which describes stakeholder as “any group or individual who can affect or is affected
by the achievement of the organization objectives.” 242 Though there are controversies on the
scope of this definition, I took this one as working definition of stakeholder for this paper.
Accordingly, stakeholders include customers, suppliers, distributors, employees, managers
(though this is debatable), local communities and shareholders. 243
Similar to stakeholder, ‘independent director’ is defined differently. Sarbanes-Oxley Act (SOA)

defines an independent director as "a person other than an officer or employee of the company or
its subsidiaries or any other individual having a relationship which, in the opinion of the
company's board of directors, would interfere with the exercise of independent judgment in
carrying out the responsibilities of directors." 244 New York Stock Exchange (NYSE) rule also
specifies that a director is deemed independent," when the director has no material relationship
with the listed company (directly or as a partner, shareholder or officer of an organization that
has a relationship with the company)”. 245
The definitions mentioned above connote similar concepts and specify many of the
characteristics of independent directors. However, these days, there are more roles which are
assumed by independent directors, so that it would be wise to have a definition that includes
those tasks too. So, independent director is described as “one who has no need or inclination to
stay in the good graces of management, and who will be able to speak out, inside and outside the
boardroom, in the face of management misdeeds in order to protect the interests of
shareholders” 246 and this one is seen as typical definition of independent director in this paper.
Non-executive director is defined under New Companies Act No.71/2008 of South Africa as a
director who is not involved in the day-to-day management of the company and has not been in
242
Amy J. Hillman, Gerald D. Keim and Rebecca A. Luce, supra note 238 , p.299
243
Charles Fontaine, Antoine Haarman and Stefan Schmid, supra note 239, p.6
244
Sarbanes-Oxley Act of 2002, passed by 107th Congress of the United States of America at the Second Session on
23rd January, 2002
245
New York Stock Exchange Rules of 2003, approved by SEC on November 4, 2003
246
Donald C. Clarke, “supra note 44, p.154
44
full-time employment with the company in the last three years. 247 In addition, such a director
should not be a material supplier or customer of the company, and he should also not be a
member of the immediate family of any individual who has been involved in the day-to-day
management or been a full-time employee in the past three years. 248 The Stock Exchange of
Hong Kong Limited defines the term non-executive director as “directors who do not have the
administrative or management responsibilities in a company, without any direct relations which
could interfere with the exercise of independent judgment with the management and do not have
any interests other than the remuneration paid by the company.” 249 We do have also the same
meaning of non-executive director in the UK. 250
3.6.3.1. Non-shareholder Directors in the USA
In the USA, the development of non-shareholder directors system was voluntarily endorsed as an
efficient solution for the manager-shareholders agency problems of the time. 251 In the USA,
before 1950, boards were largely engaged in managing and advising managements of firms and
were dominated by shareholder directors though they include certain outside directors who do
not have any link with companies. 252However, starting from1950, diverse reformative activities
have been accomplished on boards’ composition which has begun to include more non-
shareholder directors 253 hoping that “a board with some level of independence will introduce
objectivity in decision making, adds to the diversity and advisory capabilities of the board and
247
The Company Act No. 71/ 2008 of South Africa , section 94(4)(i-ii)
248
Ibid, section 94(4)(iii)
249
K.vethanayagam S/O Kanapathy, “Independent Non-executive Directors, Managerial Ownership and Firm
Performance in Malaysian Public Listed Companies,” (2005), p.5. Accessed at
≤http://eprints.usm.my/25587/1/INDEPENDENT_NONEXECUTIVE_DIRECTORS,_MANAGERIAL_OWNERS
HIP_AND_FIRM_PERFORMANCE_IN_MALAYSIAN_PUBLIC_LISTED_COMPANIES.pdf≥ viewed on
December 27, 2013
250
Derek Higgs, “Review of the Role and Effectiveness of Non-executive Directors: A Consultation Paper”(2002),
p.3. Available at:www.dti.gov.uk/cld/non_exec_review
251
Silbao Shen& Jing Jia, Will The Independent Director Institution Work In China?, 27 Loy. L.A. Int’l & Comp. L.
Rev. 223, 230 (2005) cited in Matthew Weinstein, “The Independent Director Requirement and Its Effects on the
Foreign Investment Climate in China: Progress or Regress?,” Business Law Brief (spring 2008), p.36. It is
particularly adopted for two reasons: First, to act as securities law monitors as the result of the massive securities
frauds of the 1920s and 1930s; and second, to provide profit-seeking shareholders with more adequate controls over
the performance and reliability of management.
252
Jeffrey N. Gordon, ”The Rise of Independent Directors in the United States, 1950-2005:Of Shareholder Value and
Stock Market Prices,” Stanford Law Review , No.74(2007), pp.1472-1473
253
Ibid, pp.1474-1475
45
hence improves performance of the company.” 254 This voluntary movement of introducing non-
shareholder directors in boards got judicial acceptance later and judicial interpretations of state
law started to accept decisions of independent boards and, place considerable attention in their
reviewing of corporate actions. 255 This movement had been followed by the legislature and other
self-regulatory bodies,’ stock exchanges and law review bodies such as the American Law
Institute (ALI). 256 The situation continued till 1990s. However, the collapse of Enron, World
Com and other companies triggered a wave of reforms in U.S which resulted in the enactment of
the Sarbanes-Oxley Act and the revision of the listing rules of NYSE and NASDAQ that
introduced mandatory board composition requirements for the first time. 257
The Sarbanes-Oxley Act does not specify whether boards of firms should have been comprised
of non-shareholder directors, but in its dealing with public companies requires members of audit
committee to be non-shareholder directors. 258 However, NYSE and NASDAQ make it
mandatory for all listed companies to be comprised of majority of non-shareholder directors. 259
They also try to define non-shareholder director and its unique features. They require the
nomination or selection process of non-shareholder directors to be controlled by independent
directors to enhance the independence and quality of nominees as well as to save boards from the
dominance of shareholder directors. 260
In the US, the idea of non-shareholder directors system was designed to efficiently solve the
issue of manager-shareholders conflict of interests and not made mandatory in controlled
companies where there is no agency problem. This is because:
A shareholder who controls a company does not need an external rule maker to protect him from
a management team that he has the power to appoint. Minority shareholders may need protection
from controlling shareholders, but the exchanges are apparently willing to leave this task to other
254
Umakanth Varottil, “Evolution and Effectiveness of Independent Directors in Indian Corporate Governance,”
Hastings Law Journal, Vol.6 No.2 (2010), p.16
255
Jeffrey N. Gordon, supra note , p.252, p. 1481
256
Ibid
257
Ronald W. Masulis, Christian Ruzzier, Sheng Xiao and Shan Zhao, “ Do Independent Directors Matter?,”
Journal of Economic Literature, No: G32(march,2012), p.1
258
Umakanth Varottil, supra note 254, P.24
259
Jeffrey N. Gordon, supra note 252, p.1468
260
Umakanth Varottil, supra note 254, p.25
46
bodies of law, such as federal securities law requiring disclosures, and state corporate law
mandating certain fiduciary duties. 261
Thus, it is possible to deduce that non-shareholder directors and manager-shareholders agency

problem go hand-in-hand.
In the USA, after the enactment of Sarbanes-Oxley Act, the effects of non-shareholder directors
on firms’ performance became a hot topic. Many researchers criticized non-shareholder directors
as being harmful for the investors, while others encouraged this act. The findings of Abdullah
Dah, Nouri Beyrouti and Michel Showeiry showed that when management is highly entrenched,
an increase in proportion of non-shareholder directors on boards will lower the negative impact
compared to a lower entrenched firm. 262 Further, they evidenced that an increase in non-
shareholder directors positively affected the firm value. 263 Thomas Ritchie, in his study
conducted in the USA, Australia and Europe, argues that non-shareholder directors help to
improve corporate governance. 264 Moreover, Steven T. Petra concluded that non-shareholder
directors do play an important role in controlling management (i.e. decision control) in the
context of specific settings such as takeover threats, CEO compensation, and individual
nominations to the firm’s board. 265 Jeffrey N. Gordon 266 and Christian Stadler, et al 267 addressed
that non-shareholder directors have become a complementary institution to economy of firms
directed to maximize shareholders wealth.
261
Donald C. Clarke, “Setting the Record Straight: Three Concepts of the Independent Director,” George
Washington University Law School(2006), p.94
262
Abdullah Dah, Nouri Beyrouti and Michel Showeiry, “ The Effects of Independent Directors on Firm
Value,”pp.8-9 . Accessed at ≤http://www.aabri.com/OC2012Manuscripts/OC12090.pdf≥ viewed on December 16,
2013
263
Ibid, p.9
264
Thomas Ritche, “ Independent Directors: Magic Bullet or Band-Aid?,” Corporate Governance eJournal(2007),
p. 9 . Available at ≤http://epublications.bond.edu.au/cgej≥
265
Steven T. Petra, “ Do Outside Independent Directors Strengthen Corporate Boards?,” Corporate Governance,
Vol. 5, No.1(2005), p.61
266
267
Christian Stadler, et.al, “The CEO’s Attitude Towards the Shareholder Value and the Stakeholder Model. A
Comparison Between the Continental European and the Anglo-Saxon Perspectives,” Problems and Perspectives in
Management, Vol. 4, No.3(2006), p.46
47
On the other hand, Bhagat and Black found a negative relationship between boards’
independence and shareholders’ wealth. 268 They argue that insiders do have a positive effect on
firm value than non-shareholder directors due to their knowledge and expertise about the
corporation. Another study by Bhagat and Bolton added that non-shareholder directors
negatively affect firm value 269and shareholders’ wealth. Roman Horvath and Persida Spirollari
also examined the relationship of selected boards’ characteristics and firms’ financial
performance using a sample of large USA firms between 2005-2009. Their results also showed
that non-shareholder directors worsen firm performance. 270 Rather, they concluded that
shareholder directors are important for firms’ performance because they represent powerful
incentive mechanism and limit issues related to information asymmetry between managers and
owners. 271
3.6.3.2. Non-shareholder Directors in the UK
In the UK, non-shareholder directors system is almost similar with that of the USA due to the
similarity of corporate problems experienced in their respective firms. However, the history of
non-shareholder directors in the UK is shorter and only old less than 23 years. 272 In the UK, the
basis for non-shareholder directors was laid down by Cadbury Committee Report. 273 This report
empowered non-shareholder directors to examine the performance of boards and executives as
well as to take the lead in decision making involving issues of conflict of interests with goals of
attaining independent judgments on matters of strategy, performance, appointments and
standards of conduct. 274 As a subset of non-shareholder directors, independent directors are made
independent of any businesses or relationships which would have impact on free exercise of
268
Sanjai Bhagat and Bernard Black, “Board Independence and Long-term Firm Performance,”(2000), p.33 .
Accessed at ≤http://leeds-faculty.colorado.edu/Bhagat/bb-022300.pdf≥
269
Sanjai Bhagat and Brian Bolton, “Corporate Governance and Firm Performance,” Journal of Corporate
Finance, Vol.14(2008), p. 271
270
Roman Horváth, Persida Spirollari, “ Do the Board of Directors’ Characteristics Influence Firm’s Performance?
The U.S. Evidence,” Prague Economics Papers, Vol.4 (2012), p.482
271
Ibid
272
UmakanthVarottil, supra note 254, P.27
273
Ibid
274
Financial Reporting Council, Report of the Committee on the Financial Aspects of Corporate Governance(1992)
available at http://www.ecgi.org/codes/documents/cadbury. pdf [hereinafter the Cadbury Committee Report]., at
para. 4.11
48
independent judgment. 275 In addition, like the USA system, the Cadbury report adopted a non-
shareholder director system which has nothing to do with controlled companies, so that they are
designed for manager-shareholder agency problems. 276 It also required companies to have at
least three executive directors of which at least two of them would be independent. 277
There are other subsequent reports which also form the UK Combined Code on Corporate
Governance in 1999, i.e. the Green Bury Committee Report that required the establishment of
remunerations committee 278 and the Hampel Committee Report that confirmed the role of non-
shareholder directors. 279
The Higgs report, which is the other subsequent report and which has been incorporated in the
Combined Code later, suggested at least half of the members of boards be composed of non-
shareholder directors. 280 It also provided advisory and monitoring functions to non-shareholder
directors. The boards’ independence which has been established by the Higgs report continues
and has also been reflected even in the current version of the UK Combined Code issued in 2008.
This movement towards non-shareholder directors was not limited to law and policy makers and
had also been joined by the judiciary as well. 281
Like the USA, in the UK, there are diversities on the effects of non-shareholder directors on
firms’ performance. A study conducted by Charlie Weir, Oleksandr Talavera, and Alexander
Muravyev on UK companies over 2002-2008 showed that there is a positive relationship
between the presence of non-shareholder directors and the accounting performance of
appointing companies. They also argue that the effect is stronger if non-shareholder directors are
directors in firms that are performing well or are members of the audit committee. 282Roberto
Mura also made investigation on the same issue using an original, large and hand collected panel
275
Cadbury Committee Report , at para. 4.12.
276
UmakanthVarottil, supra note 254, P.28
277
Cadbury Committee Report, at para. 4.12.
278
Richard Greenbury, et.al., Directors Remuneration :Report of a Study Group Chaired by Sir Richard Greenbury,
Jul. 17, 1995, available athttp://www.ecgi.org/codes/documents/greenbury. pdf.
279
Ronnie Hampel, Final Report of the Committee on Corporate Governance, Jan.1998,available at
http://www.ecgi.org/codes/documents/hampel_index. htm.
280
Derek Higgs, supra note 250
281
Umakanth Varottil, supra note 254 , P.30
282
Charlie Weir, et al, “Performance Effects of Appointing Other Firms' Executive Directors to Corporate Boards:
An Analysis of UK Firms,” Journal of Economic Literature, No. G34 and G39 (2008), pp.25-26
49
data set of UK firms for the period 1999-2001. The result indicated that the proportion of non-
shareholders on boards have a positive impact on firms performance. 283 This finding may have a
direct bearing on policy decisions being made by regulators in the UK, as they formulated the
Cadbury Code. This result also suggested that the boards of UK firms have been more effective
monitors on behalf of other shareholders. However, there are also empirical literatures providing
for support on ineffectiveness of independent non-shareholder directors. 284Claudio Becagli, Sara
De Masi and Andrea Paci studied whether the presence of independent directors correlates with
firm performance and firm growth in Italy, Spain, France, and the United Kingdom from 2002 to
2009. Hence, they also found evidence that independent directors do not influence present and
future firms’ performance, and firms’ growth. 285
3.6.3.3. Non-shareholder Directors in France
In France, the non-shareholder directors system has also been introduced due to the existence of
determinants such as ownership concentration, size of the company and institutional investors’
activism. 286According to Ibtissem Chouchene, the size of companies and involvement of
institutional investors in firms motivated the appointment of non-shareholder directors in French
listed companies. 287
In France, the basis for non-shareholder directors system rests on the first Viénot report (1995),
second Viénot report (1999) and the Bouton report (2002). All three reports defined the concept
of non-shareholder director and specified the necessity of composing French companies’ boards
with non-shareholder directors. Particularly, the 1999 Viénot report defined non-shareholder
director as a director who does not have any relationships with companies or their groups to save
his or her mind from interferences affect his or her free judgment. 288 The report also suggested
all boards of French listed companies to comprise 1/3 of their boards with independent
283
Roberto Mura, “Do Non-Executive Directors and Institutional Investors Have Minds Of
Their Own? Evidence on Performance of UK Firms,” p, 25 . Available at SSRN: http://ssrn.com/abstract=676971
284
Goergen (2012, p.282), cited in Charlie Weir, et al, supra note 282, p.3
285
Claudio Becagli, Sara De Masi and Andrea Paci , “Are Independent Directors Good Monitors of Public Utilities?
Evidence from Europe,” Journal of Economic Literature, G30; L94; L95(2013), pp. 12-13
286
Ibtissem Chouchene , “ The determinant of the Presence of Independent Directors in French Board Companies”,
International Journal of Business and Management, Vol.5, No.5(2010), p.144
287
Ibid, p.149
288
Viénot Committee (Conseil National du PatronatFrançais and Association Française des EntreprisesPrivées),
The report on the Boards of Directors of Listed Companies in France(1999)
50
directors. 289 However, in France, the awareness of the people on the relevancy of non-
shareholder directors continually get up and later on, the Bouton report recommended all French
listed companies with dispersed capital and without controlling shareholders to comprise their
boards with half of non-shareholder directors. 290 This has also been recommended by Afep-
Medef Code. 291
In France, there are limited studies conducted on the impact of non-shareholder directors on
performance of firms. Likewise, in France, there are diversities on the importance of non-
shareholder directors. Daniel Zeghal and Raef Gouiaa conducted a study on the effects of board
of directors’ characteristics on the financing strategies of group French companies. The research
is based on a sample of 87 French companies taken from the French index SBF 120 during
2005. 292 The results of the research found out that the high the percentage of non-shareholder
directors on boards have a positive effect on the debt ratio of financing strategies and enable
companies to pursue their own financing strategies. 293 So, it was noticed that the weaker the debt
ratio, the greater firms profitability and was further concluded that the boards that comprised of
non-shareholder directors among French companies are effective in the governance system
particularly they are based on equity capital than debt. 294Ramzi Benkraiem also studied whether
the presence of non-shareholder directors influence and limit earnings management practices in
France. The analysis, conducted over a period of 4 years from 2001 to 2004, is based on a
sample of 239 different French companies listed on the Paris stock exchange. The finding
showed that non-shareholder directors are negatively associated with earnings management and
limit the managerial latitude to maximize their own interests, sometimes at the expense of
289
Ibid
290
Bouton Committee, the Report on Promoting Better Corporate Governance in Listed Companies(2002)
291
French Corporate Governance in Listed Companies, Driving Growth and Attractiveness: A guide Book for
Investors, p.10. Accessed at http://www.ifa-
asso.com/download.php?module=actualites&file_id=202&fichier_nom=actualite-202.pdf. Visited on November 11,
2013.Afep-Medef Code(Code de gouvernementd’entreprise des societies cotées (Corporate governance practices of
listed companies) ) states the number of independent directors to be half of the board in dispersed ownership
companies and one third in controlled firms.
292
Daniel Zéghal and Raef Gouiaa, “The Effect of the Board of Directors’ Characteristics on the Financing
Strategies of French Companies,” p.9 . Available at ≤http://www.jimsjournal.org
293
Ibid
294
Ibid
51
shareholders, creditors and other stakeholders’ wealth.295This supports the recommendation of
the Viénot 1999 report.
On the other hand, Claudio Becagli, Sara De Masi and Andrea Paci analyzed the effects of non-
shareholder directors up on firms performance and firms growth in Italy, Spain, France and
United Kingdom from 2002-2009. The research showed that non-shareholder directors have
limited knowledge and are reliant on the information they receive from the CEOs and other
executive directors which may be influenced or filtered by its sources, so that they may be
ineffective of monitoring and do not influence firm performance. 296 Sandra Cavaco, Edouard
Challe, Patricia Crifo, Antoine Rebérioux and Gwenael Roudaut also conducted a study on
French listed companies and reached that there is a significant negative relationship between
accounting performance and independence. 297
3.6.3.4. Non-shareholder Directors in China
In China, a non-shareholder director system was laid down as a response to problems that
resulted from the dominance of large shareholders. 298 China has made different movements to
develop non-shareholder directors’ norms. Initially, the Shanghai Securities Exchange enacted a
Draft Guidelines on Corporate Governance (SSE Guidelines) in November 2000 which
stipulated that listed companies have to comprise at least two non-shareholder directors, the
number of non-shareholder directors within boards not to be less than 20 % as well as all
subcommittees of boards are to be comprised and chaired by non-shareholder directors. 299
Thereafter, different reformative activities were taken on including non-shareholder directors by

