BOARD STRUCTURE AND FIRM PERFORMANCE:

EVIDENCE FROM INDIA’S TOP COMPANIES

Beverley Jackling and Shireenjit Johl
Red Book Presentation

Group 11
Arnav Parekh PGP-18-014
Talat Khanam PGP-18-232
 Index
Slide Number
Introduction 3
Literature Review 5
Research Methodology 7
Hypothesis Testing and Model Development 8
Regression Result and Discussion 10
Value Proposition to Stakeholders 13
Conclusion and Limitations 14
Indian Context 15
Policy Changes 16
References 17
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Introduction
OBJECTIVE
The paper investigates the relationship between internal governance structures and financial performance of listed
Indian companies.

Background of Study Outcome of Study

 The study shows that there is a positive association

between Board Composition and firm performance.
 Duality, CEO promoter and CEO as the only
180 Top Listed Excluded Sectors: Banks employee on board do not affect the firm
Indian Companies & Financial Services performance.
 Larger Boards are positively associated with firm
performance.
 The number of Board meetings is unrelated to
performance in all estimations.
Metrics: ROA Academic Implications:  Resource Dependency Theory argument that
and Tobin’s Q 1. Agency theory directors with multiple appointments generate
2. Resource Dependence benefits in terms of firm value is NOT supported.
Theory
 Important Concepts
Clause 49 of the Listing
1 Agreements
Resource-Dependence
Theory 2

3 Agency Theory

Tobin’s Q 4
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Literature Review
“A CEO who is the sole manager on the board is argued to be more powerful than
boards consisting of other managers and thus may influence decision-making, which in
turn can have a negative impact on performance.”
-Adams et al., 2005

“The board of directors is an important resource for companies especially in

terms of the association with the external environment.”
- Hillman, Cannella, and Paetzold (2000) and Palmer and Barber (2001)

“Advocates of stewardship theory argue that authoritative decision-making under the

leadership of a single individual (as both chairman and CEO) leads to higher firm
performance.”
-Donaldson & Davis, 1991)

“A greater proportion of outside directors will monitor any self-interested

actions by managers, and therefore will be associated with high corporate
performance”
-Nicholson & Kiel, 2007
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Literature Review

“An optimum combination of inside and outside directors with not less than 50 per cent of
boards consisting of outside directors is required where the chairman is an insider.”
-Clause 49 of Listing Agreements, SEBI

“As groups increase in size they become less effective because the coordination and
process problems overwhelm the advantages from having more people to draw on.”
- Jensen(1993:865)

“Directors with multiple appointments can generate benefits given that they have many
networks and can produce benefits (and increase firm value) by accessing resources,
suppliers and customers to the corporation.”
-Booth & Deli, 1995; Mizruchi & Stearns, 1994; Pfeffer, 1972

“A study of 307 firms over a 5-year period showed that boards that met more
frequently were valued less by the market.”
- Vafeas (1999:140)
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Research Methodology
Number and Proportion of Firms by Industry
Classification (Total: 180)
1 Literature
Review
Electrical utilities, water Oil and Petroleum
works/supply, gas, and 4%
Hypothesis telecommunications

Testing 2 3% Others
8%
Computer Software and
Model Development: Services
8%
Chemicals
17%
Formation of Equations
3 for Quantitative Machinery and Industrial

3 Stage Least Squares Analysis Equipment

7%
Engineering services,
Construction, and Building
Regression Analysis Materials
8%
(3SLS) 4 Drugs and Health Care
11% Iron, Steel, and
Metals
Analysis on Results of 3SLS Industrial 7%
Manufacturing,
(Dependent Variables – Consumer Products and
Textile, and

5 ROA & Tobin’s Q) Tobacco

5%
Automobiles
13%

Electronics and Electrical

Recommendation & Equipment
6%
Media and Publishing
3%
Conclusion 6
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Hypothesis Testing
The primary variables of interest in this analysis are board composition (OUTSIDE – H1), board leadership (DUALITY, CEOPRO, CEOOEMP, and PWCEO – H2), board size
(BODSIZE – H3), and board activity (MEET – H4 and BUSYALL and BUSYOUT – H5)

