Prelims
Governance-Led Corporate Performance: Theory and Practice
ISBN: 978-1-78973-848-3, eISBN: 978-1-78973-847-6
Publication date: 21 August 2019
Citation
Manna, A., Sahu, T.N. and Gupta, A. (2019), "Prelims", Governance-Led Corporate Performance: Theory and Practice, Emerald Publishing Limited, Leeds, pp. i-xvi. https://doi.org/10.1108/978-1-78973-847-620191001
Publisher
:Emerald Publishing Limited
Copyright © 2019 Emerald Publishing Limited
Governance-Led Corporate Performance
Governance-Led Corporate Performance: Theory and Practice
Apu Manna
Balurghat College, India
Tarak Nath Sahu
Vidyasagar University, India
Arindam Gupta
Vidyasagar University, India
United Kingdom – North America – Japan India – Malaysia – China
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A catalogue record for this book is available from the British Library
ISBN: 978-1-78973-848-3 (Print)
ISBN: 978-1-78973-847-6 (Online)
ISBN: 978-1-78973-849-0 (Epub)
Contents
| List of Tables | ix | |
| List of Abbreviations | xi | |
| About the Authors | xiii | |
| Preface | xv | |
| 1. | Conceptual Approach of Corporate Governance | 1 |
| 1.1. Introduction | 1 | |
| 1.2. Corporate Governance and Its Various Dimensions | 2 | |
| 1.3. Corporate Governance Mechanisms | 3 | |
| 1.3.1. Ownership Structure | 4 | |
| 1.3.2. Board of Directors | 5 | |
| 1.3.3. CEO Characteristics | 6 | |
| 1.4. Theories of Corporate Governance | 6 | |
| 1.4.1. Agency Theory | 6 | |
| 1.4.2. Stewardship Theory | 7 | |
| 1.4.3. Resource Dependence Theory | 8 | |
| 1.4.4. Stakeholder Theory | 9 | |
| 1.4.5. Signalling Theory | 9 | |
| 1.4.6. Managerial Hegemony Theory | 9 | |
| 1.4.7. Political Theory | 10 | |
| 1.5. Motivation of the Study | 10 | |
| 1.6. Chapter Plan of the Book | 11 | |
| 2. | Corporate Governance in India | 13 |
| 2.1. Introduction | 13 | |
| 2.2. Three Historical Models and their Development Impact in India | 14 | |
| 2.2.1. The Managing Agency Model (1850–1956) | 14 | |
| 2.2.2. The Business House Model (1956–1991) | 15 | |
| 2.2.3. The Anglo-American Model (1992 to Date) | 16 | |
| 2.3. Features of Corporate Governance in India | 17 | |
| 2.4. Corporate Governance Codes in India | 18 | |
| 2.4.1. CII Code on Corporate Governance (1998) | 19 | |
| 2.4.2. Kumar Mangalam Birla Committee on Corporate Governance (1999) | 20 | |
| 2.4.3. Naresh Chandra Committee on Corporate Audit and Governance (2002) | 21 | |
| 2.4.4. Narayana Murthy Committee Report on Corporate Governance (2003) | 22 | |
| 2.4.5. Dr J. J. Irani Committee Report on Company Law (2005) | 24 | |
| 2.5. Corporate Governance and Legislations in India | 25 | |
| 2.5.1. Amendments to the Companies Act 1956 | 25 | |
| 2.5.1.1. The Companies (Amendment) Act 2000 | 25 | |
| 2.5.1.2. The Companies (Amendment) Act 2001 | 26 | |
| 2.5.1.3. The Companies (Amendment) Bill (2003) | 26 | |
| 2.5.1.4. The Companies (Amendment) Bill (2008) | 27 | |
| 2.5.2. The Companies Act 2013 | 28 | |
| 2.5.3. SEBI: Regulation of Capital Market | 29 | |
| 2.6. Good Governance Indicators | 30 | |
| 2.7. Summary | 32 | |
| 3. | Literature Review | 33 |
| 3.1. Introduction | 33 | |
| 3.2. An International Approach | 34 | |
| 3.3. A National Approach | 48 | |
| 3.4. Research Gap | 51 | |
| 3.5. Objectives of the Study | 52 | |
| 3.6. Research Hypotheses | 53 | |
| 4. | Data and Methodology | 55 |
| 4.1. Data | 55 | |
| 4.1.1. Data Source | 55 | |
| 4.1.2. Sample Selection Procedure | 55 | |
| 4.1.3. Study Period | 56 | |
| 4.1.4. Selection of Variables | 56 | |
| 4.1.4.1. Dependent Variables | 56 | |
| 4.1.4.1.1. Cash Earnings Per Share | 56 | |
| 4.1.4.1.2. Return on Capital Employed | 57 | |
| 4.1.4.1.3. Tobin’s Q | 57 | |
| 4.1.4.1.4. Market Value Added | 58 | |
| 4.1.4.2. Independent Variables | 58 | |
| 4.1.4.2.1. Promoters’ Shareholding | 58 | |
| 4.1.4.2.2. Institutional Investors’ Shareholding | 59 | |
| 4.1.4.2.3. Board Size | 59 | |
| 4.1.4.2.4. Proportion of Executive Directors | 59 | |
| 4.1.4.2.5. Proportion of Independent Directors in Board | 59 | |
| 4.1.4.2.6. Multiplicity of Directorship | 59 | |
| 4.1.4.2.7. CEO Duality | 60 | |
| 4.1.4.2.8. CEO Tenure | 60 | |
| 4.1.4.3. Control Variables | 60 | |
| 4.1.4.3.1. Executive Remuneration | 60 | |
| 4.1.4.3.2. Size of the Firm | 60 | |
| 4.1.4.3.3. Growth in Profit After Tax | 61 | |
| 4.1.4.3.4. Debt Equity Ratio | 61 | |
| 4.1.4.3.5. Assets Turnover Ratio | 61 | |
| 4.2. Research Methodology | 61 | |
| 4.2.1. Statistical Methods Used | 61 | |
| 4.2.1.1. Descriptive Statistics | 62 | |
| 4.2.1.2. Bi-variate Data Analysis | 62 | |
| 4.2.1.3. Test for Multicollinearity | 62 | |
