Corporate Governance and Financial Performance An Empirical Study of Indian

Acknowledgement
In the name of Allah, the most Beneficent and Merciful, who has provided me the
strength for my research and has blessed me with the presence of many people, who helped me
in this endeavour.
First of all, I express my deep gratitude and feel highly indebted to thank my supervisor
Prof. Javaid Akhter for his invaluable guidance and constant support throughout the process of
writing this thesis. He believed in me, and constantly provided me with gentle nudging and
encouragements. His expert advice helped me to develop my ideas, sharpen my arguments and
writing. He has been a source of inspiration and a role model whose guidance and relentless
support helped me to not only complete my research but also made me the scholar that I am
today. His continued support, optimism and suggestions have been a source of encouragement
and immense learning, which really helped me complete my research up to the expected
standards.
I owe my sincere thanks to Dr. Asif Akhtar for his guidance, for being a source of
inspiration, and for the support he extended for this research. I convey my profound gratefulness
to him, for his expert guidance and support.
I am grateful to Prof. Parvaiz Talib, Dean and Chairman, of the Department of Business
Administration (Aligarh Muslim University), who had been a source of learning and
encouragement. I am also grateful to Prof. Mohammad Khalid Azam, Prof. Mohammad Israrul
Haque, Prof. Valeed Ahmad Ansari and Prof. Jamal A. Farooquie for providing me valuable
knowledge about research methods. I am also indebted to all the other faculty members of the
department. I am also thankful to the university administration, chairman and Dean’s office for
facilitating my official works.
I am also thankful to my friends Hina Kausar, Arif Anwar, Mohd Asif Ansari, Mohd
Anas, Mohd Saad Abbasi, Zeba Naseem, Shadab, Sarwar Alam, Mr. Hameed Zaini, Mr. Ali T.
Yahya, Mr. Mohsen Moqbel, Mohd Shamshad, Zahin Ansari, Areeba Khan, Atif Ghayas, Faisal
Usmani, Umme Kulsoom Zaidi, Farah Shilpa Chauhan, Zehra, Rajni Joshi, Sukhvir Kaur,
Gurpreet Kaur, Obaidur Rahman, Zeba Naz, Eisha Khan, Adil Khan, Mohd Asim, Sana Ansari,
v
Haya Rasheed, Mehraj Uddin Ganaie, Aleem Ansari, Mahfooz Alam Ansari for rendering
assistance during the course of this research. My sincere thanks to those endless lists of people
who, in one way or the other, have helped me in this research with contacts, information and
material. Without your help, this thesis would not have been of the same solidity and quality.
My deepest and most sincere gratitude goes to my parents for their support and
cooperation. It is my aspiration that this work will serve as a tribute to them for the inspiration
I gained from them. I am grateful and honoured that I received everlasting support from my
father – Mohd Abul Qasim and from my aunty – Sayyeda Khursheed. I would like to thank my
brother Mohd Zuhaib and sister Ifrah Aquib for their belief in me through the most obscure
moments in my career and helped me a lot during every stage of my life.
(MOHD SARIM)
vi
CORPORATE GOVERNANCE AND FINANCIAL
PERFORMANCE: AN EMPIRICAL STUDY OF INDIAN
COMPANIES
ABSTRACT OF THE THESIS

SUBMITTED FOR THE AWARD OF THE DEGREE OF
Doctor of Philosophy
In
Business Administration
BY
MOHD SARIM
Under the Supervision of

Prof. JAVAID AKHTER
DEPARTMENT OF BUSINESS ADMINISTRATION

FACULTY OF MANAGEMENT STUDIES AND RESEARCH
ALIGARH MUSLIM UNIVERSITY
ALIGARH, UP (INDIA)
2018
1. Introduction
One of the emerging issues in the field of management has been the aspect of corporate
governance and its impact on firm value and return for shareholders (Mishra et al.,
2001). Various studies in diverse domains like accounting, economics, finance, law and
management (Mishra et al., 2001; Black et al., 2003; Andersen and Reeb, 2003 and
many more) have been conducted to examine whether corporate governance has any
impact on the determination of firm’s value.
India has generally been proactive in promulgating corporate governance regulations.

In doing so, a good balance has been achieved i.e. headway has been made, in terms of
helping and ensuring that regulations are not stifling our entrepreneurial initiatives.
From a purely regulatory standpoint, India competes favourably with most other
developing and Asian economies as far as its corporate governance rules for protecting
minority investors are concerned. Governance reforms have become a cornerstone of
corporate sector development in India in the recent years. However, a key challenge in
researching ‘good’ governance in India has been that it is not easy to clearly define
what ‘good’ governance is? (Pande and Ansari, 2013).
The importance of corporate governance lies in tracking the performance of companies.

Governance is important for well-functioning of an economy. Financial disasters due
to lack of governance shatter the confidence of investors and other stakeholders.
Governance is critical not only to put a check on fraudulent activities but also to prevent
deviations in the financial and economic system that may lead to a financial crisis in
the economy (Arjoon, 2005; Agarwal and Medury, 2014; Smaili and Labelle, 2016).
Corporate governance thus normally revolves around a set of worldwide attributes,

comprising ensuring accountability to shareholders and other stakeholders, generating
mechanisms to control managerial behaviour (Tricker, 1994; Keasy et al., 1997),
confirming that firms are run consistent with the laws and answerable to all stakeholders
(Dunlop, 1998), ensuring that reporting systems are organized in such a way that good
governance is facilitated (Kendall, 1999), crafting an effective leadership/strategic
management process that integrates stakeholder value as well as shareholder value
(Tricker, 1994; Kendall, 1999), and increasing answerability and corporate
performance (Keasy et al., 1997).
1
The board of directors is at the centre of corporate governance mechanism. Board is a
critical channel of communication between the shareholders and management. The
other participants include employees, customers, suppliers, and creditors. The board of
directors see their task as a guardian or custodian of assets depending upon the
corporate governance framework.
How to differentiate a good governance from a bad governance? The question has been
attempted to be answered by many scholars. The scholars have identified various key
dimensions representing features of good governance and simultaneously testing its
impact on the financial performance of companies. In doing so, few authors have
formulated a checklist of good governance indicators, calculated scores for sampled
firms and tested its relationship with financial performance parameters, while few
others have identified proxies representing good governance and testing its impact on
financial performance (Mishra and Mohanty, 2014; Pande and Ansari, 2013;
Balasubramanian et al., 2008; Khanchel, 2007; Selarka, 2005; Mohanty, 2003; Brown
and Caylor, 2004).
The present study is dedicated to researching the aspects of good governance and testing
its relationship with various financial performance parameters of Indian firms. The
study explored a basic question that why governance is needed? To understand this
notion the study tried to understand the structure of firms. It was found that governance
is needed to safeguard the funds invested by shareholders and other investors. The
literature emphasised the role of the board of directors for better management of firms.
The study with the help of literature and existing laws of Indian governance spelt out
by various regulatory bodies, further identified various key aspects to measure the
effectiveness of board governance mechanism.
The exploration of the nature and structure of the firms highlighted that people sitting
on the board of a firm are one of the most important mechanisms for governing the
functioning of the firms. The study dedicated itself towards identifying various
dimensions through which board effectiveness can be measured. Also, a number of
hypotheses are tested to check if these board characteristics are contributing to firm
performance or not. Using governance and financial data accessed from CMIE Prowess
database, for NSE 200 companies for seven years, the study employed panel data
regression analysis to test the study hypotheses.
2
2. Review of Literature
Origination of Corporate Governance
The origination of corporate governance has its root in the historical perspective of the
evolution of the firms. The firms emerged as a system for the exchange of goods and
services through the mechanism of trade. The firms were usually owned and managed
by a single person. With the passage of time, the firms began to expand their
production and reach to different markets in order to sell the produced goods and
services. Such expansion demanded a huge investment. The firms started moving to
outside financiers to fulfil their investment needs. The need to finance the expansion of
the firms attracted many people who emerged as promoters of these firms. Depending
upon the nature of financing the firms emerged into different forms which establishes
a basis for attracting various laws and regulations to protect the interest of the investors.
Such laws are supposed to enhance the workability of the firms. One of the areas
broadly covered in the corporate law is regarding the laws for corporate governance.
The modern system of corporate financing tempted the separation of ownership and
control of organisations. This separation of ownership and control is the root of
conflicting interests of owners and managers. Both the parties can have a will to
maximise their own interests. The owners have invested their hard earned money in the
business and they look for maximum possible benefit out of their investment. But the
agents may not do that and may pursue their own interest. The difference between the
benefit gained by the owner by managing the business and the benefit by getting their
business managed by agents is one of the major agency costs while the expenditures
incurred for monitoring the agents and hiring charges paid by the principal to the agents
are the other forms of agency costs (Jensen and Meckling, 1976).
Jensen and Meckling (1976) in their study on managerial behaviour and agency cost
raised few valuable questions such as why value creation for the firm falls less when
managers are not the owners than the value creation for the firm if the managers
themselves would be the owner of the firm; despite knowing the fact that managers do
not maximise the value for shareholders, why equity share capital is the major source
of finance for companies. The output of a firm in terms of value is something non-
separable. Being self-centric, the human beings found it difficult to distribute it among
3
themselves. In this situation, the owners give up their control over their firm and appoint
a third party entrusted with the task of maximising the welfare of all firm’s stakeholders
(Mäntysaari, 2011).
Theories of Corporate Governance
Corporate governance is often analysed around major theoretical frameworks. The

corporate governance theoretical framework has been addressed by many authors and
scholars to provide guidance on how different participants are inter-connected. A
theoretical framework addresses the ‘why’ of Corporate Governance and provides a
limited guidance to the Board of Directors in taking key decisions (Pande and Ansari,
2013).
The agency theory is the fundamental theory of corporate governance that regarded the
managers as self-centred agents. With the passage of time, the theory evolved to
shareholder theory, stakeholder theory, stewardship theory and resource hegemony
theory. Every theory has grounded its arguments on a specific extreme aspect of firm’s
features, management and monitoring and control role. The agency theory discoursed
the problem of separation of ownership and control and contributed to the arguments
of shareholder theory for wealth maximisation. Stakeholder theory expanded the scope
of management efforts and called for welfare for all the participants in the organisation.
However, the stakeholder theory is criticised on the ground that the goal for everything
is basically no goal.
Further, the stakeholder theory complemented stewardship theory in that it specified

the beneficiaries in the organisation and demanded win-win situation for all. The
stewardship theory presented a competing view to agency theory and regarded the
managers as self-motivated trustworthy agents. The agency theory maximised the role
of the board in monitoring the firm but stewardship theory minimised it or neglected it
at all. The resource dependency theory regarded directors as a link to the firms’ external
environment that facilitates information gathering, access to vital resources and setting
directions for the organisation. At another extreme end, managerial hegemony theory
negated the role of the board and tagged board as a legal fiction. Viewing governance
through the lens of only one theory may not be a viable perspective. Instead, a prism
4
view of all the theories can help in understanding the governance and role of the board.
The output of the prism view can describe the varied roles of the board ranging from
monitoring and control role, strategy role, linking role, service role, boundary-spanning
role, collaboration and coordinating role, advisory role and support role.
Indian Corporate Governance: A Legal Perspective
The Indian statutory framework has, by and large, been in consonance with the
international best practices of corporate governance. Broadly speaking, the corporate
governance mechanism for companies in India is enumerated in the Companies Act,
2013, Securities and Exchange Board of India (SEBI) Guidelines, and the guidelines
issued by the Accounting Standards issued by the Institute of Chartered Accountants of
India (ICAI). The guidelines are well articulated and cover a broad range of guidelines
that a board should follow to ensure effective monitoring. The guidelines cover the
important corporate governance aspects such as:
 Shareholder and Stakeholder Rights and Protection

 Disclosure and Transparency
 Responsibilities of the Board:
 The Composition of Board
 Independent Directors
 Limit on the number of directorships
 Other provisions as to Board and Committees
 Audit Committee and Responsibilities
 Audit
 Nomination and Remuneration Committee
 Related Party Transactions
 Whistle Blower Policy
 Prohibition on Insider Trading of Securities
5
Mechanisms of Corporate Governance
The separation of ownership is the main issue that requires firms to be governed by a
mechanism called a board of directors. Different theories have demonstrated crucial
roles of the board of directors in monitoring the firm and protecting the interest of all
stakeholders including shareholders. Many scholars have used governance mechanism
and board of directors interchangeably. Fama (1980) and Jensen (1993) believed that
the board of directors are at the heart of governance mechanism.
There are various studies which identified the factors that impact the effectiveness of
the board such as board size (Klein 2002b); director attendance (Allen, 2004); number
of board appointments (Young et al., 2003; Dunn & Sainty, 2004; Fich & Shivadasani,
2006). Having the firm’s Chief Executive officer also serves as the Chairperson of the
Board (called CEO/COB duality) can also compromise the independence of the board
and the audit committee causing both mechanisms to be less effective (Farber, 2005).
The review of literature postulates different key aspects of the board of directors’
characteristics with respect to carrying out their monitoring role. The first aspect
reflected in the discussion is the composition and processes of the board. Literature has
evident studies for the size of the board, the proportion of independent directors in the
board, number of meetings during the year, attendance of directors at the board meeting
as critical factors of board composition and processes. An effective composition and
process of a board are supposed to facilitate decisions that are in the best interest of the
shareholders and the organisation as a whole. So, the next aspect of board functioning
is the decisions that a board needs to take for the business organisation. One of such
decisions appeared in the discussion is the executive officer compensation. Other key
decisions include deciding upon the sources of finance and channelizing the same into
profitable ventures.
Board Structure and Processes
The Indian regulatory bodies refer to board structure as the composition of the board.
The law though doesn’t provide for a specific size of the board but emphasised on the
independence of the board. Literature is evident that a strong board of directors is one
6
that is independent of management and insiders’ influence and can minimise agency
issues (Webb, 2006). Core et al. (1999) examined board size, board independence and
CEO duality and concluded that the boards with weaker governance showed low
performance than firms with stronger governance. Darko et al. (2016) highlighted
gender diversity on board as highly debatable among researchers, policymakers and
social activists.
The other characteristics of board structure and processes widely considered in prior
studies include board size, board independence, frequency of board meetings, directors’
business, gender diversity of board and CEO duality (Vafeas, 1999; Adams et al., 2005;
Nagar and Raithatha, 2016; Srivastav and Hagendorff, 2016; Shawtari et al., 2016;
Malik and Makhdoom, 2016; Arunruangsirilert and Chonglerttham, 2017).
Board Decisions
The studies have supported the notion that the key decisions are taken by the board
which affect the firm performance (Carter et al., 2010). Fama and Jensen (1983)
described board of directors as a firms’ strategic decision-making mechanism. An
effective governance system and better firm outcomes depend upon effective board
decisions (Forbes and Milliken, 1999). The board of directors are expected to use their
expertise and skills in making decisions. The board has to make varied decisions
regarding the operating and functioning of the business and keeping the business going
on. The decisions range from deciding upon dividend per share, capital structure and
allocation of resources to different uses.
A valid question was raised by Myers (1984), “how do firms choose their capital
structure?” Since the decision on capital structure is influenced by the managers
(Myers, 2001), the board of directors is one of the important mechanisms that could
monitor the managements’ decisions. Capital structure refers to the composition of
different forms of sources of funds which consists of debt and equity funds (Arulvel
and Ajanthan, 2014). In a very recent study regarding capital structure choices, Gygax
et al. (2017) highlighted that deciding on an optimum level of debt is one of the
fiduciary duties of the board of directors.
7
The impact of dividend policy is one most arguable concerns in the corporate finance
literature and is being explored a lot both in developed and emerging markets (Hafeez
& Attiya, 2009). The declaration and distribution of dividend in India are regulated by
the Section 205 the Companies Act, 2013. The section provides that the Board need to
pass a resolution while initiating the declaration and distribution of dividend. The
dividend decision is centre to all other decisions as it attracts the attention of different
stakeholders including prospective investors.
Board Vigilance
There are several issues which invite greater vigilance on the part of the board of
directors (Lewellyn and Muller-Kahle, 2012). The greater vigilance and stronger
internal controls reduce the level of audit risk, which reduces the demand for greater
auditor effort (Boo and Sharma, 2008). The related party transactions are one of the
potential ways for insiders to steal outside shareholders’ funds via self-dealing
(Ryngaert and Thomas, 2007). The managers and officers required to deal into a varied
range of contracts, which may turn into a related party transaction if the contract is
entered into with their relatives, large shareholders, and other firms that the officers and
directors are affiliated with. Related Party transaction is one of the forms of self-dealing
transactions by controlling shareholders that are having a significant concern in India
where most firms have a major, often controlling shareholder (Kar, 2011).
In the same way, auditor’s independence is important to ensure authentic audit of the
financial statements of the firms. The auditor’s independence reflects uninfluenced
judgment and audit by the auditors (Jayeola et al., 2017). Clause 49 requires every
company to form an independent audit committee to overcome these issues. The audit
committee is vested with the responsibilities of ensuring auditor’s independence and
related party transactions not exceeding specified limits. The auditor independence can
be compromised due to a high level of involvement of auditors with the management
(Cadbury Report, 1992). A chance to locate false entries depend upon the auditor’s
competence, but reporting the same depends upon auditor’s independence (Rahmina
and Agoes, 2014).
8
Board Compensation
The directors are prone to a high level of employment risk (Carcello and Neal, 2003;
Kaplan and Reishus, 1990). An appropriate level of compensation for directors and
managers is required for undertaking such a greater responsibility and the level of risk
associated with their jobs (Hoskisson et al., 2009). Further, the compensation offered
to the board members reflects the level of board independence from managers and a
higher compensation may also be offered to the directors possessing distinct education,
experience and reputation. An attractive pay must be given to the CEO and the directors
to attract the talented people in the organisation. However, a proper corporate
governance must be implemented to ensure that the officers do not serve their own
interests. . In the words of Bose (2009), the compensation of the board must obviously
be substantial but without being awkward.
The CEO compensation of Indian firms usually comprises of salary, performance

linked incentives, allowances, perquisites and retirement benefits. Rewarding CEOs
with stock options are not common among Indian firms (Balasubramanian et al., 2010).
The agency theory view of linking the CEO compensation with the performance was
aimed at resolving the moral hazard issues between the agent and the principal.
Therefore, contracts were designed with performance linked compensation plan to
motivate the CEOs to take actions in the best interest of the organisation.
The job of a non-executive director/independent director requires greater responsibility

and the liability towards his/her job should be fixed beyond a reasonable doubt and the
remuneration allowed to them by the law by the way of sitting fee cannot be termed as
inadequate (Aggarwal, 2010). The compensation for non-executive directors and
independent directors are to be fixed by the board of directors with the prior approval
of the shareholders, except payment of sitting fees within the limits prescribed under
the Companies Act, 2013.
Ownership Structure
Ownership structure is at the root of all corporate governance problems (Sarkar et al.,
2012). Though there are many factors affecting the system of corporate governance,
9
ownership structure is supposed to be the factor highly affecting the system of
governance. Concentrated ownership is a common feature in Indian firms. A firm’s
promoters typically own the largest proportion of its equity shares. Chakrabarti et al.
(2010) document an average equity shareholding of 50.4% by promoters who own at
least 38% of a firm’s equity in three out of four Indian firms.
In India, control over companies rests either with the government or with private
parties. Accordingly, companies are grouped into the public and private sectors. Indian
private sector firms are owned and controlled by non-government entities such as
Indian business groups, multinationals, and individual promoters. Of the top 500 listed
Indian firms, 89% are in the private sector and account for 78% of the total market
capitalization (Chakrabarti et al., 2008).
According to Jensen and Meckling (1976), high ownership concentration may lead to
more alignment effect. This effect may impart promoters a strong incentive to follow
the value-maximizing goal. However, in contrasting argument by Demsetz (1983), this
can also have entrenchment effect, which can decrease firm’s value. The board is an
important corporate governance mechanism under Indian context, to protect the
minority shareholders from dominant shareholders. In addition, insider ownership by
the promoters of the company is a general characteristic of most firms. India is
gradually moving towards a market-based economy. However, such is the peculiarity
that ownership lies predominately in the hands of a group of few people (Kumar and
Singh, 2013).
Corporate Governance and Financial Performance
The measure of firm performance is central to all researches carried out in the
management domain. To be more concise, when we move further to the financial
research in the sphere of governance, financial performance measurement captures the
utmost importance (Gentry and Shen, 2010). Performance is a multi-dimensional aspect
and choosing the best financial performance parameter representing a true picture of
the firm financial health is essential. While choosing so, what should we keep in our
mind is that who is looking at the performance and what are the motives.
10
The review of literature demonstrated that along with return on assets and Tobin’s Q,
cash flows also hold a significance for the financial health of a company. Liquidity, as
measured by the cash holding of a firm, is also one the most important ratios used to
measure a firm’s financial health (Khan et al., 2016). Relying upon the literature the
present study has also selected return on assets and Tobin’s Q and operating cash flows
as proxies for financial performance parameters.
3. Research Methodology
Research Gaps
Grounding on the findings of the literature the study proposes the following research
gaps in the area of corporate governance research in Indian context:
1. The existing literature has examined the corporate governance mechanism in a

limited manner. A very few studies have conducted a comprehensive survey of
literature covering key aspects of corporate governance mechanism which is
specific to Indian firms.
2. The non-executive directors’ compensation is one of the key aspects of
corporate governance. There is a limited literature empirically testing this aspect
of corporate governance for the Indian firms.
3. The literature has suggested another key parameter of corporate governance as
the “size of the audit committee”. However, the audit committee is actually a
subset of the board and including it again as a parameter may not be appropriate.
Rather, utilising the key monitoring aspects for which an audit committee is
formulated by a firm may be more useful to study the impact of the committee
on the financial performance of Indian firms.
4. The literature has also suggested that the board needs to take various strategic
decisions having bearing on the firm performance. There is a dearth of literature
which studies the impact of boards’ decision on the financial performance of
Indian firms. Therefore, to understand the impact of boards’ decision on the
financial performance of Indian firms, there arises a need to identify key
decisions of the board as key corporate governance mechanism among Indian
firms.
11
5. Most of the studies have explored the main effect of corporate governance
parameters on the financial performance of the Indian firms. There is a lack of
studies that have explored the interaction effects of ownership structure and
board leadership style with other dimensions of corporate governance, to see
how such interaction impacts the financial performance of Indian firms.
6. The literature has further suggested that there is a difference between the
profitability of a firm and the liquidity position of a firm. Therefore, liquidity is
another important parameter of firm’s performance that should be kept in mind
while evaluating a firm’s financial performance. A very few studies have used
the liquidity aspect of the firm performance for testing the relationship between
corporate governance and financial performance.
Research Questions
To achieve this the study addresses the following research questions:
Research Question1: What are the key dimensions of corporate governance

mechanism which are specific to Indian firms, including the dimensions which are
lacking empirical verification among the existing literature in the Indian context?
Research Question2: Is there any impact of the identified corporate governance

variables on the financial performance of Indian companies?
Research Question3: Is there a difference exists between corporate governance

characteristics of companies who have appointed the CEO as the chairman and those
who have not appointed the CEO as chairman?

characteristics of companies whose ownership concentration is held by promoters and
those whose ownership concentration is held by non-promoters?
Research Question5: If difference exists between corporate governance characteristics

of companies who have appointed the CEO as the chairman and those who have not
appointed the CEO as chairman, and also companies whose ownership concentration is
12
held by promoters and those whose ownership concentration is held by non-promoters,
whether such differences are reflected in financial performance?
Research Objectives
1. To identify the key features of corporate governance and financial performance

of Indian public listed companies.
2. To investigate the impact of corporate governance on financial performance of
Indian public listed companies.
3. To empirically examine corporate governance practices with respect to board
leadership style and dominant shareholder groups.
4. To suggest possible improvements in the corporate governance framework of
Indian firms based on the findings of the present work.
Conceptual Framework of the Study
The conceptual framework for this study evolved from eight constructs including the
control variables. The constructs in this study are (a) board structure, (b) board
processes, (c) board decisions, (d) board compensation, (e) board vigilance, (f)
ownership structure, (g) firm performance, and (h) control variables. The conceptual
framework for the present study is shown in figure 1.
13
Board Structure
 Board size
 Board
independence
 Gender diversity
 CEO duality
Board Processes
 Board meetings
 Attendance at board
meetings
 Board busyness
Board Decisions
 Capital Structure
decision
 Dividend decision Firm Performance
 ROA
 Tobin’s Q
Board Vigilance  Liquidity
 Auditors’
independence
 Related party
transactions
Board Compensation
 CEO compensation
 NED compensation
Ownership Structure Control Variables
 Firm size
 Ownership  Growth
concentration  Age
 Promoter
ownership
concentration
Figure 1: Conceptual Framework of the Study
14
Measurement of Variables
The measurement of variables and scale identification with respect to type of data is
very important for determining the best possible estimation method for an econometric
model. The scale of a variable depends upon how the data is generated for each variable
taken for the study. Table 3.1 provides detail for the variables measurement, scale type
and source.
Table 3.1: Measurement of Variables, Acronym and Scale type
Variables Acronym Measurement Scale

Type
Independent Variables
Board Size BOARD_SIZE Total number of directors on the Ratio
board of firm
Board BOARD_IND Number of independent directors Ratio
Independence divided by total number of directors,
multiplied by 100
Gender Diversity DIVERSITY Dichotomous value of 1 if women Nominal
director is present on the board, 0
otherwise.
CEO Duality DUALITY Dichotomous value of 1 if CEO Nominal
holds the position of Chairman, 0
otherwise.
Board Meetings BOARD_MEET Total number of meetings held Ratio
during a financial year
Board Attendance BOARD_ATND Number of meetings attended Ratio
divided by total number of meetings
held, multiplied by 100
Board Busyness BUSY_DIR Number of directors serve on other Ratio
boards divided by total number of
directors, multiplied by 100
Capital Structure CAP_STRUC Total debt divided by equity share Ratio
Decision capital
Dividend Decision DIV_DECN Earnings per share distributed for Ratio
each financial year
CEO L_CEO_REM Log of total Remuneration paid to Ratio
Compensation chief executive officer
Non-executive L_NED_REM Log of total remuneration paid to Ratio
Directors Fee and non-executive directors in the form
Commissions of sitting fee and commissions
Auditors’ AUD_IND Fees paid for audit services divided Ratio
Independence by total fees paid for audit and non-
audit services, divided by 100
Related Party L_RPTS Log of sales to related parties plus Ratio
Transaction Purchases from related parties
15
Ownership OWN_CON Highest percentage shareholding by Ratio
Concentration a group is considered as
concentrated ownership
Promoter PROMO_D Dichotomous value of 1 if Nominal
Ownership ownership is concentrated with
Concentration promoter, 0 otherwise.
Dependent Variables
Return on Assets ROA Net income before interest divided Ratio

by total assets
Tobin’s Q TQ Market value of equity plus total Ratio
book value of liabilities divided by
total book value of assets
Cash Flows CF Net cash flows from operating Ratio
activities divided by total assets
Control Variables
Firm Size L_SIZE_TA Log of total assets Ratio
Firm Growth GROWTH Percentage of year-to-year change in Ratio
total sales.
Firm Age AGE Calculated as a difference between Ratio
the sample year and year of
incorporation
Source: Researcher’s Compilation
Research Hypotheses
The research hypotheses were created into three categories to:

 Study the impact of corporate governance on the financial performance of
Indian firms.
 Explore differences in corporate governance features and parameters of
financial performance for firms with CEO duality and firms with separate
persons for the position of CEO and chairman.
 Explores difference in corporate governance features and parameters of
financial performance for firms having ownership concentrated with promoters
and firms having ownership concentrated with non-promoters.
Sampling Procedure
The NIFTY 200 Index is designed to reflect the behaviour and performance of large
and mid-market capitalization companies. NIFTY 200 includes all companies forming
part of NIFTY 100 and NIFTY Full Midcap 100 index. The NIFTY 200 Index
represents about 85% of the free float market capitalization of the stocks listed on NSE
as on March 31, 2017. The total traded value for the last six months ending March 2017,
16
of all index constituents is approximately 77.9% of the traded value of all stocks on
NSE.
The study excluded banks and financial institutions from the sample because of
different governance and financial requirements (Haldar and Rao, 2013). The study
further excluded companies that are incorporated after the financial year 2008-2009,
and for which complete data was not available. Hence the final sample falls to 146
companies as follows:
Population of the study – NSE 200 Index Companies 200 firms
Less: Banks and Financial firms (41) firms
Less: Incorporation after 2008-09 (01) firms
Less: Unavailable reports and other data (12) firms
Final sample size 146 firms
The final sample size amounts to 146 firms for which the data for 7 years were
collected. The total number of observations for the study comprises of 1022 firm-years.
The data required for the governance and financial parameters were collected form the
Prowess database of Centre for Monitoring of Indian Economy (CMIE) and annual
reports of companies available at firms’ respective websites.
Approach for Analysis
The approach for analysis is divided into three sections as descriptive analysis,
classification analysis and regression analysis. The variables are presented in a form of
an econometric equation and the estimation of the equations is explained in detail. The
panel data analysis technique is applied for the estimation of equations and generating
the impact of corporate governance variables on financial performance of Indian firms.
The data analysis for the present study is a proper mix of statistical tools and
econometric techniques using the statistical software package Eviews 8. The approach
for the analysis is summarised in Figure 2.
17
Model Specification
The study used panel data as the method of estimation of regression equations. The data
for the sample of 146 firms were collected for 7 years. In order to determine the nature
of relationship between explanatory variables and explained variables considered in the
study, the following model was applied –
General Model: Performance = Constant Coefficient + Corporate Governance +

Control Variable + Error Term
Where, performance is a vector of corporate performance measured in terms of return

on assets, Tobin’s Q and cash flows. Corporate Governance is vector of fifteen
corporate governance variables and control variable is a set of three variables used to
assess the consistency of regression results.
Model 1 (ROA-1): Explained variable – ROA
ROAit = α0 + β1BOARD_SIZEit + β2BOARD_INDit + β3DIVERSITYit +