Hypothesis 1
H1: The proportion of outside directors on the board of directors of Indian firms is positively associated with firm performance.
Lag performance is the unique exogenous variable in the given equation
Equation:

Hypothesis 2
H2: There is a negative association between concentrated leadership structures and firm performance for Indian firms.
Powerful CEO is the unique exogenous variable in the given equation
Equation:
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Hypothesis Testing
The primary variables of interest in this analysis are board composition (OUTSIDE – H1), board leadership (DUALITY, CEOPRO, CEOOEMP, and PWCEO – H2), board size
(BODSIZE – H3), and board activity (MEET – H4 and BUSYALL and BUSYOUT – H5)

Hypothesis 3
H3: There is a positive association between the size of the board and firm performance for Indian firms.
Equation: Same as H1

Hypothesis 4
H4: There is a positive association between board activity (in terms of meeting frequency) and firm performance for Indian firms.
Equation: Same as H1

Hypothesis 5
H5: There is a positive association between multiple directorships and firm performance for Indian firms.
Altman z score is the unique exogenous variable in the given equation
Equation:
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Analysis and Discussion

Descriptive Statistics
250 50
221.09 40
200 30
37.53 20
150 10
8.44 7.84
0
100 -10
-40.58 -20
50 -30
-40
0 0.45 4.84 2.2 -50
Minimum Maximum Mean Median

ROA Tobin's Q

The firms in the sample are fairly

mature in that the mean and
median age (from date of
incorporation) is 42 and 34
respectively and ranges between
3 and 144 years of operation
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Analysis and Discussion

Regression Analysis

Hypothesis 1
• This hypothesis deals with Board composition and is proxied by variable OUTSIDE. The variable is significant at 90% level of confidence
(z=1.57)
• Even though the there is weak significance, it is consistent with past studies and the possible lack of independence of outside directors in
Indian businesses could be the reason for weaker association

Hypothesis 2
• This hypothesis deals with Board Leadership + CEO Power and is proxied by variables DUALITY, CEOPRO, CEOEMP and PWCEO.
• None of these variables are at significant for either Tobin’s Q or ROA method of performance measurement at even 90% level of
confidence. The results seem to suggest that:
i. Firms with non promoter CEOs don’t tend to outperform firms whose CEOs are promoters
ii. Boards consisting of managers other than CEO don’t outperform cases with only CEO as solo manager
iii. The notion of powerful CEO impacting firm’s performance seems to not be present in India context

• This is one of the most startling result of the analysis as it is contrary to resource agency theory as well as past findings. However, the
likely reason seems to be that the older results are majorly set in developed economies.
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Analysis and Discussion

Regression Analysis
Hypothesis 3
• This hypothesis deals with Board size and is proxied by variable BODSIZE. The variable is significant at even 99% level of confidence
(z=2.67)
• The results strongly push the point that larger boards tend to bring in deeper intellectual depth than smaller boards and hence improve
decision making and in turn performance of the firm

Hypothesis 4
• This hypothesis deals with Board Activity and is proxied by variable MEET. The variable is insignificant in impacting firm’s performance
• The insignificance may suggest that relationship between frequency board meetings and firm performance could be beyond a linear
relation or there being a possibility of a lag effect in that boards respond to poor performance by increasing moard meetings which in
turn affects following year’s performance

Hypothesis 5
• This hypothesis deals with Board Busyness and is proxied by variable BUSYALL and BUSYOUT. Both the variables are significant but have
an impact contrary to expectations
• BUSYALL which has weaker significance has actually a negative impact on the firm’s performance (measured as Tobin’s Q)
• BUSYOUT(z=1.97) has a stronger significance but again negatively impacts the Tobin value.
• This inconsistency between results of the study and resource dependency theory suggest that there maybe unique factors from Indian
context that explain this variation from theoretical position proposed in the hypothesis
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Value Proposition