| 4.2.1.3.1. Detection of Multicollinearity Property | 63 | |
| 4.2.1.4. Test for Heteroskedasticity | 63 | |
| 4.2.1.5. Test for Autocorrelation | 63 | |
| 4.2.1.6. Panel Data Model | 64 | |
| 4.2.1.6.1. Advantages of Panel Data Model | 64 | |
| 4.2.1.6.2. Techniques of Panel Data Model | 64 | |
| 4.2.1.6.3. Constant Coefficient Method or Pooled OLS Method | 64 | |
| 4.2.1.6.4. FEM or Least Square Dummy Variable Regression Model | 65 | |
| 4.2.1.6.5. REM or Error Component Model | 65 | |
| 4.2.2. Scheme of Investigation | 67 | |
| 5. | Analysis and Findings | 69 |
| 5.1. Descriptive Statistics | 69 | |
| 5.2. Analysis of Bi-variate Correlation | 71 | |
| 5.3. Detection of Multicollinearity Property | 72 | |
| 5.4. Detection of Heteroskedasticity | 72 | |
| 5.5. Analysis of Multiple Regressions: Panel Data Model | 74 | |
| 5.6. Key Findings and Its Interpretations | 82 | |
| 5.6.1. Ownership Structure and Corporate Performance | 82 | |
| 5.6.1.1. Promoters Shareholding and Firm Performance | 82 | |
| 5.6.1.2. IINV and Firm Performance | 84 | |
| 5.6.2. BS, Composition and Corporate Performance | 84 | |
| 5.6.2.1. BS and Corporate Performance | 84 | |
| 5.6.2.2. EDs and Firm Performance | 85 | |
| 5.6.2.3. IDs and Firm Performance | 85 | |
| 5.6.2.4. MD and Firm Performance | 86 | |
| 5.6.2.5. CEO Characteristics and Performance | 86 | |
| 5.6.3. Control Variables and Corporate Performance | 86 | |
| 6. | Summary and Conclusion | 89 |
| 6.1. Summary | 89 | |
| 6.2. Conclusion | 90 | |
| 6.3. Contribution of the Study | 91 | |
| 6.4. Policy Recommendation | 92 | |
| 6.5. Limitations and Scope for Further Research | 92 | |
| Bibliography | 95 | |
| Index | 103 | |
List of Tables
| Table 1. | Descriptive Statistics of Dependent, Independent and Control Variables | 70 |
| Table 2. | Bi-variate Analysis: Correlation Analysis | 72 |
| Table 3. | Correlation Matrix and VIF Values of Independent and Control Variables | 73 |
| Table 4. | Tests of Heteroskedasticity | 74 |
| Table 5. | Regression Results: Dependent Variable – ROCE | 75 |
| Table 6. | Selection of an Appropriate Model of Regression Analysis | 76 |
| Table 7. | Regression Results: Dependent Variable – CEPS | 77 |
| Table 8. | Selection of an Appropriate Model of Regression Analysis | 78 |
| Table 9. | Regression Results: Dependent Variable – TQ | 79 |
| Table 10. | Selection of an Appropriate Model of Regression Analysis | 80 |
| Table 11. | Regression Results: Dependent Variable – MVA | 81 |
| Table 12. | Selection of an Appropriate Model of Regression Analysis | 82 |
| Table 13. | Summarized Regression Results | 83 |
List of Abbreviations
| ATR | Assets Turnover Ratio |
| BSE | Bombay Stock Exchange |
| BS | Board Size |
| BSC | Balanced Scorecard |
| CEO | Chief Executive Officer |
| CEO_DUA | CEO Duality |
| CEO_TEN | CEO Tenure |
| CEPS | Cash Earnings Per Share |
| CG | Corporate Governance |
| CVA | Cash Value Added |
| D/E | Debt and Equity Ratio |
| DPS | Dividend Per Share |
| DP | Dividend Payout |
| EPS | Earnings Per Share |
| ED | Executive Director |
| ER | Executives’ Remuneration |
| EVA | Economic Value Added |
| FEM | Fixed Effect Model |
| ID | Independent Director |
| IINV | Institutional Investors’ Shareholding |
| M-Cap | Market Capitalisation |
| MD | Multiplicity of Directorship |
| MVA | Market Value Added |
| PAT | Profit After Tax |
| P/E Ratio | Price Earnings Ratio |
| PS | Promoters’ Shareholding |
| REM | Random Effect Model |
| RI | Residual Income |
| ROA | Return on Assets |
| ROCE | Return on Capital Employed |
| ROI | Return on Investment |
| SIZE | Size of the Firm |
| SEBI | Security Exchange Board of India |
| SR | Shareholder Return |
| SROI | Social Return on Investment |
| SVA | Shareholder Value Added |
| TBR | Total Business Return |
| TSR | Total Shareholder Return |
| TQ | Tobin’s Q |
| VIF | Variance Inflation Factor |
| WAI | Wealth Added Index |
About the Authors
Dr Apu Manna is presently an Assistant Professor in the Department of Commerce, Balurghat College, Balurghat, West Bengal, India. He has over four years of undergraduate teaching and research experience. Dr Manna passed M.Com. in Accounting and Finance with silver medal. He has attended several workshops and faculty development programmes and presented a number of research articles in several national and international doctoral colloquium, seminars, symposiums and conferences. He has a number of published research works to his credit in the field of Commerce, Economics and Management in different avenues of publication like national and international journals and edited volumes. He is the life member of Indian Accounting Association.