β4DUALITYit + Β5BOARD_MEETit + β6BOARD_ATNDit + β7BUSY_DIRit +
β8DIV_DECNit + β9CAP_STRUCit + β10AUD_INDit + β11L_RPTSit +
β12L_CEO_REMit + β13L_NED_REMit + β14OWN_CONit + β15PROMO_Dit +
β16L_SIZE_TAit + β17GROWTHit + β18AGEit + εit
Model 2 (TQ-1): Explained Variable TQ
TQit = α0 + β1BOARD_SIZEit + β2BOARD_INDit + β3DIVERSITYit + β4DUALITYit

+ Β5BOARD_MEETit + β6BOARD_ATNDit + β7BUSY_DIRit + β8DIV_DECNit +
β9CAP_STRUCit + β10AUD_INDit + β11L_RPTSit + β12L_CEO_REMit +
β13L_NED_REMit + β14OWN_CONit + β15PROMO_Dit + β16L_SIZE_TAit +
β17GROWTHit + β18AGEit + εit
Model 3 (CF-1): Explained variable CF
18
CFit = α0 + β1BOARD_SIZEit + β2BOARD_INDit + β3DIVERSITYit + β4DUALITYit
Where in Model 1, 2 and 3 –
α0 = Intercept coefficient;
β1, β2, β3, β4, β5 ….. β17 = Slope coefficients;
i = firm I;
t = Year T;
εit = Error term in the year t for firm i.
The estimation of panel equations and hypotheses testing is done as per following steps:
1. In the first step panel unit root test is conducted for all the variable.
2. Diagnostic tests for multicollinearity, heteroskedasticity and autocorrelation is

conducted for each model.
3. Heterogeneity tests are conducted for each models to check for variations in cross-
sections and time-series for each model.
4. If rejected the heterogeneity, pooled data regression estimation method is applied.
5. If accepted the heterogeneity, Hausman Test is applied to choose between FEM and
REM
6. Robust standard errors are calculated to control the problems of heteroskedasticity

and autocorrelation, if any.
19
Descriptive Analysis Classification Analysis Regression Analysis
Panel Data Regression

Full Sample Test by Classification
Panel Stationarity
By Grouping
CEO Duality vs. Non Duality
Multicollinearity
Promoter vs. Non Promoter
Diagnostic Tests Heteroscedasticity
CEO Duality vs. Non Duality Serial Correlation

Homogeneity Test Pooled vs. Panel
Parametric vs. non-parametric
tests choice
Hausman Test FEM vs. REM
Interaction term for

variables having significant Model Estimation and Hypothesis
difference Testing
Figure 2: Approach for Analysis
20
4. Data Analysis
Descriptive Analysis
The descriptive statistics are calculated for full sample followed by descriptive statistics
for categories of CEO duality and promoter ownership concentration. Such statistics
provide an overview of distribution of the data.
Classification Analysis
The non-parametric Mann-Whitney test for grouping variable CEO duality suggested
that significant difference between firms having CEO as chairman of the board and
firms not having CEO as chairman exists for auditors’ independence, CEO
remuneration, non-executive directors’ remuneration, and capital structure and
ownership concentration parameters of corporate governance.
The non-parametric Mann-Whitney test results for grouping variable promoter

ownership concentration shows that significant difference between firms having
ownership concentrated to promoters as against to ownership concentrated to non-
promoters exists for board size, board independence, related party transactions, CEO
remuneration, non-executive directors’ remuneration, capital structure and ownership
concentration parameters of corporate governance.
Regression Analysis
A significant difference in the auditor’s independence, capital structure decision, CEO

remuneration, non-executive directors’ remuneration and ownership concentration is
found between firms with CEO Duality and firms with non-duality. Similarly,
significant differences in the board size, board independence, capital structure decision,
related party transactions, CEO remuneration, non-executive directors’ remuneration
and ownership concentration is found between firms having ownership concentrated
with promoters and ownership concentrated with non-promoters. While, the findings of
the main regression results indicated that the board independence, diversity, capital
21
structure decision, ownership concentration and size of the firms are negatively
impacting the financial performance of Indian firms; board size, board meetings,
attendance of directors at board meeting, dividend decision, auditors independence,
related party transactions Promoter ownership concentration and age of the firm are
positively affecting the financial performance of Indian firms. Mixed results are found
for the impact of CEO duality, capital structure and non-executive directors’
remuneration on financial performance of Indian firms. The findings on the interaction
effect highlighted the adverse impact of CEO duality on the relationship between
various key corporate governance parameters and financial performance. On the
contrary, Ownership concentration with promoters positively contributed to the
financial performance and wealth creation for shareholders of Indian firms.
Key Findings
1. The boards of Indian firms are not truly independent, neither in terms of number
of independent directors on the board nor in terms of independence from
management due to CEO duality.
2. The board leadership style of vesting more power to a single person has
weakened the corporate governance system among Indian firms and has created
various agency issues for minority shareholders and other stakeholders.
Therefore, the study does not supported stewardship theory view of appointing
the CEO as the chairman.
3. The study also found weak support for resource dependence theory in context
of both the gender diversity and multiple directorship. The presence of women
director deteriorated the performance of Indian firms which may also occurred
from the fact that the appointment of women director on the Indian board is
merely to comply with the legal requirements.
4. The independent directors and non-executive directors are not sufficiently
compensated to motivate them to efficiently discharge their duties.
5. The multiple directorship hampers the ability of the directors to perform their
duties which is harmful for shareholders’ wealth and valued negatively by the
market.
22
6. The ownership concentration adversely impacted the firms’ performance.
However, promoter concentrated ownership is found to be advantageous for
shareholders’ interest. Various corporate governance practices are found to be
positively and significantly different for firms with promoter concentrated
ownership than firms with non-promoter concentrated ownership.
7. There is a huge variation in the corporate governance characteristics of Indian
listed firms due to variation in the board structure, leadership style and
ownership concentration.
Recommendations
The exploration of the relationship between corporate governance parameters and

financial performance has revealed various key findings, on the basis of which the study
would like to give the following suggestions:
1. A balance of power is needed to be established among CEOs, chairman of the

board and independent directors/non-executive directors.
2. The study has found evidences on the misuse of dual power vested to a single
person and therefore, the board leadership style is needed to be closely
monitored in order to maintain the independence of the board and the auditors.
3. The firms are required to appoint the women director on the basis of their
competence and qualifications and not because the fact that the appointment of
at least one women director is mandated by the law. The law should articulate a
qualification criteria for the appointment of women directors on the board.
4. More stringent rules are required for the appointment and of the independent
directors and non-executive directors on board along with an adequate
remuneration system that should be linked with the performance and
contribution of the directors. The re-appointment of the directors should also be
linked with past performance.
5. The trend of holding multiple directorships across different board of the Indian
firms is also required to be specifically regulated with severe clauses. The
regulations regarding the maximum number of directorship either should be
23
reduced or must be coupled with an additional requirement of substantial
attendance at the board meetings.
6. The ownership concentration is also required to be carefully monitored as it has
also proven to be harmful for shareholders. Though, the promoter ownership
concentration is found to be advantageous for the Indian firms, the level of
promoter ownership concentration is also needed to be carefully regulated
because after a particular level of ownership concentration the benefits of
interest alignment effect gets disappear.
7. The difference in the corporate governance characteristics and its relationship
with financial performance of Indian firms has arisen a need to have different
regulations for firms having different corporate governance characteristics. One
prescription does not fit for all kind of governance structure.
Table 2: Summary of Key Findings and Recommendations
S. No. Key Finding(s) Recommendation(s) Made
The boards of Indian firms are not A balance of power is required among
1.
truly independent. CEOs, chairman of the board and
independent directors/non-executive
directors.
The board leadership style of The board leadership style is needed to be
2.
vesting more power to a single closely monitored in order to maintain the
person has weakened the corporate independence of the board and the
governance system among Indian auditors.
firms.
The presence of women director Appointment of the women director on the
3.
deteriorated the performance of basis of their competence and
Indian firms. qualifications. Law should articulate a
qualification criteria for the appointment.
The independent directors and non- More stringent rules are required for the
4.
executive directors are not appointment and of the independent
sufficiently compensated. directors and non-executive directors along
with an adequate remuneration system
linked with the performance.
The multiple directorship hampers The regulations regarding the maximum
5.
the ability of the directors to number of directorship either should be
perform their duties reduced or must be coupled with an
additional requirement of substantial
attendance at the board meetings
The ownership concentration Level of promoter ownership concentration
6.
adversely impacted the firms’ is also needed to be carefully regulated
performance however, the because after a particular level of
concentration of ownership with
24
promoters has positively ownership concentration the benefits of
contributed to the firm interest alignment effect gets disappear.
performance.
A huge variation in the corporate There is a need to have different
7.
governance characteristics of Indian regulations for firms having different
listed firms due to variation in the corporate governance characteristics. One
board structure, leadership style and prescription does not fit for all kind of
ownership concentration governance structure.
5.5 Limitations of the Study
In spite of some efforts the study has several limitations. First among these is not to
include the investment/capital expenditure decision of board among capital structure
and dividend decision because data was not available for all the years across all the
firms under study. The another possible limitation of the study is that the study has
combined the data for sitting fee and commissions paid to non-executive directors to
understand the combined effect of non-executive directors’ remuneration on financial
performance. The study needed to do so because of the fact the data for sitting fee and
commission taken separately had a lot of missing figures. The study has tried to
understand the effect of ownership concentration divided into two broad categories as
promoter and non-promoter. However, there are several other groups which require an
exploration for their specific corporate governance characteristics.
Directions for Future Research
Limitations do provide avenues for improvements. Several possibilities of future

research can be derived from this study. One of these could be to focus on the use of
alternative measures for some of the key constructs in this study. What a board
discusses within board room has got much attention by the scholars and has been
attempted to measure through different ways. One of such decisions could be the
investment decision that could be explored in future researches along with capital
structure and dividend decisions. The dynamics of non-executive directors’
remuneration can also be explored in more depth. Also, the ownership concentration by
different business groups (family group, government group, foreign group, etc.) need
more specific examination to understand the complexity and dynamics of each group.
25
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TABLE OF CONTENTS
Certificates i-iv
Acknowledgement v
Table of contents vii-x
List of figures xi
List of tables xii
Chapter 1 Introduction 1-20

1.1 Overview 1
1.2 Corporate Governance: A Conceptual Overview 1
1.3 Development of Corporate Governance Framework in India 7
1.4 Need of the Study 14
1.5 Scope of the Study 17
Summary 19
Chapter 2 Review of Literature 21-82
2.1 Overview 21
2.2 Origination of Corporate Governance 21
2.3 Theories of Corporate Governance 26
2.3.1 Agency Theory 26
2.3.2 Shareholder Theory 27
2.3.3 Stakeholder Theory 27
2.3.4 Stewardship Theory 28
2.3.5 Resource Dependency Theory 29
2.3.6 Managerial Hegemony Theory 30
2.4 Indian Corporate Governance: A Legal Perspective 33
2.5 Mechanisms of Corporate Governance 49
2.5.1 Board Structure and Processes 51
2.5.1.1 Board Size 52
2.5.1.2 Board Independence 53
2.5.1.3 Board Diversity 54
2.5.1.4 CEO Duality 56
2.5.1.5 Board Meeting 57
vii
2.5.1.6 Attendance of Directors at Board Meeting 59
2.5.1.7 Busy Directors 60
2.5.2 Board Decisions 62
2.5.2.1 Capital Structure Decision 63
2.5.2.2 Dividend Decision 65
2.5.3 Board Vigilance 66
2.5.3.1 Auditors’ Independence 67
2.5.3.2 Related Party Transactions 68
2.5.4 Board Compensation 69
2.5.4.1 CEO Compensation 70
2.5.4.2 Non-Executive Directors’ Compensation 71
2.5.5 Ownership Structure 73
2.6 Corporate Governance and Financial Performance 74
Summary 76
Chapter 3 Research Methodology 83-118
3.1 Overview 83
3.2 Research Gaps 83
3.3 Research Questions 84
3.4 Research Objectives 85
3.5 Conceptual Framework of the Study 86
3.6 Operational Definition of Research Variables 88
3.6.1 Independent Variables 88
3.6.1.1 Board Structure 88
3.6.1.2 Board Processes 89
3.6.1.3 Board Decisions 89
3.6.1.4 Board Vigilance 90
3.6.1.5 Board Compensation 90
3.6.1.6 Ownership Structure 91
3.6.2 Dependent Variables 91
3.6.2.1 Financial Performance Variables 91
3.6.3 Control Variables 92
3.7 Measurement of Variables 92
3.8 Research Hypotheses 94
3.8.1 Hypotheses: Impact of Corporate Governance on Performance 94
viii
3.8.2 Hypotheses: Differences of CEO Duality vs. Non-Duality 100
3.8.3 Hypotheses: Differences of Promoter vs. Non-Promoter 102
3.9 Sampling Procedure 104
3.10 Approach for Analysis 105
3.10.1 Descriptive Analysis 105
3.10.2 Classification Analysis 106
3.10.3 Regression Analysis 106
3.10.3.1 Estimation of Panel Data 108
3.10.3.2 Diagnostic Tests 112
3.10.4 Model Specification 112
Summary 118
Chapter 4 Data Analysis 119-174
4.1 Overview 119
4.2 Descriptive Statistics 119
4.2.1 Descriptive Statistics - Full Sample 119
4.2.2 Descriptive Statistics – CEO Duality vs. Non-Duality 122
4.2.3 Descriptive Statistics – Promoter vs. Non-Promoter 125
4.3 Classification Analysis 128
4.4 Panel Unit Root Test 131
4.5 Regression Analysis 132
4.5.1 Diagnostic Tests 132
4.5.1.1 Multicollinearity Test 132
4.5.1.2 Heteroscedasticity Test 135
4.5.1.3 Serial Correlation Test 136
4.6 Model Specification Tests 137
4.6.1 Heterogeneity Test 137
4.6.2 Hausman Test 138
4.7 Regression Results 139
4.7.1 Regression Results: ROA, TQ and CF 139
4.7.2 Regression Results: ROA (Interaction Effect: DUALITY) 145
4.7.3 Regression Results: TQ (Interaction Effect: DUALITY) 149
4.7.4 Regression Results: CF (Interaction Effect: DUALITY) 152
4.7.5 Regression Results: ROA (Interaction Effect: PROMO_D) 156
ix
4.7.6 Regression Results: TQ (Interaction Effect: PROMO_D) 162
4.7.7 Regression Results: CF (Interaction Effect: PROMO_D) 168
Summary 174
Chapter 5 Findings and Conclusions 175-186
5.1 Overview 175
5.2 Discussion 175
5.3 Key Findings 182
5.4 Recommendations 183
5.5 Limitations of the Study 185
5.6 Directions for Future Research 185
Summary 186
References 187-213
Annexures
Annexure 1 Shapiro-Wilk Test
Annexure 2 List of Companies Selected for the Study
Annexure 3 Publications
x
List of Tables
Table 2.1: Board Role Perspectives 31
Table 2.2 Corporate Governance Guidelines by Major Regulating Bodies in India 35
Table 2.3: Key Studies on Corporate Governance in India 77
Table 3.1: Measurement of Variables, Acronym and Scale type 92
Table 4.1: Descriptive Statistics (Full Sample) 121
Table 4.2: Descriptive Statistics (Category Variable: CEO Duality vs. Non-Duality)
123
Table 4.3: Descriptive Statistics (Category Variable: Promoter vs. Non-Promoter

Ownership Concentration) 126
Table 4.4: Mann-Whitney Test: Grouping Variable – CEO Duality 130
Table 4.5: Mann-Whitney Test: Grouping Variable – Promoter Concentration 130
Table 4.6: Levin, Lin and Chu Test for Panel Unit Root 131
Table 4.7: Correlations Matrix of the Variables entered into Regression Analysis 134
Table 4.8: Variation Inflation Factors 135
Table 4.9: Breusch-Pagan-Godfrey Test for Heteroskedasticity 136
Table 4.10: Breusch-Godfrey LM Test for Autocorrelation 136
Table 4.11: Likelihood Ratio Test for Heterogeneity 137
Table 4.12: Hausman Test for Random Effects 138
Table 4.13: Fixed Effect Regression Results of ROA, TQ and CF 143
Table 4.14: Fixed Effect Regression Results of ROA with Interaction terms Modeled
with CEO Duality 147
Table 4.15: Fixed Effect Regression Results of TQ with Interaction terms Modeled
xi
Table 4.16: Fixed Effect Regression Results of CF with Interaction terms Modeled
Table 4.17: Fixed Effect Regression Results of ROA with Interaction terms Modeled
with Promoter Concentration 158
Table 4.18: Fixed Effect Regression Results of TQ with Interaction terms Modeled
Table 4.19: Fixed Effect Regression Results of CF with Interaction terms Modeled
Table 5.1: Summary of Key Findings and Recommendations 184
List of Figures
Figure 1: Basic Model of 5Ps of Governance 15

Figure 2: An Overview of the Study Sample 18
Figure 3: Basic Model of Principal-Agent Relationship 24
Figure 4: Board Roles in Light of Theories of Corporate Governance 32
Figure 5: Conceptual Framework of the Study 87
Figure 6: Approach for Analysis 117
xii
1.1 Overview
The chapter presents an overview of corporate governance and discusses its importance
for protecting the interest of different participants of a firm. It further discusses the
development of Indian corporate governance framework. The need for the study is
presented with the help of 5Ps of corporate governance followed by the scope of the
study. Lastly, the chapters’ scheme for the study is discussed in brief.
1.2 Corporate Governance: A Conceptual Overview
One of the emerging issues in the field of management has been the aspect of corporate
governance and its impact on firm value and return for shareholders (Mishra et al.,
2001; McConaughy et al., 1998; Black et al., 2003). Various studies in diverse domains
like accounting, economics, finance, law and management (Mishra et al., 2001; Black
et al., 2003; Andersen and Reeb, 2003 and many more) have been conducted to examine
whether corporate governance has any impact on the determination of firm’s value.
These studies have found interesting and useful observations.
With the changing socio and economic structure more particularly in developing
countries like India, it is important to examine the impact of corporate governance on
the performance of companies and protection of investors which is crucial for attracting
foreign capital. India started focusing on corporate governance in late 1990. Recent
events in India have put a spotlight on corporate governance practices of Indian
companies. The collapse of big companies such as Enron in the UK (2001) and
WorldCom in the US (2002) has drawn attention towards exploring corporate
governance from many perspectives and to suggest ways to put a check on collapses
and fraudulent activities (Norwani, Mohamad and Chek, 2011).
A key aspect that is being debated in the corridors of India is whether we need major
regulatory changes to improve corporate governance, or whether improved standards
of corporate governance could be achieved through the adoption of principle-based
standards of conduct. India has generally been proactive in promulgating corporate
governance regulations. In doing so, a good balance has been achieved i.e. headway
has been made, in terms of helping and ensuring that regulations are not stifling our
1
entrepreneurial initiatives. From a purely regulatory standpoint, India competes
favourably with most other developing and Asian economies as far as its corporate
governance rules for protecting minority investors are concerned.
Governance reforms have become a cornerstone of corporate sector development in

India in the recent years. As Indian companies began to access international capital and
as foreign investors begin to acquire stakes in Indian companies, the design of a well
laid out governance structure has become increasingly important for corporate sector
growth. However, a key challenge in researching ‘good’ governance in India has been
that it is not easy to clearly define what ‘good’ governance is? (Pande and Ansari,
2013).
Introduction of limited liability in business and subsequent evolution of stock

exchanges worldwide not only facilitated the business with funds mobilization but also
gave rise to the problem of accountability of managers towards fund providers. The
divorced system of ownership and control (Solomon and Solomon, 2004) in an
organization is characterized by owners with a limited interference in management and
managers with a limited interest in maximizing the value of firms (Dalton et al., 1998),
thereby limited interest in maximizing the wealth of shareholders. The managers may
divert resources to pursue their own interest (Jensen and Meckling, 1976; Tudway and
Pascal, 2006; Haddad, 2012; Krafft et al., 2013). Establishing a good governance
system ( Berglöf and Claessens, 2006; Khiari et al., 2007) is important for safeguarding
against such risk by ensuring transparency and accountability (Haldar and Rao, 2011).
Shareholders are the real owner of an organization and managers are hired to manage
the organization. This separation creates an Agency problem. The agency problem was
first explored by Ross (1973) and later presented in detailed form by Jensen and
Meckling (1976).
The Agency theory regards shareholders as the principals and managers as the agents.
The theory describes the differences in the interest of the agent and the principal that
creates conflict between them. The differences lead to surplus cost that reduces the
wealth of shareholders. Adding to this, the theory says that the separation of ownership
and control give rise to an issue that the principals (owners/shareholders) suffers an
agency loss to the extent to which returns fall below to what it would be if the owners
would have direct control over the management (Donaldson and Davis, 1991). The
2
conflicting interest that arises due to the agency problem often leads to decisions that
are not favourable to the shareholders. Expectations of the owners are that the agent
should run the business in a planned manner to maximize shareholders’ wealth, but
managers may not do it. Misapplication of funds may take place due to the opportunistic
nature of managers that in turn may reduce their investment allocation for companies
(Grossman and Hart, 1986). Adding to it, the conflicting nature of principal and agents
create a tendency among them to control each other (Shankman, 1999). Stakeholder
theory has a broader aspect.
Stakeholders are groups and individuals who can be directly or indirectly affected by
the activities of a firm (Freeman 1984; Jones and Wicks 1999). Unlike agency theory,
stakeholder theory argues that real success depends upon the relationship of a firm with
its stakeholders – primary stakeholders and secondary stakeholders. The primary
stakeholders include investors, suppliers, customers and employees. They are the most
affected group by the achievements and failure of a firm. The secondary stakeholders
include the government, trade associations, political groups and the community. The
theory argues that it is the responsibility of the firm to take care of the interest of all the
stakeholders. Also, the theories indicate that there is a conflict of interest among
important players in the organization.
Board of Directors plays a key role here (Donaldson and Davis, 1991) and see their role
as being stewards of a particular interest group. The stewardship theory has a broader
social oriented perspective. Under stewardship theory, the executive managers
essentially want to do a good job because their reputations are at stake. They try to be
a good steward of the corporate assets (Donaldson and Davis, 1991) and acts as a
guardian of the company’s assets (Mukhopadhyay, Mallik and Dhamodiwala, 2012).
Managers, who are in the self-actualization stage as per Maslow’s hierarchy theory, are
motivated to perform their jobs excellently to gain recognition (McClelland, 1961).
The Indian corporate governance system is being regulated by the Board of Directors
has been widely focused by researchers as it is considered as one of the most important
mechanisms of corporate governance. The primary objective of the board of directors
of a company is the monitoring and controlling of management. The board of directors
aims at preventing opportunistic behaviour of managers and ensuring that, in the
absence of the owners, the agents work in the best interest of all shareholders (Fama
3
and Jensen, 1983; Heracleous, 2001). In order to curb the opportunistic behaviour of
managers, directors are appointed to safeguard the interest of stakeholders.
The importance of corporate governance lies in tracking the performance of companies.

Governance is important for well-functioning of an economy. Financial disasters due
to lack of governance shatter the confidence of investors and other stakeholders.
Governance is critical not only to put a check on fraudulent activities but also to prevent
deviations in the financial and economic system that may lead to a financial crisis in
the economy (Arjoon, 2005; Agarwal and Medury, 2014; Smaili and Labelle, 2016).
The definition of corporate governance varies from country to country depending upon
the legal, social and economic structure. However, most of the studies attempted to
explore the Anglo-American system of corporate governance. The Anglo-American
system is characterized by a widely dispersed ownership of shares that can be traded
freely over stock exchanges. Another characteristic of such a system is that the
management of companies is in the hands of people who do not own shares in the
company. In earlier studies regarding such development in the corporate system, Means
(1931) observed that the owners do not have control over the affairs of the company
while the control rests in the hand of people who are not the real owner of the company.
What is problematic is that individuals are self-serving and will work in their own
interest (Fama, 1980). Owners who provide funds are the principal and the managers
who provide management skills are the agents. The agents may be opportunistic and
may not discharge their duties in the best possible interest of principals.
Corporate governance is a set of laws, rules and procedures that aim at shaping the
corporate practices of a company and describes the structure of relationship among
different participants of the organisation (Dossani, 2012). Corporate governance is the
application of all measures to induce managers managing the affairs of the company
properly and getting back the money invested by the owner of the funds (Shleifer &
Vishny, 1997). La Porta et al. (2000) stated corporate governance as a set of a
mechanism aimed at protecting the interest of outsiders from misappropriation of funds
by insiders. How the fund providers ensure to get a fair return on what they have
invested can collectively be regarded as corporate governance.
4
Governance is an overall and exhaustive guideline for decision making procedure
along with situations and circumstances keeping in mind the conflicting interest of the
participants of the organisation. It is the distribution of rights and responsibilities among
the actors who are vested with the task of achieving desired performance. The need for
describing rights and responsibilities in advance is due to an adversarial relationship
between managers and owners of fund (Applied Corporate Governance, n.d.). Due to
the separation of ownership and control problem corporate governance is needed to
prevent any misappropriation of money. It is expected from managers to create value
for stakeholders sustainably adhering to various legal and ethical practices (Diwedi,
2010).
Nerantzidis et al. (2012) applied content analysis method for exploring various
definitions of corporate governance used by authors and organisations and found that
the definitions of corporate governance have been broadly classified into two
categories. The first category of definitions has focussed on the behavioural aspects of
organisations in terms of performance, profitability and value creation for shareholders
and other stakeholders. The second category of definitions that describes rules and
regulations of the land where the organisation is carrying out its business activities. One
of the most common definitions quoted by authors is the definition given by the
Organisation of Economic Cooperation and Development (OECD). The OECD (2004)
described the corporate governance as a mechanism by which companies are directed
and controlled.
The control aspect of corporate governance incorporates the notions of compliance,

answerability and transparency (MacMillan et al., 2004). It also explains how managers
exercise their roles through compliance with the current laws and regulations (Cadbury,
2000). The significance of corporate governance lies in its pursuit of constantly
updating the laws, regulations, and contracts that administer firms’ operations. Also, it
is aimed at confirming that shareholder rights are protected, stakeholder and manager
interests are reconciled, and that a clean environment is maintained wherein each party
is able to discharge its responsibilities and contribute to the corporation’s growth and
value creation (Page, 2005). Governance thus sets the attitude for the corporate,
defining how power is exercised and how decisions are reached.
5
A narrow view of corporate governance portrays it as a system of laws and of financial
accounting, where socio-environmental concerns are rendered a low priority
(Saravanamuthu, 2004). The broader view of corporate governance stresses every
business’ responsibilities toward the different stakeholders that provide it with the
necessary resources for its existence, competitiveness, and success (MacMillan et al.,
2004). The managers are responsible toward shareholders whose wealth and fortunes
are at stake. But they are also responsible toward other stakeholders such as employees,
suppliers, customers, and communities whose investments in the firm are likewise
significant for running the business. Thus, the interests of all stakeholders are deserved
due regard and consideration and should be considered as constraints on managerial
action and shareholder privileges (Kendall, 1999; Page, 2005).
Corporate Governance is also closely concerned with trustworthiness and transparency,

which are progressively expected of the public both in corporate dealings and disclosure
(Page, 2005). Investor confidence and market efficiency depend on the revelation of
correct information about corporate performance. Acknowledging that the legal system
is generally important for corporate governance mechanism, which provides for the
protection of investor rights and implementation of rules (La Porta et al. (2000), the
market for corporate control becomes noticeable when there is sufficient inducement
for outside parties to pursue control of the firm or, in other words, when internal control
mechanisms fail to a large degree (Denis and McConnell, 2003). Given the active
interrelationships amongst different corporate governance mechanisms, external
features unvaryingly deserve consideration to deliver a contextualized understanding
of firm-specific internal corporate governance dimensions.
To conclude, corporate governance thus normally revolves around a set of worldwide

attributes, comprising ensuring accountability to shareholders and other stakeholders,
generating mechanisms to control managerial behaviour (Tricker, 1994; Keasy et al.,
1997), confirming that firms are run consistent with the laws and answerable to all
stakeholders (Dunlop, 1998), ensuring that reporting systems are organized in such a
way that good governance is facilitated (Kendall, 1999), crafting an effective
leadership/strategic management process that integrates stakeholder value as well as
shareholder value (Tricker, 1994; Kendall, 1999), and increasing answerability and
corporate performance (Keasy et al., 1997). Leadership, direction, control,
6
transparency, and accountability traits, therefore, lie central to comprehensive and
effective corporate governance (Huse, 2005; Van den Berghe and Louche, 2005).
The board of directors is at the centre of corporate governance mechanism. Board is a

critical channel of communication between the shareholders and management. The
other participants include employees, customers, suppliers, and creditors. The board of
directors see their task as a guardian or custodian of assets depending upon the
corporate governance framework. The governance framework depends upon a legal,
institutional and ethical environment of a country. Both the management and the
governance imply control, but the governance has got more attention for examination
of its impact on business performance of companies.
1.3 Development of Corporate Governance Framework in India
India is following the global trend in reforming its corporate governance system. After
Satyam scandal, India focused keen attention on corporate governance weaknesses.
Being a former colony of Britain, India follows a UK-style governance system that
oﬀers a reasonable level of protection to minority shareholders as compared to other
countries. The Indian industry has been following English regulatory framework of
joint stock limited liability till the late of the second half of the 19th century (Goswami,
2000). The Confederation of Indian Industry in 1998 has prescribed a code of practice
aimed at reforming corporate governance.
The liberalisation and globalisation reforms in 1991 drew the attention of the Indian
Government towards corporate governance issues in India. A study on directors in
Indian companies revealed that the directors unanimously consented to reforming
governance through improving the board and investor relations (Solomon and
Solomon, 2004). In spite of the fact that India has one of the largest listed companies
in the world, ownership is still concentrated in families. Though few authors have
described ownership structure as insider-dominated, Sarkar and Sarkar (2000)
described the structure as a mix of the outsider and insider model because minority
shareholders also participate in corporate governance.
7
Further, institutional investors have enough stakes in the Indian listed companies. There
exists a positive relationship between institutional shareholding and value of a company
(Sarkar and Sarkar, 2000). Pieces of evidence have also been provided by Sarkar and
Sarkar (2000) that the principal shareholding of Indian listed companies usually held
by directors and their relatives, corporate bodies, foreign investors, government,
financial institutions, promoters and the public. The study indicated a family dominated
ownership in the listed companies.
India had a well-developed corporate governance convention at the time of