different regulatory bodies, stock exchange markets and local governments. 300Later on, the
295
Ramzi Benkraiem, “ Does The Presence Of Independent Directors Influence Accruals Management?,” The
Journal of Applied Business Research, Vol.25, No.6(2009), p.85
296
Claudio Becagli, Sara De Masi and Andrea Paci, supra note 285, p.12
297
Sandra Cavaco, et.al, “Board Independence and Operating Performance: Analysis on (French) Company and
Individual Data,”(2013), p. 25 . Accessed at ≤http://hal.archives-ouvertes.fr/docs/00/91/94/08/PDF/cahier_2013-
31.pd ≥ viewed on December 20,2013
298
Minkang Gu, “Will an Independent Director Institution Perform Better than a Supervisor? Comments on the
Newly Created Independent Director System in the People's Republic of China,” Journal of Chinese and
Comparative Law, (2003), p.60
299
Sibao Shen and Jiang Jia, “Will the Independent Directors Institution Work in China,” Loyola of Loss Angeles
International and Comparative Law Review, Vol. 3, No.1 (2005), p.231
300
Donald C. Clarke, supra note 44, pp.177-181
52
CSRC (China Securities Regulatory Commission) addressed the issue of non-shareholder
directors by enacting various guidelines and substantive regulations. In fact, the CSRC’s first
regulation “Guidelines for Articles of Association of Listed Companies” that was enacted in
1997 and provided that companies may appoint non-shareholder directors in accordance with
their actual needs. 301 Again on august 2000, CSRC enacted “Draft Rules for Companies Seeking
Listing on a Secondary Board” required 2/3 of the directors to be non-shareholders directors. 302
Subsequently, CSRC also enacted serious of guidelines and regulations and finally, in August
2001, it enacted “Guideline on the Introduction of the Independent Directors System in Listed
Companies” which required directors “to be independent of the company and its major
shareholders, employees and major professional services providers.” 303 Listed companies were
also required to have at least two non-shareholder directors by June 30, 2002, and such directors
were to constitute at least 1/3 of boards by June 30, 2003. 304 At the end of 2004, more than 1,300
listed companies of china had succeeded in having non-shareholder directors in their boards and
each company had, on average, three non-shareholder directors. 305This continued with
essentially no growth through 2011. 306Further, Article 123 of the New Company Law (2006)
provides a new legal basis for non-shareholder directors. 307
Like the western countries, there are also diverse arguments on the relationship between non-
shareholder directors and firms’ performance. A study held by Li, Wang, and Deng tested a
sample of several Chinese companies that encountered financial distress in years 1985 through
2005. Accordingly, they found out that companies with higher portion of non-shareholder
directors are less likely to encounter financial distress as outsiders enjoy “monitor and control”
301
Sibao Shen and Jiang Jia, supra note 299, p.230
302
Donald C. Clarke, supra note 44, p. 185
303
Yurong Chen &Weixing Wang, “Study on the Independent Director System in Corporate Governance,” Asian
Social Science, Vol.5, No.7 (2009), p.65
304
Donald C. Clarke, supra note 44, p.191
305
Jiang Yu Wang, “The Strange Role of Independent Directors in a Two-tier Board Structure of China’s Listed
Companies”, Compliance and Regulatory Journal, Issue.3 (2007) , P.51
306
Juan Ma and Tarun Khanna, “Independent Directors’ Dissent on Boards: Evidence form Listed Companies of
China,” Harvard Business School, working Paper. 13-089(October 24, 2013), p.10
307
The New Company Law (2006) of China, Article 123.This very article simply state that a company has to set up
independent directors according to applicable regulations, and delegating to the State Council the power to stipulate
detailed rules concerning independent directors. But it officially provides the independent director a legal basis in
Company Law and alleviates it to the level of law from administrative regulation.
53
power over the management. 308 Mike W. Peng also reached similar finding using an archival
database covering 405 publicly listed firms and 121 company-years. 309 In addition, on the basis
of the study conducted on 139 financial services companies, it has been discovered that non-
shareholder directors from academic institutions and law firms have significant positive impacts
on corporate performance. 310
On the other hand, Shan-hui and Qi-Shen Zhou conducted an empirical study on the effect of
non-shareholder directors on firms’ performance from the view of environmental regulation,
using the mixed cross-sectional data of listed companies in Shanghai and found that the ratio of
non-shareholder directors are signiﬁcantly negatively related to ﬁrms performance irrespective of
311
the environmental legislation. Wei Wu also assessed whether there is any correlation between
boards composition and firms performance among listed companies in China and did not find
any significant correlation between the proportion of non-shareholder directors on boards and
firms performance, which means there are not enough evidence to prove that independent boards
have any positive impact on improving firms’ performance. 312
3.6.3.5. Non-shareholder Directors in South Africa
The current corporate governance practices which put South Africa at the forefront of good
governance on the international stage are the results of three reports of King’s Committee on
Corporate Governance, i.e. King I (1994), King II (2002) and King III(2009). The king’s reports
on corporate governance are the ground-breaking code of corporate governance in South Africa
and are the most effective summary of best international practices in corporate governance. 313
They are non-legislative codes different from the Sarbanes-Oxely Act of US where there are
legal sanctions for non-compliance. 314 They also follow a different approach “apply or explain”,
308
Hong-xia Li, Zong-jun Wang and Xiao-lan Deng, “Ownership, independent directors, agency costs and financial
distress: evidence from Chinese listed companies,” Corporate Governance, Vol.8, No. 5 (2008), p.633
309
Mike W. Peng, “ Outside Directors and Firm Performance During Institutional Transitions,” Strategic
Management Journal, Vol.25(2004)p.466
310
Yan Guo and Lei Lu, “Backgrounds of Independent Directors and Corporate Performance: An Empirical Study
on Chinese Listed Financial Services Companies,”(2012), p,293
311
Ibid, p.34
312
Wei Wu, Board Composition and Firm Performance: A Quantitative Study on Chinese Listed Companies (2009,
unpublished, library, Umea School of Business), pp.66-67
313
Steve Banhegvi, management : Fresh Perspectives( South Africa: Pearson education, 2007), p.317
314
Institute of Directors, King Report on Corporate Governance for South Africa(2008). ( herein after King III), p.5
54
which is unique to the Netherlands until King and now also found in the 2010 Combined Code
from the United Kingdom. 315
King report I which was published in 1994 aimed at establishing sound standards of corporate
governance for boards and directors of listed companies in South Africa. 316 King I incorporated
principles on non-shareholder directors. Accordingly, it provided that boards needs to be
comprised of at least two non-shareholder directors; non-shareholder directors to be nominated
and appointed by boards; non-shareholder directors’ remuneration to be determined through
remuneration committee; and specified that non-shareholder directors are important because they
bring an independent judgment on the issues of strategy, performance, resources, etc. 317
Again in 2002, King report II was published. King II gave more emphasis to multiple concerns
of companies’ activities such as the economic, environmental and social aspects beyond working
for the profits of shareholders adopted so far. 318However, it also recommended boards to
comprise shareholder and non-shareholder directors, preferably with a majority of non-
shareholder directors, of whom a sufficient number should be independent of management in
order to ensure the protection of minority shareholders’ interests. 319 It also defined non-
shareholder directors.
Finally, the current king report III was published in 2009. King report III is more or less similar
to the previous king report II. However, it is different for its provisions which have practical
implication for boards, directors, managements, assurance providers and stakeholders. 320 For
instance, king II adopted “comply or explain” approach whereas king III follows “apply or
explain” approach. 321 Thus, it would be in the best interest of directors to pay attention to the
principles in King III or be able to explain why they did not follow best practice. King III
became necessary because of the New Company Act No.71 of 2008 and changes in international
governance trends. The New Company Act focuses on the duties and responsibilities of directors
315
King III, p.6
316
Cliffe Dekker, King Report on Corporate Governance for South Africa 2002: What it means to you?.P. 2.
Available at ≤http://www.mervynking.co.za/downloads/CD_King2.pdf ≥
317
Institute of Directors, King Report on Corporate Governance for South Africa(1994).( herein after King I)
318
Cliffe Dekker, supra note 316, P.2
319
King II
320
KPMG, Corporate Governance and King 3(South Africa, 2009), p.1
321
KPMG, King III Summary (South Africa, 2009), p.2
55
and also gives clarity regarding performance obligation. The act does not differentiate between
an executive and a non-executive director which means that the act applies to all directors,
irrespective of whether they are involved full-time or part-time.
The king report III recommends boards members to be appointed through a formal process 322
and comprise a balance of power, with a majority of non-shareholder directors, of which the
majority to be independent. 323 It also states that at least one third of non-shareholder directors
should rotate every year. Moreover, it empowers boards to review the independence of
independent non-shareholder directors serving for more than 9 years. Principle 2.16 of the report
also provides that the chairman of boards should be an independent non-shareholder director and
not to be the CEO of the entity. Moreover, committees, other than risk committee, should
comprise a majority of non-shareholder directors of which the majority should be
independent. 324
In addition to the king’s committee reports, the New Companies Act No.71/2008 recognizes
non-shareholder directors. In fact, this new company act does not define non-shareholder
directors directly. The closet attempt to define non-shareholder directors found under section
92(4)(i-iii) of the Companies Act No.71/2008 is the one that deals with members of the audit
committee. According to the later provision, a non-shareholder director is a director who is not
involved in the day-to-day management of the company and has not been in full-time
employment with the company in the last three years. 325 In addition, such a director should not
be a material supplier or customer of the company 326 as well as should not be a member of the
immediate family of any individual who has been involved in the day-to-day management or
been a full-time employee in the past three years. 327
Although there are diverse views on the relationship between independent non-shareholder
directors and companies’ performance around the world, there is, practically, a different
experience in South Africa. Different scholars suggest there are positive relationships between
322
King III, Principle 2:19
323
King III, Principle2.18
324
King III, Principle 2.23.7
325
The Company Act No. 71/ 2008 of South Africa, Section 94(4)(i-ii)
326
Ibid , Section 94(4)(iii)
327
Ibid , Section 94(4)(b)
56
independent non-shareholder directors and firms’ performance. Collins G. Ntim examined the
association between the presence of independent non-shareholder directors and firms’ valuation
using a sample of 169 firms listed in Johannesburg Stock Exchange (JSE) from 2002 to 2007 in
South Africa. Accordingly, he stated that more independent non-shareholder directors on boards
tends to have increased capacity to effectively advise, monitor and discipline corporate
executives and thereby enhance firms’ valuation. 328 He also evidenced that a higher proportion
of non-shareholder directors enhance the ability of boards to monitor and lower executive
remuneration, so that corporate boards in South Africa show high level of efficacy. 329Selilo B.
Semosa, in his research work on South African Platinum Mining Industry, found that there is
positive relationship between the proportion of independent non-shareholder directors and
companies’ performance provided that there is a significant but no excessive representation of
independent non-shareholder directors with industry operational experience. 330Kerry C. Jenkins
also determined that non-shareholder directors experience (include skills or other attributes such
as industry, specific company, or transactional knowledge that may be associated with added
board and company value) is positively associated with companies value in South Africa. 331
Therefore, all these studies bring evidences which support the recommendations of king report
III on independent non-shareholder directors.
3.6.3.6. Non-shareholder Directors in Francophone West African Countries (OHADA)
Economic development in west and central Africa has challenged development economists and
legal scholars for decades. 332 However, since 1993, sixteen French speaking West and Central
African countries are taking a ground-breaking measure and jointly addressing their problems
328
Collins G. Ntim, “The King Reports, Independent Non-executive Directors and Firm Valuation on the
Johannesburg Stock Exchange,” Corporate Ownership and Control, Vol. 9, No. 1(2011), p.21
329
Internet source. The Effect of Company Performance and the Structure of the Board on the Remuneration of
Executive Directors. P. 17 . Accessed at ≤http://world-finance-conference.com/papers_wfc2/365.pdf≥ Viewed on
December 15, 2013
330
Selilo Bethuel Semosa, Impact of Board Composition on Performance in the South African Platinum Mining
Industry(2012, unpublished, library, University of Pretoria), p.77
331
Kerry Claire Jenkins, Outside Directors Experience and the Effect on Company Value: A South African Study
(2012, unpublished, library, University of Manchester), p.190
332
Martha SimoTumnde, et. al, Unified Business Laws for Africa: Common Law Perspectives on OHADA(
London: GMB Publishing Ltd, 2009), p.1
57
themselves. 333 These countries agreed to give up some of their national sovereignty in order to
establish a single, cross boarder regime of uniform business laws, immediately applicable as the
domestic laws of each country. 334 These are the OHADA (in English, the Organization for
Harmonization in Africa of Business Laws) laws, adopted pursuant to the 1993 OHADA
treaty. 335 The treaty aims at providing a modern and western style set of business law which
makes the members states more attractive for foreign investors. 336
Currently, there are more than eight OHADA statues; of which the Uniform Act to Commercial
Companies and Economic Interest Groups is mentioned. This Uniform Act provides two
alternative methods of management for public limited companies (in the Ethiopian case share
companies), i.e. a sole managing director or a board of directors. 337 Article 495 of the Uniform
Act provides that “public limited companies with not more than three shareholders need not form
a board of directors and may appoint a managing director who shall be responsible for managing
the company.” In such case, the managing director may be chosen from among the shareholders
or may be a non-shareholder. 338 On the other hand, public limited companies may be managed
by board of directors. However, Article 417 of the Uniform Act provides that “not more than
one-third of the members of the board shall be non-shareholders of the company.” Hence,
directors do not necessarily have to be shareholders of a company and in any case, no more than
one third of the members of the board may be non-shareholders. Therefore, in public limited
companies having three directors, two directors would have to be shareholders and only one
could be a non-shareholder.
333
These countries are commonly known as francophone countries and include west and central African countries
such as Benin, Burkina Faso, Cameroon, Central African Republic, Comoros, Congo, Côte d'Ivoire, Gabon, Guinea,
Guinea Bissau, Equatorial Guinea, Mali, Niger, Senegal, Chad and Togo.
334
Martha SimoTumnde, et. al, supra note 332, p.1
335
Ibid
336
Ibid
337
Secretariat of the Organization for the Harmonization of Business Law in Africa(OHADA), Uniform Act
Relating to Commercial Companies and Economic Interest Groups( April 1997),Art .414
338
Ibid, Art .495
58
Chapter Four
4. Merits and Demerits of Introducing Non-shareholder Directors in the Governance of

Ethiopian Share Companies
Introduction
The failure of Enron Corp, World Com Inc, Global Crossing Ltd, and other big firms in 1990’s
and the financial crisis experienced since 2008 press countries on the globe to look at corporate
governance seriously and take reformative measures on composition of boards, i.e. began to
introduce non-shareholder directors to improve the capability of boards to oversee the conducts
of managers and run firms to the interests of shareholders and stakeholders.
Following these corporate scandals and financial crisis, there have been various discourses,
debates, opinions and perspectives from different corners of the globe on causes of the outrages,
so that the atmosphere became electric. To calm down the situation and establish rock basis,
many researches have been conducted on the issue. Eventually, these researches came out with
findings which showed that weak corporate governance systems exacerbated the incidence of the
outrages. Consequently, various reformative actions on composition of boards have been
proposed and taken by governments, stock exchange markets and shareholders with their own
motivation. For example, in the USA, we may mention Sarbanes-Oxley Act of 2002 (Sarbanes-
59
Oxley) and the introduction of rules of the Securities and Exchange Commission (SEC) on
November 4, 2003 to the New York Stock Exchange (NYSE) and the National Association of
Securities Dealers (NASD) and on December 1, 2003 to the American Stock Exchange
(AMEX). 339 Similar reformative actions have also been taken in the UK, Germany, France,
China, South Africa and others; however, the crisis remained to be of global interest to date.
Thus, all these reformative actions required companies to modify the existing boards’
composition and include majority non-shareholder directors on boards hoping that they would
strengthen the ability of corporate boards of directors above and beyond improving the ability of
honest and well intentioned directors, managers and employees. 340 Again, there is also public
perception that non-shareholder directors would enhance corporate and companies finance
performance, so that they farther the confidence of stockholders and investors.
Different scholars, also on the basis of diverse theories or empirical evidences, express their
feelings, perspectives and suggestions on this issue. Accordingly, scholars like Freeman and
Friedman are interested to see professional stakeholders such as employees, customers, suppliers,
distributors and managers on boards because companies have often links with these individuals
or groups and could not exist without them or vice versa. 341 They argue that the benefits of these
individuals or constituencies are met only when companies succeed in comprising them on
boards of governance. 342Moreover, stakeholders add diversity to boards in terms of knowledge,
experience, perspectives vital to enhance boards quality to pass appropriate decisions. In addition
to Freeman and Friedman, there are also scholars who support non-shareholders to assume
directorship in firms such as Lawrence J. Trautman, , Silva Ayuso and Antonio Argandona, etc .
In contrast, there are also scholars such as Lisa M. Fairfax, J. Wallison, Joseph Heath, Wayne
Norman and others who are disinterested on the inclusion of non-shareholders on boards. These
scholars challenge the presence of these individuals or groups on boards blaming that non-
shareholder directors exacerbate corporate problems rather than giving solution. They argue that
non-shareholder directors bring conflict of interests on boards, affect boards’ cohesiveness, and
subject boards to multiple principals, etc.
339
Ran Duchin, John G. Matsusaka, and Oguzhan Ozbas , “ When are Outside Directors Effective,” (2009), p.1
340
Steven T. Petra, supra note 265, p.56
341
Edward Freeman, “Stakeholder Theory of The Modern Corporation” , General Issue in Business Ethics, p.39
342
Ibid
60
Hence, the discussion in this chapter will start with determining the merits and demerits of
introducing non-shareholder directors on boards of Ethiopian share companies. Then, it will
continue with the discussion of the prospects and challenges of introducing non-shareholder
directors in Ethiopia. Finally, it will address the issue that the subject matters need careful
attention even if it is decided to introduce non-shareholder directors.
4.1. Merits and Demerits of Introducing Non-shareholder Directors in the Governance of

Ethiopian Share Companies
It is obvious that after the collapse of Enron, World com, and other corporations, the idea of non-
shareholder directors became a matter of world interest. So, many countries have already
reformed their governance system and the rest are preparing to take reformative measures on
composition of their boards. Different from this, Ethiopia did not take any serious measure on
the area so far. This situation drives one to question whether the idea of non-shareholder
directors system is incompatible and disadvantageous or there are determinate factors that do not
necessitate the presence of non-shareholder directors in the country’s corporate governance.
Obviously, the Ethiopian Commercial Code under Article 347(1) and other legislations require
only shareholders to be members on boards of share companies and hence there is no place for
non-shareholders. In fact, there are no big share companies in the country so far. We have not
experienced any corporate scandals hitherto. But, Ethiopia has to think for a while and take
strong reformative measures towards reforming corporate governance including introducing non-
shareholder directors on board of directors.
However, there are activities to be done before any reformative measures are taken on the issue.
Inter alia, studying the merits and demerits of introducing non-shareholder directors on boards of
Ethiopian share companies would be one. Different theories, research works and experiences of
foreign countries reveal that non-shareholder directors system is valuable. So, it may be useful to
adopt the system in Ethiopia. In contrast, the non-shareholder director system may not be fully
beneficial and compatible to our regime. It may have its own disadvantages and there may also
be scholars who argue against it. To that effect, the sections below show the merits and demerits
that introducing non-shareholder directors system on boards would have on Ethiopian share
companies on the basis of different theories, research findings, opinions of scholars and other
international documents.
61
4.1.1. Merits of Introducing Non-shareholder Directors in the Governance of Ethiopian
Share Companies
As mentioned above, the non-shareholder directors system has been loved and adopted by many
countries. Different scholars also argue in favor of the system displaying the various benefits it
would bring to share companies as well as to the overall economy of a country. As part of the
international community and in addressing the current problems, introducing non-shareholder
directors in the governance of Ethiopian share companies would bring the following advantages.
1. Boards which are composed of non-shareholder directors would look at stakeholder concerns
as a governance mechanism. A stakeholder theory argues for companies to consider the interests
of stakeholders who may be individuals or groups can affect or are affected by the firms’
activities. 343 Stakeholders, in one or another way, voluntarily or involuntarily, contribute
something to the wealth, values or activities of companies and hence are either the beneficiaries
or risk bearers. 344 The same is true for companies because they may not able to create wealth,
enhance their values and continue operating without stakeholders. So, it is argued that companies
have to pay attention to these individuals and constituencies and for that matter, introducing non-
shareholder directors enables boards to consider and look at the issues of stakeholders around the
table as well as ensure companies to continue functioning. This should be so for two reasons.
First, the demands of stakeholders have intrinsic value in firms and hence firms have the
responsibility to satisfy their legitimate claims and secondly, addressing stakeholders’ claims
increase the profitability of firms. 345
The stakeholder theory has two subparts, i.e. the normative and instrumental theories. The
normative theory states that it is ethical to consider the concerns of stakeholders in boards. 346 So,
the introduction of non-shareholder directors capacitates boards to consider the claims of
343
R. Edward Freeman, Andreew C. Wicks and Bidhan Parmar, “ Stakeholder Theory and The Corporate Objective
Revisited,” Organization Science, Vol.15, No.3(May-June 2004), p.365. See also Michael C. Jensen, “Value
Maximization , Stakeholder Theory, and the Corporate Objective Function,” European Financial Management ,
Vol.7, No.3(2001), p.299
344
Charles W.L. Hill and Thomas M. Jones,” Stakeholder Agency Theory,” Journal of Management Studies, Vol.
29, No. 2 (1992), p.133.
345
Silva Ayuso and Antonio Argandona, supra note 241, p.2
346
Salma Damak-Ayadi, “Stakeholder Theory in Perspective,” Corporate Governance, Vol.2 (2005), p.7. The
various approaches of this kind have in common is the fact that they treat stakeholders both as an end and also as
having interests that possess an intrinsic value.
62
stakeholders in corporate decision making and to legitimize as well as protect their interests. 347
However, to fetch these benefits, bringing in stakeholders on boards by itself is not sufficient.
They have to be included on boards in sufficient numbers and get the chance to participate in
monitoring or oversight of boards’ committees. 348
The instrumental theory also provides for economic arguments of the merits of introducing non-
shareholder directors on boards. It argues that companies have responsibilities to give
recognition to all company-specific investments and contributions made by stakeholders. 349 In
fact, these contributions or specific-investments 350 of stakeholders to the companies may be of
little (have no value); may not be assessed apart from companies’ functions; or may not be
protected by full contracts ex-ante. But, if they are not recognized and thereby expropriated by
some forms of companies’ constituencies, it may cause conflict of interests among stakeholders
and consequently, exacerbates companies’ failure and loss of values. 351 Thus, to save companies
from such type of incidence, the instrumental theory argues that it would be better for boards to
include non-shareholder directors who may add value, assume unique risks and possess strategic
information for companies. 352Non-shareholder directors add value to companies in terms of their
specific human capital investments, hold tacit knowledge relevant to companies, provide
strategic information to companies about new product market opportunities and current
technological research, etc. 353
2. Including non-shareholder directors on boards would help companies to enhance their