Dr Tarak Nath Sahu is presently an Assistant Professor in the Department of Commerce, Vidyasagar University, Midnapore, West Bengal, India. He has over 12 years of postgraduate teaching and research experience. His specialisation is in finance and financial markets and his research publications are in the area of corporate finance, corporate governance, financial market, investment behaviour, etc. Dr Sahu, a gold medalist at both graduate and post-graduate levels, has authored two books published by Palgrave Macmillan, New York, and Emerald Publishing Limited, UK, and co-edited four books. Dr Sahu has published more than 40 research articles in reputed national and international journals.
Dr Arindam Gupta is presently a Professor in the Department of Commerce, Vidyasagar University, Midnapore, West Bengal, India. He has over 24 years of postgraduate teaching and research experience. His specialisation is in finance and public policy. Dr Gupta is gold medalist at post-graduate level, has a post graduate diploma in financial management and professional qualification of cost and management accountancy. He has completed four research projects sponsored by University Grants Commission and also post-doctoral assignment at Indian Institute of Management Calcutta. Dr Gupta has published more than 100 articles in reputed national and international journals, authored/edited 4 books, and has presented papers in more than 200 occasions in international and national level conferences or lecture programmes.
Preface
The economic growth of any nation largely depends on the vitality of its industry and capital market at large. The responsibility of maintaining the health of the industry as well as capital market mostly depends on the efficiency and effectiveness of the controlling agencies of government and their implemented policies, practices, rules, regulations, etc. A major part in the subject of corporate governance deals with these issues and ensures their apt implementation in the business corporations. The industrial growth in India along with the development of corporate culture started after independence in 1947 but the expression ‘corporate governance’ remained in vogue until 1990. The concept of corporate governance and its problems are as old as the concept of a business corporation and especially the joint stock companies. It started gaining importance after experiencing a number of corporate scandals come out mainly after economic liberalisation. In India, the crucial need for corporate governance was first realised with the occurrence of Harshad Mehta’s scam that was exposed in April 1992. During the last two decades along with many developed and developing economies, India also witnessed a number of serious cases of corporate misgovernance in a handful of joint stock companies. It was clearly indicating the nature and extent of corporate misgovernance that exists in those Indian companies.
In this context, the impact of corporate governance on corporate performance is gradually becoming a key area in research. Although a number of notable studies have been conducted to establish the relationship most of them typically focussed on developed economies and the effect of these corporate governance issues on the firm performance in emerging economies like India has got little attention. The results of earlier studies also provide contradictory findings. By considering the stewardship theory, some studies have suggested that larger board size is better for the firm, whereas by considering the agency theory some studies support small boards and less outsiders. Believing the resources dependency theory some studies have stated that large numbers of outsiders in the board help the organisation to get key resources for the organisation conveniently.
These contradictory findings of the earlier studies became the principal drive behind conducting this research work. This extensive research regarding the effect of corporate governance variables on firm performance in India addresses basic questions for specific areas viz., corporate board, ownership structure and chief executive officer characteristics. Findings of this study provide a comprehensive understanding of the dynamic relationship between corporate governance variables and corporate performance in Indian companies. It discusses the theoretical hypotheses of this relationship and compares with empirical evidence as available from earlier research works. The present study is expected to add several primary contributions to the extant literature. Besides investors, findings of the study help an organisation to determine their policies regarding ownership structure and board composition. Again this study may also provide support to the corporate governance policy-making agencies of the country to provide recommendations regarding board size, independence of the board, multiplicity of directorship, etc.
Thus, such a study is worth undertaking in emerging economies like India, in view of the fact that the study contributes to managerial science by providing scientific elements through identification and validation of the effects of corporate governance variables on corporate performance.