independence, (Pande, 2011). However, till liberalization in the year 1991, the Indian
system of corporate governance was suffering from some severe black holes. Ranging
from lacking in enforcement to flaws in the judicial system and corruptions were major
problems (Pande and Ansari, 2013). Further, ironically amount of capital invested by
government-owned fund providers was a major performance measure, but not return on
capital invested. After liberalization in 1991, India made several remarkable changes in
its governance policies. A complete overhauling was undertaken by the Indian
government to attract capital from foreign investors and to strengthen the system of
investor’s protection. By the mid of 1990s, major reform initiatives were taken but they
failed to produce satisfactory results.
Referring back, the first initiative was taken in the form Confederation of Indian
Industries (CII) voluntary code of corporate governance in 1998. Drawn heavily from
the Anglo-Saxon Model of corporate governance, the codes were focused on listed
companies. However, codes being voluntary in nature had minimal impact on the
working and practices of Indian corporate. As a result, SEBI took a more constructive
initiative in the direction of reforming governance system in India by constituting a
committee under the chairmanship of Kumar Mangalam Birla in early 1999. The
committee laid emphasis on independent directors, board representation and audit
committee and was also focused on disclosure and transparency and equal treatment of
all shareholders keeping in view interest of all stakeholders. SEBI accepted and released
the major recommendations in the form of clause 49 of the Listing Agreement of the
Stock Exchange in 2000.
Further, Department of Company Affairs under the Ministry of Finance and Company
Affairs took another initiative in 2002 and established Naresh Chandra committee that
8
pinned its recommendations on the key aspects of financial and non-financial
disclosures, independent auditing and board oversight over management. Additionally,
it recommended that auditors should not perform certain non-audit services and the
basis on which they can be disqualified from the position. The journey of reforms did
not end here. SEBI took yet another initiative in the form of committee incorporated
under the chairmanship of N R Narayana Murthy in 2002 to re-assess the Clause 49.
The committee released a report on February 8, 2003. The committee recommended on
the aspects of an audit committee, audit report, independent directors, related party
transactions, risk management, directorship and remuneration to directors, financial
disclosures and code of conducts. The committee pinpointed the presence of insiders
on Boards and emphasized whistle-blower’s access to the audit committee. The
recommendations were incorporated in clause 49 and non-compliance to it can result
in delisting and financial penalties.
Thrust did not end here. Further steps were taken by Ministry of Corporate Affairs and
Irani committee was established in 2004 to advise on new companies Bill. The
committee submitted a report on May 31st, 2005. Irani committee recommendations
were notably contrasting with Clause 49 on the issue of Boards of directors. For
example, Clause 49 required that independent director should not have any relation with
the company for a minimum of preceding three financial years, but Irani committee
lessened that limit to one financial year. The government could not present the bill in
the Parliament till 2009. Due to a big time lag government decided to reassess the Bill.
In August 2010, a report was submitted by the Standing Committee on Finance
including the separation of the roles of chairman and chief executive, tenure and
attributes of independent directors, board evaluation, appointment of auditors and
rotation of audit partners and firms.
Concurrently, in spite of the huge efforts for reforming and strengthening the system of
governance, the trust was shattered by India’s ‘Enron moment’ that urged a re-
inspection of India’s progress in corporate governance reforms, Economist (2009).
Causes for Satyam failure can be attributed to an opportunist and self-serving behaviour
of a leader and a lame audit process and board oversight. CII started investigating the
scandal and reported that “Satyam is a one-off incident -especially considering the size
of the malfeasance. The overwhelming majority of corporate India is well run, well
9
regulated and does business in a sound and legal manner.” In spite of the statement, CII
proposed several recommendations for further enhancing the governance norms and
practices.
The Securities and Exchange Board of India (SEBI) and the Ministry of Corporate
Affairs (MCA) form the framework for corporate governance initiatives in India. It is
mandatory for the listed companies to comply with the listing agreements contained in
Clause 49. MCA facilitates the exchange of ideas amongst corporate leaders,
policymakers and regulators. Likewise, Competition Act, 2002; Foreign Exchange and
Regulation Act, 1999; the Industries (Development and Regulation) Act, 1951; the
Chartered Accountant Act, 1949 and other legislation have some bearing on corporate
governance principles. Apart from regulations, non-regulatory bodies have also been
issuing guidelines for better governance. For example, voluntary governance code by
the CII in 2009. The Kumar Mangalam Birla Committee was set up by SEBI in 2000
to suggest new clause, the Clause 49 in the Listing Agreement in order to enhance
governance norms.
The Ministry of Finance delegated the Naresh Chandra Committee to examine the
aspects of auditors, company relationship and independent directors. The SEBI again
in 2003 appointed the Narayan Murthy Committee for recommending on issues
including roles and responsibilities of audit committee, audit report, independent
directors, director compensation, related party transactions, risk management and
financial disclosures. CII in 1998 for the first time coined the concept of independent
directors and their compensation. The Kumar Mangalam Birla Committee in 2000
emphasised on the presence of at least one-half of the board as independent directors
with an executive chairman and one-third otherwise. The Narayan Murthy Committee
suggested similar requirements with respect to a proper combination of executive and
non-executive directors.
A breakthrough in the moves towards achieving better governance norms was laid by a
new Companies Bill, 2011. The Bill was reviewed by the Standing Committee on
Finance and the report was submitted on June 26, 2012. The Bill was approved by the
Lok Sabha on December 18, 2012, and by the Rajya Sabha on August 8, 2013. Further,
the President of India acknowledged the Bill on August 29, 2013, that mandates the Bill
as Companies Act, 2013. The new Companies Act came into force with the objective
10
to make governance practices more effective, enhancing disclosures, reporting and
transparency through enhanced norms. The Act brought several new notions on
governance aspects. The Act defined the term independent director along with their
roles and responsibilities and mandated the presence of at least one woman director on
board in addition to resident and independent directors. Thus, the Act spotlighted board
processes which are supposed to systematize good corporate governance in the Indian
corporate system. The Act introduced the requirements of appointing of a resident and
a woman director on board.
With the similar objectives, SEBI revised Clause 49 that came into effect from October
1, 2014, applicable to all listed companies. The revision in the Clause was made to
bring the provisions complimentary with the requirements of Companies Act, however,
the Clause 49 imposed stricter requirements than the Companies Act. This simply
means that the listed companies are required to obey the provisions of strict laws. Key
dimensions focused on the Clause are rights of shareholders, the role of stakeholders in
corporate governance, disclosure and transparency, responsibilities of the board and
other responsibilities. The framework is aligned with the powers and duties of important
governance mechanisms such as directors, auditors, management, etc. in the Companies
Act.
More specifically the Clause and the Companies Act speak about the composition of
the board, a limit on the number of directorships, the tenure of independent directors,
compensation, disclosures, audit committee, risk management, related party
transactions and subsidiary companies. The Companies Act also envisioned improving
governance by requiring disclosure of nature of the interest of every director, manager,
any other key managerial personnel and relatives of such a director, manager or any
other key managerial personnel and reduction in threshold of disclosure from 20% to
2% (PwC India, 2013).
The Kumar Mangalam Birla Committee recommended the constitution of a stakeholder

relation committee to look into shareholder complaints and grievances redressal
systems with the objective of prompt redress of shareholder grievances. The Companies
Act and the Revised Clause 49 broadened the coverage of committee and mandated the
formation of such committee under the chairmanship of a non-executive director to
address the grievances and problems of all the stakeholders including the shareholders.
11
The Companies Act required every company with more than one thousand
shareholders, debenture-holders or deposit-holders during any financial year to have a
Stakeholder Committee dedicated to resolve the grievances of the security holders.
Further, moving towards making the workings more transparent the regulatory bodies
mandated the constitution of Nomination and Remuneration Committee to ensure that
the structure of remuneration is reasonable and sufficient and appropriate to the
working of the company and its goals. The committee has to be a minimum number of
three non-executive directors, half of which are to be independent directors. Directors’
salary, bonuses, benefits, stock option details, etc. are to be disclosed in the annual
report.
All the committees referred above recommended the setup of an audit committee
consisting of independent directors. The audit committee was entrusted with the task of
compliance mechanism of the organizations including the whistleblower policy of the
companies. The audit committee acts as an oversight mechanism that has primarily been
constituted to ensure transparent and fraud-free operations. The companies with paid
up capital of 10 crores or more; or having a turnover of 100 crores or more; or having
an aggregate outstanding loan of 50 crores or more are required to have an audit
committee as per section 177 of the Companies Act, 2013. The Act recommended the
composition of the aforesaid committee as not less than three directors or any other
number as determined by the Board of which two-thirds should be independent
directors. The revised Clause 49 expanded the roles and responsibilities in ensuring the
transparent and accurate financial reporting and disclosures.
In spite of the attempts made to complement the requirements of SEBI and the 2013
Act, there are several different aspects relating to independent directors. The first
difference is related to the definition itself. Among the other differences are the
requirements by the Companies Act for the board’s judgment for independent director’s
integrity, experience and expertise. The Act also requires the examination of
independence of the relatives of independent directors. The independent director may
be disqualified in case such independence is found to be missing. Differing compliance
requirements imposed by multiple regulators will lead to hardship as well as increased
cost of compliance for companies.
12
The requirements relating to audit committees was first introduced by the Companies
(Amendment) Act, 2000 with the objective to ensure that the board of directors
discharge their functions effectively and oversee management in public companies.
Again the regulators differ to several requirements for an audit committee. For example,
as per the Companies Act, the chairman of the audit committee needs not to be an
independent director. In several instances across the 2013 Act, there are provisions
which are also covered within the accounting standards.
The differences may not have any adverse impact however in certain cases, these
differences may create implementation issues. The differences exist in the definitions
of the associate company, control, subsidiary company and the related party. The
experts have believed that these terms which have been defined in the accounting
standards, which also form a part of the Companies Act, 2013, should not be defined
again in order to eliminate contradictions and ambiguity in compliance requirements.
The definitions contained in accounting standards having primary significance have
already been recognized in the section 133 of the Companies Act, 2013. The section
says that the Central Government may prescribe the accounting standards as
recommended by the Institute of Chartered Accountant of India, constituted under
section 3 of the Chartered Accountant Act, 1949.
The Companies Act prohibited auditors to render certain service such as bookkeeping
services, internal audit, design and implementation of the financial information system,
actuarial services, and investment advisory services, investment banking services,
outsourced financial services, management services and such other services as
prescribed. These services are not to be rendered directly or indirectly by an audit firm
to its client companies. These restrictions are meant to retain auditor independence in
order to enhance public confidence in the auditor’s report. Compliance with such laws
indicates to the public as well as to stakeholders that the auditors are performing their
duties with integrity and objectivity that adds credibility to the published information.
The auditors are required to mention in their report any observation, qualification,
adverse remark, etc. on financial transaction or maintenance of accounts, internal
financial control or other connected issues.
Well-built standards for governance are crucial for the healthy functioning of business
and financial markets. The study highlighted series of reforms undertaken by various
13
authorities in India since liberalization in 1991. The government has different bodies to
chalk out legal requirements for companies from different aspects striving towards the
same objective of enhancing governance effectiveness. The major regulatory
framework for Indian corporate governance is spelt through the languages of the Indian
Companies Act, SEBI regulations and Accounting Standards. The next section is
dedicated to exploring all these regulatory prescriptions for Indian corporate
governance.
1.4 Need of the Study
Corporate Governance covers a broad range of activities including dealing with policies
and practices that impact organization’s performance, and its capacity to be accountable
to its various stakeholders. There are some generally accepted elements of good
governance. Accountability, transparency and recognition of stakeholder/shareholder
rights are at the top of such principles. Few more added to it are efficiency, integrity,
stewardship, leadership, and an emphasis on performance as well as compliance
coupled with a key objective of protecting the interest of shareholders and other
stakeholders.
Organization for Economic Cooperation and Development (OECD, 2004) in its

definition of Corporate Governance covers a large number of distinct concepts of
Corporate Governance – “Corporate governance is the system by which business
corporations are directed and controlled. The corporate governance structure specifies
the distribution of rights and responsibilities among different participants in the
corporation, such as, the board, managers, shareholders and other stakeholders and
spells out the rules and procedures for making decisions in corporate affairs. By doing
this, it also provides the structure through which the company objectives are set and
the means of attaining those objectives and monitoring performance are determined”.
The definition covers important aspects of governance and can be elaborated as - there
are “people” engaged in an organization with some “purpose”, ought to “practice” some
“principles” in order to achieve desired “performance”. The People, Purpose,
Principles, Practices and Performance represent a structure where people are formally
involved with some predefined purpose. The basic concept of the people, purpose,
14
principles, practices and performance relationship can be captured with the help of the
following figure 1.
The entire stakeholder groups who are directly or indirectly related to business, for
example - shareholders, managers, directors, auditors, etc. are the people who are
engaged in running an organization in their respective capacities. Directors act as a
bridge between shareholders and managers.
People Purpose Principles -------------- Practices Performance

Check for Gap
Figure 1: Basic Model of 5Ps of Corporate Governance

Source: Developed by Researcher and Published in Asian Journal of Management
Applications and Research, 2016.
The success of a company largely depends upon an effective board. The board acts as
an intermediary between investors and managers and mitigate agency issues (Mishra
and Mohanty, 2014; Williamson, 2002). They try to align the interest of shareholders
and managers and all other participants in an organization. Board of Directors evaluates
the performance of an organization, and thereby performance of the Agents or managers
through Annual Reports presented by managers. To check the reliability of the reports,
and to ensure that the reports are free from the manipulations and misrepresentation of
facts and figures, the Board appoints an Audit Committee. The Audit committee is
vested with the responsibility of appointing the Auditors who verify the authenticity of
financial statements. Thus, from the discussion, we can add the Auditors as another
important participant in a corporation.
Every creation has a purpose. So is with the creation of an organization and its members
having varied roles. The organization has some vision and mission. In absence of a
purpose, the presence of an organization is futile. A purpose, a mission or a vision forms
the guiding principle for human behavior in an organization. Shareholder theory and
stakeholder theory are the two contradicting theories about the purpose of an
15
organization. The shareholder theory establishes that the main purpose of an
organization is making wealth for shareholders and it is an obligation on the part of
managers to maximize the shareholder value (Narang and Kaur 2014).On the other
hand, the stakeholders who actually are not the owner of the organization, but do have
some claim in the value created by the business.
In short, whatever may be the nature of a business, the purpose of an organization is to

create value for its members. The question is that how to divide and distribute the value
created among the participants such as shareholders, managers and other stakeholders.
Human behaviour is to serve own interest. Everyone strives for a larger share, maybe
at the harm of others. In order to curb this behaviour, certain principles have been
carved out by the regulatory body of every country.
Principles imply a law or a rule. The law is a universal principle. It explains the essential
attribute of something, the universal characteristics and the affiliations between things.
It sketches the boundaries within which relationships and activities are to be conducted.
The participants of an organization require striving towards the pre-defined purpose in
the light of some principles, rules and regulations. The Companies Act, 2013 and the
Clause 49 of the Listing Agreements and directives issued by the SEBI direct all the
listed companies to adhere to certain directions and guidelines.
Human beings have opportunistic behaviour. Opportunism may be in the form of

stealing, cheating, misappropriation of resources, irregularities in financial reporting,
etc. (Windolph and Moeller, 2012). Human beings tend to deviate from the pre-
established rules, regulations and principles. Managers may divert resources of the firm
to pursue their own interest. Investors are most likely to go with companies with good
governance practices delivering good performance (Mishra and Mohanty, 2014).
But a question arises how to differentiate a good governance from a bad governance?
The question has been attempted to be answered by many scholars. The scholars have
identified various key dimensions representing features of good governance and
simultaneously testing its impact on the financial performance of companies. In doing
so, few authors have formulated a checklist of good governance indicators, calculated
scores for sampled firms and tested its relationship with financial performance
parameters, while few others have identified proxies representing good governance and
16
testing its impact on financial performance (Mishra and Mohanty, 2014; Pande and
Ansari, 2013; Balasubramanian et al., 2008; Khanchel, 2007; Selarka, 2005; Mohanty,
2003; Brown and Caylor, 2004).
The study focuses to identify the people responsible for maintaining good governance
in a firm. The present study attempts to explore various practices of good governance
as prescribed by the literature and regulatory bodies. Also, the study evaluates whether
the impact of such practices is getting reflected in the performance of the firms.
1.5 Scope of the Study
There are as many variations of capitalism and corporate governance as there are
countries in the world. However, corporate governance research has tended to focus
predominantly on the Anglo American (often termed as the Anglo-Saxon) system of
corporate governance, where companies are listed on stock exchanges and shareholders
can trade freely in the shares. Traditionally, in this system, share ownership has been
widely dispersed and management of companies has been distinctly separate from
ownership.
The present study is dedicated to researching the aspects of good governance and testing
its relationship with various financial performance parameters of Indian firms. The
study explored a basic question that why governance is needed? To understand this
notion the study tried to understand the structure of firms. It was found that governance
is needed to safeguard the funds invested by shareholders and other investors. The
literature emphasised the role of the board of directors for better management of firms.
The study with the help of literature and existing laws of Indian governance spelt out
by various regulatory bodies, further identified various key aspects to measure the
effectiveness of board governance mechanism.
To answer the research questions the study selected a sample of NSE 200 Index
companies, for which the data related to corporate governance and financial aspects
was collected and analysed. The selection of NSE 200 Index companies was motivated
by two factors. Firstly, the study found just one study sampled NSE 200 Index for
exploring governance issues in India. Secondly, the NSE 200 Index includes all firms
included in NIFTY 100 Index as well as NIFTY Full Midcap 100 Index. Figure 2 (on
17
next page) exhibits an overview of the sample selected for the study. The NIFTY 200
Index reflects the behaviour and performance of the large and mid-market capitalization
companies. Thus, forming a sufficient representation of the Indian firms for exploring
corporate governance aspects.
NIFTY 500
NIFTY NIFTY
NIFTY 100 Smallcap 100
Midcap 100
NIFTY NIFTY NIFTY NIFTY Full NIFTY NIFTY Full

50 Next 50 Midcap 50 Midcap 100 Smallcap Smallcap
50 100
NIFTY
NIFTY 200
MidSmallcap 400
Figure 2: An Overview of the Study Sample

Source: IISL NIFTY Market Methodology Document, 2017)
The exploration of the nature and structure of the firms highlighted that people sitting
on the board of a firm are one of the most important mechanisms for governing the
functioning of the firms. The study dedicated itself towards identifying various
dimensions through which board effectiveness can be measured. Also, a number of
hypotheses are tested to check if these board characteristics are contributing to firm
performance or not. Using governance and financial data accessed from CMIE Prowess
database, for NSE 200 companies for seven years, the study employed panel data
regression analysis to test the study hypotheses.
18
The second chapter deals with the detailed literature review. The literature first explores
origination of the governance to assess the need and mechanism for implementing good
governance. The corporate governance theories are explored to highlight the roles and
duties of the board of directors. Moving further, Indian corporate governance
regulations as stipulated by different regulatory bodies is explored to identify
requirements of the law for Indian corporate governance. In light of the findings of the
literature and laws so far, the study narrowed down its search to explore further the
identified aspects of the board of directors.
While exploring board aspects the study considers studies conducted in India, outside
India and also the studies conducted for multiple nations including India. The third
chapter explains the methodology adopted for carrying out statistical tests. The chapter
explains in detail the research gaps, and spells out it research objectives, variables,
measurement of variables, the sample of the study, equations and method estimation of
the equations. The fourth chapter presents the results of equation estimations and
analysis followed by the fifth chapter with findings and recommendations in light of
the data analysed by the study.
Summary
The chapter portrayed an overview of the corporate governance and drew attention
towards the fact that the collapse of big business houses has resulted from lack of an
effective corporate governance. Therefore, a proper implementation of corporate
governance regulations is required to ensure good governance practices among Indian
firms. Corporate governance is a set of various attributes that ensure the protection of
shareholders and other stakeholders by controlling the opportunistic behaviour of the
managers. The chapter also highlighted that the board of directors are a critical channel
for establishing corporate governance mechanism among business firms. The chapter
further outlined the development of corporate governance framework in India and
discussed the need for the exploration of key issues in Indian corporate governance
system.
To conclude, corporate governance is seen as a mechanism which is implemented/

affected by the presence of some people (board, executive officer, auditors, chairman,
19
stakeholders, etc.), each one is appointed with some predefined objectives along with
well-regulated principles, yet the practices of these people tend to deviate from actual
guidelines which in turn, adversely affect the performance of firms and can lead to
erosion of shareholders’ wealth. Therefore, there is a need for timely exploration of
corporate governance practices and identifying probable areas of deviations in good
governance practices.
20
2.1 Overview
The literature has been classified into five broad categories and a theme based approach
is adopted for conducting an in-depth review of the literature. Therefore, the study
begins with the discussion of origination of corporate governance to get an insight into
the need for corporate governance. Then the theories of corporate governance are
discussed to understand the conceptual aspects of corporate governance and
interrelationship among various components of corporate governance. Before
discussing the various components and mechanism of corporate governance the Indian
laws of corporate governance are scanned. This is done to constrict the discussion in
the light of Indian corporate governance laws. Further, mechanisms of corporate
governance are discussed followed by the impact of corporate governance on the
financial performance of Indian companies.
2.2 Origination of Corporate Governance
The origination of corporate governance has its root in the historical perspective of the
evolution of the firms. The firms emerged as a system for the exchange of goods and
services through the mechanism of trade. The firms were usually owned and managed
by a single person. With the passage of time, the firms began to expand their
production and reach to different markets in order to sell the produced goods and
services. Such expansion demanded a huge investment. The firms started moving to
outside financiers to fulfil their investment needs. The need to finance the expansion of
the firms attracted many people who emerged as promoters of these firms. Depending
upon the nature of financing the firms emerged into different forms which establishes
a basis for attracting various laws and regulations to protect the interest of the investors.
Such laws are supposed to enhance the workability of the firms. One of the areas
broadly covered in the corporate law is regarding the laws for corporate governance.
The regulations stipulated in the corporate law and governance law have based their
concepts on the economic theories of the firm. The economic theories of the firm have
explained firms from different perspectives (Mäntysaari, 2011). The choice of the
perspective of the firm is one of the key factors for articulating governance regulations
for a firm. Choosing the perspective of the firm is important as it helps in predicting
21
and explaining the behaviour of the firm. The economic theories have broadly
categorised firms on the perspective of competencies and contracts (Foss, 1993).
The first perspective is regarding the existence of the firms. The theories of the
existence of the firms emphasised market exchange and regarded firms as production
structures. Another perspective focusses on the governance structure of firms through
the mechanism of internal exchange. This internal exchange is basically what we refer
to as organisational structure that again forms a ground for corporate governance norms.
Thus, a firm can be regarded as a production function or as an organisational structure.
Our study is dedicated to exploring the structural aspects of the firm.
The evolutionary theory of the firm was proposed by Nelson and Winter (1982). The
evolutionary economics emphasised on change. The change creates a disequilibrium to
which economic agents respond and try to adopt that change. The theory regarded firms
as a ‘black box’ where processing, storing and producing of goods and information
takes place (Jensen and Meckling, 1976; Holzl, 2005). The firms evolved as production
units aiming at maximising their output and revenues. The theories tried to propose
reasons for the existence of the firms. However, the theories pretended as if firms do
not exist at all. A firm is merely a production facility transforming inputs into outputs
under given feasible technology, matching cost, revenue and profits with the help of
demand schedule and curves. In the words of Klein (1996) firms as a production
function, in the eyes of neo-classical economists is a calculus problem.
The economic theories started focussing on the limits of the organisation. They asked
questions like what limits an incremental transaction of a firm. They further asked why
one big firm does not undertake all production processes? Thus, the theory coining such
questions is regarded as the theory of limits to the firm. The theories focussed on the
cost of governing internal exchange mechanism. The economic theories through the
explanations of organisational structure have tried to explain the concepts of
governance. Mäntysaari (2011) further explained that the theories that regard a firm as
a production function are basically theories of markets. Firms are one of the key actors
of such market. Explaining the firm from governance structure aspects Williamson,
(2002) stated that the firms exist because contracts are incomplete among the
participants of the firms. One of the contractual perspectives for firms is the shareholder
theory of the firms. A contract may be described as an agreement where a factor
22
(employee/manager) for a fixed or fluctuating remuneration agrees to obey the
directions of the owners within stated limits (Coase, 1937).
Jensen and Meckling (1976) referring to the black box label of a firm stated that profit
maximisation through input-output relationship is just one perspective studied
repeatedly in the theory of firms. How the conflicting objectives among the participants
of the firm are managed to achieve profit maximisation or value creation are needed to
be addressed. Jensen and Meckling (1976) extended their arguments on the grounds of
agency cost and described agency contract as an engagement of two or more parties
where one party hire the another one and delegates some decision-making power as
well to enable them to perform the task. The first party who hires turn out to be a
principal and the other party becomes an agent.
The modern system of corporate financing tempted the separation of ownership and
control of organisations. This separation of ownership and control is the root of
conflicting interests of owners and managers. Both the parties can have a will to
maximise their own interests. The owners have invested their hard earned money in the
business and they look for maximum possible benefit out of their investment. But the
agents may not do that and may pursue their own interest. The difference between the
benefit gained by the owner by managing the business and the benefit by getting their
business managed by agents is one of the major agency costs while the expenditures
incurred for monitoring the agents and hiring charges paid by the principal to the agents
are the other forms of agency costs (Jensen and Meckling, 1976).
Jensen and Meckling (1976) in their study on managerial behaviour and agency cost
raised few valuable questions such as why value creation for the firm falls less when
managers are not the owners than the value creation for the firm if the managers
themselves would be the owner of the firm; despite knowing the fact that managers do
not maximise the value for shareholders, why equity share capital is the major source
of finance for companies. Both the managers and owners are self-centred. They are
striving for their own utility. Yet another question arises that how an equilibrium can
be established between the two self-centric forces? The principal-agent relationship can
be depicted with the help of the help of following figure 3.
23
Figure 3: Basic Model of Principal-Agent Relationship
Source: Researcher’s Conceptualisation
The output of a firm in terms of value is something non-separable. Being self-centric,

the human beings found it difficult to distribute it among themselves. In this situation,
the owners give up their control over their firm and appoint a third party entrusted with
the task of maximising the welfare of all firm’s stakeholders (Mäntysaari, 2011). The
shareholders can surrender their control to the board of directors who accepts their
primary role as maximising the shareholders’ wealth. The board acts as a carrier of a
company and the law of different countries has vested varying powers to the directors
so that the board can take decisions in the best possible interest of the company. The
board has got an increasing role in ensuring effective corporate governance (Solomon
and Solomon, 2004; Ong and Wan, 2008). Ong and Wan (2008) emphasised that the
role of the board has been emerging as one of the key actors in monitoring the affairs
of the company and with the development in the methods of doing business has widened
the scope of board activities. There are various board characteristics that can be used
by the investors for monitoring the earning performance of the management (Bédard et
al., 2008).
24
To sum up the discussion, the black box system of the firms have shifted to a new
owner-manager relationship where owner occupies a position of the principal and the
manager fills the position of an agent. The owner bears the agency cost in the hope that
the managers will manage the business in the best interest of the owners or shareholders.
There are different costs associated with the agency relationship, where monitoring and
agent compensation (incentive) costs seem to be most effective for inducing the agents
working up to the expectations of the principals. The monitoring role is expected to be
performed by the board of directors. Along with the monitoring role, the directors are
also expected of counselling the management regarding various decision-making
problems. Thus, we can state that the directors are also working in the capacity of agents
for monitoring the business while the managers are working in the capacity of agents
for executing the decisions taken by the board of directors. However, the policy,
procedure and practices are formulated and communicated by the directors. The
monitoring of business activities of business agents is what we refer to as governance.
The governance is basically aimed at mediating and managing the conflicting roles of
agents and principal. The real challenging task is for the board to govern every actor
appointed for contributing to value creation for shareholders and other stakeholders
(Diwedi, 2010). In light of this discussion, the study attempts to identify and focus on
various characteristics and roles of the board of directors.
25
2.3 Theories of Corporate Governance
Corporate governance is often analysed around major theoretical frameworks. The

corporate governance theoretical framework has been addressed by many authors and
scholars to provide guidance on how different participants are inter-connected. A
theoretical framework addresses the ‘why’ of Corporate Governance and provides a
limited guidance to the Board of Directors in taking key decisions (Pande and Ansari,
2013). The important theoretical frameworks for Corporate Governance are discussed
below.
2.3.1 Agency Theory
The main concern of agency theory is to resolve agency problems between principal
and agent. The developed system of corporate finance is characterised by ownership of
wealth with limited control and management of that wealth without proper ownership
(Melanson, 2010). The theory says separation in ownership and control give rise to an
issue that the principals (owners/shareholders) suffer an agency loss to the extent to
which returns fall below to what it would be if owners would have a direct control over
the management (Donaldson and Davis, 1991). However, the agency problem can never
be perfectly solved and shareholders may experience a loss of wealth due to the
divergent behaviour of managers (Mintz, 2005). This separation of ownership has
brought a lot of attention on the relationship between ownership and financial
performance. Expectations of Owners are that the Agent should run the business in a
planned manner to maximize shareholders’ wealth, but managers may not do it. Due to
lack of monitoring managers are likely to fulfil their own interest. It results in an
increase in agency cost. This makes it critical to have proper governance structure to
safeguard the interest of shareholders. The agents may be opportunistic and may not
serve the interest of the shareholders in the best possible manner (Jensen and Meckling,
1976). Thus, corporate governance as per agency theory deals with the problem – “how
to assure owners that they could get a good return on their investments”.
26
2.3.2 Shareholder Theory
Like agency theory, shareholder theory also emphasizes returns on shareholder