performance. 354Companies have their own objectives, and to fulfill their objectives, they should
have the support of those individuals or groups who can affect companies and know how the
347
Mohamed Belkhir, “ Board Structure, Ownership Structure, and Firm Performance: Evidence from Banking,”
Journal of Economic Literature, Classification No. G21, G32 and G34 , P.6
348
Donald E. Pease, “Outside Directors: Their Importance to the Corporation and Protection from Liability,”
Delaware Journal of Law, Vol. 12, No.1 (1987), p.31
349
Salma Damak-Ayadi, supra note 346, p.5. Instrumental stakeholder theory was advanced by T. M. Jones in 1995
and its main idea is that everything else being equal, firms that practice stakeholder management will perform better
in profitability, stability, growth, etc. terms.
350
By specific asset investment I mean assets that cannot be redeployed to alternative use without a loss of value.
351
Charles W.L. Hill and Thomas M. Jones, supra note 344, p.133.
352
Kaufman and Englander(2005) cited in Silva Ayuso and Antonio Argandona, supra note 241, p.4
353
Renee Adams, Benjamin E. Hermalin and Michael S. Weisbach, “ The Role of Board of Directors in Corporate
Governance: A Conceptual Framework and Survey,” Working Paper (2008), pp. 28-30
354
Prashanth Beleya, “Independent Directors and Stakeholders Protection: A Case of Sime Darby,” International
Journal of Academic Research in Business and Social Sciences, Vol.2, No.4(2012), p.425
63
companies will affect theirs. Hence, understanding their relationships, significance and bringing
in them on boards facilitate both non-shareholder and shareholder directors to work together in
achieving firms’ objectives and ensuring their continuing survival. 355 It saves boards from
thinking and relying on a single objective of maximizing shareholders wealth; rather, it qualifies
them to aim at multiple relationships, objectives (involving stakeholders) and ensuring long term
success. 356
3. The introduction of non-shareholder directors enhances the quality and performance of boards
as well as companies. 357Yoseph Alemu has the opinion that introducing non-shareholder
directors on Boards of share companies is vital and enhances the performance of boards. 358This
has something to do with agency theory. 359 As we know the primary function of boards is to
monitor the engagements of managers to ensure that companies are running for shareholders
benefits. However, their effectiveness may vary on the basis of the degree that boards’ members
are dependent on firms. Boards which are primarily composed of members (shareholders) may
be reliant on firms and thereby ineffective because of their strong link with the organization
whereas boards primarily composed of non-shareholder directors are thought effective in
monitoring managers because their incentives may not be negotiated by reliance on
companies. 360Biniyam Terfa also agrees to this proposition and insists an introduction of non-
355
Gebeyaw Simachew Bekele, A Critical Analysis of the Ethiopian Commercial Code in Light of OECD Principles
of Corporate Governance Framework (2011-2012, Unpublished, Library, School of Advanced Study, University of
London),p.18 and p p.33-34
356
Ibid
357
Sajid Hussain Awan and Aamir Khan, “ Effects of Board Composition on Firm’s Performance: A Case of
Pakistani Listed Companies,” Interdisciplinary Journal of Contemporary Research in Business, Vol. 3, No.10
(2012), pp. 859-60
358
Interview with Ato Yoseph Alemu, Senior Legal Expert, Counseling and Information Service Department,
Ministry of Trade, December 31, 2013
359
Aguilera, Filatotchev, Gospel, and Jackson, 2008; Bushman and Smith, 2001; Coles and Hesterly, 2000 cited in
Raymond K. Van Ness, Paul Miesing and Jaeyoung Kang, “Understanding Governance and Corporate Borads: Is
Theory a Problem?,” European Journal of Management, Vol.7, No.9(2009), p.3. Agency theory suggests an
inherent imperfection in the relationship between capital providers (principals) and fiduciaries (agents) of that
capital. It is a long-held concept that argues when corporate ownership is separated from corporate management,
behaviors, decisions, and actions by managers will deviate from those required to maximize shareholder value. In
other words, it assumes an imminent divergence between the interests of corporate managers and those of
shareholders.
360
Silva Ayuso and Antonio Argandona, supra note 241, p.5
64
shareholder directors in the governance of Ethiopian share companies hoping that they are
independent and professional, so that they may not be easily influenced by others. 361
4. The introduction of non-shareholder directors helps boards to get the business experience,
working knowledge of strategic decision making and internal firms operations, alternative view
points and information on how similar issues and concerns are dealt with in other companies
from each non-shareholder director. 362 This has been supported by resource dependency
theory. 363 Obviously, non-shareholders are working either inside or outside firms and hence have
different exposures, information, skills and potential linkages. So, their presence on boards
enhances the quality of boards to provide comprehensive and wide-ranging resources, i.e. to
advice and counsel, communicate information between companies and external organizations or
to have support from elements outside the companies effectively. 364Non-shareholder directors do
also stimulate innovation and creativity in boards. 365
5. Comprising boards from various constituencies either stakeholders, non-executive or

independent directors increases boards capital, i.e. human capital 366 such as expertise,
experience, knowledge, reputation and skills; and relational capital like links to strategically
relevant enterprises. 367 It qualifies boards to provide relevant resources and facilitates companies
to interact, create business and expand their jurisdiction. It also enables companies to provide
adequate and efficient responses as well as to legitimatize voices that they face.
361
Interview with Ato Biniyam Terfa, Attorney and Consultant at Law and Director in Awash International Bank,
November 20, 2013
362
Krishna Udayasankar, “The Foundations of Governance Theory: A Case for the Resource Dependence
Perspective,” Corporate Ownership and Control, Vol. 5(2008), p.6. See also Lawrence J. Trautman, infra note
364, pp.5-6 and Biserka Siladi, The Role of Non-executive Directors in Corporate Governance: An Evolution
(2006, unpublished, Library, Faculty of Business and Enterprise, Swinburne University of Technology), p.33
363
The resource-dependence view of corporate governance stems from the fundamental logic that various elements
of corporate governance can act as critical resources for a firm. It allows for stakeholder interests to be captured, by
treating various stakeholder groups as sources of legitimacy, and other resources, including capital. Stakeholders
potentially supply vital resources to the firm. Managing their interests effectively results in rewards to the firm, in
the form of enhanced access to these resources. Different stakeholders are likely to control or supply different
resources.
364
Lawrence J. Trautman, “Boardroom Diversity: Why it Matters”, Journal of Economic Literature, D63, D70,
D71, G30, G34, J16, J44, J70, K22, K40, L20, M10, M14, M40 and M50 (2008), pp.5-6.
365
Ibid, p.6
366
Chun-Yao Tseng and Chun-Yi Lin, “The Relationship Between Corporate Governance and Intellectual Capital:
Empirical Study of Taiwanese Electronics Manufactures,” East Management Review,Vol.13, No.1 (2011), p.271
367
Ibid, p.272.
65
6. The introduction of non-shareholder directors brings heterogeneity on boards and hence, there
will be cognitive diversity. 368 Non-shareholder directors may be from important external
constituencies, so that they provide firms with significant resources which are otherwise
unavailable or may have critical contacts with essential elements of firms and thus, serve as a
bridge with the external environment. 369 Therefore, it is these stakeholders and shareholders who
form boards. This situation brings cognitive diversity which is relevant to perform the functions
of boards effectively because it promotes discussion of diverse viewpoints, reduces the
probability of self-satisfaction and narrow-mindedness, and provides for wide range of solutions
to problems and decision criteria to evaluate corporate strategies other than facilitating directors
to share their diverse experiences and views. 370 It also “ensures the continued operation of
companies through access to valued information and resources, facilitation of inter-firm
commitments and establishes and maintains the firms’ legitimacy.” 371
7. The presence of non-shareholder directors on boards reduces the possibilities of formation of

polarization of attitudes and opinions among directors of boards or depolarizes attitudes and
opinions of directors. 372 Group polarization is the tendency for groups to take more extreme
positions following group discussion than the positions originally held by individual
members. 373That means group polarization represents intensification of preexisting initial group
preferences. 374
8. The existence of non-shareholder directors on boards is also significant to overcome

Egocentrism. 375Egocentrism refers to the tendency of individuals to give more concern to their
interest and welfare than others and thereby involves “a lack of differentiation between some
368
Daniel P. Forbes and Frances J. Milliken, “Cognition and Corporate Governance: Understanding Board of
Directors as Strategic Decision Making Groups,” Academy of Management Review, Vol. 24(1999), p.9
369
Ibid
370
Internet Source. Daniel Ferreira, Board Diversity( july9, 2010), pp.227-228. Accessed at
http://personal.lse.ac.uk/FERREIRD/Board%20Diversity%20version%201.pdfvisited on November 13, 2013 ,
371
Nancy Averill, Diversity Matters: Changing the Face of Public Boards (Canada: Myatree),.P.5
372
Lynne L. Dallas, “The New Managerialism and Diversity on Corporate Board of Directors”, Tulane Law
Review, Vol.76 (2002),p.26
373
Hongquan Zhu, Group Polarization on Corporate Boards: Theory and Evidence on Board Decision About
Acquisition Premiums, Executive Compensation and Diversification ( 2009, Unpublished, Library, Faculty of
Business Administration, University of Michigan), p.14
374
Susan G. Straus, et.al, “The Group Matters: A Review of the Effects of Group Interaction on Processes and
Outcomes in Analytic Teams”, RAND working paper series, WR-580-USG ( April, 2009), p. ix
375
Lynne L. Dallas, supra note 372 , p.27
66
aspects of self and others.” 376This individual decision making bias has its own impact on the
decisions of boards, particularly when individual decision makers decide issues in which they
have to assess the preferences and views of others. 377 However, having non-shareholder directors
on boards reduces this tension because it is composed of directors who have diverse views and
sets of values of paramount importance to enhance the quality of decisions of boards.
9. Non-shareholder directors on boards are also significant in reducing the efforts of searching
for and forming confirmation bias among directors. 378 This is because in diversified boards, there
are divergent views and hence it is not easy for directors to initially agree or engage in biased
search process. Actually, confirmation bias is the observed tendency of group members to seek
information that confirms their initial opinions. 379 Thus, diversifying board members helps to
enhance the quality of boards’ decision. It also makes boards less prone to overconfidence. 380
10. Non-shareholder directors improve the quality of decisions of boards on matters which are
complex, require creativity and judgment. 381Yoseph Alemu argues that introducing non-
shareholder directors on Boards of share companies is vital and enhances the decision of
boards. 382In a heterogeneous boards, there is cognitive conflict, i.e. member directors are with
different backgrounds, so that they bring in different conflicting ideas, views and knowledge
which capacitate boards to see problems and challenges from different perspectives, alternatives
view points and in different arrays of interpretations. 383 So, this situation improves the quality of
thinking of boards.
376
Internet source. Patrick L. Hill and Daniel K. Lapsley, Egocentrism, p.1. Accessed at
http://www3.nd.edu/~dlapsle1/Lab/Articles%20&%20Chapters_files/Egocentrismv.Visited on November 14, 2013,
377
Lynne L. Dallas, supra note 372, p.27
378
Susan G. Straus, et.al, supra note 374, p.ix
379
J. Edward Russo, Victoria Husted Medvec & Margaret G. Meloy, The Distortion of Information During
Decisions, 66 org. behavior &human decision processes 102 (1996) cited in Lynne L. Dallas, supra note 372 , p.28
380
Susan G. Straus, et.al, supra note 374, p. x
381
S. Barsade, et al., To your heart’s content: A model of affective diversity in top management teams, 45
Administrative Science Quarterly, (2000); cited in Frank Dobbin and Jiwook Jung, “Corporate Board Gender
Diversity and Stock Performance: The Competence Gap or Institutional Investor Bias?”, p.4. Accessed at
http://www.wjh.harvard.edu/~dobbin/cv/workingpapers/Board_Diversity_and_Performan.visited on November 13,
2013.
382
Interview with Ato Yoseph Alemu, supra note 358
383
Donald C. Hambrick, et al., The Influence of Top Management Team Heterogeneity on Firms' Competitive
Moves, 41 Administrative Science Quarterly, (1996) cited in Frank Dobbin and Jiwook Jung, supra note 381, p.5
67
11. The presence of non-shareholder directors on boards equips companies to interact with
different peoples, cultures, ideas, viewpoints, talents and ensure their continued growth. 384 As we
know the number of directors on boards is too few and may not have lots of exposures,
experiences, perspectives and other talents. This remains intact if boards are comprised of
shareholders who have similar perspectives, interests and ideas. However, boards consisting of
non-shareholder directors get many advantages, because they are comprised of directors from
different backgrounds and enable boards to interact with different ideas, perspectives, peoples
385
and cultures as well as to expand the firms’ markets and remain competitive. Further, non-
shareholder directors enable companies to have efficient employees, to reach out to the entire
population, to be innovative and to tap new sources of talent relevant to their existence and
expansion. 386
12. Boards which are comprised of non-shareholder directors have the capacity to produce
quality products or services needed by different communities; reach out a wider range of
customers and clients; and thereby increasing the sales performance and ultimate profitability to
their companies. 387Non-shareholder directors have the ability to assess the demands of markets,
appreciate diverse clients and customers, produce new products and services at the particular
interests or needs of diverse societies, employ attractive strategies and thereby increase the
financial position of their companies in the market place and remain profitable. 388
13. Introducing non-shareholder directors on boards is appropriate to prevent or reduce

discrimination or stereotyping that takes place in companies. 389Diversified boards are comprised
of individual directors who have different backgrounds, experiences, cultures, ideas, etc and
hence, they may experience discrimination or stereotyping either inside or outside boards’ room.
384
Jiang Liao, Martin R. Young and Qian Sun, “Independent Directors Characteristics and Performance: Evidence
from China,” Journal of Economic Literature, G34; G38 (2009), p.17.
385
Richard A. Johnson and Daniel W. Greening, “The Effects of Corporate Governance and Institutional Ownership
Types on Corporate Social Performance,” Academy of Management Journal, Vol. 42(1999), p.568
386
Mohammed Boussouara and David Deakins, “Trust and the Acquisition of Knowledge from Non-executive
Directors by High Technology Entrepreneurs,” International Journal of Entrepreneurial Behavior and
Research, Vol.6, No.4 (2000), pp. 209-210
387
Pillar non-profit network, Board Diversity Training: A Toolkit (March, 2008). Available at
www.pillarnonprofit.ca, p.8
388
Ibid
389
Lisa M. Fairfax, “The Bottom Line on Board Diversity: A Cost-Benefit Analysis of the Business Rationales for
Diversity on Corporate Governance”, Wisconsin Law Review (2005) , p.826
68
Thus, they are likely to contribute to a positive working environment by preventing or decreasing
employment conflicts, discrimination, stereotyping and the consequence costs related to these
issues. 390 They provide proactive attention to diversity issues and create a climate in which all
members of companies can work effectively. Otherwise, turnover, miscommunication and
interpersonal conflicts may bring lower productivity and ultimate lower performance on profit,
market share or other strategic goals of firms’.
14. Boards which are composed of non-shareholder directors are efficient in creating good
relationships between boards and companies, diverse employee populations, shareholders and
other individuals and corporate constituencies. 391 Boards composed of non-shareholder directors
understand the diversity and concerns of its multiple employees, shareholders or other
individuals and groups and are likely to adopt or facilitate the adoption of different policies and
strategies which increases their satisfaction. 392They enhance companies’ ability to work with
these diverse groups or individuals which in turn leads to a greater productivity and profitability
of firms. 393 They also enhance the social capital and social cohesion of those communities. 394
15. Boards made up of non-shareholder independent, non-executive or stakeholder directors are

efficient in enhancing the quality of financial reporting, lowering the probability of fraudulent
financial reporting and issuing more accurate earnings forecasts, so that they are suitable in
mitigating agency costs. 395I came across also the same merits of introducing non-shareholder
directors on boards of companies in my interview with Befikadu Gashaw. Befikadu argues that it
would be wise to introduce non-shareholder directors in Ethiopian share companies in the current
390
Daniel Ferreira, supra note 370, pp.227-228
391
Martha A. Gelekancy and Donald C. Hambrick, , “ The External Ties of Top Executives: Implications for
Strategic Choice Performance,” Administrative Science Quarterly, Vol. 42, No.654(1997), p.662
392
Ibid
393
Lisa M. Fairfax, supra note 389 , pp.828-829
394
Nancy Averill, supra note 371, p.6. Social capital is the value of those networks and relationships which satisfy
social needs and produce outcomes such as a sense of belonging, compliance with the law and trust in public
institutions. Social cohesion is the capacity for cooperation and participation in a society.
395
Stefaanescu Cristina Alexandrina, “How do Board of Directors Affect Corporate Governance Disclosure ?-The
Case of Banking Sytem,” The Romanian Economic Journal, year XVI, No.47(march, 2013),p.130. See also Anis
Mnif, “Corporate Governance and Mnagment earnings Forcast Quality: Evidence from French Ipos”( February,
2010) , pp. 5-6. Accessed at http://hal.inria.fr/docs/00/45/91/71/PDF/p61.Pdf on visited November 11, 2013
69
situation particularly to follow up financial reports, auditing activities, etc. 396The appointment of
non-shareholder directors “will provide more resources, information, and legitimacy to
boards.” 397 Non-shareholder directors are more knowledgeable about the concerns of diverse
stakeholders; responsive to the needs of the society; 398 and courageous to face even costly and
unpopular compliance issues. 399 Thus, they push the concerns, interests and benefits of
shareholders, stakeholders and the society farther.
16. Introducing non-shareholders, like knowledgeable employees, assists boards to be better