•There are several studies done for developed economies but this study adds
value to the decision making for policy makers for laws like clause 49 to address
issues related to board structure that can possibly impact the firm’s performance

STAKEHOLDERS •In light of increasing FDI there need to be better management policies in
place to avoid cases like Satyam Computers even after the company had
adopted the clause

Policy Makers
•The study done in 2009 enables decision makers to undertake further
Company Promoters reforms in Companies Act

From the perspective of company promoters, they can incorporate several

findings of the research like need for outside directors and size of company
boards to improve their firm’s performance
 Introduction Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion &
Review Methodology Model Development Discussion Stakeholders Limitations

Conclusion & Limitations

Conclusions Limitations

• Results suggest that in Indian Market • Limited number of variables related to

requirement of outside directors as per corporate governance were addressed in
clause 49 may be an important aspect of the study, which limits the generalizability of
corporate governance the findings
• There is a positive relation between the
board size and financial performance of a • The analysis done is explanatory and
company, thus supporting the resource drawn from theory. Hence, further
dependency theory investigations particularly on the unique
• The major finding of the study is that the aspect of family businesses in India (60%
firm’s whose outside directors have many of all firms) needs to be done
directorships may lower the effectiveness
of their role as corporate monitors. This
could probably be due to limited pool of
outside directors with right expertise in
India
 Literature Research Hypothesis Testing and Regression result & Value Proposition to Conclusion & Indian Context
Review Methodology Model Development Discussion Stakeholders Limitations

Why is India different?

More than 60% of the firms

are family owned businesses. Underdeveloped stock market
This tends to create agency at that point (2009)
problems with corporate
governance

Though all set of companies The availability of Independent

listed in category A,B and C Directors is a major concern
were to adopt Clause 49 by and secondly, often Directors
2006, only 40% of companies are not skilled at par with
had complied by 2007 developed economies
 Research Hypothesis Testing and Regression result & Value Proposition to Conclusion & Indian Context Further Policy Changes
Methodology Model Development Discussion Stakeholders Limitations

Policy Changes post 2009

Companies Act 2013

 Even after the introduction of Clause 49 in 2000, India was still could not deliver the highest standard
of corporate governance

 As a consequence, Companies Law 2013 was drafted as with a dedicated chapter on issues related
to corporate governance

 The Companies Act gave Clause 49 a strong statutory backing. Following provisions were
highlighted in the act

• Compulsory rotation of auditors and audit firms

• Compulsory appointment of atleast 1 women Director
• Mandatory requirement of Independent Directors
• Formal evaluation of performance all Directors
• Statutory status for SFIO to ensure higher accountability and transparency
Hypothesis Testing and Regression result & Value Proposition to Conclusion & Indian Context Further Policy Changes References
Model Development Discussion Stakeholders Limitations

References

 Adams, R. B., Almeida, H., & Ferreira, D. 2005. Powerful CEOs and their impact on corporate
performance. Review of Financial Studies, 18: 1403–1432.

 https://www.gktoday.in/gk/corporate-governance-clause-49-and-companies-act-2013-
provisions/#Clause_49_of_SEBI_Listing_Agreement

 Agrawal, A. & Knoeber, C. R. 1996. Firm performance and mecha- nisms to control agency problems
between managers and share- holders. Journal of Financial and Quantitative Analysis, 31: 377–397.

 Altman, E. I. 1968. Financial ratios, discriminates analysis, and the prediction of corporate
bankruptcy. Journal of Finance, 23: 586– 609.

 Andersen, R. C. & Reeb, D. M. 2003. Founding-family ownership and firm performance: Evidence
from the S and P 500. Journal of Finance, LVIII: 1301–1328.
THANK YOU
Appendices