investments. The shareholder theory encourages the economic perspective of a firm and
draws attention towards maximising the shareholders’ wealth side-lining the
contributions of other participants. The shareholder theory advocates self-interest by
attempting to enhance own benefits. The self-interest is viewed as an invisible hand that
will indirectly benefit the society at large if everyone maximises its own profits.
The shareholder theorists also advocated free market with limited government
intervention (Pfarrer, 2010). Friedman (1970) stated that the only social responsibility
of the business is to optimise the use of its own resources to generate maximum profit.
The view of Friedman (1970) is commending the view raised by Adam Smith (1776)
in which he stated that every economic agent is self-driven and works for his own
interest. This way an agent contributes indirectly to the society. Sen (1977) in his work
on rational fools emphasised that the actions of every agent are stimulated by self-
interest. This self-driven attitude is basically the root of all agency problems between
shareholders and managers and that is why it needs some sort of vigilance from a third
party. The question is that how the managers or agents can be trusted that they are
working in the best possible interest of the principals or shareholders. The agency view
says that they cannot be trusted and that is why the board of directors are expected to
monitor the agents and represent the interest of the principals (Muth and Donaldson,
1998).
2.3.3 Stakeholder Theory
The shareholder theory emphasised on the maximisation of shareholder wealth as a

mean to acquire competitive advantage in the industry (Pfarrer, 2010). The stakeholder
theory offers a broader view of the same. The alternate approach suggested by
stakeholder theory for securing a competitive advantage is to serve not only the
shareholders but to take care of other stakeholders as well. The purpose of the firm is
to create a balance between the interests of all stakeholders (Evan and Freeman, 1993;
Ararat and Ugur, 2003). This way the firms are motivated for sacrificing a little of their
27
self-interest and to serve a win-win situation over the lop-sided approach to wealth
maximisation of a particular group of people.
Stakeholders are the group of people without whose support an organization cannot
exist. The shareholder model of corporate governance relies on the assumption that
shareholders are morally and legally entitled to direct the corporation since their
ownership is an extension of their natural rights to own property. Stakeholder theory
suggests that the purpose of the firm is to serve broader societal interests going beyond
the economic value creation for shareholders alone. Stakeholder view of the firm is
offered as an alternative that considers the economic aspect of business as the primary
benefit for society. Stakeholder theory posits that managers must systematically attend
to the interests of various stakeholder groups that may include employees, community,
creditors, client, etc. (Mintz, 2005). In a nutshell, the emphasis of this theory is to guide
managers to pursue broad stakeholder orientations rather than narrow shareholder
orientations.
2.3.4 Stewardship Theory
The stewardship theory is derived from the disciplines of sociology and psychology,
offers a contradictory view of agency theory and assumes managers as being steward
rather than as self-interested agents (Davis et al., 1997; Muth and Donaldson, 1998).
Agency theory is motivated by the economics and finance disciplines, grounding
arguments around capitalistic views, depicted managers or agents striving for self-
centred financial objectives. The stewardship theory argued for various non-financial
motives for managers and agents that give them psychological satisfaction and sense of
achievement. The executive managers, under this theory essentially want to do a good
job because their reputation is at stake. They try to be a good steward of the corporate
assets (Donaldson and Davis, 1991) and acts as a guardian of the company’s assets
(Mukhopadhyay et al., 2012). Managers who are in the self-actualization stage as per
Maslow’s hierarchy theory, are motivated to perform their jobs excellently to gain
recognition (McClelland, 1961). If the wealth of shareholders is maximised, the
managers’ satisfaction is considered to be maximised (Yusoff and Alhaji, 2012).
28
The directors too are the stewards of the resources of the company and take the
responsibility for looking after the strategic direction of the company. Being stewards
of the resources of the company, the directors need to assess and manage the corporate
risk, maintaining the integrity of the financial controls of the organisation and ensuring
that competent executives and managers are in the right place and the goals of directors
and managers are aligned.
The stewardship theory indicates that the principals trust their agents that the agents
will fetch a good return on their investments. This trust is missing in agency theory.
However, both the theories represent an extreme situation pertaining to the management
of the company. One extreme end says managers as self-centred while the other says
managers are self-motivated for performing well. The directors represent owners and
work with the managers for counselling them for strategic decisions and monitoring
performance.
Nordberg (2007) noted that the directors see their roles as being stewards of particular
interest groups only. Thus, the framework suggests that the problem usually arises out
of the divergent role and conflicting interest of various groups – shareholders,
management and directors and the foundation of trust among these groups can be built
on the pillars of transparency, accountability, fairness and responsibility
(Mukhopadhyay et al., 2012).
2.3.5 Resource Dependency Theory
The resource dependency theory is derived from economics and sociology disciplines.
The theory explains that the organisation need to link with its external environment to
get access to various resources that are valuable, rare, inimitable and non-substitutable
(Yusoff and Alhaji, 2012). The directors are regarded as a gateway of a firm facing
inside the management and outside the shareholders, primarily striving to connect the
firm with its external environment and manage all external relationships (Machold and
Farquhar, 2013). The theory supports multiple directorships across various boards in
the corporate world that is one of the major sources for networking and information
gathering (Yusoff and Alhaji, 2012). This characteristic of the board is referred to as
co-optation where members of the board are a link to external resources and they try to
29
balance between cooperation and competition while serving on different boards (Azlan
Annuar, 2012; Ortiz-de-Mandojana et al., 2012).
2.3.6 Managerial Hegemony Theory
The managerial hegemony theory compliments the agency theory proposition for
separation of ownership and control but negate the role of the board as an effective
monitoring body and regard the board as legal fiction performing the rubber stamping
function of management (Azlan Annuar, 2012; Hung, 1998; Drucker, 1974). The theory
emphasizes the dominating nature of CEOs and management on board that leads to a
passive role for independent directors. Independent directors are not able to make
independent judgments because CEOs dominate selection process for outside directors
(Vancil, 1987) and performance evaluation of the organisation by the board is just a
compliance to legal requirements (Hung, 1998). Also, the board’s decision making is
not independent of management and management at times resists board’s involvement
in strategic decision making (Marie L’Huillier, 2014). The independent directors are
merely passive observers and lack the ability to monitor management behaviour (Wan
Mohammad et al., 2016). However, Nordberg (2007) mentioned that it is up to the
board whether it behaves like the top ruling body (class hegemony) or surrender to
management to become a legal fiction and play a subservient role to the professional
managers (Marie L’Huillier, 2014).
The agency theory is the fundamental theory of corporate governance that regarded the
managers as self-centred agents. With the passage of time, the theory evolved to
shareholder theory, stakeholder theory, stewardship theory and resource hegemony
theory. Every theory has grounded its arguments on a specific extreme aspect of firm’s
features, management and monitoring and control role. The agency theory discoursed
the problem of separation of ownership and control and contributed to the arguments
of shareholder theory for wealth maximisation. Stakeholder theory expanded the scope
of management efforts and called for welfare for all the participants in the organisation.
However, the stakeholder theory is criticised on the ground that the goal for everything
is basically no goal.
30
Further, the stakeholder theory complemented stewardship theory in that it specified
the beneficiaries in the organisation and demanded win-win situation for all. The
stewardship theory presented a competing view to agency theory and regarded the
managers as self-motivated trustworthy agents. The agency theory maximised the role
of the board in monitoring the firm but stewardship theory minimised it or neglected it
at all. The resource dependency theory regarded directors as a link to the firms’ external
environment that facilitates information gathering, access to vital resources and setting
directions for the organisation. At another extreme end, managerial hegemony theory
negated the role of the board and tagged board as a legal fiction. Viewing governance
through the lens of only one theory may not be a viable perspective. Instead, a prism
view of all the theories can help in understanding the governance and role of the board.
The output of the prism view can describe the varied roles of the board ranging from
monitoring and control role, strategy role, linking role, service role, boundary-spanning
role, collaboration and coordinating role, advisory role and support role. The role
perspectives of the board of directors can be summed up in table 2.1.
Table 2.1: Board Role Perspectives
Theory Assumptions Board’s Role Author(s)

Emphasised
Agency Theory Low trust Monitoring and Ross (1973);
High challenge control role Jensen and
Low risk tolerance Meckling (1976)
Shareholder Theory Optimisation of Monitoring and Friedman (1970)
resource to generate control role
maximum profit
Stakeholder Theory Collective effort Collaborative and Evan and Freeman
Shared risk coordinating role (1993)
Benefit to all
Stewardship Theory High trust Strategic, service, Davis, Schoorman
Less Challenge advice and control and Donaldson,
High risk tolerance role (1997);
Muth and
Donaldson (1998)
Resource Dependency Social capital of Boundary Zahra and Pearce
Theory board spanning, service, (1989);
Board reputation strategy and Hung (1998)
linkage role
Managerial Board is legal fiction Control and support Drucker (1974);
Hegemony Theory Management role Hung (1998)
dominates board
Source: Adapted and modified from Machold and Farquhar, 2013
31
The agency theory indicated board role as an overseer of the actions of executives in
order to protect the interest of shareholders. Extending the role of the board the
stakeholder theory highlighted the role of the board as a negotiator for different
participants in the organisation and make them ready to compromise on conflicting
issues for creating a win-win situation. Adding further to the role stewardship theory
described the role of directors as one who reviews and set strategies of the firm. The
resource dependence theory further added the role of boundary spanning and
representing the firm to its external participants and tapping critical resources for firms
and nurturing a long-term relationship with critical constituencies. The managerial
hegemony theory presented a different view that the board is having a passive role
because the major decisions are taken by the management and the executive officers
while board just affirms and supports the decision. The various roles of the board in the
light of different theories are summarised in figure 4.
Agency Theory
Shareholder Monitoring and

Theory control role
Collaborative role
Stakeholder Coordinating role

Theory
Strategic role
Board
Service role
Stewardship Roles
Theory Advisory role
Boundary spanning
role
Hegemony
Linkage role
Theory
Resource
Dependency
Theory
Figure 4: Board Roles in Light of Theories of Corporate Governance

Source: Researcher’s Conceptualisation
32
The previous section was dedicated to a general view of the theories of the firm and
corporate governance framework and we came up with several roles of the board of
directors in the light of the aforesaid theories. There is another constraint to the
governance structure. The constraint decides a holistic structure of governance and
explains the roles and responsibilities of participants and spells out reward/punishment
in case of non-compliance. Every country has its unique codes for corporate governance
(Nerantzidis and Tsamis, 2017; Chahine and Saade, 2011) depending upon its
economic system, industrial set up, type of government and cultural values. The
variations in legal system may have an impact on corporate governance effectiveness
and performance of firms (Aguilera and Jackson, 2003, cited in Chahine and Saade,
2011). Owing to this fact the present study further dedicated to narrowing down the
roles of the board and other aspects of governance with respect to the legal framework
of India.
2.4 Indian Corporate Governance: A Legal Perspective

The previous section entails a general view of the development of board role as a
monitoring and guiding component in a governance system. The present section is
dedicated to exploring the Indian laws of governance in depth. The Indian law has
provided detailed and comprehensive guidelines for monitoring of business affairs. The
law dedicated its emphasis around shareholder and stakeholder rights and protection;
disclosure and transparency; responsibilities, composition and provisions of the board;
audit, nomination and remuneration committees; related party transactions; insider
trading; etc. The Table 2.2 (on next page) provided a highlight of the major laws
enunciating governance requirements for the Indian listed firms.
Regarding the shareholder and stakeholder rights and protection, the Clause 49 of the
Listing Agreement emphasised on the protecting the interest of minority shareholders
which is supplemented by the Companies Act with the requirement of small
shareholders’ nominee on board. The stakeholder relationship committee is needed to
be appointed as per Section 178 of the Companies Act, 2013. The laws further required
all the listed companies to disclose material information related to financial matters,
ownership, performance, accounting policies, the volume of related party transactions,
etc. The Companies Act directed the directors of the company not to gain undue
33
advantage from company’s resources. Complementing this requirement the Clause 49
prescribed various responsibilities of the board ranging from disclosing the volume of
related party transactions, monitoring misuse of resources, ensuring an independent
audit, risk assessment and maintaining the mandated composition and working
procedure for board and other board committees, etc.
The laws encouraged independent and diversified boards. If the chairman of the board
is an executive director, half of the board needs to be consisting of independent of
directors, one-third otherwise. Also, if the non-executive chairman is a promoter or
holding a key position at board level or one level below the board, at least half of the
board should consist of independent directors. The Companies Act mandated the
presence of one women director on the Indian Boards. The law also specified for
maximum numbers of directors that can be appointed by a company. However, this rule
does not apply to government companies. The independent directors are required to
meet separately once in a year.
34
Table 2.2 Corporate Governance Guidelines by Major Regulating Bodies in India
Dimension Clause 49 Companies Act, 2013 Accounting Standards

Shareholder and Stakeholder Rights 49(IA) & (IB) Schedule IV N/A
and Protection -Such as nomination and selection -One of the role of independent
of board members directors is to protect the interest of
-Protection of minority all stakeholders, particularly
shareholders minority shareholders
-Timely information regarding the -Also, maintaining a balance
agenda of meetings among the conflicting interests of
-Information regarding capital stakeholders
structure enabling certain Section 151
shareholders to obtain control -Small shareholders representation
disproportionate to their equity on board
ownership Section 178
-Equitable treatment of all -The stakeholder relationship
shareholders committee is to be appointed for
-Facilitation of voting rights by resolving the issues of security
foreign shareholders holders
-Framework to avoid insider
trading
-Effective redress for violation of
stakeholders’ right
-Employee participation
-Timely and reliable information on
regular basis
-Whistle blower mechanism
35
Table 2.2 Continued…
Disclosure and Transparency 49(IC) N/A AS 1
- Disclosure of material information - Disclosure of all significant
such as financial performance, accounting policies to be disclosed
ownership and governance in one place
- Implementation of prescribed AS 18
accounting standards - Disclosure of volume of RPTs
- Audit of annual reports by either as an amount or as an
independent, competent and appropriate proportion
qualified auditor
Responsibilities of the Board 49(ID) Section 166 N/A
- Disclosure of related party - Act in the best interest of
transaction company and its stakeholders
- Board and executives - Attempt not to gain undue
remuneration (depends on turnover) advantage
- Ensuring Transparent nomination
process with respect to experience,
knowledge and gender in the board
- Monitoring and managing misuse
of corporate assets and RPTs
- Ensuring the integrity of the
company’s accounting and financial
reporting system by way such as
independent audit, compliance, risk
management, etc.
36
- Maintaining the mandated
composition and working
procedures for board committees
Composition of Board 49(IIA) Section 149 N/A
- Optimum combination of - At least one women director on
executive and non-executive board
directors - At least one resident director
- At least one woman director on - One-third independent directors
Board on board
- Fifty percent of the board of - A maximum of 15 directors on
directors comprising non-executive board
directors - Can be more than 15 after passing
- If chairman is a non-executive special resolution
director, 0ne-third of the board - A nominee director (read with
should be Independent director section 161) appointed by any
- If chairman is an executive institution
director, half of the board should be
Independent director
- If non-executive chairman is a
promoter or holding key position at
board level or one level below the
board, at least half of the board
should consist of independent
directors.
37
Independent directors 49(IIB) Section 149 N/A
- No material relationship with its - None of whose relatives having
promoters, directors, holding, transaction with the promoters,
subsidiary or associate company directors, holding, subsidiary or
during two preceding financial associate company amounting to
years and during the current 2% or more of gross turnover or
financial years total income or fifty lakh rupees
- A non-executive director other during two preceding financial
than a nominee director years and during the current
- not promoter of holding, financial years
subsidiary or associate company - A director other than a managing
- None of whose relatives having director or a whole-time director or
transaction with the promoters, nominee director
directors, holding, subsidiary or - A person of integrity, expertise
associate company amounting to and experience
2% or more of gross turnover or Section 149(8) (Read with
total income or fifty lakh rupees schedule IV)
during two preceding financial - Safeguard the interests of all
years and during the current stakeholders, particularly minority
financial years shareholders
- At least one separate meeting in a - Balancing the conflicting interest
year of the stakeholders
- At least one separate meeting in a
year
38
Number of Directorships 49(IIB) Section 165 N/A
- Not to serve as an independent - Individual can hold 20
director in more than 7 listed directorships
companies - Maximum 10 directorships in
- If serving as a whole-time director public companies
shall not serve as an independent - No specification with respect to
director in more than 3 listed independent directors
companies
Board Provisions 49(IID) Section 173 N/A
- Board has to meet 4 times a year, - Board has to meet 4 times a year,
maximum gap between two maximum gap between two
meetings is 120 days meetings is 120 days
- Cannot be a member of more than
10 committees across all the boards
of Indian listed companies
- Cannot be chairman in more than
5 committees across all the boards
of Indian listed companies
Whistle Blower Policy 49(IIF) N/A N/A

Mechanism for reporting about
unethical behaviour along with
safeguard for the whistle blower
39
Audit Committee and 49(III) Section 177 N/A
Responsibilities - At least three members, two-third - At least three members, majority
be independent directors to be independent directors
- Chairman to be independent - Majority of the members
director including the chairman should be
- Committee has to meet 4 times a able to read and understand the
year, maximum gap between two financial statements
meetings is 4 months - Review and monitor the auditor’s
49(IIID) independence
- Review and monitor the auditor’s - Review and monitor the
independence effectiveness of audit process
- Review and monitor the - Examination of financial
effectiveness of audit process statements and auditor’s report
- Approval of RPTs
- Scrutiny of inter corporate loans
and investments
- Valuation of undertakings or
assets of company
- Evaluation of internal financial
controls and risk management
systems
Insider Trading N/A Section 195 N/A
- Act of buying or selling securities
by a director or key managerial
personnel in case expected to have
40
Auditors N/A Section 143 N/A
- Right to access books of accounts
and vouchers of the company
- A report is to be made to the
members of the company on
accounts being examined
Section 145
- A report with respect to
qualifications, observations and
comments on financial statements
of the company
Nomination and Remuneration 49(IV) Section 178 N/A
Committee - At least three members, all non- - Formation of a stakeholder
executive directors and at least half committee
be independent directors - Chairman is to be a non-executive
- Chairman to be independent director or other person as
director prescribed by the board
- Committee has to meet 4 times a
year, maximum gap between two
meetings is 4 months
Related Party Transaction 49(VII) Section 188 AS 18
- Requires approval of the audit - With consent of the board - A transfer of resources or obligations
committee - No vote of the member identified as between related parties, with or
- Material RPTs require approval from related party without a price
shareholders through special resolution - All RPTs to be reported to - Ability to control or exercise
- Related parties be abstained from shareholders along with justifications significant influence in making
voting financial/operating decisions
41
The table 2.2 (on the previous page) highlights the statutory framework on corporate
governance in India. The Indian statutory framework has, by and large, been in
consonance with the international best practices of corporate governance. Broadly
speaking, the corporate governance mechanism for companies in India is enumerated
in the following major enactments/ regulations/ guidelines/ listing agreement:
The Companies Act, 2013: The Act contains provisions relating to board constitution,
board meetings, board processes, independent directors, general meetings, audit
committees, related party transactions, disclosure requirements in financial statements,
etc. Companies Act was enacted on August 30, 2013, which provides for a major
overhaul of corporate governance norms for all companies.
Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory

authority having jurisdiction over listed companies and which issues regulations, rules
and guidelines to companies to ensure the protection of investors. SEBI has amended
the Listing Agreement with effect from October 1, 2014, to align it with New
Companies Act. Clause 49 of the Listing Agreement can be said to be a bold initiative
towards strengthening corporate governance amongst the listed companies. This Clause
intends to put a check over the activities of companies in order to save the interest of
the shareholders. This effectively means that listed companies will have to comply with
requirements of Companies Act 2013 or revised Clause 49 whichever is stricter.
Accounting Standards issued by the Institute of Chartered Accountants of India

(ICAI): ICAI is an autonomous body, which issues accounting standards providing
guidelines for disclosures of financial information. Section 129 of the New Companies
Act inter alia provides that the financial statements shall give a true and fair view of the
state of affairs of the company or companies, comply with the accounting standards
notified under s 133 of the New Companies Act. It is further provided that items
contained in such financial statements shall be in accordance with the accounting
standards.
The concept of Corporate Governance entails a wide range of dimensions or aspects

that need to be focussed upon. One such component is -
Shareholder and Stakeholder Rights and Protection: Clause 49(I)(A) & (B) provides
that the company should seek to protect and facilitate the exercise of shareholders’
42
rights. Provision has been made regarding the effective participation of Shareholders
in key decisions such as nomination and selection of board members. The company
should provide adequate and timely information to shareholders regarding agenda of
general meetings as well as the issues to be discussed at the meeting, information
relating to Capital structures and arrangements that enable certain shareholders to
obtain a degree of control disproportionate to their equity ownership should be
disclosed. Moreover, the company should ensure equitable treatment of all
shareholders, including minority and foreign shareholders, facilitating the foreign
shareholders of their voting rights, the company should also devise a framework to
avoid Insider trading.
Further, the company should recognise the rights of stakeholders and encourage
cooperation between the company and the stakeholders. Stakeholders should have the
opportunity to obtain effective redress for violation of their rights. A company should
encourage mechanisms for employee participation. Stakeholders should have access to
relevant, sufficient and reliable information on a timely and regular basis to enable them
to participate in the Corporate Governance process. The company should devise an
effective whistleblower mechanism enabling stakeholders, including individual
employees and their representative bodies, to freely communicate their concerns about
illegal or unethical practices.
On the same aspect, Schedule IV of Companies Act, 2013 also provides that it is a very
important role of independent directors to protect the interest of all stakeholders,
particularly the minority shareholders and he should also strive to maintain a balance
among the conflicting interests of the various stakeholders. Moreover, Section 151 lays
down that the Small shareholders should also have representation on the board. Further,
Section 178 talks about the appointment of stakeholder relationship committee for
resolving the issues of security holders.
However, there is no such corresponding AS in this aspect.
Disclosure and Transparency: Clause 49 (I)(C) provides that the company should
ensure timely and accurate disclosure on all material matters including the financial
situation, performance, ownership, and governance of the company. Information should
be prepared and disclosed in accordance with the prescribed standards of accounting,
43
financial and non-financial disclosure. Channels for disseminating information should
provide for equal, timely and cost-efficient access to relevant information by users. The
company should maintain minutes of the meeting explicitly recording dissenting
opinions if any. The company should implement the prescribed accounting standards
in letter and spirit in the preparation of financial statements taking into consideration
the interest of all stakeholders and should also ensure that the annual audit is conducted
by an independent, competent and qualified auditor.
So far as accounting standards related to disclosure are concerned, AS 1 provides that

all significant accounting policies be disclosed in one place. And AS 18 deals with
Disclosure of volume of RPTs either as an amount or as an appropriate proportion.
Responsibilities of the Board: Another important dimension that plays a very

prominent role in corporate governance is the Responsibility of the board as given in
Clause 49(I)(D). Members of the Board and key executives should be required to
disclose to the board whether they, directly, indirectly or on behalf of third parties, have
a material interest in any transaction or matter directly affecting the company. The
Board and top management should conduct themselves so as to meet the expectations
of operational transparency to stakeholders while at the same time maintaining the
confidentiality of information in order to foster a culture for good decision-making. The
board should full-fill certain key functions, including reviewing and guiding corporate
strategy, major plans of action, risk policy, annual budgets and business plans; setting
performance objectives; monitoring implementation and corporate performance; and
overseeing major capital expenditures, acquisitions and divestments. The Board should
be able to exercise objective independent judgement on corporate affairs. The Board
and senior management should facilitate the Independent Directors to perform their role
effectively as a Board member and also a member of a committee.
Section 166 of the Companies Act also makes somewhat similar provision. It lays down
that a director of a company shall act in good faith in order to promote the objects of
the company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, and the community and for the protection of
the environment. A director of a company shall exercise his duties with due and
reasonable care, skill and diligence and shall exercise independent judgment. A director
44
of a company shall not achieve or attempt to achieve any undue gain or advantage either
to himself or to his relatives, partners, or associates.
The Composition of Board: Clause 49(IIA) of the listing agreement deals with the
composition of the Board. The Board of Directors of the company shall have an
optimum combination of executive and non-executive directors with at least one
woman director and not less than fifty percent of the Board of Directors comprising
non-executive directors. Where the Chairman of the Board is a non-executive director,
at least one-third of the Board should comprise independent directors and in case the
company does not have a regular non-executive Chairman, at least half of the Board
should comprise independent directors. Provided that where the regular non-executive
Chairman is a promoter of the company or is related to any promoter or person
occupying management positions at the Board level or at one level below the Board, at
least one-half of the Board of the company shall consist of independent directors.
On the other hand, as per Section 149, every company shall have a Board of Directors
consisting of individuals as directors and shall have—
(a) a minimum number of three directors in the case of a public company, two directors
in the case of a private company, and one director in the case of a One Person Company;
and
(b) a maximum of fifteen directors:
Provided that a company may appoint more than fifteen directors after passing a special
resolution:
Provided further that such class or classes of companies as may be prescribed shall have
at least one woman director.
Independent Directors: As per Clause 49(IIB), the expression ‘independent director’

shall mean a non-executive director, other than a nominee director of the company:
who, in the opinion of the Board, is a person of integrity and possesses relevant
expertise and experience; (i) who is or was not a promoter of the company or its
holding, subsidiary or associate company; (ii) who is not related to promoters or
directors in the company, its holding, subsidiary or associate company; apart from
45
receiving director's remuneration, has or had no material pecuniary relationship with
the company, its holding, subsidiary or associate company, or their promoters, or
directors, during the two immediately preceding financial years or during the current
financial year; none of whose relatives has or had pecuniary relationship or transaction
with the company, its holding, subsidiary or associate company, or their promoters, or
directors, amounting to two per cent or more of its gross turnover or total income or
fifty lakh rupees or such higher amount as may be prescribed.
Section 149 (8) provides that the company and independent directors shall abide by the
provisions specified in Schedule IV.
Limit on the number of directorships: Clause 49(IIB) provides that a person shall not
serve as an independent director in more than seven listed companies. Further, any
person who is serving as a whole time director in any listed company shall serve as an
independent director in not more than three listed companies. The corresponding
provision is Sec. 165. No person, after the commencement of this Act, shall hold office
as a director, including any alternate directorship, in more than twenty companies at the
same time. Provided that the maximum number of public companies in which a person
can be appointed as a director shall not exceed ten. No specification with respect to
independent directors.
Other provisions as to Board and Committees: As per Clause 49(IID), the Board shall
meet at least four times a year, with a maximum time gap of one hundred and twenty
days between any two meetings. A director shall not be a member in more than ten
committees or act as Chairman of more than five committees across all companies in
which he is a director. Furthermore, every director shall inform the company about the
committee positions he occupies in other companies and notifies changes as and when
they take place.
Section 173 provides that every company shall hold the first meeting of the Board of
Directors within thirty days of the date of its incorporation and thereafter hold a
minimum number of four meetings of its Board of Directors every year in such a
manner that not more than one hundred and twenty days shall intervene between two
consecutive meetings of the Board.
46
Audit Committee and Responsibilities: Clause 49(III) lays down that the audit
committee shall have minimum three directors as members out of which two-thirds of
the members of the audit committee shall be independent directors. The Chairman of
the Audit Committee shall be an independent director. The Audit Committee should
meet at least four times in a year and not more than four months shall elapse between
two meetings. The role of the Audit Committee shall include the following: Review
and monitor the auditor’s independence and performance, and effectiveness of audit
process; Approval or any subsequent modification of transactions of the company with
related parties; Scrutiny of inter-corporate loans and investments; Valuation of
undertakings or assets of the company, wherever it is necessary; Evaluation of internal
financial controls and risk management systems; Reviewing, with the management,
performance of statutory and internal auditors, adequacy of the internal control systems.
Section 177 of the Companies Act provides that the Board of Directors of every listed
company shall constitute an Audit Committee. The Audit Committee shall consist of a
minimum of three directors with independent directors forming a majority. Provided
that majority of members of Audit Committee including its Chairperson shall be
persons with the ability to read and understand, the financial statement. Every Audit
Committee shall review and monitor the auditor’s independence and performance, and
effectiveness of audit process; examination of the financial statement and the auditors’
report thereon; approval or any subsequent modification of transactions of the company
with related parties.
Audit: Section 143 provides that every auditor of a company shall have a right of access
at all times to the books of account and vouchers of the company. The auditor shall
make a report to the members of the company on the accounts examined by him.
Moreover, Section 145 specifies that Auditors of the company need to give a report
with respect to qualifications, observations and comments on financial statements of
the company.
Nomination and Remuneration Committee: Clause 49(IV) mentions that the company
through its Board of Directors shall constitute the nomination and remuneration
committee which shall comprise at least three directors, all of whom shall be non-
executive directors and at least half shall be independent. Chairman of the committee
shall be an independent director.
47
Section 178 provides that the Board of Directors of every listed company shall
constitute the Nomination and Remuneration Committee consisting of three or more
non-executive directors out of which not less than one-half shall be independent
directors: Provided that the chairperson of the company (whether executive or non-
executive) may be appointed as a member of the Nomination and Remuneration
Committee but shall not chair such Committee.
Related Party Transactions: As per Clause 49(VII), a related party transaction is a