informed about the issues, concerns, and problems of companies’ business and thereby mitigates
the dependence of boards on CEOs for receiving information. 400 Boards have, most often,
received information about the companies’ business from CEOs. It is also obvious that the
agenda of meetings are at mostly prepared by CEOs and it is rarely that boards hold meetings
without the presence of CEOs. 401 Further, CEOs may have their own path or may be rent-seekers
and the information supplied by CEOs to boards may be filtered and presented losing its
originality. However, if stakeholders such as knowledgeable workers are become directors, they
supply original information to boards on different affairs of the companies. 402
17. The presence of non-shareholder directors on boards helps to mitigate the manager-
shareholders conflict of interests and operate companies to the benefits of shareholders in share
companies with dispersed ownership. 403 As we know in share companies with dispersed
396
Interview with Ato Befikadu Gashaw, Director, Domestic, Economic Analysis and Publication Directorate and
Economic Modeling and Statistical Analysis Directorate, National Bank of Ethiopia, November 25, 2013
397
Nor Raihan Mohamad, et al, The Effects of Board Independence, Board Diversity and Corporate Social
Responsibility on Earnings Management( University of Malaysia: Faculty of Management and Economics, 2010),
p.5
398
The Institute of Chartered Accountants of Scotland, Non-Executive Directors : Their Role and Responsibilities
in a Private Company( The Institute of Chartered Accountants of Scotland, 2009) , p.4
399
Ibid
400
Dilek Demirbas and Andrey Yukhanaev, “Independence of Board of Directors, Employee Relation and
Harmonization of Corporate Governance: Empirical Evidence from Russian Listed Companies,” Employee
Relations, Vol. 33 , No. 4(2011), pp. 461-462
401
Margit Osterloh and Bruno S. Frey, “Shareholders Should Welcome Employees as Directors,” Institute for
Emperical Research in Economics- University of Zurich, working paper serious ISSN: 1424-0459, No:
228(2005),p.8
402
Dilek Demirbas and Andrey Yukhanaev, “supra note 400, pp. 461-462
403
Jeffrey Lawrence and Geof Stapledon, Do Independent Directors Add Value? (Melbourne: Center for Corporate
Law and Securities Regulation, 1999), pp. 4-5
70
ownership, it is hard for shareholders to control and manage their companies. Consequently, they
provide the power to manage their firms to managers retaining their ownership. However,
shareholders are, due to lack of information or resources, unable to closely monitor the
managements, their strategies and performance. 404 This opens an opportunity for managers of
companies to break their fiduciary duties they owe to shareholders and use the assets of
405
companies to farther their interests. They may abuse their authority by engaging in self-
dealing, fraud or otherwise shirking their responsibilities. But, if boards are composed of non-
shareholder directors, they can fill the gap between the uninformed shareholders as principals
and the fully executive managers as agents by monitoring the managers more closely. 406Non-
shareholder directors control the situation through diverse mechanisms. For instance, non-
shareholder directors by closely examining conflict of interests transactions to the interest of
firms would be able to protect them from self-dealings; through active oversight of managers
succeed in preventing or reducing managers wrongdoings or frauds; and by proactively
examining firms affairs save managers from shirking which in turn capacitate managers to be
productive and more effective in making decisions relevant to companies. 407
18. Non-shareholder directors are also important to protect minority shareholders from greedy
conducts of block shareholders. 408Alebachew Sitotaw states that shareholder directors, these
days, are in many cases, especially in passing decisions, influenced by block holders, and he has
the opinion that non-shareholder directors are vital to protect the rights of minority shareholders
from block holders. 409 Likewise, in companies with dispersed ownership and in controlled
companies, it is block holders who have information and resource about the management,
financial status and performance of the companies. So, they may use the assets of companies for
404
Dragan Radonjic, “Independent Directors and New Corporate Governance Paradigm (Pros & cons of Independent
Directors),” Annals FLB – Belgrade Law Review, Year LX, No. 3(2012), p.101
405
Stephen M. Bainbridge, Independent Directors and the ALI Corporate Governance Project, 61 Geo. Wash. L.
Rev. 1034, 1034 (1993) cited in Umakanth Varottil, “Evolution and Effectiveness of Independent Directors in
Indian Corporate Governance,” Hastings Law Journal, Vol.6, No.2 (2010), p.13
406
Dragan Radonjic, supra note 404, p.101
407
M. Habbash, A. Salama, R. Dixon, “The effects of Non-Executive Directors’ Commitment and Chairman
Independence on Earnings Management: UK Evidence”, Journal of Applied Accounting Research,( 2008), p.20
408
Donald C. Clarke, “Three Concepts of the Independent Director,” Delaware Journal of Corporate Law
,Working Paper No.256 (2007), p.80.
409
Interview with Ato Alebachew Sitotaw, Expert, Trade Registration and licensing Directorate, Ministry of Trade,
December 31, 2013
71
their interest to the disadvantage of minority shareholders. However, non-shareholder directors
safeguard minority shareholders by checking block shareholders. 410
19. Non-shareholder directors impartially monitor matters such as “the nomination of directors,
the remuneration of directors and the audit of the accounting for companies’ performance in
which executive directors have conflict of interest.” 411 These areas are very sensitive because
they were among drivers which result in corporate scandals in the last decades. Non-shareholder
directors also improve decisions of boards with regard to replacement, acquisitions and
compensation of CEOs. 412
20. Non-shareholder directors bring and maintain good corporate governance into share
companies. 413 They also contribute much to boards as well as firms from different
perspectives. 414 They monitor “the performance and actions of executives; are less dependent on
CEOs; are more sensitive to external assessment of their performance as directors; are less
devoted to inside accounts of companies prospectus; are less worried about the disclosure of
potentially competitively sensitive information; have credibility in the checking of market
signals; create significant value in the allocation of resources; and thereby, maintain managerial
accountability.” 415
410
Stefano Caselli and Stefano Gatti, “Corporate Governance and Independent Directors: Much Ado about Nothing?
The Evidence behind Private Equity Investment Performance,” Journal of Economic Literature, No. G34, G24
and G11, p.12
411
Serena Scarabotti, “The Independent Directors’ Role in Europe: Developments and Open Debates in Italy,” The
Columbia Journal of European Law Online, Vol.15 (2009) , p.78.
412
Karen Lin, et al, “Exit as Voice: The Unintended Consequence of Independent Director Resignations in an
Emerging Economy” (April 2, 2011), p. 6. Accessed at
≤http://areas.kenan-flagler.unc.edu/Accounting/Documents/2011%20GIA%20Conference/Exit%20as%20Voice.pdf
≥ visited on November 11, 2013. Weisbach (1988) finds that CEO turnover is more (less) sensitive to firm
performance when boards are dominated by outside (inside) directors. In the takeover market, Byrd and Hickman
(1992) show that while on average, there is a negative price reaction to the announcement of acquisitions, the price
drop is significantly lower for firms with a board containing a majority of outside directors. Analyzing target firms
in acquisitions, Cotter, Shivdasani, and Zenner (1997) find that when target’s board has a majority of outside
directors, the target receives a return about 20% higher than that of an otherwise similar firm without a majority of
outside directors on the board. Lastly, Core, Holthausen and Larcker (1999) examine the relationship between board
independence and CEO pay. Their results suggest that CEOs earn higher pay when the board of the firm contains
more outside directors appointed during their tenure.
413
Jeffrey Lawrence and Geof Stapledon, supra note 403, p.6
414
415
Jeffrey N. Gordon, supra note 252, p.1471.
72
21. The presence of non-shareholder directors on boards promotes transparency and disclosure
within companies. 416 Noticeably, the basic functions of directors are overseeing the activities of
CEOs. Since non-shareholder directors are independent from management and corporation, they
are under no obligations and hence they critically examine each and every conducts, records,
data, etc. 417 Thus, non-shareholder directors enable boards to prevent managers from
withholding or otherwise distorting information. 418
22. Introducing non-shareholder directors on boards also brings important transformations into
the political economy settings like maximizing the stock prices of companies, promoting the
interests of shareholders and allocate firms capital efficiently. 419 As we know, non-shareholder
directors are less dependent on CEOs and the organization, less committed to management and
less captured by the internal perspectives of companies. 420 Hence, they are not interested in the
current prices which disvalue companies and their strategies, and they pass appropriate decisions
which safeguard companies as well as shareholders.
23. Non-shareholder directors are impartial and viewed as ‘the best arbiters’ of corporate
conduct. 421Non-shareholder directors impartially assess the conducts of managers and other
officers within firms and reach on decisions that satisfy the interests of
shareholders. 422Alebachew Sitotaw shares this impartiality of non-shareholder directors and
argues that they bring objective decisions. 423 Thus, non-shareholder directors are the best arbiters
on matters of corporate governance and are ideal substitutes for external regulators and
courts. 424They reduce “the need for government to play a significant role in the area of corporate
416
Christopher Pass, “Corporate Governance and the Role of Non-executive Directors in Large UK Companies: An
Empirical Study, “Corporate Governance, Vol.4, No. 2(2004), p.53
417
Ibid
418
Lisa M. Fairfax, “ The Uneasy Case for the Inside Director”, Iowa Law Review , Working Paper No.538(2010),
p.139
419
Dragan Radonjic, “supra note 404, p.111
420
Ibid
421
Eugene F. Fama and Michael C. Jensen, “Separation of Ownership and Control”, Journal of Law and
Economics,Vol.26, No.2 (1983), p.315
422
Thomas Clarke, “The Contribution of Non-executive Directors to the Effectiveness of Corporate Governance,”
Career Development International, Vol.3, No.3 (1998), p.119
423
Interview with Ato Alebachew Sitotaw, supra note 409
424
Donald C. Clarke, supra note 408, p.78
73
accountability.” 425 This is because courts and external regulators are not business people and
hence, are not best suited to judge business decisions neither are they proactive in monitoring
business decisions. 426
24. Non-shareholder directors equip boards to prove that certain standards have been observed in
firms. 427 For instance, non-shareholder directors are appropriate to follow up whether the annual
report is accurate; the balance sheet has been prepared in conformity with the accepted
accounting standards, etc. 428
25. Non-shareholder directors are central to maintain standards of professionalism as well as best
practices on boards which in turn build shareholders trust and confidence. 429Yoseph Alemu
states that introducing non-shareholder directors makes boards perform their roles and
responsibilities systematically and in organized manner. 430Non-shareholder directors enhance the
ability of honest and motivated directors, managers or employees, so that they promote the
confidence of stockholders and other investors. 431
26. Non-shareholder directors secure the rights and interests of companies. As we know, one of
the mechanisms through which shareholders control the activities of boards is via derivative suit.
But, for shareholders to bring suit against any director in the name of a company, they shall first
demand and receive the approval of board of directors. However, this may be challenging
because directors may decline to permit their fellow director to be sued particularly when boards
are composed of insiders. But, this might be alleviated by incorporating non-shareholder
directors on boards. 432
27. Non-shareholder directors also “counterbalance management weaknesses, ensure legal and
ethical behavior, extend the reach of a company through contacts, expertise, and access to debt or
425
E. Norman Veasey, “Should Corporation Law Inform Aspirations for Good Corporate Governance Practices or
Vice Versa?,” U. PA. L. REV(2001), p.2182.
89
Lisa M. Fairfax, supra note 418, pp.140-141
427
Prashanth Beleya, “Independent Directors and Stakeholders Protection: A Case of Sime Darby,” International
Journal of Academic Research in Business and Social Sciences, Vol.2, No.4(2012), p.425
428
Ibid
429
Vikramaditya Khanna and Shaun J. Mathew, “The Role of Independent Director in Controlled Firms in India:
Preliminary Interview Evidencer, “National Law School of India Review, Vol.22, No.1(2010), p.46
430
Interview with AtoYoseph Alemu, supra note 358
431
Steven T. Petra, supra note 265, p.56
432
Vikramaditya Khanna and Shaun J. Mathew, supra note 429, p.22
74
equity capital as well they can be a source of well-conceived, binding, long-term decisions for a
company.” 433
4.1.2. Demerits of Introducing Non-shareholder Directors in the Governance of Ethiopian

Share Companies
In the above section, an attempt has been made to list out the merits that would be enjoyed by
Ethiopian share companies if non-shareholder directors system is introduced to their boards. But,
there are also disadvantages that would be incurred with its introduction. Herein below are some
of the disadvantages which would be faced with the introduction of non-shareholder directors in
the governance of Ethiopian share companies.
1. Boards comprised of non-shareholder directors may not be suitable to solve matters that
necessitate verifiable or correct answers. 434Non-shareholder directors are directors who are from
different backgrounds and have different sets of perspectives and values. Hence, they may not be
issue relevant expertise; rather, they may be qualified more with presenting and sharing different
ideas, views and experiences which help to consider issues from different angles and sides than
searching for a direct correct answer.
2. Boards which are composed of diversified non-shareholder directors would have impact on
ensuring boards’ cohesiveness. 435 Cohesiveness is “the personal attraction among group
members, that is, the positive feelings that group members feel for other members of the
group.” 436As we know boards constituted of diversified non-shareholder directors have members
from different backgrounds and exposures, wide range of information, ideas and perspectives.
This will result in cognitive conflict within boards, and directors may not be attracted to and feel
good about other fellow members. Consequently, there may not be boards’ cohesiveness and
directors may not give attention to boards tasks.
433
Dipen Chatterjee, “Independent Directors and Current Legal Perspectives in India”(2009), p.5
434
435
Daniel P. Forbes and Frances J. Milliken, supra note 368, p.9
436
Irvin Summer, Terry Coffelt and Roy E. Horton, “ Work Group Cohesion,” Psychological Reports, Vol.63,
No.2( 1988), p.1
75
3. Boards constituted of non-shareholder directors are susceptible to conflict of interests and
agenda pushing. 437 That means non-shareholder directors may work representing the interests of
diverse individuals, constituencies or their own personal agenda at the expense of firms’ assets or
may be influenced and subjected to a distinct and professional agenda of fellow directors. 438
4. Boards composed of non-shareholder directors consume more time to settle problems

compared to boards comprised of shareholder directors only. 439 Traditionally, boards have often
limited time to deal with firms’ issues. The situation is exacerbated if boards comprise non-
shareholder directors who bring in diverse conflicting ideas, perspectives or use varied
vocabularies and paradigms to solve complex and challenging problems. 440This provides a tough
time for boards to negotiate, reach consensus and produce effective decisions within short period
of time. Even if they succeeded in passing decisions, it is less likely that the solution is accepted
by all directors and result in diminishing the confidence to rely on boards’ decisions. 441
5. Introducing non-shareholder directors subjects boards to be accountable to stakeholders and

the owners and hence it loses its substantive objectives. 442 We know, ordinarily, that companies
are owned by shareholders and that boards are required to run companies in the interests of
shareholders. However, if boards are obliged to involve stakeholders, they are required to
balance the interests of stakeholders as well as shareholders alike. Moreover, they should be
accountable to stakeholders in addition to the owners of share companies. 443 This situation
misses the substantive objectives of boards to maximize long-term owner value as well as
discredits the traditional accountability of boards to investors. It is also impractical to make
boards accountable to multiple masters’ and to work smoothly. This is because “a manager told
to serve two masters (a little for the equity holders, a little for the community) has been freed of
437
Frank Dobbin and Jiwook Jung, “Corporate Board Gender Diversity and Stock Performance: The Competence
Gap or Institutional Investor Bias?,” North Carolina Law Review, Vol. 89, No.3(2011), p. 6.
438
Daniel Ferreira, supra note 370, p. 228
439
440
Ibid
441
Ibid
442
Elaine Sternberg, “The Stakeholder Concept: A Mistaken Doctrine,” Foundation for Business Responsibilities,
Issue Paper No.4(1999) , p.16
443
Ibid
76
both and is answerable to neither. Faced with a demand from either group, the manager can
appeal to the interests of the other.” 444
6. Composing boards with non-shareholders also undermines the right to private property of
shareholders. 445Boards which are constituted of non-shareholders have to run share companies to
the benefits of stakeholders too and not shareholders only. This prevents shareholders, who are
the investors and owners of companies, from determining how and for what purpose their
property has to be used including for charity purposes. 446 Actually, companies have their own
legal personality and properties different from that of shareholders. However, the properties of
firms should not be used for the interests of all stakeholders who are not the investors.
7. Boards consisted of diversified non-shareholders also incur multitask problems. 447If boards
are comprised of members representing different interests and missions, it will be challenging for
them to discharge their roles and responsibilities. They are obliged to satisfy multiple tasks,
interests and objectives. The problem is exacerbated because companies may, practically, not
give boards’ bulleted tasks; rather, they tell them to do “the best they can.” 448 This situation
creates ambiguity for boards and pushes each director to pursue his or her own interest to the
disadvantage of firms.
8. Non-shareholder directors may limit the freedom as well as time of CEOs of companies “to
make innovative and profit generating business decisions.” 449 Though non-shareholder directors
have the responsibility to monitor executives, they may be hyperactively or excessively restless
and make impatient movements. 450 This has its own effect of wiring CEOs not to be innovative,
creative and effective.
444
Joseph Heath and Wayne Norman, “Stakeholder Theory, Corporate Governance and Public Management: What
Can the History of State-run Enterprises Teach us in the Post-Enron era?, ”Journal of Business Ethics (2004), p.15
445
Elaine Sternberg, supra note 442, p.31
446
Ibid
447
Joseph Heath and Wayne Norman, supra note 444, p.14
448
Ibid
449
450
Ibid
77
9. Non-shareholder directors are part timers and may be too busy with other commitments, and it
would be difficult for them to develop much more than a rudimentary understanding of their
companies’ working and barely enough to perform the essential functions of firms. 451
10. Qualified and professional non-shareholder directors may seek greater fee as well as get the
approval of appointing share companies. This rewarding system may subject non-shareholder
directors to love their position, payments, and incentives and thereby lose their independence of
monitoring executives. 452 This, in turn, also affects the good corporate governance of companies.
11. Non-shareholder directors have not any ownership interest in firms, and they may be
reckless, inattentive and ineffective in monitoring the conducts of managers in the interests of
shareholders. 453 Prof. Tilahun Teshome argues that non-shareholder directors may have their
own merits and demerits. However, since they have not ownership interest, they may not lead
boards in a meaningful way which in turn has serious impact on the profitability,
competitiveness and sustainability of firms. 454
12. Non-shareholder directors may face lack of information. 455Non-shareholder directors do not
engage in the day to day operation of firms and may not have sufficient information about
conducts done inside firms. So, they may fail to discover any concealment and deception by the
management or prevent any wrongdoings and financial manipulations. 456
13. Non-shareholder directors may, with the increment of time they spent on boards, be less
independent and affect the interests of shareholders. 457 We know that the responsibilities and
functions of boards are greater and sometimes may be complex, and directors may spend more
time together. This situation may push non-shareholder directors to create extensive social ties
such as family or professional ties with fellow directors or with CEOs of firms. This may lead to
451
Reggy Hooghiemstra and Jaap van Manen, “The Independence Paradox: Impossibilities Facing Non-executive
Directors in The Netherlands,” Corporate Governance: An International Review, Vol. 12.No.3 (2004), p.317.
452
Dragan Radonjic, supra note 404 p.110
453
Interview with Tilahun Teshome, professor, College of Law and Governance Studies, Addis Ababa University,
November 12, 2013
454
Ibid
455
Enrichetta Ravina and Paola Sapienza, “What do Independent Directors Know? Evidence from Their
Trading,”Journal of Economic Literature, No. G3, G34, K22,(April 13, 2009), P. 963.
456
Peter J. Wallison, “All the Rage: Will Independent Directors Produce Good Corporate Governance?,” American
Enterprise Institute, Working No. 30670(2009), p.4
457
G. P. Stapledon, Institutional Shareholders and Corporate Governance (Oxford: Clarendon Press,1996), p.144
78
board cohesiveness and consequently, non-shareholder directors may be less independent and
lose their ability to behave objectively and impartially, and this may weaken their courage to
exercise adequate control on the conducts and activities of fellow directors and officers. 458
4.2. Prospects and Challenges of Introducing Non-shareholder Directors in the Governance

of Ethiopian Share Companies
Though the idea of having non-shareholder directors is not introduced so far, there are factors
which would facilitate and encourage its introduction in Ethiopia. Below are some of the
prospects which encourage the introduction of non-shareholder directors in the governance of
Ethiopian share companies.
First, Ethiopia has adopted a free market economic policy since 1992. 459The government
recognizes the private sector as an “engine” for country’s economic development and thereby
promotes private investment in different sectors of the economy with some exceptions reserved
wholly to the government such as telecommunications and electric power supply. To that effect,
the government has made a number of reformative measures including privatizing state owned
enterprises. The private sector has, using the suitable environment created, been growing
extensively. For instance, we are observing that several share companies are being formed. It has
been experienced that numerous people are buying stocks and becoming owners in different
share companies. 460 Consequently, these days, separation of ownership and control of share
companies is emerging in the country. Share companies are now-a-day managed by directors and
other executive officers, and agency problems and other corporate governance issues are
becoming inevitable.
Ethiopian share companies, nowadays, are surrounded by a number of corporate problems such
as blending of politics and business, absence of share markets, inadequate shareholder protection
458
Van den Berghe and Baelden, “The Complex Relation Between Director Independence and Board Effectiveness,
Corporate Governance. Vol. 5, No. 5(2005), p. 64.
459
Information from Ministry of Finance and Economics, accessed≤ at http://www.mofed.gov.et≥ viewed on
October 28, 2013
460
For instance, Buna International Bank has 11200 shareholders and Awash International Bank has 3000
shareholders.
79
461
laws, ineffective court system, poor competitive environment, 462 inadequate risk management
system 463, etc. Thus, the prevalence of these corporate problems urges Ethiopians to search for
efficient solutions and hence, in line with different theories, different researchers and best
practices on the globe, introducing non-shareholder directors on boards is a wise solution.
Further, the government also launched an ambitious Growth and Transformation Plan (GTP) in
2011 which has also the aim of improving commercial regulatory frameworks in the country. 464
So, we can take these situations as opportunities to introduce non-shareholder directors on boards
of Ethiopian share companies.
Second, the Ethiopian economy, these days, has shown progress and is referred to as one of the
fastest growing economy on the globe. 465 The capacity of domestic investors is increasing. The
capacity as well as the size of share companies is also being strengthened. Consequently, our
share companies, though little, have begun to invest in some foreign countries. However, in order
to be efficient and reaching out to diverse peoples, customers, markets and remain competitive,
their boards have to be composed of diverse talented and professional non-shareholder directors.
This is because non-shareholder directors bring different conflicting ideas, viewpoints,
experiences and skills on boards and enhance their qualities to solve complex and concrete issues
and challenges as well as develop efficient strategic plans, decisions, etc. Hence, our emerging
economy is one determinant factor to introduce non-shareholder directors in the governance of
Ethiopian share companies.
Third, the country has also been inviting foreign investors to come and invest in the country and
has promised to provide different protections and incentives. For instance, the government
adopted different laws and ratified international conventions and documents. 466 The government
461
Tessema, A.2003. Prospects and Challenges for Developing Securities Market in Ethiopia: An Analytical
Review. R & D Management, 15(1), p.51 cited in Asnakech Getenet Ayele, “Revisiting the Ethiopian Bank
Corporate Governance system: A Glimpse of the Operation of Private Banks,” Law, Social Justice & Global
DevelopmentJournal (2013). P. 27. See also Minga Negashe, “Rethinking Corporate Governance in Ethiopia,”
Journal of Economic Literature, No. K12, K22, L22, M14, M41, N27 (2008), p.2
462
Seyoum, (2010) cited in Asnakech Getenet Ayele, supra note 461, P. 27
463
Asnakech Getenet Ayele, supra note 461, P. 27
464
Federal Democratic Republic of Ethiopia, Growth and Transformation Plan (GTP) (2011)
465
The African Development Bank Group Chief Economist Complex,” Ethiopia’s Economic Growth Performance :
Current Situation and Challenges,” Economic Brief, Vol.1, No. 5( 2010), p.1
466
Ministry of Finance, supra note 459. The government adopted different laws such as Investment Proclamation No
280/ 2002. It has also ratified the convention establishing the Multilateral Investment Guarantee Agency (MIGA) of
80
in its Growth and Transformation Plan (GTP) also promised to complete Ethiopia’s accession to
the World Trade Organization (WTO). 467 Hence, all the country’s activities show that it is on the
way to join international transactions. So, the situation is pushing Ethiopia to introduce a
standardized non-shareholder directors system taking best theories, international practices and
experiences in to account. It is also advantageous because it creates a chance to establish good
corporate governance system in our share companies and capacitate them to be competitive and
profitable.
Fourth, though it did not happen in Ethiopia so far, the collapse of Enron corp., World com,
Tyco, Adelphia, etc. and the recent financial crisis that has materialized on the globe put several
countries to learn about the serious consequences of weak corporate governance problems. Thus,
Ethiopia has to learn from these incidences and make itself ready, inter alia, by introducing non-
shareholder directors on boards of share companies for the future, because it has no guarantee
that financial crisis would not happened in Ethiopia in the upcoming periods. Comprising boards
with non-shareholder directors is also one of the signals of good corporate governance.
Five, the 1960 Ethiopian Commercial Code has been implemented for over half of a century and
some of its provisions are outdated 468 and not fit for modern international commercial
transactions and business systems. Thus, it cannot provide an efficient solution for corporate
problems like the corporate scandals and financial crises experienced in 1990s and 2008
respectively. Moreover, this Commercial Code is under revision.
Finally, there are also scholars, officers and practitioners that argue for the introduction of the
system in Ethiopia. Dr. Solomon Abay argues that these days on the globe, there are movements
from corporate social responsibility to shareholders towards to corporate social responsibility to
469
stakeholders. Accordingly, he says many countries (including Germany) are following the
system and have introduced independent directors on boards of their firms. 470 Hence, it would be
wise for Ethiopia to take into cognizance of the global atmosphere and endorse the system.
the World Bank and signed bilateral promotion agreements with a number of OECD (Organization for Economic
Cooperation and Development) countries.
467
GTP, supra note 464
468
Minga Negashe, supra note 461, p.2
469
Interview with Dr Solomon Abay, Lecturer, School of Law, Civil Service University, November 19, 2013
470
Ibid
81
Befikadu Gashaw also agrees with introducing non-shareholder directors on boards of Ethiopian
share companies particularly insisting on their relevance in following financial reports, auditing
activities, etc. 471Befikadu also argues that he has experienced practically that some share
companies are initially appointing non-shareholder professional directors on their boards though
they do have mechanisms which makes these directors shareholders later, i.e. through selling or
granting shares. 472 Further, he argues that there were independent persons assuming directorship
in two or three financial sectors so far. 473Biniyam Terfa also insists on the introduction of non-
shareholder directors considering their professional quality and less prone for influences and
interventions. 474
Alebachew Sitotaw also favors introducing non-shareholder directors. However, he argues that
the necessity of introducing non-shareholder directors on boards depends on the nature of share
companies. 475 Accordingly, he is of the opinion that non-shareholder directors may be introduced
on boards of non-financial companies. He justifies the situation of non-financial share
companies as corrupted, problem fraught and surrounded by many difficulties. He states that:
 shares are offered for public subscription in limited cases and usually are subscribed
among founders;
 founders are escaping steal the properties of share companies;
 there are serious disagreements and disputes between the founders or boards of directors
and shareholders;
 there are cases in which incompetent shareholders are appointed as a directors ;
 directors are influenced by block holders; and
 share companies are not followed up and supervised adequately by Ministry of Trade. 476
Hence, Alebachew Sitotaw states that it is wise to introduce experienced, skilled and
professional non-shareholder directors on boards of share companies. 477
471
Interview with Ato Befikadu Gashaw, supra note 396, 2013
472
Ibid
473
Ibid
474
Interview with Ato BiniyamTerfa, supra note 361
475
Interview with Ato Alebachew Sitotaw, supra note 409
476
Ibid
477
Ibid
82
Yoseph Alemu also argues in favor of non-shareholder directors. He mentions that the existing
corporate governance problems as the basic ground to introduce non-shareholder directors on
boards of non-financial share companies. He states that the governance of non-financial share
companies is corrupted and there is loss or theft of property; the directors are not discharging
their duties and responsibilities to the maximum; directors are not independent and do not pass
objective decisions; directors work is not systematic and organized; etc. 478 So, Yoseph Alemu
has the opinion that introducing non-shareholder directors on boards of non-financial share
companies is vital to enhance the quality, decision and independence of boards. 479
On the other hand, there are also factors which challenge the introduction of non-shareholder
directors in the governance of Ethiopian share companies. These are:
First, in the history of corporate governance of Ethiopia, share companies are governed by
shareholder directors only. This has worked for over half of a century and the business
communities as well as people are accustomed to it. It is hard to break this system. Thus,
introducing non-shareholder directors in the composition of boards may not be welcomed
particularly by rent-seeking executive officers, directors as well as blocks shareholders of share
companies. This is because non-shareholder directors will prevent them from their shirking,
sharking and other wrongful activities and ensure companies to be operated in the interests of all
shareholders and stakeholders. Further, due to its newness, introducing non-shareholder directors
may not be even easily accepted by shareholders, approved by the legislature and interpreted
well by courts of law.
Second, non-shareholder directors do not own stocks in companies. They are neither the owners
nor investors of companies. So, shareholders may not believe that non-shareholder directors will
operate companies in their interests or may be perceived as reckless, ineffective, inattentive,
selfish, etc. So, these situations may make shareholders to fear and challenge the introduction of
non-shareholder directors in the governance of their share companies.
Third, it would be a problem to get qualified and professional non-shareholder directors. These
days, we are observing that board members are paid unfair remuneration, incurred high level of
478
Interview with Ato Yoseph Alemu, supra note 358
479
Ibid
83
risk and surrounded by other bad circumstances. As a result, many professional and experienced
shareholder directors have begun to decline assuming directorship. 480 Thus, there might not be
any reason which motivates qualified and expert non-shareholder directors to assume
directorship in Ethiopian share companies. Moreover, the quality of professional education has
also become questionable because of the increase in number of universities, colleges, etc. which
offer degrees and diplomas not commensurate with the qualifications and standards demanded by
external environment. 481
Fourth, there are also scholars and officers disinterested with introducing non-shareholder
directors in the governance of Ethiopian share companies. In fact, these persons do not disregard
the advantages that would be gained by the system. But, they feel more comfortable with the
existing system. Prof. Tilahun Teshome argues that having independent directors system is still
debatable on the globe. 482 Further, he contends that since non-shareholder directors have no
ownership interest, they may be reckless, inattentive, and ineffective in leading firms, and it is
not wise to introduce as a system. 483Megrga Waqoya is also happy with existing system
justifying that the existing companies are working well with the existing system; Ethiopian
financial share companies may not incur problems in the coming years due to the close follow up
of NBE; and non-shareholder directors are participating on advisory boards of share
companies. 484
4.3. Subject Matters that Need Attention in Introducing Non-shareholder Directors in the
Governance of Ethiopian Share Companies
The writer of this thesis has a strong belief on the appropriateness of introducing non-shareholder
directors in the governance of Ethiopian share companies. I argue so for different reasons:
It brings numerous advantages to companies, shareholders, stakeholders, society and the country.
480
Interview with Tilahun Teshome, supra note 453
481
Minga Negashe, “supra note 461, p.2
482
Interview with Tilahun Teshome, supra note 453
483
Ibid
484
Interview with Ato Merga Waqoya, Principal Examiner, Directorate of Banks Supervision, National Bank of
Ethiopia, November 25, 2013.
84
There are a number of factors suitable to introduce non-shareholder directors systems in the
domestic regime.
The demerits and challenges that may be faced can be easily overcame and made suitable to the
domestic environment.
However, in introducing non-shareholder directors in Ethiopia, we should not simply integrate