transfer of resources, services or obligations between a company and a related party,
regardless of whether a price is charged or not. It requires the approval of the audit
committee whereas Material RPTs require approval from shareholders through a
special resolution. Moreover, the related parties are required to abstain from voting for
the approval of the related transactions. But in the light of Sec 188, the related party
transactions can take place with the consent of the board. On this aspect, AS 18 lays
down that All RPTs to be reported to shareholders along with justifications.
Whistle Blower Policy: Clause 49(II)(F) enunciates that the company shall establish a
vigil mechanism for directors and employees to report concerns about unethical
behaviour, actual or suspected fraud or violation of the company’s code of conduct or
ethics policy. This mechanism should also provide for adequate safeguards against
victimization of director(s) / employee(s) who avail the mechanism and also provide
for direct access to the Chairman of the Audit Committee in exceptional cases. The
details of the establishment of such mechanism shall be disclosed by the company on
its website and in the Board’s report.
Prohibition on Insider Trading of Securities: Section 195 provides that No person

including any director or key managerial personnel of a company shall enter into insider
trading. Insider trading means an act of subscribing, buying, selling, dealing or agreeing
to subscribe, buy, sell or deal in any securities by any director or key managerial
personnel or any other officer of a company either as principal or agent if such director
or key managerial personnel or any other officer of the company is reasonably expected
to have access to any non-public price sensitive information in respect of securities of
company. If any person is found contravening the provisions of this section, he shall
be punishable with imprisonment for a term which may extend to five years or with
fine which shall not be less than five lakh rupees but which may extend to twenty-five
48
crore rupees or three times the amount of profits made out of insider trading, whichever
is higher, or with both.
The previous section discussed the Indian laws of corporate governance as laid down
by Companies Act, SEBI and ICAI. The guidelines are well articulated and cover a
broad range of guidelines that a board should follow to ensure effective monitoring. In
the light of board role perspectives and the Indian laws as depicted till now, the study
attempts to move further and tries to look more deeply into the aspects of the board as
studied by scholars in the field of corporate governance. In the previous sections, we
witnessed different opinions on the role of the directors. Various theories have been
analysed to understand the dynamics of the board of directors’ role. The board of
directors is another name given to governance mechanism. Having understood the
importance of the board, the next step is to determine how to measure board
effectiveness that can be used for studying the impact of corporate governance
parameters on the financial performance of Indian companies.
2.5 Mechanisms of Corporate Governance
Many scholars have used governance mechanism and board of directors

interchangeably. There are various studies which identified the factors that impact the
effectiveness of the board such as board size (Klein 2002b); director attendance (Allen,
2004); number of board appointments (Young et al., 2003; Dunn & Sainty, 2004; Fich
& Shivadasani, 2006). Having the firm’s Chief Executive officer also serves as the
Chairperson of the Board (called CEO/COB duality) can also compromise the
independence of the board and the audit committee causing both mechanisms to be less
effective (Farber, 2005).
Corporate governance should be proactive and should be considered as vital as water

and fire (Mihaela, Feleagă and Feleagă, 2014). Corporate governance practices have
been a matter of concern for many countries. The corporate governance issue is inherent
to corporations (Zabri et al., 2016). In India, the issue of corporate governance has got
much attention after Satyam Scam in 2009 that called for revisiting and exploring the
governance system from many perspectives and to suggest ways to put a check on
collapses and fraudulent activities.
49
Fama (1980) and Jensen (1993) believed that the board of directors are at the heart of
governance mechanism. There is a plenty of research available on the board and
performance of companies and corporate failures in the past have demanded a broader
and active role of the board of directors in monitoring the affairs of companies. While
researching the monitoring role of the corporate board researchers focused on
composition and the importance of outside directors in protecting the interest of
shareholders (Weisbach, 1988; Cotter et al., 1997). The composition of the board is
important for its effectiveness. Besides the monitoring role of the board, Page and Spira
(2016) extended the discussion towards the conformance and performance aspects of
the board referring to a business model. Page and Spira (2016) considered that for a
board of directors, corporate governance and developing and sustaining business model
is one and the same thing. As we know that a business model needs to be dynamic, so
is the role of directors. Apart from governing and monitoring of business activities, the
board of directors are required to develop and sustain a business model of a company.
In order to develop and sustain the business, the board of directors need to take various
key decisions such as capital budgeting decision, financing decision, corporate strategy,
CEO compensation, etc. (Osma, 2008; Shiah‐Hou and Cheng, 2012; Bailey and Peck,
2013; Lo and Wu, 2016). Practically, most strategic decisions of the company are
analysed by the board. A director’s decision is supposed to be influenced by his/her
affiliation, reputation capital or compensation (Shivdasani, 1993; Perry, 1996; Chiang
and He, 2010).
The directors keep a close vigilance on the working of the executive officers. The
vigilance is aimed at acquiring the information regarding the decisions and actions of
executive officers. The information so obtained is further used for performance
evaluation and compensation (Lo and Wu, 2016). The board consists of members
having expertise in different fields. That expertise is very crucial for counselling the
management with respect to various decisions and problem-solving. We know that the
board of directors fix the executive compensation and in the same way, the directors
also get compensated for their time and efforts in managing and monitoring the affairs
of companies. The literature laid emphasis on the compensation of outside directors and
related the effectiveness of monitoring role of the outside directors with their
compensation. The compensation can reduce monitoring issues (Maug, 1997) and can
improve firm performance and maximise firm value (Perry, 2000; Brick, et al., 2006).
50
The discussion postulates different key aspects of the board of directors’ characteristics
with respect to carrying out their monitoring role. The first aspect reflected in the
discussion is the composition and processes of the board. Literature has evident studies
for the size of the board, the proportion of independent directors in the board, number
of meetings during the year, attendance of directors at the board meeting as critical
factors of board composition and processes. An effective composition and process of a
board are supposed to facilitate decisions that are in the best interest of the shareholders
and the organisation as a whole. So, the next aspect of board functioning is the decisions
that a board needs to take for the business organisation. One of such decisions appeared
in the discussion is the executive officer compensation. Other key decisions include
deciding upon the sources of finance and channelizing the same into profitable ventures.
2.5.1 Board Structure and Processes
The Indian regulatory bodies refer to board structure as the composition of the board.
The law though doesn’t provide for a specific size of the board but emphasised on the
independence of the board. Literature is evident that a strong board of directors is one
that is independent of management and insiders’ influence and can minimise agency
issues (Webb, 2006). Core et al. (1999) examined board size, board independence and
CEO duality and concluded that the boards with weaker governance showed low
performance than firms with stronger governance. Darko et al. (2016) highlighted
gender diversity on board as highly debatable among researchers, policymakers and
social activists.
Board structure and processes are extremely important for non-financial firms and if
the behaviour of the board is not attentive towards board processes, the board may not
be able to pacify various business risks (McNulty et al., 2013). A key responsibility of
directors is to obtain diverse information regarding firm’s activities. Attending board
meetings, according to Adams and Ferreira (2012), is one of the best ways of obtaining
such information. The other characteristics of board structure and processes widely
considered in prior studies include board size, board independence, frequency of board
meetings, directors’ business, gender diversity of board and CEO duality (Vafeas, 1999;
Adams et al., 2005; Nagar and Raithatha, 2016; Srivastav and Hagendorff, 2016;
51
Shawtari et al., 2016; Malik and Makhdoom, 2016; Arunruangsirilert and
Chonglerttham, 2017).
2.5.1.1 Board Size
The total number of directors on a board forms the size of a board. For effective
governance of companies, the law has prescribed an optimal though not ideal, mix of
both executive and non-executive directors (Zabri, et al., 2016). The size of the board
varies from country to country and company to company. Differences among countries
may be attributed to differences in the cultural and legal setup of countries. No standard
size of the board is thus found to have existed in the world. Rather, a right size for a
board should be decided by the usefulness of a board to work as a team (Conger et al.,
2009). Yermack (1996) and Eisenberg et al. (1998) found that firms with a small board
are valued highly by the market.
Like there is no consensus with respect to the size of the board, researchers have no
consensus on the relationship between board size and performance (Zabri, et al., 2016).
Some researchers have found a positive relationship between board size and firm
performance (Shukeri et al., 2012; Mak and Kusnadi, 2005; Adams and Mehran, 2003;
Kiel and Nicholson, 2003). An effective size of the board was suggested to be between
seven to ten directors by Jensen (1993) and Lipton and Lorsch (1992). In a study by
Sanda et al. (2010) small board size was found to be positively correlated with firm
performance while a board with more than ten directors was found to be negatively
associated with firm performance. A positive impact of board size on firm performance
for large firms was found by Jackling and Johl (2009). Lakhal (2005) found a weak yet
positive relationship between board size and firm performance. Studies have also
shown that board size has a positive influence on ROA (Shukeri et al., 2012).
Some researchers have argued in favour of a negative relationship between board size
and firm performance (Ghosh, 2006; Kumar and Singh, 2013; Singh and Davidson,
2003; Mishra et al., 2001; Yermack, 1996; Eisenberg et al., 1998). No significant
relationship has been found between the two variables (Mishra et al., 2001; Forbes and
Milliken, 1999; Eisenberg et al., 1998; Holthauson and Larcker, 1993). Zabri, et al.
(2016) found a weak negatively significant relationship of board size with ROA but an
52
insignificant relationship with ROE. A positive relationship between board size and
firm performance was found by Daltn et al. (1998) in US context, but contrary to it a
negative relationship was found for many other countries including US, UK and
Malaysia (Yermack, 1996; De Andres et al., 2005; Conyon and Peck, 1998; Mak and
Kusnadi, 2005; O’Connell and Cramer, 2010; Donnelly and Kelly, 2005; Malik and
Makhdoom, 2016).
2.5.1.2 Board Independence
Carcello (2009) states that directors’ independence is a factor of their impartiality and
extrication from the firm. Board is viewed independently in terms of percentage of
independent non-executive directors to the total number of directors on board (Prabowo
and Simpson, 2011). The independence of board is directly related with the number of
independent directors on board and thus, the board becomes more independent with the
increase in the number of independent directors (John and Senbet, 1998). The
independent directors improve transparency, disclosures, quality of governance and the
quality of key decisions (Chiang and He, 2010; Hagendorff et al., 2010; Jaggi et al.,
2009). What motivates the independent directors to discharge their services efficiently
is their reputation (Fama and Jensen, 1983).
Regulators and finance providers have emphasised on having independent directors on

the boards of the companies, especially after the failure of Satyam. The need for more
independent boards among Indian firms has coined a ‘validity’ concern for the
stewardship theory. But studies have shown a lack of relationship or beneficial
relationship between board independence and firm performance (Daily et al., 2003;
Shleifer and Vishny, 1997; Hermalin and Weisbach, 1991; Lawrence and Stapledon,
1999). Lawrence and Stapledon (1999) suggested a beneficial role of independent
directors in situations like financial reporting quality and executive compensations. A
similar view was expressed by Hermalin and Weisbach (1991). The authors concluded
that outside directors play a crucial role while a firm faces any unfavourable situations.
The day-to-day business of the firms is looked after by inside directors only.
As we witnessed in the discussion regarding board meeting frequency that CEO sets
the direction for the board meeting, and due to lack of time, the independent directors
53
usually do not authenticate the information provided to them by the CEO, and this
situation is worse when CEO holds the chairman post as well (Roberts et al., 2005; Roy,
2011). Luoma and Goodstein (1999) stated that the presence of independent directors
on board may generally be symbolic as they are appointed merely to comply with the
regulations enforced by the law and their expertise and experience most of the times
get little emphasis as a criterion for selection.
Despite all arguments, the board independence is considered beneficial to companies.

Independent directors can bring independence to the board and can curb managerial
self-interest (Abdullah, 2004; Rhodes et al., 2000). The agency theory describes the
consequences of the separation of ownership and management and postulates that
managers may pursue their own interests at the expense of shareholders (Jensen and
Meckling, 1976). The independent directors can bring better auditing system (Salleh et
al., 2005) and can ensure that the processes are carried out transparently with
compliance to the disclosure norms (Chen and Jaggi, 2000) and thus ensure that the
interest of shareholders can be protected (Ramdani and Witteloostuijn, 2009). You et
al. (1986) found that the number of independent directors is positively correlated with
the profitability of companies. Despite the fact that the independent directors play an
important role in monitoring the functioning of a firm, the results with respect to its
impact on performance are not clear. A negative impact of outside directorship, on the
other hand, was found by Peasnell et al. (2005), though the author reported that outside
directorship provides solutions to many agency problems and improves quality of
earnings (Klein, 2002). However, Sarkar et al. (2008) conducted a study on governance
parameters and their relationship with the performance of Indian companies. The
authors concluded that there is no association between board independence and
earnings management in India.
2.5.1.3 Board Diversity
The researches on the diversity of boards have gained attention towards the presence of
female director(s) on boards of firms. Gender diverse firm is reported more efficient
than non-diverse firms (Adams and Ferreira, 2009; Liu et al. 2014). The relationship
between diverse board and firm performance has been explored by many scholars (Post
54
& Byron, 2015; Carter et al., 2010). Resource dependence theory and human capital
theory supported the presence of a positive relationship between a board diversity and
firm performance. Corporate boards across different countries are becoming more
gender diverse due to various factors such as the presence of pressure groups and
changed legislative requirements (Kumar and Zattoni, 2016; Gregory-Smith et al.,
2014). Peterson and Philpot (2007) emphasised that the women directors may have
different roles on the board. The empirical researches on gender diversity found mixed
pieces of evidence for its impact on firm performance and characteristics. For example,
better attendance records at board meetings for male directors was found with a higher
percentage of women directors on board (Adams and Ferreira, 2009). Another study by
Adams et al. (2011) reported that a firm with gender diverse board pays more attention
to stakeholders and thus, are stronger monitors.
Specific to financial performance, positive impact of gender diversity on market value

and accounting performance of firms was found by Carter et al. (2003); Erhardt et al.
(2003); Campbell and Mínguez-Vera (2008); Dezsö and Ross (2012); Terjesen et al.
(2015). While gender diversity reported to positively affect the performance of complex
firms, such impact found another way around for less complex firms (Anderson et al.,
2011). Gender diversity on board was found detrimental for market value and
accounting performance (measured by Tobin’s Q and return on assets respectively) by
Adams and Ferreira (2009). Carter et al. (2010) found gender diversity irrelevant for
market value however, the diversity was found positive and significant for return on
assets. Chapple and Humphrey (2014) and Rose (2007) revealed no relationship
between diversity and performance.
Alazzani et al. (2017) suggested a positive relationship between the social performance
of a firm and gender diverse board. Alazzani et al. (2017) concluded that the
relationship of social and environmental performance with gender diversity feature of
boards vary with the type of culture within which a company operates. Brammer,
Millington, and Pavelin (2007) indicated significant variation in gender diversity across
industries. Bianco, Ciavarella, and Signoretti (2015) discovered that firms with
concentrated ownership or having family-business usually have a family-affiliated
woman on board. Mehrotra (2015) conducted a comparative study between the US and
Indian board features. The author found that the US corporate boards are more gender
55
diverse than Indian corporate boards. Most of the Indian firms appoint women directors
just to comply with legal requirements (Zehra and Sarim, 2017). Balasubramanian,
Black and Khanna (2010) while studying firm-level governance issues for Indian firms
reported that firms usually have only one women director. In another paper,
Balasubramanian (2013) discussed the inclusivity of women on Indian boards and
stated that corporations should hire women on board on the basis of their competence
and potentials and not because of regulatory requirements. Female directors are likely
to speak up against any misconduct of the company as they are found to be less tolerant
of frauds and misappropriation of funds (Gupta and Gupta, 2015). Haldar et al. (2014)
found a positive and significant impact of the presence of women director on board and
firm performance for Indian companies.
2.5.1.4 CEO Duality
A question arises that whether a mere increase in the number of independent directors
truly makes the board independent and can provide solutions to the boardroom
problems and will suffice the oversight role of the board. The most appropriate answer
is ‘no’. The independence of the board has yet another dimension that is the board
should also be independent of the management. The independent directors, the CEO
and the Chairman are the key participants of any board. A balance of power among
them needs to be established (Petra, 2005) for an effective governance. Duality refers
to the situation when the CEO of the firm is appointed as the chairman of the board as
well (Fizel & Louie, 1990; Lorsch & MacIver, 1989). The duality situation is reported
to reduce the monitoring of the CEO (Hayward & Hambrick, 1997). The chairman
holds some powers distinct from the other members of the board.
The power vested with the CEO lessens the effectiveness and independence of the board
and should have limited power (Lehn and Zhao, 2006; Adams et al., 2005; Hermalin &
Weisbach, 1998; Cerbioni and Parbonetti, 2007). The board is presided by the
Chairman who sets agendas for the board meeting. CEO duality refers to merging the
position of the chairman and executive officer in a single person (Abraham and Singh,
2016). The duality provides sufficient opportunities for management discretion
(Mansor et al., 2013). The CEO who has been vested with the role of the Chairman has
56
the power of hiring, firing and setting the compensation of top management (Petra,
2005; Haniffa and Cooke, 2002). Therefore, researches have suggested to assigning
CEO with limited power (Yermack, 1996).
Stewardship theory argues in favour of appointing CEO as chairman of the board for
better performance of firms however, agency theory says that managers may not take
decisions in the best interest of the shareholders and is likely to damage company
performance because of the power bestowed on the CEO (Jensen and Meckling, 1976;
Core et al., 1999; Patton and Baker, 1987). Researches, however showed the benefits
of combining the positions of CEO and chairman with a single person. Donaldson and
David (1991) found an improved return on assets for firms with a single person holding
the positions of CEO and the chairman. On the contrary, Brickley et al., 1997 and Coles
et al., 2001 suggested separating the two roles for better performance of firms. Malik
and Makhdoom (2016) found duality negatively associated with firm performance.
Studies related to Indian governance issues found no impact of CEO duality on firm
performance (Dalton et al., 1998; Jackling and Johl, 2009).
2.5.1.5 Board Meeting
How frequently a board should meet is debated widely in the academic and industrial
parlance and has been studied frequently (Vafeas, 1999; Adams et al., 2005; Shawtari
et al., 2016; Battiston and Bonabeau, 2003; Aparna and Mehta, 2014; Salama and
Putnam, 2013). Activeness of a board lies in the frequency of board meetings
(Donaldson and Davis, 1991). Board meetings can be one of the important methods to
improve the board effectiveness (Conger et al., 1998). However, the limited time that
the outside directors get to spend during meetings is not sufficient to discuss all the
critical issues and exchange of ideas with the members of the board. Jensen (1993) has
suggested that boards should be more active during problems. Jensen viewed the board
as a fire-fighting device during problems as against the role of improving governance
and hence higher board action is required to respond to poor performance. Against to
this belief, researchers have denoted board meetings as an important mechanism for
governance. Bianco et al. (2015) and Hahn and Lasfer (2016) studied the impact of
board diversification on the frequency of board meetings.
57
The directors who show their presence at the board meeting are supposed to perform
their duties in the interest of shareholders. However, the most critical hurdle in the way
to discharge the duties is lack of time. One of the probable reasons contributing to time
paucity for directors is holding multiple directorships across different boards. That
multiple directorships create a bearing on the ability of the directors to mark their
presence for board meetings (Byrne, 1996). Jensen (1993) raised another issue that the
CEO of companies usually set directions for discussion in the board meetings that
hampers the needful control of board over management. A similar opinion was shared
by Battiston and Bonabeau (2003) and Malik and Makhdoom (2016). A greater number
of the board meetings is referred to as one of the characteristics of an effective board
by Jaiswall and Bhattacharyya (2016) that can contribute to better monitoring. The
board meeting is one of the best ways by which independent directors share their
expertise and provide with networking opportunity to the firm (Jaiswall and
Bhattacharyya, 2016).
Adams et al., (2005) found similar results as of Jensen (1993) and Vafeas (1999) that
the board meetings are reactive in nature as against the proactive. Vafeas (1999)
concluded that meetings are frequent when a firm faces poor performance and is valued
less by the market. Though, the performance usually seems improving after an
increased number of meetings (Brick and Chidambaran, 2010). A positive relationship
between the board meeting and firm performance was found by Brick and Chidambaran
(2010). No impact of frequency of board meetings on firm performance was found by
Sanni and Ahmed Haji (2012) and Jackling and Johl (2009). However, in another study
Ahmed Haji (2014) depicted negative association between firm performance and
frequency of board meetings. A similar negative association was found by Malik and
Makhdoom (2016) and Rodriguez-Fernandez et al. (2014). Frequency of board meeting
and performance of Indian firms was found unrelated by Jackling and Johl, (2009). The
frequency of meeting is reported to be varying for family versus non-family business
(García-Ramos and García-Olalla, 2011).
58
2.5.1.6 Attendance of Directors at Board Meeting
Attendance at board meetings is essential to the monitoring and advising duties of a

director and is studied widely in the field of governance (Arunruangsirilert and
Chonglerttham, 2017; Dou e al., 2015; Bianco et al., 2015; Chahal and Kumari, 2013;
Chiang and He, 2010; Asthana and Balsam, 2010). As the board activeness lies in a
high frequency of meetings, director activeness lies in their attendance at those
meetings (Donaldson and Davis, 1991). This is what the stewardship theory also
proposes as one of the measures of directors’ diligence towards meeting the
expectations of the stakeholders including shareholders (Arunruangsirilert and
Chonglerttham, 2017). The attendance at the meeting is important for accessing
relevant information required for discharging the duties entrusted with the directors.
However, directors usually face a paucity of time due to too many directorships (Lipton
and Lorsch, 1992) and as a result, they are not able to attend meetings regularly (Byrne,
1996). Directors duly and frequently attending the board meetings are said to be
performing their duties with respect to protecting shareholders’ interests.
Many authors have referred board attendance as one of the parameters of board
processes that enable better decision-making and foster the relationship between the
executive and non-executive directors (McNulty et al., 2013; Roberts et al., 2005). The
diligence of the board measured in terms of the number of meetings attended by the
independent directors out of the total number of meetings held by the company
(Carcello et al., 2002; Sarkar and Sarkar, 2005; Pande and Ansari, 2013). Masulis et al.
(2012) reported poor attendance of foreign non-executive directors. The UK regulatory
body in 2003 made it compulsory for all companies to issue a letter of service contract
to its appointed non-executive directors stating the level of commitment expected from
them towards their duties such as diligence and full attendance at the board meeting
(Hahn and Lasfer, 2016). Female directors are more likely to attend meetings and male
directors have fewer attendance problems in a gender-diverse board (Adams & Ferreira
2009).
Sarkar et al. (2008) suggested that earnings management can be curbed by independent
director activeness, represented in terms of attendance of directors. Bhatt and
Bhattacharya (2015) reported board attendance positively significant for firm
performance measured by return on assets and Tobin’s Q. The authors suggested
59
regulations regarding minimum mandatory attendance required for board meetings.
Nagar and Raithatha (2016) reported that attendance at board meeting insignificant for
preventing cash flow manipulations. A similar insignificant impact of board attendance
on performance was reported by Chahal and Kumari (2013) in a study in the Indian
context. Gill (2013) in another study for Indian firms reported attendance of the
independent directors significantly higher for public sector banks.
2.5.1.7 Busy Directors
A busy board means over-commitment of directors over multiple boards across

different firms. A firm with a higher proportion of busy directors is referred to as not
good monitors for shareholders, valued less by the market and shows lower profitability
Fich and Shivdasani (2006). Conversely, a study by Ferris et al. (2003) reported another
way around and found a positive relationship between board busyness and firm
performance. Multiple directorships are promising as it offers many networking
opportunities. The opportunities may be beneficial to the firm for accessing external
environment for resources and capabilities. The capabilities possess by busy director
counterbalances the impact of their busyness (Adams et al., 2010). The literature has
supported multiple directorships in line with resource dependence theory, however, the
relationship between the busyness and performance is still not clear. Studies have
examined the relationship between busyness of directors and firms’ performance and
did not find significant effects (De Haan and Vlahu, 2015). Fairness opinion was
explored by Frye and Wang (2010) for boards with directors having multiple
directorships. The fairness opinion means seeking a professional opinion of an advisor
by the board regarding mergers and acquisitions to get an assessment that the price of
the deal is fair to the shareholders. The authors concluded that holding many
directorships may result in not seeking the fairness opinion and use their own
experience and knowledge gained due to multiple directorships Harris and Shimizu
(2004). The knowledge, in turn, improves decision making Carpenter and Westphal
(2001).
Therefore, there are two competing views for multiple directorships. The first view says
serving on multiple boards adds to the knowledge and experience of the director. The
other view says that getting involved with multiple boards makes director busy leading
60
to ineffective governance. The ability of independent directors to discharge their duties,
up to some extent, depends upon the time they spend with the company. Sarkar et al.
(2012) mentioned that on one hand multiple directorships seem promising, but, on the
other hand, it hinders the ability of directors to perform their duties. The authorities in
the US limited the maximum number of outside directorships to two for full-time
directors (Clements et al. (2015). The need for such regulation came out of concern for
over boarding that, in the eye of the regulators, hampers the effectiveness of the board.
Field et al. (2013), regardless of the above concern, stated out of their findings that
busyness may add to ineffective monitoring but the knowledge and experience that they
get because of multiple directorships make them outstanding counsellor. In short, Field
et al. (2013) found busy boards contributing positively to all firms particularly
established firms. Falato et al. (2014) reported that director interlocked firms are valued
negatively by the market. The authors concluded that busyness of directors with
multiple firms is harmful to shareholders’ wealth and weakens monitoring ability of
directors.
Lee and Lee (2014) reported situation specific results for busyness to performance
relationships. The busyness was found to be positively associated with the value of a
firm when the firm lacks experience or finance and needs leverage upon the outside
directors’ social capital and knowledge. However, the benefits of such leverage found
to be robust in countries with weak shareholders’ right. The firm value with respect to
busyness reported to reducing when controlling shareholders hold high voting rights.
The negative association between cash and busyness estimated to reduce with firms
with high advice needs, high debt financing needs and with less concentrated capital
structure. A study by Chauhan et al. (2015) sampling Indian firms concluded that board
busyness reduces stock prices crash risk in the futures market. The authors further
added that the effects that can be attributed to busy boards found missing in groups of
companies, however, holds true for standalone firms. Another study conducted by Shaw
et al., (2016) for large Indian firms to explore further the pros and cons of directors’
interlocks. The authors termed director interlocks as a channel to tap the external
resources for the firm. Shaw et al., (2016) concluded that directors’ expertise and social
capital has a significant and positive effect on firm performance.
61
2.5.2 Board Decisions
The studies have supported the notion that the key decisions are taken by the board
which affect the firm performance (Carter et al., 2010). Fama and Jensen (1983)
described board of directors as a firms’ strategic decision-making mechanism. An
effective governance system and better firm outcomes depend upon effective board
decisions (Forbes and Milliken, 1999). The authors mentioned that the research on
board needs to incorporate the actions of the board. The board of directors are expected
to use their expertise and skills in making decisions. The board has to make varied
decisions regarding the operating and functioning of the business and keeping the
business going on. The decisions range from deciding upon dividend per share, capital
structure and allocation of resources to different uses. The decisions that are aimed at
allocating and committing resources are strategic in nature. The strategic decisions
differ from routine decisions in a manner that the former one is critical to shaping the
future of the organisations. The board needs to dedicate resources through strategic
decisions. The strategic decision-making is a complex procedure. It is complex because
the board needs to process lots of information, evaluate interdependence of relationship,
forecast future prospects, predict undetermined outcomes, etc. The major corporate
finance decisions include decisions regarding capital budgeting, capital structure,
working capital management and dividend decisions (Shafana, 2016).
Task and cohesiveness are the two factors identified in many studies as critical for
group effectiveness. The board as a group of experts is supposed to perform the task of
control effectively. A group is supposed to have various differences. The board as a
group should be able to work together maintaining the cohesiveness among group
members. Both the factors are observed as significant contributors to the firm
performance. While task influences the performance directly, cohesiveness work as an
aid to task performances. The task of control for board includes important decisions
like executive officer compensation, acquisition, restructuring, capital issues, etc.
Taken together the factors discussed, the present study identified dividend declaration
and capital structure as key board’s strategic decisions.
62
2.5.2.1 Capital Structure Decision
A valid question was raised by Myers (1984), “how do firms choose their capital
structure?” This concern regarding choosing capital structure was raised by Myers in
1984 during AFA presidential address. Since the decision on capital structure is
influenced by the managers (Myers, 2001), the board of directors is one of the important
mechanisms that could monitor the managements’ decisions. The board‘s primary
function is to protect the shareholders’ interests (Ishak et al., 2011).
Capital structure refers to the composition of different forms of sources of funds which
consists of debt and equity funds (Arulvel and Ajanthan, 2014). The sources and form
of capital have a bearing on ownership and profitability. Ideally, a firm’s financial
leverage is driven by its objectives and size of the firm. If a more of equity fund is
employed, it dilutes the ownership and control. On the other hand, if a more of the
loaned fund is employed, it increases the level of risk. One of the golden rules in finance
is that the higher the risk the higher the return. But the rule has certain constraints that
limit the risk appetite of business firms. The firms cannot keep increasing the risky
sources of funds in order to generate higher returns. The firm should decide an optimum
capital structure that optimises its profitability. The literature has suggested many
determinants of capital structure. Lemmon et al. (2008) referred to this problem of
choosing between an optimum capital mixes as ‘capital structure puzzle’. It is beneficial
for a firm not to maintain one debt level over time (DeAngelo and Roll, 2015). The
authors raised concern regarding having some appropriate answers to the puzzle in spite
of having rich literature on capital structure and theories.
Another fundamental question that arises is that who chooses the capital structure of a
firm. In a very recent study regarding capital structure choices, Gygax et al. (2017)
highlighted that deciding on an optimum level of debt is one of the fiduciary duties of
the board of directors. The authors further grounded their arguments on resource
dependence theory and emphasised that the directors while evaluating the capital
structure choices go beyond their monitoring and advising role. Going beyond their
monitoring and advising role the board provides access to external resources. The
authors provided an indication that the directors’ network is one of the important factors
for choosing capital structure. As per companies Act, 2014 the board is required to form
an Allotment committee that will submit a report regarding allotment of shares for
63
board approval. The board resolution is mandatory before issuing the shares. The law
has also conferred the power of issuing of debt securities to the board. The discussion
emphasised the decisional role of the board regarding capital structure. The directors
assess the need and sources of finance and make the finance need to be fulfilled.
In fact, based on agency cost theory, managers tend to execute in their own best interest
instead of the best interest of shareholders. These agency problems exist because of the
resolution between the two important mechanisms of the corporations including
ownership and control of the firm. This matter highlights the necessity of effective
corporate governance with an independent board in every organization in order to
alleviate the agency issues.
Firm’s corporate governance or more precisely firm’s board of directors which is the
significant element of corporate governance and firm’s financial policy are two areas
that are very important for investors to analyze the company. According to Abor and
Biekpe (2005), capital structure decision is essential due to the necessity of maximizing
returns to numerous organizational stakeholders. The financial distress which can
eventually lead to bankruptcy is the consequence of the false decisions about the capital
structure of the company (Heng et al., 2012). Thus, finance managers should set the
capital structure in a way to enhance the company’s value. Good corporate governance
practices possibly will have a substantial impact on company’s strategic decisions such
as external financing, which is taken at board level and clearly board of directors is the
significant element of the corporate governance. Consequently, the board of director’s
features such as CEO/Chair duality, the presence of non-executive directors, board size
and the presence of independent directors may have a direct influence on the firm’s
capital structure decisions. According to Claessens et al. (2002), the consequences of
weak corporate governance are not just the poor performance and risky financing
patterns; it also leads to macroeconomic crisis. Among various corporate finance
decisions, capital structure decision is a key decision that contributes positively to meet
the other three corporate finance decisions (Shafana, 2016). In spite of all the facts,
Arulvel and Ajanthan (2014) found that the capital structure negatively impacting the
financial performance of listed companies in Sri Lanka.
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2.5.2.2 Dividend Decision
The dividend amount is distributed among the shareholders to reward their shareholder
for investing their money and time in a particular firm (Khan, et al., 2016). A company’s
board declares a dividend keeping in mind four important dates, the declaration date,
the ex-dividend date, the record date and the payment date (Maverick, 2015). Firms
who provide a reasonable return to their investors are supposed to be well managed and
less prone to frauds. The impact of dividend policy is one most arguable concerns in
the corporate finance literature and is being explored a lot both in developed and
emerging markets (Hafeez & Attiya, 2009). The payment of dividend is another way of
reducing agency cost (Easterbrook, 1984) but it increases the transaction cost (Rozeff,
1982). So, there is a trade-off between agency cost and transaction cost. Rozeff (1982)
found an inverse relationship between ownership concentration and dividend payout
ratio. The author argued that the dividend payments can reduce agency costs. So, where
there is a concentration of ownership exists, need to pay dividend gets reduced.
The declaration and distribution of dividend in India are regulated by the Section 205
the Companies Act, 2013. The section provides that the Board need to pass a resolution
while initiating the declaration and distribution of dividend. The dividend cannot be
declared at Annual General Meeting (AGM) unless the board approves it for the
payment. The final approval from the shareholders is required as an ordinary resolution
at the AGM however, the shareholders are not permitted to increase the amount of
dividend endorsed by the board.
The dividend decision is centre to all other decisions as it attracts the attention of
different stakeholders including prospective investors. The dividend decision shows the
amount transferred to reserve and amount kept as retained earnings (Khan et al., 2016).
The dividend is one of the most, if not the most, parameters for measuring firm
performance. There is no thumb rule for dividend decision and the board has to consider
many factors for dividend declarations (Uwuigbe et al., 2012). Few key factors could
be last years’ dividend paid, expectations of shareholders, the reputation of
management, existing profit, etc. (Agyei and Marfo-Yiadom, 2011; Pruitt and Gutman,
1991). Many studies have attempted to explore the dynamics of dividend policy but
still, there is no clear picture regarding dividend policy behaviour of firms and its
impact on firms’ performance (Black, 1976; Brealey et al., 2005).
65
The Stock Exchange behaviour in Pakistan is highly depended on the dividend policy
announced by corporate (Khan et al., 2016). The authors found a positive relationship
between dividend payment and return on assets and market value of firms listed on
Pakistan Stock Exchange. Uwuigbe et al. (2012) studied the relationship between
financial performance and dividend payout ratio and found a positive and significant
relationship between the two variables.
In another study Velnampy et al. (2014) studied the association between dividend
policy and firm performance of listed manufacturing companies in Sri Lanka. The
authors found that the dividend policy has no impact on the return on equity and return
of assets of the listed companies. Adjaoud and Ben-Amar (2010) demonstrated that
effective governance leads to higher dividend payouts. The study further concluded that
board composition has a positive and significant impact on dividend payout ratio. Chen
et al. (2005) reported that the performance of the firm is not much impacted by the
dividend policies of smaller firms.
2.5.3 Board Vigilance
There are several issues which invite greater vigilance on the part of the board of
directors (Lewellyn and Muller-Kahle, 2012). The greater vigilance and stronger
internal controls reduce the level of audit risk, which reduces the demand for greater
auditor effort (Boo and Sharma, 2008). There must be a strict vigilance by the board in
matters such as auditor’s independence and related party transactions as both poses a
risk for a company in the form of misappropriation of funds. The board is required to
monitor such issues with utmost vigilance. The agency based approaches to corporate
governance view board of directors as a vigilance body for monitoring the management
of the firms (Kroll et al., 2008) to prevent the expropriation of funds and to ensure audit
quality (Jayeola et al., 2017; Ryngaert and Thomas, 2007).
The related party transactions are one of the potential ways for insiders to steal outside
shareholders’ funds via self-dealing (Ryngaert and Thomas, 2007). The managers and
officers required to deal into a varied range of contracts, which may turn into a related
party transaction if the contract is entered into with their relatives, large shareholders,
and other firms that the officers and directors are affiliated with. In the same way,
66
auditor’s independence is important to ensure authentic audit of the financial statements
of the firms. The auditor’s independence reflects uninfluenced judgment and audit by
the auditors (Jayeola et al., 2017). Clause 49 requires every company to form an
independent audit committee to overcome these issues. The audit committee is vested
with the responsibilities of ensuring auditor’s independence and related party
transactions not exceeding specified limits.
2.5.3.1 Auditors’ Independence
Accounting literature has a scant on identification and the consequences of a firm

having problematic directors (Bhuiyan, 2015) that can influence the hiring of higher
non-audit services from auditors, resulting in a concern about auditor independence
(Habib and Bhuiyan, 2016). The auditors examine the financial statements of
companies and assure that the statements are correct to the best of their knowledge. The
end users of such reports trust the auditors that they have stated the fact and have not
concealed anything that is material to them. However, the failure of companies such as
Enron, Worldcom and Satyam because of manipulations in financial statements has
shattered the trust of investors and other stakeholders (Rahmina and Agoes, 2014). Such
manipulations for managers were not possible, but with the help of the auditors.
The auditor independence can be compromised due to a high level of involvement of

auditors with the management (Cadbury Report, 1992). The report suggested an
appropriate level of relationship between the auditor of the firm and the management
by putting a proper check on both the parties. Therefore, the auditor independence from
management has got huge attention during recent past and still it is under consideration
(Sarkar & Sarkar, 2010; Larcker and Richardson, 2004). A chance to locate false entries
depend upon the auditor’s competence, but reporting the same depends upon auditor’s
independence (Rahmina and Agoes, 2014).
The literature has suggested auditors’ independence is measured as a ratio of audit fees
to total fees paid by the company to its external auditors (Balasubramanian et al., 2008;
Pande and Ansari, 2013; Sarkar, Sarkar and Sen, 2012; Aggarwal, 2013). A high
percentage denotes a high level of independence and implies that the auditors were
associated with the firm primarily for audit services. On the contrary, a low percentage
67
of audit service fees to total fees implies making the auditor more dependent on the
company for their economic survival which could, possibly, hinder and compromise
the ability of the auditors to fully and faithfully discharge its audit-related functions.
Studies have reported a significant negative relationship between non-audit fees and
financial performance (Iyengar et al., 2007). However, (Ashbaugh et al., 2003) found
no violation of independence in hiring non-audit services form the auditors. On the
other hand, a slight earning management because of non-audit services was reported by
Frankel et al. (2002). But, the audit fee was found to be negatively associated with
earning management.
2.5.3.2 Related Party Transactions
Related Party transaction is one of the forms of self-dealing transactions by controlling

shareholders that are having a significant concern in India where most firms have a
major, often controlling shareholder (Kar, 2011). To be more specific, the related party
transaction refers to those transactions that a firm enters into with its subsidiaries, the
parent company, associates, managers, directors and majority shareholders, as well as
their close relatives (Di Carlo, 2014). In their survey, Balasubramanian et al (2008)
found that a majority of the firms had policies requiring RPTs to be on arms-length
terms.
There are different views in the literature on related party transaction issue. The agency
theory views related party transaction as an instrument of self-serving by insiders, i.e.
managers, dominant shareholders or both, to extract private benefits at the expense of
outsiders (Di Carlo, 2014; Gordon et al. (2004). The parties can seek benefits that are
not meant to be shared with other shareholders, but to serve own interest (Doidge et al.,
2009). While, on the other hand, there is the opposing view that such transactions are
‘efficient transactions’ that fulfil rational economic demands of a firm such as the need
for service providers with in-depth firm-specific knowledge at a reduced cost, (Khanna
and Palepu, 2000; Williamson, 1985).
According to the Indian Accounting Standards (AS-18) parties are related to each other
“if one party has the ability to control or significantly influence the other in making
financial and/or operating decisions in a particular reporting period”. The role of Audit
68
Committee for dealing with Related Parties Transactions of the Company are provided
under the provisions of Section 188 of the Companies Act, 2013 read with Companies
(Meetings of Board and its Powers) Rules, 2014. It mandates for certain compliance
requirements for Audit Committee approval for the related parties transactions. It
further seems the scope is going to increase by the proposed Companies Amendment
Bill 2016. The proposed Companies Amendment Bill 2016, will make the role of Audit
Committee clearer, if implemented, it will clear the Recommendatory Role of Audit
Committee. The proposed amendment mandates the Audit Committee to scrutinize all
related party transitions whether or not it covers under Section 188. However, if
transactions with Related Parties which are not coming under Section 188, and the
Audit Committee does not approve it, then it shall make its recommendations to the
Board. Thus the position and role of Audit Committee will be more specific and
defined.
Pozzoli and Venuti (2014) investigated the relationship between related party
transaction and financial performance of Italian firms. The study revealed no
relationship between related party transaction and financial performance of Italian
firms. The authors the acclaimed the effectiveness of governance mechanisms in Italy.
Similar findings were reported by Umobong (2017) for Nigerian firms. The author
concluded that the related party transactions are positively associated with financial
performance measured as return on assets, return on equity and earning per share.
Srinivasan (2013) reported deficiencies in the related party transaction requirements.
The results suggested a negative and significant impact of related party transaction on
return on assets for Indian companies. The author urged that the audit committee has to
play a crucial role in monitoring the related party transactions.
2.5.4 Board Compensation
The discussion in the previous sections has drawn attention towards an ever increasing
demand for the board role. The role that stretches from active monitors to risk managers
and the most important, maintaining the trust of stakeholders. The directors are prone
to a high level of employment risk (Carcello and Neal, 2003; Kaplan and Reishus,
1990). An appropriate level of compensation for directors and managers is required for
undertaking such a greater responsibility and the level of risk associated with their jobs
69
(Sahlman, 1990; Hoskisson et al., 2009). Further, the compensation offered to the board
members reflects the level of board independence from managers and a higher
compensation may also be offered to the directors possessing distinct education,
experience and reputation (Chiang and He, 2010). An attractive pay must be given to
the CEO and the directors to attract the talented people in the organisation. However, a
proper corporate governance must be implemented to ensure that the officers do not
serve their own interests. In the words of Bose (2009), the compensation of the board
must obviously be substantial but without being awkward.
2.5.4.1 CEO Compensation
The executive compensation has become one of the major issues in the field of
corporate governance (Kumar and Zattoni, 2016; Chen et al., 2010; Chen et al., 2016).
The issue attracted consideration when the global financial hit companies’
performances across various countries but in contrast to that the executives’
remuneration showed a surge (Chen et al., 2010). CEO power is significant to influence
CEO remuneration (Bebchuk and Fried, 2003). The CEO compensation of Indian firms
usually comprises of salary, performance linked incentives, allowances, perquisites and
retirement benefits. Rewarding CEOs with stock options are not common among Indian
firms (Jaiswall and Bhattacharyya, 2016; Balasubramanian et al., 2010).
Studies have suggested a various set of actions to curb the CEO’s opportunistic
behaviour and to bring his/her action in line with shareholders’ interest (Lo and Wu,
2016). To motivate managers to work in the interest of the organisation stock options
was suggested by the agency theory though, that later found to be a weak technique
with several shortcomings (Jensen and Meckling, 1976; Holmstrom, 1979; Denis et al.,
2006; Valenti, 2013). The agency theory view of linking the CEO compensation with
the performance was aimed at resolving the moral hazard issues between the agent and
the principal. Therefore, contracts were designed with performance linked
compensation plan to motivate the CEOs to take actions in the best interest of the
organisation (Conyon and He, 2012). The CEO compensation is studied in two different
parlances. The first is the relationship of CEO duality with CEO compensation. The
70
other is the impact of CEO compensation on firms’ performance. Core et al. (1999)
found that CEOs at firms with greater agency problems receive greater compensation.
When CEO is the also the chairman of the board, he himself approves his remuneration
(Manna et al., 2015). This situation is referred to as ineffective monitoring and control
where CEO compensation is affected by CEO duality (Balasubramanian et al., 2015).
Many studies have explored the impact of CEO duality on executive compensation
(Chen et al., 2010). The results of the study conducted by Jaiswall and Bhattacharyya
(2016) for Indian firms showed that the total compensation is not higher for CEOs who
are also the chairman of the board. The executives’ pay along with returns for majority
shareholders shown a rise for the firm with CEO duality in Brazilian firms (Abraham
and Singh, 2016). It is so because usually the CEO is dominated by majority
shareholders.
While studying the issues of corporate governance among fortune 500 companies,
Malik and Makhdoom, (2016) found that CEO compensation negatively correlated with
firm performance. Conyon and He (2012) examined the association between CEO
compensation and performance firms in China. The authors found that the CEO
compensation was positively correlated with the firm performance. Jaiswall and
Bhattacharyya (2016) reported that CEO compensation has an insignificant relationship
to firm performance for Indian companies. In another study by Jaiswall and Firth (2009)
reported not to be associated with stock returns, but positively associated with the return
on assets. Similar positive association between CEO compensation and return on assets
was reported by Ghosh (2010) and Parthasarathy et al. (2006).
2.5.4.2 Non-Executive Directors’ Compensation
Shareholders hand over power to a board of director in order to enhance performance

(Jaafaar and James, 2015). A manager may place personal interest as a priority rather
than firm performance. Remuneration should be designed to align manager and
shareholder interests (Jensen and Meckling 1976). Remuneration provided to executive
directors is higher as compared to non-executive directors due to task and
responsibilities, which according to a study by Salim and Wan-Hussin (2009), is in the
ratio of 9:1 respectively.
71
In the recent past, the non-executive directors and independent directors have gained
much attention due to financial mishandling of firms and a need was realised to place
people with no particular interest with the firm, who can monitor the functioning of the
firms. Non-executive directors serve a number of important functions on the board of
directors. The functions may include monitoring senior managers and contributing to
strategic decision-making, contribute a valuable set of resources and bring experience
to the firm. The literature on corporate governance has witnessed ample studies on
executive directors and executive managers’ remuneration attributes, but a little is
studied about non-executive directors’ remuneration (Goh and Gupta, 2016). There are
few studies such as Goh and Gupta (2016); Jaafaar and James, 2015; Lazar et al. (2014);
Hahn and Lasfer (2011); that are dedicated to studying the remuneration of non-
executive directors.
Remuneration payable to board members in India may be paid in one or more forms
viz., salary, sitting fees, commission, perquisites and allowances. However, an
independent director is not be entitled to any remuneration, other than sitting fee,
reimbursement of expenses for participation in the Board and other meetings. (Sharma,
2013). The job of a non-executive director/independent director requires greater
responsibility and the liability towards his/her job should be fixed beyond a reasonable
doubt and the remuneration allowed to them by the law by the way of sitting fee cannot
be termed as inadequate (Aggarwal, 2010). The compensation for non-executive
directors and independent directors are to be fixed by the board of directors with the
prior approval of the shareholders, except payment of sitting fees within the limits
prescribed under the Companies Act, 2013. Payment by way of stock options is not
allowed to independent directors (Jhunjhunwala, 2014). Section 197 of the Companies
Act, 2013 and Regulation 17(6)(a) of SEBI (Listing Obligation Disclosure
Requirement) Regulation 2015 require the prior approval of the shareholders of a
company for making payment to its non-executive directors.
One of the main reasons not to study the remuneration of non-executive directors is that
a major portion of it is fixed by the law. However, that doesn’t suffice the justification
not to study an important parameter. Therefore, the present study utilises the data for
sitting fee and commissions to non-executive directors for studying its impact on firm
performance.
72
2.5.5 Ownership Structure
Ownership structure is at the root of all corporate governance problems (Sarkar et al.,
2012). Though there are many factors affecting the system of corporate governance,
ownership structure is supposed to be the factor highly affecting the system of
governance. Concentrated ownership is a common feature in Indian firms. A firm’s
promoters typically own the largest proportion of its equity shares. Chakrabarti et al.
(2010) document an average equity shareholding of 50.4% by promoters who own at
least 38% of a firm’s equity in three out of four Indian firms. Financial institutions also
own large blocks of shares. Sarkar and Sarkar (2000) report that despite an average of
6.2% of shareholding in manufacturing firms, institutional investors collectively owned
more than a quarter of a firm’s total equity shares in 6.7% of these firm.
In India, control over companies rests either with the government or with private
parties. Accordingly, companies are grouped into the public and private sectors. Indian
private sector firms are owned and controlled by non-government entities such as
Indian business groups, multinationals, and individual promoters. Of the top 500 listed
Indian firms, 89% are in the private sector and account for 78% of the total market
capitalization (Chakrabarti et al., 2008). Public sector firms account for the remaining.
These firms are owned and controlled either by the central government or the state
governments. They are largely concentrated in select industries and are dominant
players in industries such as banking, defence, oil, and natural gas, etc. Such
concentration of ownership of shares gives rise to dominant groups which in turn
creates interest conflicts for minority groups.
Zakaria et al. (2014), in the context of Malaysia, show a positive relation among
ownership concentration, managerial ownership and corporate performance. Alipour
and Amjadi (2011) investigate into the effect of ownership structure on performance in
the context of Tehran. They find that there is a positive and significant relation between
ownership concentration and firm’s performance.
According to Jensen and Meckling (1976), high ownership concentration may lead to
more alignment effect. This effect may impart promoters a strong incentive to follow
the value-maximizing goal. However, in contrasting argument by Demsetz (1983), this
can also have entrenchment effect, which can decrease firm’s value. Claessens et al.
73
(2002) in similar argument suggest the same thing. Up to a particular level of stock
concentration, alignment effect is more predominant, and after that expropriation cost
of minority shareholders outweigh these benefits and firm performance declines. It is,
however not clear, whether measures of corporate governance affect performance in
the same way when ownership is not in general widely dispersed or in particular when
ownership is concentrated in the hands of families that are promoters (Corbetta and
Salvato, 2004).
The board is an important corporate governance mechanism under Indian context, to

protect the minority shareholders from dominant shareholders. In addition, insider
ownership by the promoters of the company is a general characteristic of most firms.
India is gradually moving towards a market-based economy. However, such is the
peculiarity that ownership lies predominately in the hands of a group of few people
(Kumar and Singh, 2013).
2.6 Corporate Governance and Financial Performance
The measure of firm performance is central to all researches carried out in the
management domain. To be more concise, when we move further to the financial
research in the sphere of governance, financial performance measurement captures the
utmost importance (Gentry and Shen, 2010). Performance is a multi-dimensional aspect
and choosing the best financial performance parameter representing a true picture of
the firm financial health is essential. While choosing so, what should we keep in our
mind is that who is looking at the performance and what are the motives.
Financial performance implies how well a firm is managing to get enough return on its
resources employed (Copisarow, 2000). Different users may be interested in different
ratios depending upon their motives and return expectations. For example, an individual
investor may be looking for the return on shares in the form of capital gains. At the
same, time a bank may be interested in accounting returns so as to assure the return of
its interest and principal amount. Therefore, the need for every stakeholder is different,
as their interest in the firm is different. Past studies have also documented that a firm is
evaluated by insider and outsiders differently (Pande and Ansari, 2013). That is why
the studies have measured the performance of companies from two different points of
74
views. The first view is the accounting performance and the other view is the market
performance of companies (Tshipa, 2015; Hassan and Halbouni, 2013). It is important
to capture the performance from both of the views. The accounting measures represent
the performance of the firm during the past year(s), the market-based performance
parameters reflect long-term as well as future prospects (Hoskins et al., 1994).
According to Demsetz and Lehn (1985), financial ratios calculated using financial
statements are a good way to evaluate financial performance. There is no consensus in
the literature suggesting the best proxy for financial performance, however, return on
asset and Tobin’s Q are the most often used performance parameters. As an accounting
performance parameter return on assets is used by many authors such as Mishra and
Mohanty, 2014; Duc and Thuy, 2013; Rajput and Joshi, 2014; Klapper and Love, 2004;
Zabri et al., 2016; Aggarwal et al., 2016; Bhuiyan, 2015. In the same way, Tobin’s Q
is also employed by authors such as Black et al., 2006; Haldar and Rao, 2015, Klein et
al., 2005; Carter et al., 2010; Dow and McGuire, 2016; Altuner, et al., 2015.
Return on assets is a better measure of firm performance and many researchers have
defined firm performance in terms of return on assets (Mishra and Mohanty, 2014). The
return on assets and Tobin’s Q were used by Rajput and Joshi, (2014) depending upon
the findings from the literature reviewed. The Tobin’s Q is used as financial
performance parameter to capture performance from the market point of view (Dow
and McGuire, 2016). Zabri et al. (2016) used return on assets as a measure of firm
performance and suggested the use of Tobin’s Q to measure the impact of governance
on performance. Tobin’s Q is an important proxy for financial performance as it
represents the economic value that indicates the effectiveness of governance
mechanism (Haldar and Rao, 2015).
People in the field of accounting and finance have expressed their opinion regarding
the difference for a firm being profitable and being having sufficient liquidity. A firm
may be profitable but may have liquidity problems. The profitability measures are
computed on the basis of accrual rather than actual receipt of cash. Though profitability
measures the success of a firm, it ignores the cash flows of the firms. Alias et al. (2013)
applied operating cash flows as a measure of firm performance to study the variations
in dividend per shares declared by the board. Tang (2007) used operating cash flow per
share as a performance parameter and concluded that the corporate governance
75
indicators are positively correlated with the said parameter. Harford et al. (2012)
conducted a study on corporate governance and cash holdings in US firms and
concluded that firms with weak governance structure holds lower cash reserves and
tend to buy back their shares instead of providing dividends to shareholders. The
authors also stated that the firms with excess cash were having lower profitability and
valuation.
Hence, the review demonstrated that along with return on assets and Tobin’s Q, cash
flows also hold a significance for the financial health of a company. Liquidity, as
measured by the cash holding of a firm, is also one the most important ratios used to
measure a firm’s financial health (Khan et al., 2016). Relying upon the literature the
present study has also selected return on assets and Tobin’s Q and operating cash flows
as proxies for financial performance parameters.
Summary
The survey of literature highlighted that the separation of ownership is the main issue
that requires firms to be governed by a mechanism called a board of directors. Different
theories have demonstrated crucial roles of the board of directors in monitoring the firm
and protecting the interest of all stakeholders including shareholders. Many scholars
have used governance mechanism and board of directors interchangeably. The study
further explored the laws in India for corporate governance and relevant studies in line
with the parameters suggested by the law. Also, the literature suggested ownership
concentration as one of the main causes of all corporate governance problems. The
studies have shown that the board leadership style matters for the effectiveness of a
board in monitoring a firm. The performance of a firm is suggested to be measured
from market point of view and from accounting point of view. A difference in the
profitability and liquidity position of firms is highlighted by the literature.
76
Table 2.3: Key Studies on Corporate Governance in India
S. Author(s) Dependent Independent Variable(s) Control Variables Country/ies Study Key Findings
No. Variable(s) Sample/Period
1 Motwani ROCE, EPS, P/E Corporate governance score Sales, India 25 firms listed in Corporate governance has still a
and Pandya Ratio, ROA, P/B NSE and BSE long way to go, to influence the
2013 Value firm’s value;
Importance of CG is
diminishing in the eyes of
investors
2 Mishra and ROA Legal Indicator, board Firm size (market India 141 A group BSE The board and the proactive
Mohanty indicator and proactive capitalization) stocks indicators influence the firm
2014 indicator performance
3 Madhani N/A Corporate governance N/A India 54 Companies in Significant difference between
2014 disclosure score 2011-12 corporate governance disclosure
scores of Indian domestic firms
and cross-listed firms.
4 Panicker et FII Promoter holdings, Market India 113 Indian IIT firms, Concentrated promoter holdings
al. 2016 independent directors, capitalisation, 2005-2013 have lesser foreign investments;
independent chairman, ROA, Debt to Number of directors have
number of directors equity ratio, positive and significant relation
Measures of with FII
liquidity
5 Rajput and ROA, Tobin’s Q, Ownership structure (FII, Age, Size (total India BSE 100 companies FII and family ownership
Joshi 2015 ROE govt. ownership, family assets), debt-equity (76 final sample), positive impact on ROE;
ownership, retail 2007-2014 Government and retail
shareholders), board size, shareholder affect ROE
CGI negatively;
Negative impact of CGI on ROE
6 Karpagam Tobin’s Q, ROA, Board Size, board Size (total assets) India CNX Midcap NSE 50 Board Size, Firm Size and
2013 ROE, P/E ratio independence, insider firms Insider Directors create more
ownership, grey directors 2005-2012 wealth as the result of better
performance
77
7 Pande and Tobin’s Q, Board structure and process, N/A India S&P CNX 500 Differences in the nature
Ansari 2013 ROA independence of auditors, related party Companies, 2010- of the dominating
transactions, Nature of dominant 12 shareholder(s) result in
shareholders (family managed significant differences in
companies, foreign ownership and govt. the firm’s corporate
and no domination) governance characteristics
and in firm performance
8 Nagar and Cash flows Cash flows (financing and investments), Discretionary India India: 1430 firms Firms in both countries
Sen 2016 (operating) regulations, accruals, MTB, US US: 1752 firms engage in manipulating
ROA, size (total 1995-2010 operating cash flow;
assets) Family firms in India
engage in more shifting
than non-family firm
9 Sarkar, Average and Board index, ownership index, audit N/A India BSE 500 Strong correlation between
Sarkar and excess rate of committee index, auditor index, companies the Corporate Governance
Sen 2012 return corporate governance index 2003-2008 Index and the market
performance
10 Kuamr and Tobin’s Q Board size, promoter ownership Age, size (total India 176 BSE firms Negative impact of board
Singh 2013 assets), leverage, 2008-2009 size on firm value
growth Significant positive
association of promoter
ownership with firm value
11 Chugh, ROA Board size, CEO duality, independent Size (total assets), India NSE 50 Larger board size creates
Meador and directors sales companies more opportunities and
Kumar 2009 resources for better
2011 performance;
CEO-duality does not
create any synergies and
there is no support for the
stewardship theory
78
12 Agnihotri and Disclosure score Family ownership, Firm size, firm age, India BSE 200 firms Promoter shareholding, proportion
Bhattacharya independent directors, geographic of independent directors and
2015 special positions, dispersion specific positions like chief ethical
officer influence disclosure of
whistleblowing policies
13 Manna, Sahu Tobin’s Q, Ownership structure, Board Sales, executive India Nifty 50 firms Board size and foreign promoters’
and Gupta Market Value size, executive directors, remuneration, asset 2009-2013 shareholdings have a positive
2016 Added, EPS, independent directors, turnover ratio, debt- impact on corporate performance;
ROCE multiple directorship, CEO equity ratio, age, Assets turnover is positively
duality, CEO tenure, related with the performance
variables;
Multiple directorship negatively
related with TQ and MVA
14 Haldar and Rao Tobin’s Q Corporate governance index N/A India 323 firms Indian markets values companies
2013 2008-2011 that carry out governance reforms
proactively
15 Jaiswall and CEO Ownership attributes, board ROA, size; MTB, India 5045 CEO-years CEO compensation is not
Bhattacharyya compensation attributes, CEO attributes, risk; Locations, age 2002-2013 associated with board
2016 characteristics, but with firm’s
ownership structure and CEO’s
tenure
16 Pandya 2013 Tobin’s Q, Family controlled firms, Sales, age, financial India 25 BSE firms No significant impact of corporate
ROCE Board Size, Board leverage, asset 2008-2012 governance variables on firm’s
Composition, Board tangibility value
Meetings, CEO duality,
Gender diversity
17 Bishnoi and Sh PAT/total assets board size, board Size, Sales growth India 42 NSE listed The degree of compliance with
2015 PAT/total income independence, board index, foreign firms corporate governance is fairly
audit index 2005-06 to good
2011-12
79
18 Mehrotra 2015 N/A Board size, board N/A India India: BSE 100 Boards of US listed companies are
independence, board US firms relatively larger with majority of
leadership structure (CEO US: NYSE 100 independent directors on board,
duality), gender diversity firms prominence of combined board
leadership structure and relatively
more gender diverse as compared to
Indian boards
19 Roy 2015 Dividend Ownership structure Geometric mean of India 51 top Indian listed Corporate governance has
payout ratio, variables, Corporate total assets, Market companies (based significant impact on the dividend
Dividend yield governance variables, to book value, firm on market Cap.) policy of the firm
ratio Profitability measures, age, firm size 2007-08 to 2011-12
Liquidity measures, Capital (total assets)
structure variables
20 Bhatt and Tobin’s Q, Independent directors, board Leverage, firm size India 114 IT firms on Board size and board attendance had
Bhattacharya ROA, ROE, size, attendance of board (total assets), sales BSE and NSE a positive impact on firm
2015 ROCE members, non-executive growth and age 2006-2011 performance;
directors, CEO duality, No association of board meetings
board meeting, Ownership and independent directors with firm
performance
21 Gupta and ROA, ROE, Board structure, N/A India India: Top 5 MNCs corporate governance practices have
Sharma 2014 share prices committees, disclosure South South Korea: Top 5 limited impact share prices and
Korea MNCs financial performance of companies
2005-06 to 2012-13
22 Raithatha Cash flows Board characteristics, Size, MTB, ROA India 1974 firms Cash flow manipulation increases
2016 ownership structure, 2005-2011 with increase in controlling
auditors ownership;
Board diligence and better audit fail
to curb such manipulation
80
24 Srinivasan 2013 ROA Related party transactions, Growth (market India 171 BSE firms RPTs were found to be
Cap./total assets), 2008-09 to 2010- lower in companies where
Leverage 11 big audit firms were
statutory auditors
25 Bansal and ROA, ROE, board independence, board Leverage, firm age India 235 NSE listed Board size improves
Sharma 2016 Tobin’s Q, Market size, duality, promoter firms market performance;
Capitalisation shareholding, audit 2004-2013 More independent board
committee independence, directors would result in
audit committee meeting lower return on equity
26 Arora and Sharma ROA, ROE, Board size, proportion of Firm age, leverage, India 1922 BSE Larger boards are
2016 Tobin’s Q, net outside directors, board size (sales), manufacturing associated with greater
profit margin, meetings, CEO duality, advertising intensity, firms knowledge, improved
Stock returns Institutional ownership research and 2001-2010 decision-making and
development intensity enhanced firm
performance;
CEO duality is not related
to firm performance
27 Haldar, Shah and Economic value Board diversity, board size Firm size, firm age India 448 BSE firms Women directors having a
Rao 2014 added, market 2003-2013 positive impact on the
value added financial performance.
28 Jameson, Prevost Tobin’s Q, Family and founder variable, Sales growth, asset India 1796 BSE firms Controlling shareholder
and Board size, Busy directors, tangibility, capital 2011 board membership in
Puthenpurackal CEO duality, Board expenditure, long term Indian firms has a
2014 diversity, Outside Directors, debt, total assets significant negative
ownership structure, association with Tobin's
Q;
Controlling shareholders
appears to be costly for
minority shareholders
81
S. Author(s) Dependent Independent Variable(s) Control Country/ies Study Key Findings
No. Variable(s) Variables Sample/Period
29 Malik and ROA, Tobin’s Q, Board size, board Firm size, 33 USA firms 100 companies out of Board independence improves
Makhdoom Stock return independence, board leverage 67 Non-USA Fortune Global 500 transparency in board decision-
2016 meetings, large firms including 2 Companies making process;
shareholders, CEO firms from India 2005-2012 CEO compensation has inverse
compensation relationship with firm
performance
30 Ghosh 2011 Auditor type, Firm ownership, Firm Size, age India 593 to 631 firms for Audit fees are higher for firms
audit fees performance 2005 with higher earnings opacity;
Domestic auditors are less
likely to be preferred by both
foreign and Indian private
corporations.
31 Bijalwan and ROCE, ROE, Transparency, disclosure Size (total India 121 BSE listed firms corporate governance policies
Madan 2013 PAT, ROA and shareholders’ rights, assets), 2010-2011 and transparency and disclosure
Corporate leverage, are positively and significantly
governance codes and liquidity related with performance
initiatives
32 Kalsie and Tobin’s Q, ROA, Board size Size, age, India 145 NSE listed non- Board size has a positive and
Shrivastav ROCE, market- debt, growth, financial firms significant impact on the firm
2016 to-book value risk 2008-2012 performance
82
3.1 Overview
The chapter explains the methodology adopted to answer the research questions to
achieve the study objectives. In the light of the survey of the literature, several research
gaps have been identified and various research questions have been raised. The chapter
then states its objectives of the study and develops a conceptual framework. After
defining the variables of the study, measurement of the variables is explained. After
describing the sample of the study, a detailed explanation of methodology is dealt with
in order to establish the relationship among variables of interest for the study.
3.2 Research Gaps
The study explored the aspects of the corporate governance mechanism that is relevant
and crucial for governing the Indian corporate system. This has been found that while
the board of directors serve as one of the best mechanisms in curbing the opportunistic
behaviour of manager, there are several loopholes that may make the shield of Indian
corporate governance weak. The study includes the important dimensions of corporate
governance that were found either missing or studied by few authors only. Grounding
on the findings of the literature the study proposes the following research gaps in the
area of corporate governance research in Indian context:
1. The existing literature has examined the corporate governance mechanism in a