the system by directly transplanting the experiences of foreign countries. Rather, it would be
better to study and assess the environment in domestic regime, learn best theories and
international practices and there by develop our own system fit with our regime. However, there
are matters in non-shareholder directors system which continue be contentious till now and need
careful consideration. These subjects are several and practiced differently in many countries, but
this paper is limited to the appointment mechanisms of non-shareholder directors, their expected
standards and qualifications, their number on boards, their roles and responsibilities, their
remuneration and the way their compensation and liability should be determined. These issues
are the concerns of Ethiopia too and need to be settled appropriately in conformity with the
domestic system (particularly in conformity with rules on shareholder directors) and
international best practices. Under the sections below, experiences of different countries on
subjects have been discussed.
4.3.1. Selection and Appointment of Non-shareholder Directors
Selection and appointment of non-shareholder directors varies from country to country as well as
from share company to share company. It may also take different shapes in controlled companies
and companies with dispersed ownership. USA and UK follow almost similar system in the
nomination and appointment of non-shareholder directors as result of the similarities of the
problems they experienced, i.e. managers-shareholders conflict of interests. Thus, both
USA 485and UK 486require their listed companies to establish independent nomination committee
to perform the nomination process of non-shareholder directors. In these countries, the
485
NYSE, Listed Company Manual (2003) available at http://nysemanual.nyse.com/lcm, Para 303A and
NASDAQ RULES], available
athttp://nasdaq.cchwallstreet.com/NASDAQTools/PlatformViewer.asp?selectednode=chp_1_1_4_2 &
manual=%2Fnasdaq%2Fmain%2Fnasdaq-equityrules%2, r, 5605(e)
486
Financial reporting council, report of the committee on the financial aspects of corporate governance(19192)
available at http://www.ecgi.org/codes/documents/cadbury.pdf, para.4.30
85
nomination committees evaluate various candidates of non-shareholder directors and recommend
their appointment for shareholders meetings. But, the nomination committees before they choose
nominees, they use diverse methods to evaluate and identify the appropriate candidates, i.e. think
about the nominees recommended by external consultants such as recruitment firms, suggestions
of diverse industry players and nominations made by managers of firms. 487 Thereafter, the
nomination committees present the nominee non-shareholder directors to shareholders for
appointment.
In India, all of the reports made on reformative measures of corporate governance of controlled
firms recommend that selection of non-shareholder directors to be made through nomination
committee whose chairman and majority members need to be independent directors. 488 This
committee has the responsibility to assess and nominate non-shareholder directors for
appointment by shareholders meetings. Hence, promoters or shareholders have the power to
approve or reject the appointment of any nominee using their voting rights. The appointment of
each director is conducted on individual basis at shareholders meetings by way of a separate
resolution and has to be approved by majority of shareholders present and voting. 489This
situation creates trust and confidence in the market that non-shareholder directors nominated by
the nomination committee without the influence of anybody remain independent of potential
promoters or block holders. 490
In china, non-shareholder directors may be nominated by board of directors (the supervisory

board), incumbent members of board of directors or a shareholder or shareholders (who
independently or jointly have more than 1% stake in the company). 491 Before appointment,
nominee non-shareholder directors are required to make public statement assuring that they have
no financial ties with the listed company in which they are proposed to assume directorship. 492
487
Helen Bird, “The Rise and Fall of the Independent Director,” Australian Journal of Corporate Law(1995) ,p.
251
488
Vikramaditya Khanna and Shaun J. Mathew, supra note 429, pp.56-57
489
Indian Companies Act of 1956, § 263. Available at ≤www.mca.gov.in/ ≥
490
VikramadityaKhanna and Shaun J. Mathew, “supra note 429, p.57
491
Niu Yuan, “A brief Analysis of the Defects and Countermeasures of the Independent Directors System in China,”
International Journal of Law and Management, Vol.51, No.4 (2009), p.261
492
China Securities Regulatory Commission, Guidelines for Introducing Independent Directors to the Board of
Directors of Listed Companies (Aug. 16, 2001). Available at
http://www.csrc.org.cn/cn/search/search_detail.jsp?infoid=1061947864100&type=CMS.STD
86
Thereafter, the respective listed companies are required to submit their nominations of non-
shareholder directors for examination and approval by the CSRC. 493 Hence, it is only after the
nominees are approved by CSRC that shareholder meetings are held on the appointment of non-
shareholder directors. 494
Of the methods mentioned above, I do believe that the selection and appointment process
through independent nomination committee is more advantageous. This is because the selection
of non-shareholder directors through independent committee helps to keep the independence as
well as the quality of the candidates proposed for directorship in companies. 495 This system also
insulates the nominees from the interference of potential shareholders and rent-seeking
managers. It also saves the composition of boards from the influence of block holders and rent-
seeking managers. 496
4.3.2. The Proportion of Non-shareholder Directors on Boards
The proportion of non-shareholder directors on boards also varies from country to country as
well as from share company to share company. This is valid and same numbers across countries
and boards is not expected, because the corporate governance problems experienced in countries
as well as in share companies are varied or have different degrees. So, it depends on the very
persistence of the problems experienced in a country or in a firm. 497 However, boards should be
comprised of sufficient number of non-shareholder directors, so that they can perform their
functions in an objective, professional, impartial, and dispassionate manner and thereby mitigate
the experienced governance problems. 498 Accordingly, in India, clause 49 (I)(A) of the Equity
Listing agreement specifies that “where the chairman is an executive or a promoter or related to a
promoter or a senior official, then at least one-half the board should be comprised of non-
shareholder directors; in other cases, non-shareholder directors should constitute at least one-
third of the board size.”
493
Jiang Yu Wang, supra note 305, p.51
494
Chien-Chung Lin, Independent Directors in China (March 9, 2006), p.2, Accessed at≤http://www.waseda.jp/law-
school/jp/keisei/pdf/action1_17_07≥.pdf viewed on November 11, 2013
495
Anil Shivdasani and David Yermack, “CEO Involvement in the Selection of New Board Members: An Empirical
Analysis,” The Journal of Finance, Vol. 54, No.5 (1999), p.1851
496
497
Donald E. Pease, supra note 348, p.34
498
87
In China, the CSRCs “Guidance Opinion on the Establishment of Non-shareholder Director
System in Listed Companies” (august, 2001) requires boards of listed companies in china to be
constituted at least one third of non-shareholder directors. 499 In France, the Bouton report made
all French listed companies with dispersed capital and without controlling shareholders to
compose their boards with half of non-shareholder directors. 500 In the UK, boards are made to
comprise at least half of non-shareholder directors 501 and in the USA, NYSE and NASDAQ
make it mandatory that all listed companies to be comprised of majority of non-shareholder
directors. 502 Thus, when we introduce non-shareholder directors, we should fix their proportion
on the basis of the type and degree of corporate problems experienced in the country or in the
firm.
4.3.3. The Roles and Responsibilities of Non-shareholder Directors
The other subject matter that needs to be considered is what roles and responsibilities should
non-shareholder directors assume? Should they carryout roles and responsibilities the same with
shareholder directors or should they shoulder different tasks and duties? When we determine the
roles and responsibilities of non-shareholder directors, it is necessary to consider “the modern
day corporate governance, the board of directors and the inter-relation of non-shareholder
directors within this framework in achieving the objectives of any enterprise.” 503Hence, non-
shareholder directors may assume diverse forms of tasks and duties in different countries and
share companies subject to the corporate governance principles and listing requirements applied
and practiced. It may also vary in companies with dispersed ownership and controlled
companies. No matter how, non-shareholder directors, as we may learn from the experiences of
different countries, share companies and academic literatures, may perform the following roles:
499
Jie Yuan, “ Formal Convergence or Substantial Divergence?,” Asian-Pacific Law and Policy Journal, Vol.9,
Issue.1(20070, p.81
500
Bouton Committee, supra note 290
501
Derek Higgs, supra note 250
502
NYSE, supra note 485
503
S. Gopalakrihnan, role and responsibilities of independent directors (2005), p.861. Accessed at
≤www.icai.org/resource_file/10500jan05p861-866.pdf≥visited on November 9, 2013.
88
First, non-shareholder directors have roles towards shareholders and stakeholders. Non-
shareholder directors work to serve the interests of shareholders as well as stakeholders. 504 As
we know non-shareholder directors are directors who have not owned any stock in companies
and thereby less dependent on the managements and corporations. Thus, they ensure
transparency and bring balance towards resolving conflict areas. They have significant role in
influencing the decision of boards as well as managements to respect and protect the interests of
individuals or group of stakeholders. They closely monitor and oversee the conducts of managers
and other fellow directors and prevent them from abusing the assets of firms to enhance
shareholders’ and stakeholders’ interests. 505 Non-shareholder directors also serve as watchdog of
block shareholders on the behalf of minority shareholders. 506 They ensure the assets of
companies to be used for all shareholders alike. 507
Second, non-shareholder directors are Strategic advisors. Non-shareholder directors may also be
a strategic advisor to the managements, fellow directors and block shareholders by sharing their
knowledge, experience, skills, perspectives and different information on diverse business
matters. 508 They lesson the perceptions of different customers and clients, assess the market
demands, determine the needs and interest of the people, produce products or services satisfying
the interests of diverse people, propose plan to reach out in different market places and create
strong ties with different cultures, peoples and norms, so that they, through their strategic
advising, enhance the value of firms.
Third, non-shareholder directors have roles towards to the board. Non-shareholder directors
have, as member of boards, also similar roles as that of other directors (shareholder directors). 509
However, non-shareholder directors are primarily expected to come up with different cognitive
elements such as different views, ideas, skills, information, specialist knowledge and wide
504
Mervin Messias, Non-executive Directors (Gauteng Law Council) Available at
http://www.gautenglaw.co.za/content/index.cfm?navID=7&itemID=72 Accessed on January 02, 2014
505
Rob Dixion, Keith Milton and Anne Woodhead, “An investigation into the role and effectiveness and future of
non-executive directors,” Journal of General Management, Vol. 31, No.1( 2005) , p. 3
506
Mervin Messias, supra note 504
507
Ibid
508
Ruth Barratt and Nada Korac-Kakabadse, “ Developing Reflexive Corporate Leadership: The Role of the Non-
executive Directors,” Corporate Governance , Vol. 2, No. 3(2002), p. 33
509
Vinod Kothari, Role and Responsibilities of Independent Directors under the Companies Act. Available ≤at
http://www.scribd.com ≥
89
experience to all key decision making, performance and risk evaluation affecting the
company. 510
In addition to their roles, non-shareholder directors have also responsibilities similar to

shareholder directors. 511 Hence, they are required to observe their fiduciary duties of care,
diligence, impartiality and acting in good faith. 512 It is also necessary for non-shareholder
directors to “prepare themselves thoroughly for meetings; be objective in forming decisions; be
open minded; be free and frank expressing their opinion, be committed to decisions of the board,
continuously seek information from inside or outside, be informed on laws and regulations and
utilize the expertise they possess to the good advantage of the company.” 513
4.3.4. Remuneration of Non-shareholder Directors
The remuneration of non-shareholder directors also brings varying concerns. It involves

diversities on compensation mechanisms, i.e. is it fair, too low or excessive? It is also tough to
specify clearly whether the remuneration of non-shareholder directors should resemble the
compensation packages of shareholder directors and CEOs. Thus, when we deal with
remuneration of non-shareholder directors, these things have to be clearly addressed.
Certainly, non-shareholder directors assume several extra roles and responsibilities in addition to
the roles and duties they share with shareholder directors. They work under different
environments. They are influenced by their fiduciary duties because if they fail to meet their
obligations, they are liable for damages. 514 They are influenced by their own aspiration to create
and maintain good reputation because if they fail to secure their good reputation as a monitor,
they may not get any external directorship in the market. 515 They do assume huge tasks and
monitor the conducts of managers in firms under diverse influences and environments. Non-
510
Nick Gould, The Role of the Non-executive Directors: An Overview (2008), p.2. Available ≤ at
http://www.incelaw.com/≥
511
Vinod Kothari, supra note 509
512
Bernard S. Black, The Principal Fiduciary Duties of Boards of Directors (Presentation at Third Asian Roundtable
on Corporate Governance, Singapore, April 4, 2001), pp1-12.
513
S. Gopalakrihnan, supra note 503, p.865
514
Price water house Coopers (PWC), Non-executive Directors’: Practices and Fees Trends Report (South Africa,
2013), p.42
515
Rudieger Fahlenbrach, Angie Low and Rene M. Stulz, “The Dark Side of outside Directors: Do they quit when
they are most needed?,” Charles A. Dice Center, Working Paper No. 2010-7(2013),p.2.
90
shareholder directors also like financial incentives. 516. Thus, to recognize their effort and
motivate them for more works, there shall be incentives for non-shareholder directors.
Accordingly, there are legal and structural mechanisms which provide for incentives for non-
shareholder directors to make them think like shareholders about firms. 517
Non-shareholder directors have legitimate authority to determine their remuneration within the
limitations provided and subject to the approval of shareholders meetings. 518 Traditionally, non-
shareholder directors are awarded with different components of compensation for their service,
i.e. they may be paid in the form of cash compensation, stock option award, stock grant and in
addition, they often are awarded with pension plan for certain number of years after
retirement. 519 Though these are some of the compensation mechanisms secured for non-
shareholder directors, it is not wise to pay them too low or too excessive. If their remuneration is
too low, they may be discouraged to ensure corporate governance and protect the interests of
shareholders, stakeholders and firms. They may be ineffective, passive and may not be able to
control and prevent agency related problems. On the other hand, if their remuneration is too
excessive, they may be less independent and form ties with the managements as well as
corporations. Thus, they may not perform those roles and responsibilities expected from them.
Rather, they have to be awarded with fair compensation commensurate with their performance as
well as wealth and turnover of companies. 520
In recent periods, in some countries, it has been said that the remuneration of non-shareholder
directors is too low. For instance, in India, in an interview made with independent directors, it
was found out that their payment is insufficient and imbalance to their increased liabilities and
other nuisance risks they incur outside their control. 521 However, a reform measure had been
taken as per CII (Confederation of Indian Industry) report which recommended non-shareholder
directors to receive adequate sitting fees which have to be calculated on the basis of companies’
516
Tod Perry, “Incentive Compensation for Outside Directors and CEO Turnover”, Journal of Economic
Literature, No.G30 and G34(2000), p.3
517
Ibid, p.4
518
Stephen Bryan, et al, “Compensation of Outside Directors: An Empirical Analysis of Economic Determinants,”
New York University, Working Paper No. 2451/27453 (2000), p.9
519
Ibid, pp. 9-11
520
King Report III. See also Tom Wixley and Geoff K. Everingham, What You must Know About Corporate
Governance (Cape Town: Siber Link, 2002), p. 67
521
Vikramaditya Khanna and Shaun J. Mathew, supra note 429, p.63
91
net worth and turn over. 522 But, the report, to keep non-shareholder directors independent and
enable them objectively perform their monitoring activities, prohibited the issuance of stock
options or profit linked compensations. 523Non-shareholder directors in Singapore also feel their
remuneration is low. 524
Opposing this, there is a group which argues that the remuneration paid to non-shareholder
directors is excessive. This group also quarrels that board members are not paid amounts
commensurate with their performance; rather, they are inactive, unproductive, and dependent and
do not try to prevent agency problems from occurring with sitting management. 525
But, there is also a third group which disagrees with the above criticisms and concludes that the
compensation paid to non-shareholder directors these days is fair. This group argues that the
compensation mechanisms provided are centered on agency cost reduction and are similar to the
mechanisms of remuneration paid to CEOs. 526 However, they hold that the remuneration of non-
shareholder directors is increasing. 527
Any ways, now, we are observing that the compensation paid to non-shareholder directors began
to be measured in terms of pre-determined standards and elements and hence, non-shareholder
directors are entitled to a payment which is determined in terms of a percentile rate of established
norms. 528 This mechanism is safe and avoids unnecessary controversies on compensation. This
would be better if regulators introduce remuneration committee comprising of independent
directors. 529 This committee sets the remuneration of non-shareholder directors to be fair and in
conformity of the financial stability and future performance of companies. It also prevents
excessive compensation of directors.
522
Report of the CII Task Force on Corporate Governance, Corporate Governance: Recommendations for Voluntary
Adoption(2009) , p.3
523
Ibid
524
Wong Meng Meng, “Directors Nomination and Remuneration-Some Thoughts”, (2007), p.5. Accessed at ≤
http://www.icsa.co.za/documents/2010SpeakerPresentations/JacquiBaumgardt.pdf ≥ viewed on December 01, 2013
525
Stephen Bryan, et al, supra note 518, pp.1-2
526
Ibid, pp.1
527
Oppermann, 1997; Schellhardt, 1999; Perry, 1999 Cited in Stephen Bryan, supra note 518, p.1
528
Wong Meng Meng, supra note 524, p.4
529
Tshepo Mongalo, Corporate Law and Corporate Governance: A Global Picture of Business Undertakings in South
Africa ( New Africa Education, 2003), P. 225
92
4.3.5. Liability of Non-shareholder Directors
There are also questions on the liabilities of non-shareholder directors. Thus, we have to closely
consider how their liabilities should be determined. Should they be subject to similar liability
standards of shareholder directors or to a different system? Should their liabilities go to the
extent of the amount of their compensation or go beyond and make them incur out-of-pocket
liabilities?
Historically, it is a worldwide norm to make non-shareholder directors to incur near zero