limited manner. A very few studies have conducted a comprehensive survey of
literature covering key aspects of corporate governance mechanism which is
specific to Indian firms.
2. The non-executive directors’ compensation is one of the key aspects of
corporate governance. There is a limited literature empirically testing this aspect
of corporate governance for the Indian firms.
3. The literature has suggested another key parameter of corporate governance as
the “size of the audit committee”. However, the audit committee is actually a
subset of the board and including it again as a parameter may not be appropriate.
Rather, utilising the key monitoring aspects for which an audit committee is
formulated by a firm may be more useful to study the impact of the committee
on the financial performance of Indian firms.
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4. The literature has also suggested that the board needs to take various strategic
decisions having bearing on the firm performance. There is a dearth of literature
which studies the impact of boards’ decision on the financial performance of
Indian firms. Therefore, to understand the impact of boards’ decision on the
financial performance of Indian firms, there arises a need to identify key
decisions of the board as key corporate governance mechanism among Indian
firms.
5. Most of the studies have explored the main effect of corporate governance
parameters on the financial performance of the Indian firms. There is a lack of
studies that have explored the interaction effects of ownership structure and
board leadership style with other dimensions of corporate governance, to see
how such interaction impacts the financial performance of Indian firms.
6. The literature has further suggested that there is a difference between the
profitability of a firm and the liquidity position of a firm. Therefore, liquidity is
another important parameter of firm’s performance that should be kept in mind
while evaluating a firm’s financial performance. A very few studies have used
the liquidity aspect of the firm performance for testing the relationship between
corporate governance and financial performance.
3.3 Research Questions
An effective board is a pre-requisite for an effective corporate governance and

monitoring of business firms. Along with an effective board, ownership concentration
and balance of power to key persons also affect the effectiveness of corporate
governance. One of the powerful pacifiers of board effectiveness is the board leadership
style. The board independence, key decisions and approvals are reported to be
influenced due to the board leadership style. Also, the concentration of ownership to
dominant groups and to promoters impact the board effectiveness and monitoring
quality.
This study aims to contribute to literature on corporate governance and its impact on
financial performance of Indian firms by examining the key corporate governance
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characteristics as spelled out by Indian regulatory bodies and suggested by relevant
literature. To achieve this the study addresses the following research questions:
Research Question1: What are the key dimensions of corporate governance

mechanism which are specific to Indian firms, including the dimensions which are
lacking empirical verification among the existing literature in the Indian context?
Research Question2: Is there any impact of the identified corporate governance

variables on the financial performance of Indian companies?

characteristics of companies who have appointed the CEO as the chairman and those
who have not appointed the CEO as chairman?

characteristics of companies whose ownership concentration is held by promoters and
those whose ownership concentration is held by non-promoters?
Research Question5: If difference exists between corporate governance characteristics

of companies who have appointed the CEO as the chairman and those who have not
appointed the CEO as chairman, and also companies whose ownership concentration is
held by promoters and those whose ownership concentration is held by non-promoters,
whether such differences are reflected in financial performance?
3.4 Research Objectives
1. To identify the key features of corporate governance and financial performance

of Indian public listed companies.
2. To investigate the impact of corporate governance on financial performance of
Indian public listed companies.
3. To empirically examine corporate governance practices with respect to board
leadership style and dominant shareholder groups.
4. To suggest possible improvements in the corporate governance framework of
Indian firms based on the findings of the present work.
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3.5 Conceptual Framework of the Study
The conceptual framework for this study evolved from eight constructs including the
control variables. The constructs in this study are (a) board structure, (b) board
processes, (c) board decisions, (d) board compensation, (e) board vigilance, (f)
ownership structure, (g) firm performance, and (h) control variables. The conceptual
framework for the present study is shown in figure 5. Where a proper board structure
is important for effective and efficient monitoring of firms. Board process is the way
by which the board of directors get access to firm related information that can be
affected if board of directors are engaged with multiple boards. However, board
busyness is seen as boundary spanning role by resource dependence theory. The
information accessed help the board of directors to take appropriate decisions and
provide an efficient vigilance to the firm’s assets. The board of directors are
compensated for their tasks. One of the most debatable payments in the corporate world
is the CEO compensation. The present study however, also included payments to non-
executive directors in the form of sitting fee and commissions.
The literature suggested that the concentrated ownership is the root of all corporate
governance issues in India. Keeping this in mind the study added ownership
concentration as another important construct to know the relationship with frim
performance parameters. The survey of the literature also showed that the studies have
also employed various firm specific features to assert its impact on performance. The
present study has also employed firm size, growth and age as control variables. The
next sections are dealing with the operational definition, variable measurement, sample
description and detailed methodology for hypotheses testing.
The operational definition of the variables is given in the next section, while the
measurement of the variables are given in Table 3.1.
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Board Structure
 Board size
 Board
independence
 Gender diversity
 CEO duality
Board Processes
 Board meetings
 Attendance at board
meetings
 Board busyness
Board Decisions
 Capital Structure
decision
 Dividend decision Firm Performance
 ROA
 Tobin’s Q
Board Vigilance  Liquidity
 Auditors’
independence
 Related party
transactions
Board Compensation
 CEO compensation
 NED compensation
Ownership Structure Control Variables
 Firm size
 Ownership  Growth
concentration  Age
 Promoter
ownership
concentration
Figure 5: Conceptual Framework of the Study
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3.6 Operational Definition of Research Variables
The dependent and independent variables are identified with the help of an in-depth
review of literature on corporate governance and its impact on financial performance
of companies carried out in India as well as outside of India. The variables selected for
the study viz., corporate governance and financial performance are the constructs which
have been defined differently by different researchers in this field, and since no
consensus definition of these variables is agreed up-on in the literature, the authors have
given the operational definitions to these variables (Saravanan, 2012).
The study has eight main constructs - board structure, board processes, board decisions,
board compensation, board vigilance and ownership structure as independent variables,
firm performance as dependent variables and a set of control variables. For measuring
the main constructs of the corporate governance the study has identified several proxies
and given them operational definitions. The study has also identified control variables
to control for any confounding effect of these variables on firm performance. The
control variables identified are – size of firm, growth of firm and age of firm. The
following section is dedicated to describe our variables of interest along with
operational definition.
3.6.1 Independent Variables
As discussed earlier, the independent variables are the corporate governance parameters
identified on the basis of in-depth survey of literature. They are the main constructs of
corporate governance mechanism in India. The Indian corporate governance is
identified to be managed through the mechanisms of:
3.6.1.1 Board Structure
The first construct of corporate governance for the study is the board structure, which
is further measured by the following covariates:
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1. Board size: The board size is the total number of directors present on a board for a
given firm at a given financial year.
2. Board independence: The board independence is the total number of independent

directors present on a board of a firm in a given financial year.
3. Gender diversity: Gender diversity implies the presence of woman director(s) on

board.
4. CEO duality: The chief executive officer of a company also holding the position of
the chairman of the board.
3.6.1.2 Board Processes
The second construct of the corporate governance for the study is the board processes,
which is further measured by the following covariates:
5. Number of board meetings: The total number of formal meetings held by a firm
during a given financial year.
6. Attendance of directors at board meetings: Represents the number of meetings

attended by directors out of total number of meetings held in a company.
7. Busy directors: Directors serving on the boards of other companies. A director is

supposed to be busy director when he/she holds multiple directorships.
3.6.1.3 Board Decisions
The third construct of the corporate governance for the study is the decisions and
approvals made by the board of directors. The covariates of board decisions and
approvals are:
1. Capital Structure decision: The proportion of equity to debt capital maintained by a

firm during a financial year. The ratio may vary as a result of buying back the shares,
issue fresh shares, repayment of debt or raising fresh debt capital.
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2. Dividend decision: The return declared by the board of directors to be paid to the
shareholders per share on the outstanding equity shares by the company at the end of
financial year. However, return declared is not usually the same as dividend paid. The
dividend paid in relation to earn is called as payout ratio.
3.6.1.4 Board Vigilance
The fourth construct of corporate governance for the study is board vigilance, which is
represented by the following sub-parameters:
1. Auditors’ independence: The auditors’ independence implies that the auditors are
least involved with the non-audit services to the firm.
2. Related party transactions: Transactions that a firm enters into with its subsidiaries,
parent company, associates, managers, directors and majority shareholders, as well as
their close relatives.
3.6.1.5 Board Compensation
The fifth construct of corporate governance for the study is the board compensation.
The board compensation is measured as:
1. CEO compensation: The CEO compensation is the total remuneration paid to the
chief executive officer of the company during a financial year.
2. Sitting fees and commission to non-executive directors: The amount paid to non-
executive directors in the form of sitting fees and commission for attending meetings
and other services.
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3.6.1.6 Ownership Structure
The sixth construct of corporate governance for our study is the ownership structure
which is represented by ownership concentration.
1. Ownership concentration: Owning a largest share of equity shares by a single group

such as promoters and non-promoters.
3.6.2 Dependent Variables
The dependent variables are the variables that are supposed to vary with the changes in
the independent variables. In the present study the dependent variable is the financial
performance parameters.
3.6.2.1 Financial Performance Variables
Financial performance is the seventh construct of the present study. The performance
of firms are measured with the help of following variables:
1. Return on assets: The return on assets is the percentage of profit of a company with
respect to its all resources. It is the return generated on per rupee of investment.
2. Tobin’s Q: Tobin’s Q is the ratio of book value of a firm with the market value of
the firm.
3. Cash flows: The cash flow here is the cash generated by the operating activities of a
firm. It is the net cash received by a firm by doing its main business.
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3.6.3 Control Variables
The performance of a firm is reported to be affected by various firm specific features

(Mishra and Mohanty, 2014), which is captured by size of a firm, growth and age of a
firm. Thus, the control variables are forming the eighth construct of the study.
1. Size of firm: The size of a firm is measured in terms of total assets held by a company
at the end a given financial year.
2. Growth of firm: It is the growth in the sales of a firm during a given financial year.
3. Age of firm: In the eye of law, a firm is born when it gets registered with the Registrar
of Companies. Therefore, age of a firm is counted with its year of incorporation.
3.7 Measurement of Variables
The measurement of variables and scale identification with respect to type of data is
very important for determining the best possible estimation method for an econometric
model. The scale of a variable depends upon how the data is generated for each variable
taken for the study. Table 3.1 provides detail for the variables measurement, scale type
and source.
Table 3.1: Measurement of Variables, Acronym and Scale type

Type
Board Size BOARD_SIZE Total number of directors on the Ratio
board of firm
Board BOARD_IND Number of independent directors Ratio
Independence divided by total number of directors,
multiplied by 100
Gender Diversity DIVERSITY Dichotomous value of 1 if women Nominal
director is present on the board, 0
otherwise.
CEO Duality DUALITY Dichotomous value of 1 if CEO Nominal
holds the position of Chairman, 0
otherwise.
Board Meetings BOARD_MEET Total number of meetings held Ratio
during a financial year
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Type
Board Attendance BOARD_ATND Number of meetings attended Ratio
divided by total number of meetings
held, multiplied by 100
Board Busyness BUSY_DIR Number of directors serve on other Ratio
boards divided by total number of
directors, multiplied by 100
Capital Structure CAP_STRUC Total debt divided by equity share Ratio
Decision capital
Dividend Decision DIV_DECN Earnings per share distributed for Ratio
each financial year
CEO L_CEO_REM Log of total Remuneration paid to Ratio
Compensation chief executive officer
Non-executive L_NED_REM Log of total remuneration paid to Ratio
Directors Fee and non-executive directors in the form
Commissions of sitting fee and commissions
Auditors’ AUD_IND Fees paid for audit services divided Ratio
Independence by total fees paid for audit and non-
audit services, divided by 100
Related Party L_RPTS Log of sales to related parties plus Ratio
Transaction Purchases from related parties
Ownership OWN_CON Highest percentage shareholding by Ratio
Concentration a group is considered as
concentrated ownership
Promoter PROMO_D Dichotomous value of 1 if Nominal
Ownership ownership is concentrated with
Concentration promoter, 0 otherwise.
Dependent Variables
Return on Assets ROA Net income before interest divided Ratio

by total assets
Tobin’s Q TQ Market value of equity plus total Ratio
book value of liabilities divided by
total book value of assets
Cash Flows CF Net cash flows from operating Ratio
activities divided by total assets
Control Variables
Firm Size L_SIZE_TA Log of total assets Ratio
Firm Growth GROWTH Percentage of year-to-year change in Ratio
total sales.
Firm Age AGE Calculated as a difference between Ratio
the sample year and year of
incorporation
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3.8 Research Hypotheses
Depending upon the research questions raised in light of the survey of literature,
research hypotheses were created, which are testable and subject to acceptance or
rejection, depending upon the result produced by estimation methods.
3.8.1 Hypotheses: Impact of Corporate Governance on Performance
In order to answer the research question five, the study investigated the impact of
corporate governance features on financial performance of Indian companies.
Therefore, the study hypothesises that:
Board Structure
Ho1: There is no significant impact of board size on the financial performance of Indian
companies.
Ho1a: There is no significant impact of board size on ROA of Indian companies.
Ho1b: There is no significant impact of board size on Tobin’s Q of Indian companies.
Ho1c: There is no significant impact of board size on Operating Cash Flows of Indian
companies.
Ho2: There is no significant impact of board independence on the financial

performance of Indian companies.
Ho2a: There is no significant impact of board independence on ROA of Indian

companies.
Ho2b: There is no significant impact of board independence on Tobin’s Q of Indian

companies.
Ho2c: There is no significant impact of board independence on Operating Cash Flows

of Indian companies.
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Ho3: There is no significant impact of gender diversity of board on the financial
Ho3a: There is no significant impact of gender diversity of board on ROA of Indian

companies.
Ho3b: There is no significant impact of gender diversity of board on Tobin’s Q of

Indian companies.
Ho3c: There is no significant impact of gender diversity of board on Operating Cash

Flows of Indian companies.
Ho4: There is no significant impact of CEO duality on the financial performance of

Indian companies.
Ho4a: There is no significant impact of CEO duality on ROA of Indian companies.
Ho4b: There is no significant impact of CEO duality on Tobin’s Q of Indian companies.
Ho4c: There is no significant impact of CEO duality on Operating Cash Flows of

Indian companies.
Board Processes
Ho5: There is no significant impact of number of board meetings on the financial

Ho5a: There is no significant impact of number of board meetings on ROA of Indian

companies.
Ho5b: There is no significant impact of number of board meetings on Tobin’s Q of

Indian companies.
Ho5c: There is no significant impact of number of board meetings on Operating Cash

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Ho6: There is no significant impact of attendance of directors at board meeting on the
Ho6a: There is no significant impact of attendance of directors at board meeting on

ROA of Indian companies.
Ho6b: There is no significant impact of attendance of directors at board meeting on

Tobin’s Q of Indian companies.
Ho6c: There is no significant impact of attendance of directors at board meeting on

Operating Cash Flows of Indian companies.
Ho7: There is no significant impact of board busyness on the financial performance of

Indian companies.
Ho7a: There is no significant impact of board busyness on ROA of Indian companies.
Ho7b: There is no significant impact of board busyness on Tobin’s Q of Indian

companies.
Ho7c: There is no significant impact of board busyness on Operating Cash Flows of

Indian companies.
Board Decisions
Ho8: There is no significant impact of Capital structure decision of board on the

Ho8a: There is no significant impact of Capital structure decision of board on ROA of

Indian companies.
Ho8b: There is no significant impact of Capital structure decision of board on Tobin’s

Q of Indian companies.
Ho8c: There is no significant impact of Capital structure decision of board on

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Ho9: There is no significant impact of dividend decision of board on the financial
Ho9a: There is no significant impact of dividend decision of board on ROA of Indian

companies.
Ho9b: There is no significant impact of dividend decision of board on Tobin’s Q of

Indian companies.
Ho9c: There is no significant impact of dividend decision of board on Operating Cash

Board Vigilance
Ho10: There is no significant impact of auditors’ independence on the financial

Ho10a: There is no significant impact of auditors’ independence on ROA of Indian

companies.
Ho10b: There is no significant impact of auditors’ independence on Tobin’s Q of Indian

companies.
Ho10c: There is no significant impact of auditors’ independence on Operating Cash

Ho11: There is no significant impact of related party transactions on the financial

Ho11a: There is no significant impact of related party transactions on ROA of Indian

companies.
Ho11b: There is no significant impact of related party transactions on Tobin’s Q of

Indian companies.
Ho11c: There is no significant impact of related party transactions on Operating Cash

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Board Compensation
Ho12: There is no significant impact of CEO compensation on the financial

Ho12a: There is no significant impact of CEO compensation on ROA of Indian

companies.
Ho12b: There is no significant impact of CEO compensation on Tobin’s Q of Indian

companies.
Ho12c: There is no significant impact of CEO compensation on Operating Cash Flows

of Indian companies.
Ho13: There is no significant impact of non-executive directors’ remuneration on the

Ho13a: There is no significant impact of non-executive directors’ remuneration on

ROA of Indian companies.
Ho13b: There is no significant impact of non-executive directors’ remuneration on

Tobin’s Q of Indian companies.
Ho13c: There is no significant impact of non-executive directors’ remuneration on

Ownership Structure
Ho14: There is no significant impact of ownership concentration on the financial

Ho14a: There is no significant impact of ownership concentration on ROA of Indian

companies.
Ho14b: There is no significant impact of ownership concentration on Tobin’s Q of

Indian companies.
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Ho14c: There is no significant impact of ownership concentration on Operating Cash
Firm Attributes
Ho15: There is no significant impact of firm size on the financial performance of Indian
companies.
Ho15a: There is no significant impact of firm size on ROA of Indian companies.
Ho15b: There is no significant impact of firm size on Tobin’s Q of Indian companies.
Ho15c: There is no significant impact of firm size on Operating Cash Flows of Indian
companies.
Ho16: There is no significant impact of firm growth on the financial performance of

Indian companies.
Ho16a: There is no significant impact of firm growth on ROA of Indian companies.
Ho16b: There is no significant impact of firm growth on Tobin’s Q of Indian

companies.
Ho16c: There is no significant impact of firm growth on Operating Cash Flows of

Indian companies.
Ho17: There is no significant impact of firm age on the financial performance of Indian
companies.
Ho17a: There is no significant impact of firm age on ROA of Indian companies.
Ho17b: There is no significant impact of firm age on Tobin’s Q of Indian companies.
Ho17c: There is no significant impact of firm age on Operating Cash Flows of Indian
companies.
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3.8.2 Hypotheses: Differences of CEO Duality vs. Non-Duality
In order to answer the research question two, it is important to explore differences in

corporate governance features and parameters of financial performance for firms with
CEO duality and firms with separate persons for the position of CEO and chairman.
Therefore, the study hypothesises that:
Board Structure
Ho18: There is no significant difference between board size of companies who have
appointed the CEO as the chairman and those who have not appointed the CEO as
chairman.
Ho19: There is no significant difference between board independence of companies

who have appointed the CEO as the chairman and those who have not appointed the
CEO as chairman.
Board Processes
Ho20: There is no significant difference between board meeting of companies who have
appointed the CEO as the chairman and those who have not appointed the CEO as
chairman.
Ho21: There is no significant difference between board attendance of companies who

have appointed the CEO as the chairman and those who have not appointed the CEO
as chairman.
Ho22: There is no significant difference between board busyness of companies who

as chairman.
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Board Decisions
Ho23: There is no significant difference between capital structure decision of

companies who have appointed the CEO as the chairman and those who have not
appointed the CEO as chairman.
Ho24: There is no significant difference between dividend decision of companies who

as chairman.
Board Vigilance
Ho25: There is no significant difference between auditors’ independence of companies

who have appointed the CEO as the chairman and those who have not appointed the
CEO as chairman.
Ho26: There is no significant difference between related party transaction of

Board Compensation
Ho27: There is no significant difference between CEO compensation of companies who

as chairman.
Ho28: There is no significant difference between NED compensation of companies who

as chairman.
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Ownership Concentration
Ho29: There is no significant difference between ownership concentration of

3.8.3 Hypotheses: Differences of Promoter vs. Non-Promoter Ownership
In order to answer the research question three, the study further explores difference in
corporate governance features and parameters of financial performance for firms
having ownership concentrated with promoters and firms having ownership
concentrated with non-promoters. Therefore, the study hypothesises that:
Board Structure
Ho30: There is no significant difference between board size of companies having

ownership concentrated with promoters and companies having ownership concentrated
with non-promoters.
Ho31: There is no significant difference between board independence of companies

having ownership concentrated with promoters and companies having ownership
concentrated with non-promoters.
Board Processes
Ho32: There is no significant difference between board meeting of companies having

with non-promoters.
Ho33: There is no significant difference between board attendance of companies

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Ho34: There is no significant difference between board busyness of companies having
with non-promoters.
Board Decisions
Ho35: There is no significant difference between capital structure decision of

companies having ownership concentrated with promoters and companies having
ownership concentrated with non-promoters.
Ho36: There is no significant difference between dividend decision of companies

Board Vigilance
Ho37: There is no significant difference between auditors’ independence of companies

Ho38: There is no significant difference between related party transaction of

Board Compensation
Ho39: There is no significant difference between CEO compensation of companies

Ho40: There is no significant difference between NED compensation of companies

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Ownership Concentration
Ho41: There is no significant difference between ownership concentration of