personal liability. 530 The reason why non-shareholder directors incur small risk of out-of-pocket
liability is attributable to different reasons such as:
 incorporation of different provisions which put procedural barriers to bring suits against
non-shareholder directors;
 establishment various indemnification mechanisms by companies which aim at
reimbursing expenses incurred by non-shareholder directors ;
 recognition of directors and officers liability insurance policies (D&O) and incentives;
and
 establishment of other mechanisms which facilitate settlement of cases that save non-
shareholder director from incurring any expenses. 531
However, there are two arguments on this historical persistence of non-shareholder directors low
risk personal liability, i.e. those who argue for or against low level of personal liability. Those
who argue for the tough out-of-pocket liability justified that if liability is remote, non-
shareholder directors may be slack off and fail to satisfy their roles and responsibilities. 532 They
could be reckless, passive, ineffective and fail to oversee the managers in a meaningful way. 533 It
530
Boris Feldman, “Directorial Liability: Tips for Outside Directors on Minimizing Personal Exposure in
Shareholder Lawsuits”(2002), p.1. Available at≤ http://www.borisfeldman.com/directors.html ≥. viewed on
February 10, 2014
531
Bernard Black, Brain Cheffins and Michael Klausner, “Outside Director Liability,” Stanford Law Review,
Vol.58(2006), P. 1062,
532
Lisa M.Fairfax, supra note 418, p.172
533
Ibid
93
also allows ineffective and careless non-shareholder directors to settle their liabilities through
their personal mechanisms’ and continue their directorship on boards which is devastating. 534
On the other hand, it has also been suggested that the near-zero personal liability of non-
shareholder directors is better and brings many advantages than the toughened one. For that, they
suggest the following justifications:
First, non-shareholder directors may not always become attentive watchdogs of managers fearing
personal liability. 535 They also become efficient and effective in monitoring the conducts of
managers due to diverse incentives such as cash compensations, stock options awards, etc. 536So,
incentive mechanisms motivate non-shareholder directors to be productive and ensure good
corporate performance in contrast to the impacts of personal liability which brings downside
risks.
Second, reputation also motivates non-shareholder directors to work effectively. 537 Non-
shareholder directors are outside directors and hence, unless they perform effectively, they might
not get directorship in any other external firms. So, to secure their reputation, non-shareholder
directors efficiently monitor the conducts of managers; prevent shirking or sharking of the assets
of firms; 538 and issue an opposing or dissenting opinion. 539
Third, if non-shareholder directors are made to incur tough out-of-pocket liability, they will not
get interesting upside benefits; rather, they incur a wider scope of personal liability. So, they will
be forced to incur downside risks and thereby adopt extensive precautions and bureaucratic
procedures which in turn affect the performance of boards and interests of shareholders. 540
534
Bernard Black, Brain Cheffins and Michael Klausner, “ Outside Director Liability: A Policy Analysis,” Journal
of Institutional and Theoretical Economics(2006),p.10
535
Lisa M. Fairfax, supra note 418, p.172
536
Scott(1983), cited in Bernard Black, Brain Cheffins and Michael Klausner, supra note 534, p.10
537
Fama and Jensen (1983) cited in Mohamed Belkhir, supra note 347, p.6
538
539
Karen Lin, et al, “Exit as Voice: The Unintended Consequence of Independent Director Resignations in an
Emerging Economy”(April 2, 2011), p.≤ 18. Accessed at http://areas.kenan-
flagler.unc.edu/Accounting/Documents/2011%20GIA%20Conference/Exit%20as%20Voice.pdf ≥ visited on
November 11, 2013
540
Bernard Black, Brain Cheffins and Michael Klausner, supra note 534, p.12
94
Fourth, increased out-of-pocket liability also discourages other professional non-shareholder
directors to assume directorship in firms. 541 An increment of personal liability has an impact on
the supply of qualified, expertise and professional non-shareholder directors. This situation
particularly affects those wealthy individuals because they, in many cases, became wealthy as
result of efforts of qualified and business expertise of non-shareholder directors. 542Moreover, it
also badly affects the performance of boards and corporate governance.
Therefore, the near zero personal liability for non-shareholder directors seems a sensible policy.
This is because the potential benefits of near zero personal liability outweigh the benefits of
increased out-of-pocket liability. Moreover, the costs incurred in changing the present near zero
personal liability may not be balanced with the benefits to be received, because increased out-of-
pocket liability discourages qualified nominees from serving on boards, causes
counterproductive, and forces non-shareholder directors to adopt extensive precautions and
bureaucratic procedures. 543
In the US, the corporate law specifies that non-shareholder directors owe duty of care and loyalty
to their firms. 544 US security law also specifies that non-shareholder directors are liable for
misstated information in public offering of securities. 545Moreover, non-shareholder directors are
liable under different legal regimes. 546 In the US, different from other countries, the system is
more designed to serve litigation against directors. Further, litigants pay their own legal expense
whether win or lose; derivative and class action suits are permitted; 547 and attorneys are seen as
entrepreneurs who seek out legal violations and suitable clients rather than waiting passively for
prospective litigants to come to them. 548 Accordingly, there are many suits brought against non-
541
Robert W. Hamilton, “Reliance and Liability Standards for Outside Directors,” Wake Forest Law Review,
Vol.24, No.1 (1989), P.28
542
Bernard Black, Brain Cheffins and Michael Klausner, supra note 534, p.12
543
Ibid, p.1
544
David I. Michaels, “No Fraud? No. Problem: Outside Director Liability for Shelf Offerings Under Section 11 of
the Securities Act of 1933,”Review of Banking and Financial Law, Vol. 28(2009), pp.370-371
545
Securities Act of 1933 of US, Section. 11
546
William A. Knepper, and Dan A. Bailey, Liability of Corporate Officers and Directors, volume 1 (6th ed., 1998)
cited in Brian R. Cheffins, Bernard S. Black and Michael Klausner, “Outsider Directors, Liability Risk and
Corporate Governance: A Comparative Analysis,” ECGI – Law, Working Paper No. 48 (2005), p.7
547
Kevin M. LaCroix, “Outside Director Liability: Increased Risks and Practical Considerations,”( 2006), p.3
548
Coffee (1986) cited in Brian R. Cheffins, Bernard S. Black and Michael Klausner,” Liability Risk for Outside
Directors; A Cross-Border Analysis,” European Financial Management, Vol.11, No.2 (2005), p.156
95
shareholder directors every year, but none of these cases brought tough out-of-pocket liability for
non-shareholder directors. 549 In the period between 1991 and 2003, it is only in two cases that
non-shareholder directors incurred out-of-pocket liability. 550 The reason why non-shareholder
directors did not incur increased out-of-pocket liability is due to procedural barriers,
indemnification systems and directors and officers (D&O) insurance plans. 551
In countries such as Australia, Britain, Canada, France, Germany and Japan, the liability of non-
shareholder directors arise from three instances, i.e. from the duties non-shareholder directors
owe to companies; the rights of shareholders to bring suit against directors ;and severe financial
distresses. 552 In these countries, non-shareholder directors are subject to civil liabilities, criminal
sanctions and administrative penalties specified under their company law and diverse legal
regimes. 553Moreover, non-shareholder directors receive a less protection for out-of-pocket
liability than in the US and the only layers of protection designed are indemnification and D&O
insurance plans. 554However, there are systems which discourage suit against non-shareholder
directors. 555But, still the risk of non-shareholder directors is not near zero personal liability. In
each country, non-shareholder directors are made to pay “damages or a related financial penalty,
or could have been in this position with a minor adjustment of the facts”. 556 Thus, in these
countries the risk of out of pocket liability is small but not absent. 557
549
Brian R. Cheffins and Bernard S. Black, “Outside Director Liability Across Countries,” Texas Law Review,
Vol.84 (2006), p.1387. See also Roger W. Wells, “ Corporations – Outside Directors’ Liability for Breach of
Fiduciary Duty to Investigate- Doyle v. Union Insurance Co., 202 Neb.559, 277 N. W. 2d 36(1979),” Creighton
Law Review, Vol. 13, No. 1( 1979)
550
Brian R. Cheffins, Bernard S. Black and Michael Klausner, supra note 546, p.9
551
Jiangyu Zhu, “Liability of Outside Directors and Corporate Governance-A Comparative Study,” Perspectives,
Vol. 3, No.2, pp. 7-9
552
553
Ibid
554
555
Bernard S. Black, Brian R. Cheffins, and Michael Klausner , “Shareholder Suits and Outside Director Liability:
The Case of Korea,” Journal of Korean Law, Vol.10, No.2 (2011), pp.336-342
556
Brian R. Cheffins, Bernard S. Black and Michhael Klausner, supra note 546, p,22
557
Bernard S. Black, Brian R. Cheffins, and Michael Klausner , supra note 555, pp.336-342
96
Chapter Five
5. Conclusion and Recommendations
5.1. Conclusion
Human beings do have individual taste, demand and interest on objects so far as they exist on the
globe. For that, they engage in different undertakings. Of these activities, business is the basic
one. A business is an institution organized and operated to provide goods and services to the
society in financial, commercial or industry aspects with the objectives of earning profits,
benefits, advantages or livelihoods. It is “an incorporeal movable consisting of all movable
property brought together and organized for the purpose of carrying out any of the commercial
activities specified in Art.5 of Commercial Code.”
Share Companies are one aspects of businesses in which human beings engage to earn profits,
benefits, advantages or livelihoods. According to Article 304 (1) of the Commercial Code, share
companies are companies whose capital are fixed in advance and divided into shares and whose
liabilities are met only by their assets. Though share companies are owned by shareholders, their
management is, due to lack of information, resources and dispersed ownership, given to other
bodies, i.e. directors, managers and other officers. The managements of companies, generally
named as corporate governance, have the responsibility to run companies in the interests of both
shareholders and stakeholders.
However, the collapse of Enron Corp, World Com Inc, Global Crossing Ltd, and other big firms
and the financial crisis experienced since 2008 press countries on the globe to look at corporate
governance seriously and take reformative measures on the composition of their boards. These
reformative measures have been taken by governments, stock exchange markets and
shareholders with their own motivation and target at introducing non-shareholder directors
(professional and qualified independent, non-executive and stakeholder directors) in the
governance of firms hoping they would enhance the capacity of boards to monitor the conducts
of managers or block holders to protect the interests of shareholders or minority shareholders
respectively. These reformative activities are supported by diverse theories, research works,
scholars and even by the public hoping that they would enhance corporate governance and
97
companies’ performance. However, there are also scholars and empirical works that challenge
the introduction of non-shareholder directors in the governance of firms.
These days, the idea of non-shareholder directors became a worldwide interest and adopted in
different jurisdictions. Some countries are also preparing themselves to integrate the system with
their domestic regime. Thus, there are different experiences and practices on the emergence of
non-shareholder directors on the globe.
Accordingly, USA took the pioneer in adopting non-shareholder director system just following
the collapse of its giant firms such as Enron, World Com and others as a solution to the manager-
shareholders agency problem experienced in the country. For that matter, USA enacted
Sarbanes-Oxley Act, NYSE and NASDAQ which require all listed companies to be composed of
majority of non-shareholder directors. Following the US, the UK also integrated non-shareholder
directors system which is almost similar to that of the US as result of the similarity of corporate
problems experienced in their companies. In the UK, the base for this system was laid by
Cadbury Committee Report. Later on, the Higgs report suggested at least half of the members of
boards be consisted of non-shareholder directors and this has also been reflected in the current
version of the UK Combined Code of 2008. The idea of non-shareholder directors also spreads
out across countries of the globe such as France, China, South Africa and Francophone West
African Countries (OHADA). However, consequent to these reformative measures, different
studies were conducted in the above mentioned countries on the relationships between non-
shareholder directors and firms performances. The research works conducted reveal two opposite
results, i.e. some findings showed that non-shareholder directors are vital to enhance good
corporate governance and firms’ financial performances whereas other studies found negative
relationships between non-shareholder directors and firms’ financial performances. The only
exception is South Africa where all researches showed that there are significant positive
relationships between non-shareholder directors and firms’ performances.
In Ethiopia, non-shareholder director is not recognized. The Commercial Code and other relevant
laws prohibit boards of share companies from composing non-shareholder directors. On the top
of that the Commercial Code does not specify competitive qualifications needs to be satisfied to
assume directorship. Thus, incompetent shareholders may assume directorship in Ethiopian share
companies.
98
This paper, having considered these and other corporate governance problems, dealt on merits
and demerits of introducing qualified and professional non-shareholder directors in the
governance of Ethiopian share companies. So, it, considering different theories, research works,
suggestions of scholars, best international practices and the domestic situation, determined that
introducing non-shareholder directors in the governance of Ethiopian share companies brings
more advantages. For instance, introducing non-shareholder directors in the governance would:
 enable boards to look at stakeholders concerns as a governance mechanism;

 vital for the survival of companies;
 enhance the quality of boards and the performance of companies;
 help boards to get the business experience, working knowledge of strategic decision
making and internal firm operations, alternative view points and information on how
similar issues and concerns are dealt with in other companies from each non-shareholder
director; and
 increase boards human capital such as expertise, experience, knowledge, reputation and
skills and relational capital like links to strategically relevant enterprises, etc
The paper also determined that non-shareholder directors system may have some
counterproductive effects. So, non-shareholder directors:
 may not be suitable to solve matters that necessitate verifiable or correct answer;
 affect boards’ cohesiveness;
 consume more time on firms issues;
 subject boards to multiple principals;
 bring multitask problems;
 undermine the right to private property of shareholders;
 face lack of information; etc.
In Ethiopia, although there are challenges, there are plenty of factors which facilitate the
inclusion of non-shareholder directors in the domestic regime. For instance,
 the government has adopted free market economic policy since 1991;
 more share companies with dispersed ownership are being formed in which agency
problem and other corporate governance issues are indeed inevitable;
99
 our economy is emerging and developing in fastest rate;
 our firms began to invest in some foreign countries;
 the government actively working in inviting investors; there are multiple corporate
governance problems need quick and efficient responses; the commercial code is under
revision; etc.
However, the writer of this thesis has a strong belief on the appropriateness of introducing non-
shareholder directors in the governance of Ethiopian share companies because of the following
reasons:
 It brings numerous advantages to companies, shareholders, stakeholders, society and the

country.
 There are a number of determinants suitable to introduce non-shareholder directors
systems in the domestic regime.
 The demerits and challenges that may be faced can be easily over came and made
suitable to the domestic environment.
However, when we introduce non-shareholder directors in the governance of Ethiopian share

companies, there are subjects need to be addressed in light of international best practices.
Accordingly, foreign best experiences show that: First, the selection and appointment process of
non-shareholder directors is made through independent nomination committee. This keeps the
independence and quality of candidates supposed for directorship in companies. Second, the
proportion of non-shareholder directors on boards is fixed on the basis of the type and degree of
corporate problems experienced in a country or in a firm. Fourth, remuneration is determined
through remuneration committee composed of independent directors. This serves the
remuneration of non-shareholder directors to be fair and in conformity with the financial stability
and future performance of companies. It also prevents excessive compensation of directors.
Finally, non-shareholder directors, historically, are subjected to near zero personal liability and
this seems a sensible policy. Increased out-of-pocket liability discourages qualified nominees
from serving boards, causes counterproductive and forces non-shareholder directors to adopt
extensive precautions and bureaucratic procedures.
100
5.2. Recommendations
International experiences show that there is an increasing move towards including non-
shareholder directors in the governance of share companies. However, Ethiopia did not introduce
non-shareholder directors and joined the system so far. The writer of this thesis, after cognizance
of the current corporate governance problems and determines the advantages and disadvantages
of non-shareholder directors, concluded that non-shareholder directors should be introduced in
the country. But, this does not mean that non-shareholder directors produce complete solutions to
the corporate problems saw in Ethiopian share companies and are guarantee to the future. Rather,
they can reduce the problems in a considerable manner and relax the tension. But, this needs the
attention and co-operation of different bodies such as the government of Ethiopia, share
companies and non-shareholder directors themselves. For that, the writer would like to
recommend the followings.
I. Recommendations to the government
 The government should revise its company law in conformity with the real situations of the
country, international standards and best practices. Particularly Art 347(1) of the Commercial
Code and Art 5 of NBE directive No.SBB/49/2011 shall be amended.
 The government should start a program on corporate governance, inter alia , provide
training, education and workshop on corporate governance, non-shareholder directors and
their merits, demerits, remuneration and liability, etc. to diverse target groups such as:
 company directors( shareholder and non-shareholder directors);
 officers;
 shareholders;
 potential investors ( domestic or foreign);
 financial and non-financial institutions;
 judges; and
 professional such as lawyers, accountants, etc
 The government as well as share companies should establish appropriate legal and structural
frameworks which ensure efficient compensation system to non-shareholder directors. There
should be a pre-determined standards and elements, so that non-shareholder directors are
entitled to a remuneration determined on the basis of a percentile rate of established norm.
101
This would be better if regulators introduce remuneration committee composed of
independent directors.
 The government should ensure non-shareholder directors to incur near zero personal liability
through different mechanisms. This may be through:
 adopting laws which set procedural barriers to bring suits;
 establishing indemnification mechanisms by companies;
 applying different incentive mechanisms;
 establishing other mechanisms that do not force non-shareholder directors to pay to settle
cases, etc
 The government should adopt a law which saves non-shareholder directors from being
accountable to multiple principals, i.e., to both shareholders and stakeholders. Non-
shareholder directors should be made accountable to shareholders and not to stakeholders
because they receive their legitimate authority from the investors.
 The government as well as share companies should set pre requisite standards such as
integrity, probity and high ethical standards to non-shareholder directors.
 The government as well as share companies should devise mechanisms which keep the
independence of non-shareholder directors, i.e. reducing directors’ length of service,
increasing board diversity or giving added consideration to social ties in the definition of
independent directors, etc.
II. Recommendations to share companies
 Share companies should appoint equal proportion of professional, experienced and skilled
non-shareholder directors (who are relevant to pass complete decisions on concrete and
complex problem), and issue relevant non-shareholder directors (who are capable of
determining correct answers to problems).
 Share companies should establish mechanisms which ensure both shareholder and non-
shareholder directors to work together with co-operation and maintain boards’ cohesiveness
by bringing tasks that are involving, attractive or intrinsically interesting and involve
performance goals.
102
 Share companies should establish mechanisms which facilitate as well as oblige non-
shareholder directors to be attentive, familiar with companies and their organizations and be
informed.
III. Recommendations to non-shareholder directors
 Non-shareholder directors should develop elaborated mechanisms for obtaining

feedbacks, greater attention to signals suggesting failure and greater willingness to
change boards’ decision in the face of negative feedbacks.
103
Bibliography
Table of Laws
 Banking Business Proclamation, 2008, Proclamation No.592., Fed.Neg.Gaz.Year ,14th ,

No.57
 Civil Code of the Empire of Ethiopia, 1960, Proclamation No.165, Nagaret Gazeta,
Year 19th ,No.2
 Commercial Code of the Empire of Ethiopia, 1960, Extra ordinary issue, Nagaret
Gazeta, No. 3,
 Commercial Registration and Business Licensing Proclamation(amendment), 2003, Art ,
Proclamation No 376, Federal Neg. Gaz. Year 10th, No. 9
 Commercial Registration and Business Licensing Proclamation, 2010, Proclamation No
686, Federal Neg. Gaz. Year 16th, No. 42
 Directives No.SBB/49/2011, Licensing and Supervision of Banking Business, Limits on
Board Remuneration and Number of Employees Who Sit on Bank Board Directives,
NBE
 Insurance Business Proclamation, 1994, proclamation No.86, Fed. Neg.Gaz., year 53,
No.46
 Investment Proclamation, 2002, Proclamation No 280, Federal Neg. Gaz. Year 8th, No.
27
 Privatization of Public Enterprises, 1998, Proclamation No. 146, Fed. Neg. Gaz, Year 5,
No.26
 Public Enterprise Proclamation, 1992, Proclamation No.25, Fed. Neg. Gaz, Year.51,
No.21
Table of Books
 Alemayehu Fantaw and Kefene Gurmu, Law of Traders and Business Organizations:
Teaching Material(unpublished, JLSRI, 2009),
 Anand, Sanjay, Essentials of Corporate Governance (New Jersey: John Wiley & Sons,
Inc., 2008)
104
 Aras, Guler and Crowther, David (ed), Handbook of Corporate Governance and Social
Responsibility (England : Gower Publishing Limited, 2010)
 Averill, Nancy, Diversity Matters: Changing the Face of Public Boards (Canada:
Myatree),.
 Banhegvi, Steve, Management: Fresh Perspectives( south Africa: Pearson education,
2007),
 Bavly, Dan A., Corporate Governance and Accountability: What Role for the Regulator,
Director and auditor?(London; Quorum Books, 1999),
 Berghe, Lutgart Van den and Ridder, Liesbeth De, International Standardization of Good
Corporate Governance: Best Practices for the Board of Directors(Springer Science+
Business Media Dordrecht, 1999)

Black, Henry C., Black’s Law Dictionary (5thed, West Publishing Co. St Paul, 1979)
 Blake, William F., A Basic Private Investigation: A Guide to Business Organization,
Management and Basic Investigation Skills for the Private Investigator( Charles C
Thomas Pub Ltd, 2011)
 Bourne, Nicholas, Principles of Company Law(3rded, Cavendish Publishing Limited: UK,
1998)
 Calder, Alan Corporate Governance: A Practical Guide to the Legal Frameworks and
International Codes (London: Kogan Page Limited, 2006),
 Claessens, Stijn, Corporate Governance and Development,( The World Bank:
Washington DC, 2003)
 Dine, Janet, Company Law (4thed, Palgrave: New York, 2001),
 Fekadu petros, Ethiopian Company Law (Fareast Trading: Addis Ababa, 2012),
 Fernando, A. C., Corporate Governance: Principles, Policies, and Practices (Pearson
Education, 2006)
 Gall, Le, French Company Law ( Oyez publishing Ltd: London )
 Garratt, Bob, Thin on Top: Why Corporate Governance Matters and How to Measure and
Improve Board Performance (London: Nicholas Brealey Publishing, 2003),
 Griffin, Stephen, Company Law: Fundamental Principles (4th ed, Pearson Education:
England, 2006)
105
 Gup, Benton E. (ed), Corporate Governance in Banking: A Global Perspective (UK:
Edward Elgar Publishing Limited, 2007),
 International Finance Corporation, Corporate Governance Manual ( 2nded, Hanoi,
Vietnam: BACSON, 2010)
 Judge, Stephen, Business Law (2nded, Macmillan Press Ltd: London, 1999),
 Keenan, Dennis and Riches,Sarah, Business Law(8thed, Pearson Education Limited:
England, 2007),
 Kelly, D. Holmes, A. and Hayward, R., Business Law (4thed, Cavendish Publishing
Limited: UK, 2002),
 Larcker, David and Tayan, Brian, Corporate Governance Matters: A Closer Look at
Organizational Choices and Their Consequences (New Jersey: Pearson Education, Inc.,
2011)
 Lawrence, Jeffrey and Stapledon, Geof, Do Independent Directors Add Value?
(Melbourne: Center for Corporate Law and Securities Regulation, 1999)
 Lipman, Frederick D. and Lipman, L. Keith, Corporate Governance Best Practices:
Strategies for Public, Private, and Not-for-Profit Organizations (New Jersey: John Wiley
& Sons, Inc., 2006)
 Macintyre, Ewan, Business Law (2nd ed,Pearson Education Limited: England, 2005),
 Mann , Richard A. and Roberts, Barry S. , Smith and Roberson’s Business Law (
15th ed., Cenegage Learning: USA, 2011)
 Miller, Roger Leroy and Jentz, Gaylord A., Business Law Today text and cases: E-
commerce, Legal, Ethical and Global Environment (8thed,Cengage Learning: USA,
2010),
 Mongalo, Tshepo, Corporate Law and Corporate Governance: A Global Picture of
Business Undertakings in South Africa( New Africa Education, 2003)
 Moye, John E., The Law of Business Organizations (6th ed, Delmar Cengage learning:
USA, 2004)
 Nacri, Ahmed,(ed), Corporate Governance Around the World (London: Routledge,
2006),
 Nayler, Peter, Business Law in the Global Marketplace (Elsevier Butterworth-
Heinemann: UK, 2006)
106
 Oman, Charles P. (ed), Corporate Governance in Development: The Experiences of
Brazil, Chile, India and South Africa( center for international private enterprise and
OECD development center, 2003)
 Owens, Keith, Law for Non-Law Students( 3rd ed, Routledge-Cavendish: London, 2001)
 Pillar nonprofit network, Board Diversity Training: A Toolkit (March, 2008). Available
at www.pillarnonprofit.ca
 Sagar ,D. , Mead , L. and Back ,Philippa Foster, Fundamentals of Ethics, Corporate
Governance and Business Law (Elsevier Ltd: USA, 2006),
 Schneeman, Angela,The Law of Corporations and Other Business
th
Organizations(5 ed,Cengage Learning: USA, 2010),
 Serbetic, Selim, Corporate Governance: Manufacturing Companies; Performance During
the Financial Crisis in Turkey (Saarbrucken, Germany; LAP LAMBERT Academic
publishing Gmbh and Co.KG, 2011)
 Solomon, Jill and Solomon, Aris, Corporate Governance and Accountability (England:
John Wiley & Sons Ltd, 2004)
 Stapledon, G. P., Institutional Shareholders and Corporate Governance (Oxford:
Clarendon Press, 1996)
 The Institute of Chartered Accountants of Scotland, Non-Executive Directors : Their
Role and Responsibilities in a Private Company( The Institute of Chartered Accountants
of Scotland, 2009)
 Tumnde, Martha Simo, et. al, Unified Business Laws for Africa: Common Law
Perspectives on OHADA( London: GMB Publishing Ltd, 2009)
 Turner, Catherine, Corporate Governance: A Practical Guide for Accountants (Oxford:
Elsevier Ltd, 2009),
 Wild, Charles and Weinstein, Stuart, Smith and Keenan’s Company Law(14thed, Pearson
Education Limited: England, 2009),
 Winship, Peter (ed), Background Document of The Ethiopian Commercial Code of
1960(Artistic Printers: Addis Ababa,1974),
107
 Journal Articles
 Adams, R., Hermalin, Benjamin E. and Weisbach, Michael S., “The Role of Board of
Directors in Corporate Governance: A Conceptual Framework and Survey,” Working
Paper (2008),
 Alexandrina, Stefaanescu Cristina, “How do Board of Directors Affect Corporate
Governance Disclosure ?-The Case of Banking Sytem,” The Romanian Economic
Journal, year XVI, No.47(march, 2013),
 Andreasson, Stefan, “Shareholder and Stakeholder Interests: the Politics of Corporate
Governance Reform in South Africa” (2006). Accessed at
≤http://bisa.ac.uk/index.php?option=com_bisa&task=download_paper&no_html=1&pass
≥ viewed on December 6, 2013
 Arguden, Yilmaz, “A Corporate Governance Model: Building Responsible Boards and
Sustainable Business”, Private Sector Opinion, Issue 17.
 Ashenafy Beyene Fanta, KelifaSrmolo Kemal and YoditKassaWaka,” Corporate
governance and impact on bank performance,” Journal of Finance and Accounting,
Vol.1, No.1(2013)
 Asnakech Getenet Ayele, “Revisiting the Ethiopian Bank Corporate Governance system:
A Glimpse of the Operation of Private Banks,” Law, Social Justice & Global
Development Journal (2013).
 Awan, Sajid Hussain and Khan, Aamir, “ Effects of Board Composition on Firm’s
Performance: A Case of Pakistani Listed Companies,” Interdisciplinary Journal of
Contemporary Research in Business, Vol. 3, No.10 (2012),
 Ayuso, Silva and Argandona, Antonio, “Responsible Corporate Governance: Towards a
Stakeholder Board of Directors?,” IESE Business School – University of Navarra, WP no
701(2007),
 Barratt, Ruth and Korac-Kakabadse, Nada, “ Developing reflexive corporate leadership:
The role of the non-executive directors,” Corporate Governance , Vol. 2, No. 3(2002)
 Becagli, C., Masi, S. D. and Paci, A., “Are Independent Directors Good Monitors of
Public Utilities? Evidence from Europe,” Journal of Economic Literature, No. G30; L94
and L95(2013)
108
 Beleya, Prashanth, “ Independent Directors and Stakeholders Protection: A Case of Sime
Darby,” International Journal of Academic Research in Business and Social Sciences,
Vol.2, No.4(2012)
 Belkhir, Mohamed, “ Board Structure, Ownership Structure, and Firm Performance:
Evidence from Banking,” Journal of Economic Literature, Classification No. G21, G32
and G34
 Benkraiem, Ramzi, “Does The Presence Of Independent Directors Influence Accruals
Management?,” The Journal of Applied Business Research, Vol.25, No.6(2009)
 Berghe, Van den and Baelden, “The Complex Relation Between Director Independence
and Board Effectiveness, Corporate Governance. Vol. 5, No. 5(2005)
 Berle, Adolph A., “Corporate Powers as Powers in Trust,” Harvard Law Review (1931),
 Bhagat, Sanjai and Black, Bernard, “Board Independence and Long-term Firm
Performance,”(2000. ≤
Accessed at http://leeds-faculty.colorado.edu/Bhagat/bb-
022300.pdf≥
 Bhagat, Sanjai and Bolton, Brian, “Corporate Governance and Firm Performance,”
Journal of Corporate Finance, Vol.14 (2008)
 Bird, Helen, “The Rise and Fall of the Independent Director,” Australian Journal of
Corporate Law(1995)
 Black, Bernard S., “The Principal Fiduciary Duties of Boards of Directors” (Presentation
at Third Asian Roundtable on Corporate Governance, Singapore, 4 April 2001),
 Black, Bernard S., Cheffins, Brian R., and Klausner, Michael , “ Outside Director
Liability: A Policy Analysis,” Journal of Institutional and Theoretical Economics(2006)
 Black, Bernard S., Cheffins, Brian R., and Klausner, Michael , “Shareholder Suits and
Outside Director Liability: The Case of Korea,” Journal of Korean Law, Vol.10, No.2
(2011),
 Black, Bernard S., Cheffins, Brian R., and Klausner, Michael , “Outside Director
Liability,” Stanford Law Review, Vol.58(2006),
 Black, Bernard S., Cheffins, Brian R., and Klausner, Michael, “Liability Risk for Outside
Directors; A Cross-Border Analysis,” European Financial Management, Vol.11, No.2
(2005),
109
 Black, Bernard S., Cheffins, Brian R., and Klausner, Michael, “Outsider Directors,
Liability Risk and Corporate Governance: A Comparative Analysis,” ECGI – Law,
Working Paper No. 48 (2005)
 Boussouara, Mohammed and Deakins, David, “Trust and the Acquisition of Knowledge
from Non-executive Directors by High Technology Entrepreneurs,” International Journal
of Entrepreneurial Behavior and Research, Vol.6, No.4(2000)
 Bryan, Stephen, et al, “Compensation of Outside Directors: An Empirical Analysis of
Economic Determinants, ”New York University, Working Paper No. 2451/27453 (2000),
 Cabraal, Ajith Nivard, “Importance of Corporate Governance for the Banking and
Financial Sector”( 24-25 February, 2007). . Accessed at
≤http://www.bis.org/review/r070314c.pdf?frames=0≥ viewed on December 3, 2013.
 Carrillo, Elena F. Perez, “Corporate Governance : Shareholders’ Interests’ and Other
Stakeholders’ Interests’,” Corporate Ownership and Control, Vol.4, No.4(2007)
 Caselli, Stefano and Gatti, Stefano, “Corporate Governance and Independent Directors:
Much Ado about Nothing? The Evidence behind Private Equity Investment
Performance,” Journal of Economic Literature, No. G34, G24 and G11
 Cavaco, Sandra, et.al, “Board Independence and Operating Performance: Analysis on
≤ at
(French) Company and Individual Data,”(2013). Accessed http://hal.archives-
ouvertes.fr/docs/00/91/94/08/PDF/cahier_2013-31.pd≥ viewed on December 20,2013
 Charreaux, Gerard, “Corporate Governance Theories: From Micro Theories to National
Systems Theories”(2004), JEL Classification : G300 ; P500,
 Charron, Donna Card, “Stockholders and Stakeholder: The Battle for Control of the
Corporation,” Cato Journal, Vol.27, No.1 ( 2007
 Chatterjee, Dipen, “Independent Directors and Current Legal Perspectives in
India”(2009)
 Cheffins, Brian R., “ The History of Corporate Governance,” ECGI Working Paper
Series in Law , No. 184(2012),
 Chen, Yurong & Wang, Weixing, “Study on the Independent Director System in
Corporate Governance,” Asian Social Science, Vol.5, No.7 (2009), p.65
 Chilosi, Alberto and Damiani, Mirellla, “Stakeholders vs, Shareholders in Corporate
Governance”(2007). Accessed at http://mpra.ub.uni-muenchen.de/2334/
110
 Chouchene, Ibtissem, “ The determinant of the Presence of Independent Directors in
French Board Companies”, International Journal of Business and Management, Vol.5,
No.5(2010)
 Clarke, Donald C, “Setting the Record Straight: Three Concepts of the Independent
Director,” George Washington University Law School(2006),
 Clarke, Donald C, “Three Concepts of the Independent Director,” Delaware Journal of
Corporate Law, Working Paper No.256 (2007)
 Clarke, Donald C., “the Independent Director in Chinese Corporate Governance,”
Delaware Journal of Corporate Law, Vol. 31(2006)
 Clarke, Thomas, “The Contribution of Non-executive Directors to the Effectiveness of
Corporate Governance,” Career Development International, Vol.3, No.3 (1998)
 Croix, Kevin M. La, “Outside Director Liability: Increased Risks and Practical
Considerations,”( 2006)
 Dah , A., Beyrouti, N. and Showeiry,M, “ The Effects of Independent Directors on Firm
Value,”. Accessed at ≤http://www.aabri.com/OC2012Manuscripts/OC12090.pdf≥ viewed
on December 16, 2013
 Dallas, Lynne L., “The New Managerialism and Diversity on Corporate Board of
Directors”, Tulane Law Review, Vol.76 (2002)
 Damak-Ayadi, Salma, “Stakeholder Theory in Perspective,” Corporate Governance,
Vol.2 (2005),
 Dekker, Cliffe, King Report on Corporate Governance for South Africa 2002: What it
means to you?. Available at ≤http://www.mervynking.co.za/downloads/CD_King2.pdf ≥
 Demirbas, Dilek and Yukhanaev, Andrey, “Independence of Board of Directors,
Employee Relation and Harmonisation of Corporate Governance: Empirical Evidence
from Russian Listed Companies,” Employee Relations, Vol. 33 , No. 4(2011),
 Dixion, R., Milton, K. and Woodhead, A., “An investigation into the role and
effectiveness and future of non-executive directors,” Journal of General management,
Vol. 31, No.1( 2005)
 Dobbin, Frank and Jung, Jiwook, “Corporate Board Gender Diversity and Stock
Performance: The Competence Gap or Institutional Investor Bias?,” North Carolina Law
Review, Vol. 89, No.3(2011)
111
 Dodd, E, Merrick, “ For Whom are Corporate Managers trustee?,” Harvard Law Review,
Vol. XLV, No.7 (1932)
 Duchin, R., Matsusaka, John G., and Ozbas, Oguzhan , “ When are Outside Directors
Effective,” (2009),
 Dujuan, Yuan, “Inefficient American Corporate Governance under the Financial Crisis
and China’s Reflections,” International Journal Law and Management (2009)
 Dyck, Alexander, “ Privatization and Corporate Governance: Principles, Evidence and
Future Challenges”(2000). Accessed
at≤http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.202.286&rep=rep1&type=p
df≥ viewed on November 12, 2013.
 Fahlenbrach, R., Low, A. and Stulz, Rene M., “The Dark Side of outside Directors: Do
they quit when they are most needed?,” Charles A. Dice Center, Working Paper No.
2010-7 (2013),
 Fairfax, Lisa M, “The Bottom Line on Board Diversity: A Cost-Benefit Analysis of the
Business Rationales for Diversity on Corporate Governance”, Wisconsin Law Review
(2005)
 Fairfax, Lisa M., “ The Uneasy Case for the Inside Director”, Iowa Law Review ,
Working Paper No.538(2010)
 Fama, Eugene F. and Jensen, Michael C., “Separation of Ownership and Control”,
Journal of Law and Economics, Vol.26, No.2 (1983),
 Fekadu Petros, “Emerging Separation of Ownership and Control in Ethiopian Share
Companies: Legal and Policy Implication,” Mizan Law Review, Vol. 4, No.1 (2010),
 Feldman, Boris, “Directorial Liability: Tips for Outside Directors on Minimizing
Personal Exposure in Shareholder Lawsuits”(2002). ≤ Available at
http://www.borisfeldman.com/directors.html ≥. viewed on February 10, 2014
 Fontaine, C., Haarman, A. and Schmid, Stefan , “The Stakeholder Theory,” Stakeholder
Theory of the MNC(2006),
 Forbes, Daniel P. and Milliken, Frances J., “Cognition and Corporate Governance:
Understanding Board of Directors as Strategic Decision Making Groups,” Academy of
Management Review, Vol. 24(1999),
112
 Freeman, Edward, “Stakeholder Theory of The Modern Corporation” ,General Issue in
Business Ethics
 Freeman, R. Edward and McVea, John, “ A Stakeholder Approach to Strategic
Management,”(2002).
Available at SSRN: ≤http://papers.ssrn.com/paper.taf?abstract_id=263511≥
 Freeman, R. Edward and Phillips, Robert A., “Stakeholder Theory: A Libertarian
Defense,” Business Ethics Quarterly, Vol. 12, No.3(2002)
 Freeman, R. Edward, Wicks, Andreew C. and Parmar, Bidhan, “ Stakeholder Theory and
The Corporate Objective Revisited,” Organization Science, Vol.15, No.3(May-June
2004), .
 Gelekancy, Martha A. and Hambrick, Donald C., , “ The External Ties of Top
Executives: Implications for Strategic Choice Performance,” Administrative Science
Quarterly, Vol. 42, No.654(1997)
 Gopalakrihnan, S., “role and responsibilities of independent directors”(2005). Accessed
at ≤www.icai.org/resource_file/10500jan05p861-866.pdf ≥visited on November 9, 2013.
 Gordon, Jeffrey N, “The Rise of Independent Directors in the United States, 1950-
2005:Of Shareholder Value and Stock Market Prices,” Stanford Law Review ,
No.74(2007),
 Gould, Nick, The Role of the Non-executive Directors: An Overview (2008). Available
at ≤ http://www.incelaw.com/≥
 Gu, Minkang, “Will an Independent Director Institution Perform Better than a
Supervisor? Comments on the Newly Created Independent Director System in the
People's Republic of China,” Journal of Chinese and Comparative Law, (2003)
 Guo, Yan and Lu, Lei, “Backgrounds of Independent Directors and Corporate
Performance: An Empirical Study on Chinese Listed Financial Services
Companies,”(2012)
 Habbash M., Salama, A., and Dixon R. Dixon, “The effects of Non-Executive Directors’
Commitment and Chairman Independence on Earnings Management: UK Evidence”,
Journal of Applied Accounting Research,( 2008)
 Hamilton, Robert W., “Reliance and Liability Standards for Outside Directors,” Wake
Forest Law Review, Vol.24, No.1 (1989),
113
 Heath, Joseph and Norman, Wayne, “Stakeholder Theory, Corporate Governance and
Public Management: What Can the History of State-run Enterprises Teach us in the Post-
Enron era?, ”Journal of Business Ethics (2004),
 Higgs, Derek, “Review of the Role and Effectiveness of Non-executive Directors: A
Consultation Paper”(2002). Available at:www.dti.gov.uk/cld/non_exec_review
 Hill, Charles W.L. and Jones, Thomas M.,” Stakeholder Agency Theory,” Journal of
Management Studies, Vol. 29, No. 2 (1992),
 Hillman, Amy J., Keim, Gerald D. andLuce, Rebecca A., “Board Composition and
Stakeholder Performance: Do Stakeholder Directors Make a Difference?”,Business&
Society, Vol. 40 No. 3(2001),
 Hooghiemstra, Reggy and Manen, Jaap van, “The Independence Paradox: Impossibilities
Facing Non-executive Directors in The Netherlands,” Corporate Governance: An
International Review, Vol. 12. No. 3 (2004)
 Horváth, Roman and Spirollari, Persida, “ Do the Board of Directors’ Characteristics
Influence Firm’s Performance? The U.S. Evidence,” Prague Economics Papers, Vol.4
(2012)
 Hussien Ahmed Tura, “Overview of Corporate Governance in Ethiopia: The Role,
Composition and Remuneration of Board of Directors in Share Companies,” Mizan Law
Review, Vol. 6, No.1(2012)
 Johnson, Richard A. and Greening, Daniel W., “The Effects of Corporate Governance
and Institutional Ownership Types on Corporate Social Performance,” Academy of
Management Journal, Vol. 42(1999)
 Kanapathy, K.vethanayagam S/O Kanapathy, “Independent Non-executive Directors,
Managerial Ownership and Firm Performance in Malaysian Public Listed Companies,”
(2005). Accessed at
≤http://eprints.usm.my/25587/1/INDEPENDENT_NONEXECUTIVE_DIRECTORS,_M
ANAGERIAL_OWNERSHIP_AND_FIRM_PERFORMANCE_IN_MALAYSIAN_PU
BLIC_LISTED_COMPANIES.pdf≥ viewed on December 27, 2013
 Khanna, Vikramaditya and Mathew, Shaun J., “The Role of Independent Director in
Controlled Firms in India: Preliminary Interview Evidencer, “National Law School of
India Review, Vol.22, No.1(2010),
114
 Kothari, Vinod, “Role and Responsibilities of Independent Directors under the
Companies Act.” Available at≤ http://www.scribd.com ≥
 Letza, Steve and Sun, Xiuping, “ Corporate Governnace: Paradigms, Dilemmas and
Beyond,” Sibao Shen and Jiang Jia, “Will the Independent Directors Institution Work in
China,” Loyola of Loss Angeles International and Comparative Law Review, Vol. 3,
No.1 (2005),
 Li, H., Wang, Z. and Deng, X., “Ownership, independent directors, agency costs and
financial distress: evidence from Chinese listed companies,” Corporate Governance,
Vol.8, No. 5 (2008)
 Liao, Young, Martin R. and Sun, Qian, “Independent Directors Characteristics and
Performance: Evidence from China,” Journal of Economic Literature , No. G34;
G38(2009),
 Lin, Chien-Chung, “Independent Directors in China,” (mar 9, 2006). Accessed
athttp://www.waseda.jp/law-school/jp/keisei/pdf/action1_17_07.pdf viewed on
November 11, 2013,.
 Lin, Karen, et al, ‘Exit as Voice: The Unintended Consequence of Independent Director
Resignations in an Emerging Economy”(April 2, 2011),. Accessed at ≤ http://areas.kenan-
flagler.unc.edu/Accounting/Documents/2011%20GIA%20Conference/Exit%20as%20Vo
ice.pdf ≥ visited on November 11, 2013
 Ma, Juan and Khanna, Tarun, “Independent Directors’ Dissent on Boards: Evidence form
Listed Companies of China,” Harvard Business School, working Paper. 13-089(October
24, 2013)
 Masulis, Ronald W., Ruzzier, C., Xiao, S. and Zhao, S., “Do Independent Directors
Matter?,” Journal of Economic Literature, No: G32(march,2012),
 Meng, Wong , “Directors Nomination and Remuneration-Some Thoughts”,
(2007).Accessed ≤ at
http://www.icsa.co.za/documents/2010SpeakerPresentations/JacquiBaumgardt.pdf ≥
viewed on December 01, 2013
 Messias, Mervin, “Non-executive Directors” (Gauteng Law Council). Available at
http://www.gautenglaw.co.za/content/index.cfm?navID=7&itemID=72 Accessed on
January 02, 2014
115
 Michaels, David I., “No Fraud? No. Problem: Outside Director Liability for Shelf
Offerings Under Section 11 of the Securities Act of 1933,”Review of Banking and
Financial Law, Vol. 28(2009)
 Minga Negashe, “Corporate Governance and Ownership Structure: The Case of
Ethiopia,” Ee-JRIF Special issue on the Ethiopian Economy, Vol.5, No.1 (2013)
 Minga Negashe, “Rethinking Corporate Governance in Ethiopia,” Journal of Economic
Literature, No. K12, K22, L22, M14, M41, N27 (2008),
 Mnif, Anis, “Corporate Governance and Management earnings Forecast Quality:
Evidence from French Ipos”( February, 2010). Accessed at
http://hal.inria.fr/docs/00/45/91/71/PDF/p61.Pdf on visited November 11, 2013
 Mura, Roberto, “Do Non-Executive Directors and Institutional Investors Have Minds Of
 Ness, Raymond K. Van, Miesing, Paul and Kang, Jaeyoung, “Understanding Governance
and Corporate Boards: Is Theory a Problem?,” European Journal of Management, Vol.7,
No.9(2009
 Ntim, Collins G., “The King Reports, Independent Non-executive Directors and Firm
Valuation on the Johannesburg Stock Exchange,” Corporate Ownership and Control, Vol.
9, No. 1(2011)
 Pass, Christopher, “Corporate Governance and the Role of Non-executive Directors in
Large UK Companies: An Empirical Study, “Corporate Governance, Vol.4, No. 2(2004),
 Pease, Donald E., “Outside Directors: Their Importance to the Corporation and Protection
from Liability,” Delaware Journal of Law, Vol. 12, No.1 (1987)
 Peng, Mike W., “ Outside Directors and Firm Performance During Institutional
Transitions,” Strategic Management Journal, Vol.25(2004)
 Perry, Tod, “Incentive Compensation for Outside Directors and CEO Turnover”, Journal
of Economic Literature, No.G30 and G34(2000)
 Petra, Steven T., “Do Outside Independent Directors Strengthen Corporate Boards?,”
Corporate Governance, Vol. 5, No.1(2005)
 Radonjic, Dragan, “Independent Directors and New Corporate Governance Paradigm
(Pros & cons of Independent Directors),” Annals FLB – Belgrade Law Review, Year LX,
No. 3(2012),
116
 Ravina, Enrichetta and Sapienza, Paola, “What do Independent Directors Know?
Evidence from Their Trading,” Journal of Economic Literature, No. G3, G34,
K22,(April 13, 2009)
 Ritche, Thomas, “ Independent Directors: Magic Bullet or Band-Aid?,” Corporate
Governance eJournal (2007). Available at ≤ http://epublications.bond.edu.au/cgej≥
 Saint, Daniel K. and Tripathi, Aseem Nath, “the Shareholder and Stakeholder Theories of
Corporate Purpose.”. Accessed at
≤http://www.knowledgeworkz.com/samatvam/newsletter/The%20Shareholder%20and%
2≥ viewed on December 9, 2013.
 Scarabotti, Serena, “The Independent Directors’ Role in Europe: Developments and Open
Debates in Italy,” The Columbia Journal of European Law Online, Vol.15 (2009)
 Seyoum Yohannes, “On Formation of a Share Company in Ethiopia”, Journal of
Ethiopian Law, Vol. 22 ,No.1 (July,2008),
 Shen, Sibao and jia, Jiang , “Will the Independent Directors Institution Work in China,”
Loyola of Loss Angeles International and Comparative Law Review, Vol. 3, No.1
(2005),
 Shivdasani, Anil and Yermack, David, “CEO Involvement in the Selection of New Board
Members: An Empirical Analysis,” The Journal of Finance, Vol. 54, No.5(1999)
 Smith, D. Gordon, “The Shareholder Primacy Norm”, Journal of Corporation Law,
Vol.23, No.2 (1998).
 Stadler, Christian, et al, “The CEO’s Attitude Towards the Shareholder Value and the
Stakeholder Model. A Comparison Between the Continental European and the Anglo-
Saxon Perspectives,” Problems and Perspectives in Management, Vol. 4, No.3(2006)
 Sternberg, Elaine, “The Stakeholder Concept: A Mistaken Doctrine,” Foundation for
Business Responsibilities, Issue Paper No.4 (1999)
 Straus, Susan G., et.al, “The Group Matters: A Review of the Effects of Group
Interaction on Processes and Outcomes in Analytic Teams”, RAND working paper series,
WR-580-USG ( April, 2009)
 Summer, I., Coffelt, T. and Horton, Roy E., “ Work Group Cohesion,” Psychological
Reports, Vol.63, No.2( 1988)
117
 The African Development Bank Group Chief Economist Complex, “Ethiopia’s Economic
Growth Performance : Current Situation and Challenges,” Economic Brief, Vol.1, No. 5(
2010),
 Their Own? Evidence on Performance of UK Firms,” Available at SSRN:
http://ssrn.com/abstract=676971
 Trautman, Lawrence J., “Boardroom Diversity: Why it Matters”, Journal of Economic
Literature, D63, D70, D71, G30, G34, J16, J44, J70, K22, K40, L20, M10, M14, M40
and M50 (2008),
 Tseng, Chun-Yao and Lin, Chun-YI, “The Relationship Between Corporate Governance
and Intellectual Capital: Empirical Study of Taiwanese Electronics Manufactures,” East
Management Review ,Vol.13, No.1 (2011)
 Udayasankar, Krishna, “The Foundations of Governance Theory: A Case for the
Resource Dependence Perspective,” Corporate Ownership and Control, Vol. 5(2008)
 Varotti, Umakanth, “Evolution and Effectiveness of Independent Directors in Indian
Corporate Governance,” Hastings Law Journal, Vol.6 No.2 (2010)
 Veasey, E. Norman, “Should Corporation Law Inform Aspirations for Good Corporate
Governance Practices or Vice Versa?,” U. PA. L. REV (2001), p.2182.
 Velsaco, Julian, “Shareholder Ownership and primacy,” University of Illinois Law
Review, No.3(2010)
 Wallison, Peter J., “All the Rage: Will Independent Directors Produce Good Corporate
Governance?,” American Enterprise Institute, Working No. 30670(2009) ,
 Wang, Jiang Yu, “The Strange Role of Independent Directors in a Two-tier Board
Structure of China’s Listed Companies”, Compliance and Regulatory Journal, Issue.3
(2007),
 Weinstein, Matthew, “The Independent Director Requirement and Its Effects on the
Foreign Investment Climate in China: Progress or Regress?,” Business Law Brief (spring
2008)
 Weir, Charlie, et al, “Performance Effects of Appointing Other Firms' Executive
Directors to Corporate Boards: An Analysis of UK Firms,” Journal of Economic
Literature, No. G34 and G39 (2008)
118
 Yuan, Jie, “ Formal Convergence or Substantial Divergence?,” Asian-Pacific Law and
Policy Journal, Vol.9, Issue.1(2007)
 Yuan, Niu, “A brief Analysis of the Defects and Countermeasures of the Independent
Directors System in China,” International Journal of Law and Management, Vol.51, No.4
(2009),
 Zéghal, Daniel and Gouiaa, Raef, “The Effect of the Board of Directors’ Characteristics
on the Financing Strategies of French Companies,”. Available at
≤http://www.jimsjournal.org ≥
 Zhu, Jiangyu, “Liability of Outside Directors and Corporate Governance-A Comparative
Study,” Perspectives, Vol. 3, No.2
 Zollinger, Peter, “Stakeholder Engagement and the Board: Integrating Best Governance
Practices,” Global Corporate Governance Forum, Focus 8(2009),
Research works
 Betre Dawit, The Law of Business Organizations: A Comparative Study of General

Partnerships and Private Limited Companies (1991, Unpublished Snr. Thesis, AAU Law
Library, faculty of law, Addis Ababa University)
 Gebeyaw Simachew Bekele, A Critical Analysis of the Ethiopian Commercial Code in
Light of OECD Principles of Corporate Governance Framework (2011-2012,
Unpublished, Library, School of Advanced Study, University of London)
 Gona, Shingirirayi, The Role of the Independent Director in Maintaining Good Corporate
Governance (2009, unpublished , library, University of Cape Town),
 Jenkins, Kerry Claire, Outside Directors Experience and the Effect on Company Value: A
South African Study (2012, unpublished, library, University of Manchester)
 Mohamad, Nor Raihan, et al, The Effects of Board Independence, Board Diversity and
Corporate Social Responsibility on Earnings Management( University of Malaysia:
Faculty of Management and Economics, 2010)
 Nigussie Tadesse, Major Problems Associated With Private Limited Companies in
Ethiopia: The Law and Practice (March 2009,unpublished, Library, Faculty of Law,
Addis Ababa University )
119
 Semosa, Selilo Bethuel, Impact of Board Composition on Performance in the South
African Platinum Mining Industry(2012, unpublished, library, University of Pretoria)
 Siladi, Biserka, The Role of Non-executive Directors in Corporate Governance: An
Evolution (2006, unpublished, Library, Faculty of Business and Enterprise, Swinburne
University of Technology)
 Tumuheki, Justine, Towards Good Corporate Governance: An Analysis of Corporate
Governance Reforms in Uganda(2007, unpublished , library, University of Cape Town)
 Wu, Wei, Board Composition and Firm Performance: A Quantitative Study on Chinese
Listed Companies (2009, unpublished, library, Umea School of Business)
 Zhu, Hongquan, Group Polarization on Corporate Boards: Theory and Evidence on
Board Decision About Acquisition Premiums, Executive Compensation and
Diversification( 2009, Unpublished, Library, Faculty of Business Administration,
University of Michigan),
Codes and Documents
 Basel Committee on Banking Supervision, Principles for Enhancing Corporate

Governance, (Bank for International Settlement (BIS), Oct. 2010), Available
at<http:/www.bis.org/pub/bcbs/68.pdf> Last visited on December 13, 2013.
 Bouton Committee, the Report on Promoting Better Corporate Governance in Listed
Companies(2002)
 China Securities Regulatory Commission, Guidelines for Introducing Independent
Directors to the Board of Directors of Listed Companies (Aug. 16, 2001). Available at
http://www.csrc.org.cn/cn/search/search_detail.jsp?infoid=1061947864100&type=CMS.
STD
 Economic Commission for Africa, Guidelines For Enhancing Good Economic and
Corporate Governance in Africa (2002),
 FDRE draft Commercial Code
 Federal Democratic Republic of Ethiopia ,Ethiopian Industrial Development Strategy(
2001)
 Federal Democratic Republic of Ethiopia, Growth and Transformation Plan (GTP) (2011)
120
 Financial Reporting Council, Report of the Committee on the Financial Aspects of
Corporate Governance (1992). Available at
http://www.ecgi.org/codes/documents/cadbury. pdf
 French company law of 2006
 French Corporate Governance in Listed Companies, Driving Growth and Attractiveness:
A guide Book for Investors. Accessed at
http://www.ifaasso.com/download.php?module=actualites&file_id=202&fichier_nom=ac
tualite-202.pdf. Visited on November 11, 2013
 Greenbury, Richard, et.al., Directors Remuneration :Report of a Study Group Chaired by
Sir Richard, Greenbury, Jul. 17, 1995, .Available
athttp://www.ecgi.org/codes/documents/greenbury. pdf.
 Hampel, Ronnie, Final Report of the Committee on Corporate Governance, Jan.1998.
Available at http://www.ecgi.org/codes/documents/hampel_index. htm.
 Indian Companies Act of 1956, § 263. Available at ≤www.mca.gov.in/ ≥
 Institute of Directors, King Report on Corporate Governance for South Africa (2008)
 Institute of Directors, King Report on Corporate Governance for South Africa (1994)
 KPMG, King III Summary (South Africa, 2009)
 KPMG, Corporate Governance and King 3(South Africa, 2009)
 London Stock Exchange (LSE): Committee on Corporate Governance, Hampel: The
Combined Code, Section 1A, Main Principle, (London, July
2003).<http://www.frc.org.uk/documents/pagemanager/frc/Web%20Optimised%20Comb
ined%20Code%203rd%20proof.pdf> December 13, 2013.
 NASDAQ OMX RIGA, Principles of Corporate Governance and Recommendations on
their Implementations(2010)
 National Conference of Commissioners on Uniform State Laws, the Uniform Partnership
Act ( 1997),
 New York Stock Exchange Rules of 2003, approved by SEC on November 4, 2003
 Organization for Economic Co-operation and Development (OECD), Principles of
Corporate Governance (2004)
 Paul Freeman, Partnership Act of UK (1890)
121
 Price water house Coopers (PWC), Non-executive Directors’: Practices and Fees Trends
Report (South Africa, 2013)
 Private Sector Initiative for Corporate Governance, Principles for Corporate Governance
in Kenya and a Sample Code of Best Practice for Corporate Governance(2012)
 Private Sector’s Responses to the Current Global Financial and Economic Crisis: The
Case of Ethiopia, Prepared by EEA to the International Labor Organization, April 23,
2009 Addis Ababa, Ethiopia
 Rati Shah MBE, The Partnership Act of 1890, p.1. Available≤ at
www.oshwal.co.uk/sites/default/files/ON-01-12-Partnership. pdf ≥ viwed on December
12, 2013
 Report of the CII Task Force on Corporate Governance, Corporate Governance:
Recommendations for Voluntary Adoption(2009). (herein after “CII Report)
 Sarbanes-Oxley Act of 2002, passed by 107th Congress of the United States of America at
the Second Session on 23rd January, 2002
 Secretariat of the Organization for the Harmonization of Business Law in Africa
(OHADA), Uniform Act Relating to Commercial Companies and Economic Interest
Groups( April 1997)
 Securities Act of 1933 of US, Section
 The Company Act No. 71/ 2008 of South Africa,
 The Association of Business Executives, Principles of Business Law,
 The Report on Boards of Directors of Listed Companies in France(1999)
 USAID, Ethiopian Commercial Law and Institutional Reform and Trade Diagnostic
(January,2007),
 Viénot Committee (Conseil National du Patronat Français and Association Française des
Entreprises Privées),
 Zekarias keneea, Lecture note on Corporate Governance(Course on Company Law and
Finance, Addis Ababa University, Addis Ababa, January, 2013)
Interviews
 Interview with Ato Alebachew Sitotaw, Expert, Trade Registration and licensing
Directorate, Ministry of Trade, December 31, 2013
122
 Interview with Ato Befikadu Gashaw, Director, Domestic, Economic Analysis and
Publication Directorate and Economic Modeling and Statistical Analysis Directorate,
National Bank of Ethiopia, November 25, 2013
 Interview with Ato Biniyam Terfa, Attorney and Consultant at Law and Director in
Awash International Bank, November 20, 2013
 Interview with Ato Merga Waqoya, Principal Examiner, Directorate of Banks
Supervision, National Bank of Ethiopia, November 25, 2013.
 Interview with Ato Yoseph Alemu, Senior Legal Expert, Counseling and Information
Service Department, Ministry of Trade, December 31, 2013
 Interview with Dr Solomon Abay, Lecturer, School of Law, Civil Service University,
November 19, 2013
 Interview with Tilahun Teshome, Professor, College of Law and Governance Studies,
Addis Ababa University, November 12, 2013
Internet Sources
 Daniel, Ferreira, Board Diversity (July 9, 2010).Accessed at

http://personal.lse.ac.uk/FERREIRD/Board%20Diversity%20version%201.pdfvisited on
November 13,
 Duties of Directors (2006).. Accessed at
http://www.deloitte.com/assets/DcomSouthAfrica/Local%20Assets/Documents/za_audit_
directorsduties07_140507 viewed on December 28, 2013.
 Governance versus Management,. Accessed at http://www.health.qld.gov.au/health-
reform/docs/factsheet-govn-mgnt visited on august 13, 2013
 Hill, Patrick L. and lapseley, Daniel K., Egocentrism. Accessed at
http://www3.nd.edu/~dlapsle1/Lab/Articles%20&%20Chapters_files/Egocentrismv.Visit
ed on November 14, 2013,
 Information from Ministry of Finance and Economics, accessed at
≤http://www.mofed.gov.et≥ viewed on October 28, 2013
 Lister, Jonathan, Functions of Corporate Governance accessed at
http://www.ehow.com/info_8044296_functions-corporate-governance.html visited on
august 13, 2013
123
 Meaning, characteristics and types of a Company. Available at
≤http://wwn.ddegjust.ac.in/studymaterial/bba/abba-201.pdf ≥visited on march 08, 2013
 The Effect of Company Performance and the Structure of the Board on the Remuneration
of Executive Directors. ≤ Accessed at http://world-finance-
conference.com/papers_wfc2/365.pdf≥ Viewed on December 15, 2013
124

Alemayehu Yismaw

Uploaded by

Copyright:

Available Formats

Alemayehu Yismaw

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Alemayehu Yismaw

Uploaded by

Copyright:

Available Formats

ADDIS ABABA UNIVERSITY

COLLEGE OF LAW AND GOOD GOVERNANCE

LL.M Program in Business Law

SUBMITTED IN THE PARTIAL FULLFILMENT OF THE REQUIRMENTS FOR THE

ADVISOR- ZEKARIAS KENEAA (ASSOCIATE PROFESSOR)

Name of Author: Alemayehu Yismaw signature_____________________

Name of Advisor: Zekarias Keneaa signature ___________________

Examiner/ Reader name : Tewodros Mihret signature____________________

Examiner/ Reader name : Binyam signature_____________________

Chapter One: Introduction

1.1. Back Ground of the Study and Literature Review--------------------------------------------------1

1.2. Statement of problems----------------------------------------------------------------------------------7

1.3. Research questions--------------------------------------------------------------------------------------9

1.4. Objectives of the study--------------------------------------------------------------------------------10

1.5. Methodology of the study-----------------------------------------------------------------------------10

1.6. Significance of the study------------------------------------------------------------------------------11

1.7. Scope of the study-------------------------------------------------------------------------------------11

1.8. Limitations of the study-------------------------------------------------------------------------------12

Chapter Two: General Overview on Companies

2.2. Formation of Companies------------------------------------------------------------------------------14

2.3. Distinguishing Features of Companies--------------------------------------------------------------17

2.4. Types of Companies------------------------------------------------------------------------------------18

2.4.2. Private Limited Companies----------------------------------------------------------------------20

Chapter Three: Corporate Governance of Share Companies

3.1. Meaning and Nature of Corporate Governance----------------------------------------------------22

3.2. Significances of Corporate Governance-------------------------------------------------------------25

3.3. Principles of Good Corporate Governance----------------------------------------------------------29

3.4. Models of Corporate Governance--------------------------------------------------------------------32

3.4.1. A Shareholders’ Model of Corporate Governance --------------------------------------------32

3.4.2. A Stakeholders’ Model of Corporate Governance---------------------------------------------34

3.5. Organs of Corporate Governance and their Role---------------------------------------------------37

3.5.2. The Board-------------------------------------------------------------------------------------------39

3.5.3. The Manager ---------------------------------------------------------------------------------------39

3.5.4. Auditors ---------------------------------------------------------------------------------------------40

3.6. Board of Directors of Share Companies ------------------------------------------------------------39

3.6.1. Meaning and Nature of Board of Directors-----------------------------------------------------39

3.6.2. Board Composition and Independence----------------------------------------------------------41

3.6.3. Experiences of Foreign Countries on Board Composition with Particular Emphasis on

3.6.3.1. Non-shareholder Directors in the USA----------------------------------------------------45

3.6.3.2. Non-shareholder Directors in the UK------------------------------------------------------48

3.6.3.4. Non-shareholder Directors in China--------------------------------------------------------52

3.6.3.5. Non-shareholder Directors in South Africa------------------------------------------------54

3.6.3.6. Non-shareholder Directors in Francophone West African Countries (OHADA)----57

Chapter Four: Merits and Demerits of Introducing Non-shareholder Directors in the

4.1. Merits and Demerits of Introducing Non-shareholder Directors in the Governance of

4.1.1. Merits of Introducing Non-shareholder Directors in the Governance of Ethiopian Share

4.1.2. Demerits of Introducing Non-shareholder Directors in the Governance of Ethiopian

4.2. Prospects and Challenges to Introduce Non-shareholder Directors in Governance of

4.3.1. Selection and Appointment of Non-shareholder Directors-----------------------------------85

4.3.2. The Proportion of Non-shareholder Directors on Boards------------------------------------87

4.3.3. The Roles and Responsibilities of Non-shareholder Directors ------------------------------88

4.3.4. Remuneration of Non-shareholder Directors---------------------------------------------------90

4.3.5. Liability of Non-shareholder Directors---------------------------------------------------------93

Chapter Five: Conclusion and Recommendation

5.1. Conclusion ----------------------------------------------------------------------------------------------97

ALI: American Law Institute

AMEX: American Stock Exchange

BIS: Bank for International Settlement

CEOs: Chief Executive Officers

CII: Confederation of Indian Industry