3.9 Sampling Procedure
After defining the measurement for the variables of interest for the study, the next step
is to select the sample for which the data is to be collected. The data for NSE 200 index
companies for the period of 2009-2010 to 2015-2016 was collected, processed and
analysed.
The NIFTY 200 Index is designed to reflect the behaviour and performance of large
and mid-market capitalization companies. NIFTY 200 includes all companies forming
part of NIFTY 100 and NIFTY Full Midcap 100 index. The NIFTY 200 Index
represents about 85% of the free float market capitalization of the stocks listed on NSE
as on March 31, 2017. The total traded value for the last six months ending March 2017,
of all index constituents is approximately 77.9% of the traded value of all stocks on
NSE.
The study excluded banks and financial institutions from the sample because of
different governance and financial requirements (Haldar and Rao, 2013). The study
further excluded companies that are incorporated after the financial year 2008-2009,
and for which complete data was not available. Hence the final sample falls to 146
companies as follows:
Population of the study – NSE 200 Index Companies 200 firms
Less: Banks and Financial firms (41) firms
Less: Incorporation after 2008-09 (01) firms
Less: Unavailable reports and other data (12) firms
Final sample size 146 firms
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The final sample size amounts to 146 firms for which the data for 7 years were
collected. The total number of observations for the study comprises of 1022 firm-years.
The data required for the governance and financial parameters were collected form the
Prowess database of Centre for Monitoring of Indian Economy (CMIE) and annual
reports of companies available at firms’ respective websites.
3.10 Approach for Analysis
A critical step after proposing research framework, sample selection and data collection
is the analysis of the data to answer the research questions and achieve desired
objectives. The data analysis contributes to investigate the characteristics of the data
collected and specify the relationship among the variables under study. The data
analysis for the present study is a proper mix of statistical tools and econometric
techniques using the statistical software package Eviews 8.
3.10.1 Descriptive Analysis
To analyse the data and to draw meaningful conclusions the study analyses and
compares in a descriptive statistics way. First, descriptive statistics for full sample is
calculated. Then, descriptive statistics by grouping is calculated for having an overview
about corporate governance practices and financial performance of Indian firms. The
first grouping is for firms with CEO duality and firms with separate positions for the
CEO and chairmanship of the board. The second grouping is based on the category of
promoter shareholding and non-promoter shareholding. The third grouping is with
respect to the type of business group holding of Indian firms classified as family
business group, government dominated group, corporate dominated group, and foreign
dominated group and dispersed group.
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3.10.2 Classification Analysis
The classification analysis of the study is carried out in two phases. First, classification
analysis is done for differences in corporate governance characteristics of firms who
have appointed their CEOs as chairman of the board and firms who have not appointed
their CEOs as chairman of the board. The second classification analysis for differences
for corporate governance characteristics is carried out for the category for firms having
ownership concentrated with promoters and firms having ownership concentrated with
non-promoters.
To check the normality of the data Shapiro-Wilk Test is applied. The normality of data
is important to run a parametric test to see the differences in the corporate governance
and financial performance characteristics among firms in the aforesaid categories. In
case normality is not confirmed, non-parametric tests are used to test the significance
of differences among the corporate governance variables of the Indian firms.
3.10.3 Regression Analysis
The regression analysis is conducted to predict the impact of corporate governance

variables on financial performance variables. The data for NSE 200 companies for a
period of seven years started from the financial year 2009-10 to financial year 2015-16
is collected for further analysis. The organisation of data suggests that our data set is in
panel format. Therefore, we need to apply panel data analysis technique for analysis of
our data.
The term panel data refers to the combination of time series data and cross-section data,
where data is collected from the same number of individual, countries, firms, etc.
(cross-section) over more than one period of time, say weekly, monthly, half-yearly,
annually, etc. (time series). The unique feature of panel data is that each cross section
units repeated over time and each time period is repeated across cross-section units.
Using a combination of time series and cross-section data gives several advantages,
which cannot be generated by using only one of the two data sets (Gujarati, 2004). The
advantages of using panel data is very well explained by Baltagi (2005). The advantages
are as follows:
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1. The panel data takes care for heterogeneity of cross-section under study. It may be
individuals, states, countries, firms, etc. studied over time. Time series and cross-
section data sets doesn’t control for such heterogeneity.
2. The combining effect of time series and cross-section data sets as a panel data set
gives more informative data, more variability, less co-linearity among the variables,
more degrees of freedom and more efficiency
3. The panel data combines same set of individuals over multiple times. This feature of
panel data set enables it to study the dynamics of change. The panel data is suitable to
study the situations like duration of unemployment, job turnover, labour mobility, etc.
4. Panel data models allow us to construct and test more complicated behavioural
models than purely cross-section or time-series data.
5. The application of panel data provides more data points, more degree of freedom and
more efficiency in estimation.
6. Eliminates the effect of unobserved variables like αs in general linear model.
There are different types of panel data sets. A balanced panel has same number of cross-
sections over time and same time period across cross-sections. An unbalanced panel
has different number of cross-sections over time or different time period across cross-
sections. A short panel has number of cross-sections comparatively higher than the
number of time period. A long panel on the other hand, has large number of time
observations for few cross-sections.
The present study has 146 numbers of cross-sections for which data is collected for
seven years. Also, the study has same number of cross-sections over time and same
time period across cross-sections. Thus, the panel data for the study is short-balanced
panel data set. The need to identify the panel type is important for determining the
matter of interest. For example, in case of short panel the main interest is in knowing
how the cross-section is behaving, as against to a long panel where interest is in
knowing how time is behaving.
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3.10.3.1 Estimation of Panel Data
A general model for cross-section data is given by:
Yi = α + β1Xi + εi …………………………………………………………….. (1)
Where i = 1, 2 ….N is the number of cross sections or individuals.
A general model for time series data is given by:
Yt = α + β1Xt + εt …………………………………………………………….. (2)
Where t = 1, 2 ….T is the number of time periods.
As we know that a panel data is the combination of cross-section data and time series
data sets, a general model or pooled model for a panel data is given by combining the
two equations.
Yit = α + β1Xit + εit ……………………………………………………………. (3)
Where i = 1, 2 ….N is the number of cross sections or individuals and t = 1, 2 ….T is

the number of time periods.
In case of cross-section data set and time series data set the slope coefficient β indicates
the impact on dependent variable Yi or Yt due to the changes in Xi or Xt respectively.
It means that at a time the changes are depicted either for individuals or for periods. But
in case of panel data set the slope coefficient β captures the variation in Yit due to the
variations in Xit. In more simple words, the change in Y for cross-section (i) at time (t)
is predicted by β for observation X for cross-section (i) at time (t).
The steps involved in panel data estimation for the study are as follows:
Step 1: Develop a general model pooling cross-section and time series data
Yit = αit + β’it Xit + εit …………………………………………………………… (4)
Step 2: Check for homogeneity. The homogeneity means that the cross-sections and
time periods are identical and behaving in similar fashion. However, we need to check
for homogeneity for one at a time, either for time or cross section, keeping the other as
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zero. If homogeneity is not found, it means that there are either individual specific
effects or time specific effects or both. So, the equation 4 can be rewritten as:
Yit = αi + λt + β’it Xit + εit ………………………………………………………. (5)
Note in the equation 5 αit which was representing intercept term for cross-section and
time has now splitted into αi and λt, separating the individual and time effects.
Sub-step1: Test for individual specific effects, assuming that there is no time specific
effect. As mentioned earlier, while checking the individual specific effects time effect
has to be kept zero [λt = 0]. Therefore, the equation will take the form as:
Yit = αi + β’it Xit + εit …………………………………………………………. (6)
The null hypothesis is that there is no difference in alphas (α).
Ho: α1 = α2 = …= αn = 0
Alternate hypothesis is at least one α is different i.e. α1 ≠ α2.
If the null hypothesis is accepted, implies that no heterogeneity is there in data across
cross-section. If rejected, there are individual specific effects in the data.
Sub-step2: Test for time specific effects, assuming that there is no individual specific
effect. As mentioned earlier, while checking the time specific effects individual effect
has to be kept zero [αi = 0]. Therefore, the equation will take the form as:
Yit = λt + β’it Xit + εit …………………………………………………………. (7)
The null hypothesis is that there is no difference in lambdas (λ).
Ho: λ1 = λ2 = …= λt = λ
Alternate is at least one λ is different i.e. λ1 ≠ λ2.
If the null hypothesis is accepted, implies that no heterogeneity is there in data across
time period. If rejected, there are time specific effects in the data.
The test applied to check heterogeneity in the cross-section and time-series is

Likelihood Ratio Test. Precisely, it is an F-test which is a joint hypothesis test.
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Step 3: Determining the model
The following possibilities can arise depending upon the results of above steps - a
model can be:
1. Both individual and time invariant: Data is homogeneous, pooled the data,
panel data methods cannot be applied.
2. Individual variant, time invariant: Heterogeneity is present in the data. The
model refers to as one-way variable intercept model in cross-section.
3. Time variant, individual invariant: Heterogeneity is present in the data. The
model refers to as one-way variable intercept model in time series.
4. Both time and individual variant: Heterogeneity is present in the data. The
model refers to as two-way variable intercept model.
Step 4: Selecting the method of estimation
In case both individual and time are constant, pooled data estimation method is applied
for generating results and hypothesis testing. In case of pooling the data the error term
captures all unabsorbed variables, ignoring time and cross-sections. If presence of
heterogeneity is detected, we need to estimate it by either fixed effect model or random
effect model.
Fixed Effect Model (FEM): Also called as Least Square Dummy Variable Model.
Depending upon the nature of heterogeneity, the model uses dummies for estimation of
equations. It implies that the model would have a constant slopes but varying intercepts
for cross-sections or time-series or both. If the heterogeneity is detected in cross section,
the model creates N-1 dummies for estimation. On the other hand, if heterogeneity is
detected in time-series, the model creates T-1 dummies for estimation. In case if
heterogeneity is found in both the cross-section and time-series, the model will create
dummies for both the cross-sections and time-series. The estimation of model for
variability in either cross-section or time-series is referred to as one-way variable
intercept model in cross-section/time-series estimated by FEM. If variability exists in
both the cross-section and time-series it is referred to as two-way variable intercept
model estimated by FEM. Equation for one-way model in cross-section or time-series
will be given by equation 6 or equation 7. For a two-way model the equation will be
110
given by equation 5. The FEM is estimated by the method of Ordinary Least Square
(OLS).
Random Effect Model (REM): One of the major disadvantages of FEM is that it causes
loss of degree of freedom with every dummy introduces in the model. The REM instead
of creating dummies and capturing variation in intercepts, utilises omitted variables in
the error term without losing degree of freedom. So, the unobserved variables are not
fixed, but they are random and vary with the error term of the model. That is why REM
is also known as error component model or variance component model. It implies that
the cross-section differences or time-series differences are reflected in the error term
rather in fixed intercept values.
A general model is given by Yit = μ + αi + λt + β’i Xit+ uit, where αi and λt are random
variables and vit = αi + λt + uit. So, the equation can be rewritten as:
Yit = μ + β’ Xit + vit …………………………………………………………. (8)
If equation 8 is a one-way model, then:
vit = αi + uit ; λt = 0 [if time-series is invariant]
or, vit = λt + uit ; αi = 0 [if cross-section is invariant]
If equation 8 is a two-way model, then:
vit = αi + λt + uit [if both cross-section and time-series are variant]
The random effect model is estimated by the method of Generalised Least Square
(GLS).
Now, the question is that how to choose between FEM and REM. The selection of
estimation method between the two is usually based on Hausman test. The null
hypothesis for Hausman test is REM is appropriate and the alternate hypothesis is that
REM is not appropriate. If null hypothesis is accepted, we can apply either FEM or
REM. But if null hypothesis is rejected then we have to apply FEM for estimation of
model.
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3.10.3.2 Diagnostic Tests
Before estimating the equation it is essential to run various diagnostic tests such as
collinearity diagnostics, serial correlation test and heteroscedasticity test.
Multicollinearity Test: The first diagnostic test we conducted is to check for the
presence of multicollinearity.
Heteroscedasticity Test: We conducted Breusch-Pagan test for heteroskedasticity in

panel data. The null hypothesis for the test is that the data is homoscedastic.
Serial Correlation Test: We further conducted Wooldridge test for autocorrelation in

panel. The null hypothesis for the test is that there is no first-order correlation in the
data.
In order to control the problems of heteroskedasticity and serial correlation, we have

estimated the robust standard errors in our models.
Panel Stationary Test: The literature suggests checking of stationarity of time-series

component of the data as first important step before estimating the equations and
generating results (Praptiningsih, 2009). The study applied Levin, Lin and Chu unit root
test as applied by Ferreira (2008); and Freckleton, Wright and Craigwell (2012). The
Levin, Lin and Chu unit root test is viewed as pooled as a pooled Dickey-Fuller test and
is adequate for heterogeneous panels of moderate size. The null for the test is Unit Root.
3.11.4 Model Specification
The study used panel data as the method of estimation of regression equations. The data
for the sample of 146 firms were collected for 7 years. In order to determine the nature
of relationship between explanatory variables and explained variables considered in the
study, the following model was applied –
General Model: Performance = Constant Coefficient + Corporate Governance +

Control Variable + Error Term
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Where, performance is a vector of corporate performance measured in terms of return
on assets, Tobin’s Q and cash flows. Corporate Governance is vector of fifteen
Model 1 (ROA-1): Explained variable – ROA
ROAit = α0 + β1BOARD_SIZEit + β2BOARD_INDit + β3DIVERSITYit +

β4DUALITYit + Β5BOARD_MEETit + β6BOARD_ATNDit + β7BUSY_DIRit +
β8DIV_DECNit + β9CAP_STRUCit + β10AUD_INDit + β11L_RPTSit +
β12L_CEO_REMit + β13L_NED_REMit + β14OWN_CONit + β15PROMO_Dit +
β16L_SIZE_TAit + β17GROWTHit + β18AGEit + εit
Model 2 (TQ-1): Explained Variable TQ
TQit = α0 + β1BOARD_SIZEit + β2BOARD_INDit + β3DIVERSITYit + β4DUALITYit

Model 3 (CF-1): Explained variable CF
CFit = α0 + β1BOARD_SIZEit + β2BOARD_INDit + β3DIVERSITYit + β4DUALITYit

Where in Model 1, 2 and 3 –
α0 = Intercept coefficient;
β1, β2, β3, β4, β5 ….. β17 = Slope coefficients;
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i = firm I;
t = Year T;
εit = Error term in the year t for firm i.
The estimation of panel equations and hypotheses testing is done as per following steps:
1. In the first step panel unit root test is conducted for all the variable.
2. Diagnostic tests for multicollinearity, heteroskedasticity and autocorrelation is

conducted for each model.
3. Heterogeneity tests are conducted for each models to check for variations in cross-
sections and time-series for each model.
4. If rejected the heterogeneity, pooled data regression estimation method is applied.
5. If accepted the heterogeneity, Hausman Test is applied to choose between FEM and
REM
6. Robust standard errors are calculated to control the problems of heteroskedasticity

and autocorrelation, if any.
After estimating the main effect of corporate governance parameters on financial

performance of Indian firms, interaction effect of CEO Duality and promoter ownership
concentration on the relationship between corporate governance and financial performance are
estimated. In the next step, the corporate governance variables which are reported to be
significantly different by the Mann-Whitney Test for the aforesaid categories (CEO
duality and promoter concentrated ownership) are modeled in regression estimated with
interaction terms.
The interaction effect of CEO duality and promoter concentrated ownership on the
relationship between corporate governance and financial performance is estimated to
assess how the CEO duality and promoter concentrated ownership affects firm
performance. Whether it positively contributes to the performance or negatively
114
impacts the performance. Interaction terms are generated by multiplying the corporate
governance variables with CEO duality and promoter concentrated ownership.
Yip and Tsang (2007) explained the application of dummy variable with the help of an
example of studying the impact of a firm’s country of origin on the performance of the
firm. To categorise firms into domestic firms and foreign firms, a dummy variable is
added which takes the value of 1 if the firm is a foreign firm and 0 if the firm is a
domestic firm. Thus, the domestic firm is chosen as a base category and the coefficient
of the foreign-firm dummy can be interpreted as the difference in the intercept between
the foreign and the domestic firms.
The present study has assigned the value of 1 to the firms with CEOs holding the
position of the chairman as well (CEO duality), and 0 to the firms with CEOs not
holding the position of the chairman of the board (non-duality). Similarly, the value of
1 is assigned to the firms with promoter concentrated ownership and 0 to the firms with
non-promoter concentrated ownership.
Thus, the firms with non-duality and non-promoter concentrated ownership are chosen
as base category so that the firms with CEO duality and promoter concentrated
ownership can be interpreted as the difference in the intercepts between the aforesaid
categories.
The following model is applied to include the interaction term:
Performance = Constant Coefficient + Corporate Governance + Corporate

Governance*Duality/Corporate Governance*PROMO_D + Control Variable + Error
Term
Where, the performance is a vector of corporate performance measured in terms of

return on assets, Tobin’s Q and cash flows. Corporate Governance is vector of fifteen
Depending upon the number of variables indicated to be significantly different between

firms with CEO Duality and non-duality, the models are numbered as ROA2, ROA3
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and so on; TQ2, TQ3 and so on; and CF2, CF3 and so on. Each interaction term is
estimated separately to avoid the problem of multicollinearity.
The study will hypothesise that (in continuation of the previous hypotheses):
Ho42: There is no significant statistical difference in the impact of corporate

governance parameter on the financial performance between Indian firms with CEO
Duality and firms with non-duality.
Ho43: There is no significant statistical difference in the impact of corporate

governance parameter on the financial performance between Indian firms having
ownership concentrated with promoters and ownership concentrated with non-
promoters.
If the interaction term is significant, it implies that the effect of the corporate
governance parameter(s) on the financial performance depends on CEO
duality/promoter concentrated ownership. It will also mean that the slope of the lines
for firms with CEO duality and firms with non-duality are significantly different.
Similarly, the slopes are different for firms having ownership concentrated with
promoters and ownership concentrated with non-promoters (Jim, 2018).
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Descriptive Analysis Classification Analysis Regression Analysis
Panel Data Regression

Full Sample Test by Classification
Panel Stationarity
By Grouping
CEO Duality vs. Non Duality
Promoter vs. Non Promoter Multicollinearity

Diagnostic Tests Heteroscedasticity
CEO Duality vs. Non Duality Serial Correlation

Homogeneity Test Pooled vs. Panel
Parametric vs. non-parametric
tests choice
Hausman Test FEM vs. REM
Interaction term for

variables having significant Model Estimation and Hypothesis
difference Testing
Figure 6: Approach for Analysis

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Summary
There are few research gaps in the Indian corporate governance literature which are
needed to be addressed. A conceptual framework is developed to answer the research
questions and to achieve the objectives of the study. Fifteen critical factors of corporate
governance, three critical factors of financial performance and three firm specific
attributes have been defined and their measurement is explained. The approach for
analysis is divided into three sections as descriptive analysis, classification analysis and
regression analysis. The variables are presented in a form of an econometric equation
and the estimation of the equations is explained in detail. The panel data analysis
technique is applied for the estimation of equations and generating the impact of
corporate governance variables on financial performance of Indian firms.
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4.1 Overview
The relationship between Corporate Governance variables and firms’ performance

variables is studied by applying panel data regression analysis. The panel data
regression analysis is different from cross-section analysis and has different set of
assumptions. The variables in panel regression equation takes double subscript to
represent time and cross-section. The study employs fifteen corporate governance
variables, three control variables and three financial performance variables.
The chapter presents the analysis for the statistical tests applied in order to establish
relationship between Corporate Governance variables and firms’ financial performance
variables. Following the methodology as explained in the previous chapter, descriptive
statistics for the variables is explained first followed by the results for non-parametric
tests. The results for regression analysis are described after various essential checks to
ensure that the results are valid and reliable.
4.2 Descriptive Statistics
The descriptive statistics are calculated for full sample followed by descriptive statistics
for categories of CEO duality and promoter ownership concentration. Such statistics
provide an overview of distribution of the data.
4.2.1 Descriptive Statistics - Full Sample
Table 4.1 presents the descriptive statistics of the variables taken for the study. The
descriptive statistics is used to provide simple summaries about the sample variables.
The table shows that Indian firms have 12 members (on an average) on the board of
directors. On an average, the boards of Indian firms are comprising 50% independent
directors. Of the total sampled firms, while approximately 54% firms have at least one
woman director on the board, only 36% firms have appointed CEO as the chairman of
the board. It implies that the Indian firms have lower tendency to appoint CEO as the
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chairman of the board. Further, it also implies that the gender diversity of board is found
to be missing on Indian board in spite of having mandatory requirement by law for the
same.
The board of directors of Indian firms have met approximately 6 times a year, which is
2 times more than the required limit by the regulatory authorities. All the firms have
shown to comply with the minimum number of meetings per year requirement as the
minimum number of meeting as per the data is 4 meetings. The mean score for board
attendance is 73.95% that implies that approximately 74% directors have shown
presence during the board meetings. However, few boards have shown a poor
attendance with only 30% members presented during meeting. On an average, 74%
members of the board have served on the boards of other firms. In few firms all the
members of the board have found to serve on boards of the other firms.
The capital structure of Indian firms have shown the presence of high debt fund. On an
average, for one rupee of equity invested, 23.05 rupees of debt fund is employed. This
shows a presence of high financial risk among Indian firms. The results showed that
the boards have approved to distribute a dividend of around 42.57 rupees per share. A
maximum of 3936.63 rupees per share of dividend is declared and distributed by the
board that can be witnessed by the descriptive statistics.
On an average, of the total fee paid to the auditors, around 69% fee was paid for audit
related services. Few firms have shown 100% independence of auditors which is in the
interest of the shareholders and other stakeholders. The board of directors have
approved a high amount of related party transactions and the CEO of the Indian firms
are highly paid as compared to non-executive directors. Related party transactions,
CEO remuneration and non-executive director remuneration have been log-
transformed. Log of related party transactions is ranging from 5.805 to -0.698 with a
mean value of 3.648 and the standard deviation of 1.004. Also, the log of CEO
remuneration is ranging from 4.275 to -0.523 with a mean value of 1.788 and the
standard deviation of 0.630. In the same way, log of non-executive directors’
remuneration is ranging from 2.479 to -1 with a mean value of 0.475 and the standard
deviation of 0.636083. It implies that the log of related party transactions, log of CEO
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remuneration, log of non-executive directors’ remuneration are reasonably tend to their
mean values. The ownership concentration is stretched up to 90.4% with a mean value
of 52.68%. Increase in ownership concentration increases worries for minor
shareholders as it enhances the chances of fraud (Loebbecke et al., 1989).
The dispersion in the minimum and maximum values of size of the firms measured by
Total Assets, indicates that there is a huge difference among the size of the sampled
firms. Taking log of Total Assets, the size of the sample firms is ranging from 6.683 to
0.230 with a mean value of 4.921 and the standard deviation of 0.639. It shows that the
variable is clustering around the mean value of the series. There is a huge variation in
the growth and age of the sampled firms.
The mean value of ROA for the sampled firms is 0.915 with a standard deviation of
0.656 and a minimum value 0.017. It implies that on an average the firms are financially
sound. The mean value of TQ is 3.088 and the standard deviation is 3.903. The
minimum and maximum values of TQ are 0.039 and 69.809 which shows that there is
a large variation in the market capitalisation of the sampled firms. On an average, the
CF of the firms are around 10.403 with a standard deviation of 10.728. However, the CF
is ranging from 54.367 to -129.411.
Table 4.1: Descriptive Statistics (Full Sample)
Variables Observations Mean Median Maximum Minimum Std. Dev.

BOARD_SIZE 1022 11.898 12 25 4 3.631
BOARD_IND 1022 50.457 50 100 10 12.071
DIVERSITY 1022 0.543 1 1 0 0.498
DUALITY 1022 0.358 0 1 0 0.480
BOARD_MEET 1022 6.393 6 24 4 2.560
BOARD_ATND 1022 73.956 75 100 30 12.783
BUSY_DIR 1022 74.443 78.571 100 0 21.043
CAP_STRUC 1022 23.050 8.126 635.941 0.003 51.567
DIV_DECN 1022 42.572 15.26 3936.63 -191.09 179.287
AUD_IND 1022 69.064 69.624 100 12.195 19.103
RPTS 1022 27826.5 5007 638725.4 0.2 65834.08
L_RPTS 1022 3.648 3.699 5.805 -0.698 1.004
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Variables Observations Mean Median Maximum Minimum Std. Dev.
CEO_REM 1022 202.573 62 18820.9 0.3 992.728
L_CEO_REM 1022 1.788 1.792 4.275 -0.523 0.630
NED_REM 1022 10.663 2.4 301.8 0 27.817
L_NED_REM 1022 0.475 0.380 2.479 -1 0.636
OWN_CON 1022 64.404 63.305 90.4 36.29 10.217
PROMOTER_D 1022 0.689 1 1 0 0.463
SIZE_TA 1022 237532.9 72135.8 4821120 1.7 461981.8
L_SIZE_TA 1022 4.921 4.858 6.683 0.230 0.639
GROWTH 1022 20.299 13.048 2542.658 -81.836 94.819
AGE 1022 39.890 32.5 119 3 24.191
ROA 1022 0.915 0.772 3.716 0.017 0.656
TQ 1022 3.088 2.054 69.809 0.039 3.903
CF 1022 10.403 10.109 54.367 -129.411 10.728
Source: Researcher’s computation
4.2.2 Descriptive Statistics – CEO Duality vs. Non-Duality
The category wise descriptive analysis for the variable CEO Duality showed close mean
and standard deviation values for board size, board independence, board meetings and
board attendance at meeting. A little variation in mean and standard deviation values is
witnessed for board busyness, auditor independence and ownership concentration.
Related party transactions, CEO remuneration, non-executive directors’ remuneration,
dividend and capital structure have shown large variations between firms with CEO
duality and firms with non-duality. Board size for both categories of firms is
approximately 12 directors on board. Board independence for firms with CEO as
chairman of the board as well is 51.41%. The board independence for firms with
separate positions of CEO and chairman of the board is 49.92%. The boards of both the
categories of firm have met 6 times a year and board of directors have shown
satisfactory presence for the meetings. However, the minimum of attendance of
directors at board meeting as per the table 4.2 is 30% and 35.29% for firms with CEO
duality and non-duality respectively.
On an average, 75% of the total board members of non-duality category have served on
the board of other firms, while approximately 73% of the total board members of duality
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category have served on the boards of the other firms. The mean value of auditors’
independence for firms with non-duality category is 70.19% and for firms with CEO
duality category is 67.04%. The mean values of related party transactions for CEO
duality category firms is 24639.3 and non-duality firms is 33539.07, which shows a huge
difference for related party transactions for both the categories of firms. The CEO remuneration
and non-executive directors remuneration for firms with non-duality is higher than the firms
with CEO duality. On an average, firm with non-duality have paid a higher dividend than firms
with CEO duality. One of the reasons for such difference in dividend payment might be the
level of leverage used by both the categories of firms. The firms with non-duality have used
higher leveraged capital structure than the firms with CEO duality. The ownership
concentration is higher for the firms who have appointed their CEOs as the chairman of the
board of directors. The accounting profit and market value of firms with CEO duality is higher
than firms with non-duality. On an average, the liquidity position of both the categories of firms
are similar, with the exception that few firms in the category of CEO duality have shown a
negative cash flows of -67.654 as against a negative value of cash flows of -129.411 for firms
with non-duality.
Table 4.2: Descriptive Statistics (Category Variable: CEO Duality vs. Non-
Duality)
1 = CEO Duality Obs. Mean Max Min. Std. Dev.

0 = Non-Duality
BOARD_SIZE
0 656 11.729 25 4 3.351
1 366 12.202 25 4 4.075
BOARD_IND
0 656 49.924 100 10 11.615
1 366 51.412 83.333 15.789 12.811
BOARD_MEET
0 656 6.131 24 4 2.098
1 366 6.863 20 4 3.177
BOARD_ATND
0 656 74.107 100 30 12.483
1 366 73.688 100 35.294 13.320
BUSY_DIR
0 656 75.262 100 0 20.395
1 366 72.975 100 0 22.110
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1 = CEO Duality Obs. Mean Max Min. Std. Dev.
0 = Non-Duality
AUD_IND
0 656 70.190 100 12.195 18.417
1 366 67.046 100 21.25 20.143
RPTS
0 656 24639.3 638725.4 0.2 60444.37
1 366 33539.07 447583.8 0.2 74272.34
L_RPTS
0 656 3.695 5.805 -0.699 0.923
1 366 3.566 5.651 -0.699 1.132
CEO_REM
0 656 234.728 18820.9 0.3 1224.784
1 366 144.940 1505.2 0.9 244.097
L_CEO_REM
0 656 1.807 4.275 -0.523 0.645
1 366 1.754 3.178 -0.046 0.600
NED_REM
0 656 0.577 2.480 -1 0.684
1 366 0.291 1.903 -1 0.491
L_NED_REM
0 656 14.348 301.8 0 33.625
1 366 4.057 80 0 8.209
DIV_DECN
0 656 33.777 589.76 -191.09 57.343
1 366 58.336 3936.63 -166.79 289.182
CAP_STRUC
0 656 18.170 319.248 0.005 33.608
1 366 31.796 635.941 0.003 72.746
OWN_CON
0 656 63.853 90 36.29 10.041
1 366 65.394 90.4 50 10.467
ROA
0 656 0.984 3.569 0.022 0.638
1 366 0.793 3.716 0.017 0.671
TQ
0 656 3.405 49.647 0.121 3.396
1 366 2.518 69.809 0.040 4.626
CF
0 656 11.299 47.907 -129.411 11.179
1 366 8.798 54.367 -67.654 9.679
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4.2.3 Descriptive Statistics – Promoter vs. Non-Promoter Ownership
The category wise descriptive analysis for the variable promoter concentration showed
close mean and standard deviation values for board size, board meetings, board
attendance at meeting, board busyness and auditors' independence. A little variation in
mean and standard deviation value is witnessed for board independence. Related party
transactions, CEO remuneration, non-executive directors’ remuneration, dividend,
capital structure and ownership concentration have shown large variations between
firms with promoter concentrated ownership and firms with non-promoter concentrated
ownership. Board size for both categories of firms is approximately 12 directors on
board however, firms with promoter ownership concentration had a maximum of 25
directors on board while firms with non-promoter ownership concentration had a
maximum 23 directors on board. Board independence for firms with promoter
concentrated ownership as per the table 4.3 is 49.13%.
The board independence for firms with non-promoter concentrated ownership is

53.38%. The boards of both the categories of firm have met around 6 times a year and
board of directors have shown satisfactory presence for the meetings. However, the
minimum of attendance of directors at board meeting as per the table 4.3 is 30% for
both the categories of firms. Approximately, 74.83% of the total board members of non-
promoter category firms have served on the board of other firms, while around 74.26%
of the total board members of promoter category firms have served on the boards of the
other firms. The mean value of auditors’ independence for firms with non-promoter
concentrated ownership category is 69.46% and for firms with promoter concentrated
ownership category is 68.88%.
The mean values of related party transactions for promoter concentrated ownership
firms is 24137.33 and for non-promoter concentrated ownership firms is 36031.10, which
shows a wide difference for related party transactions for both the categories of firms. While,
the CEO remuneration for firms with promoter concentrated ownership is higher than the
firms with non-promoter concentrated ownership, the non-executive directors have been
paid higher in non-promoter concentrated ownership firms. The firms with non-promoter
concentrated ownership have paid a higher dividend than firms with promoter concentrated
125
ownership. The non-promoter concentrated ownership firms have used high level of
leveraged capital structure. On an average, the ownership concentration is higher for the firms
with promoter concentrated ownership. The accounting profit and market value of firms with
promoter concentrated ownership is higher than firms with non-promoter concentrated
ownership. On an average, the liquidity position of both the categories of firms are similar,
with the exception that few firms in the category of promoter concentrated ownership have
shown a negative cash flows of -129.412 as against a negative value of cash flows of -7.506 for
firms with non-promoter concentrated ownership.
Table 4.3: Descriptive Statistics (Category Variable: Promoter vs. Non-Promoter

Ownership Concentration)
1 = Promoter Obs. Mean Max Min. Std. Dev.

0 = Non-Promoter
BOARD_SIZE
0 317 12.360 23 5 3.339
1 705 11.691 25 4 3.740
BOARD_IND
0 317 53.389 100 15.79 11.466
1 705 49.139 85.71 10 12.114
BOARD_MEET
0 317 6.142 13 4 1.749
1 705 6.506 24 4 2.845
BOARD_ATND
0 317 74.453 100 30 12.751
1 705 73.734 100 30 12.801
BUSY_DIR
0 317 74.838 100 0 21.791
1 705 74.266 100 0 20.712
AUD_IND
0 317 69.468 100 15.666 18.777
1 705 68.883 100 12.195 19.258
RPTS
0 317 36031.1 391060 35.4 69711.63
1 705 24137.33 638725.4 0.2 63721.48
L_RPTS
0 317 3.890 5.592 1.549 0.880
1 705 3.540 5.805 -0.699 1.038
126
1 = Promoter Obs. Mean Max Min. Std. Dev.
0 = Non-Promoter
CEO_REM
0 317 200.842 6528.9 0.9 439.526
1 705 203.352 18820.9 0.3 1158.686
L_CEO_REM
0 317 1.918 3.815 -0.046 0.624
1 705 1.729 4.275 -0.523 0.624
NED_REM
0 317 13.707 156.2 0 26.463
1 705 9.294 301.8 0 28.316
L_NED_REM
0 317 0.568 2.194 -1 0.699
1 705 0.433 2.480 -1 0.601
DIV_DECN
0 317 67.422 3936.63 -166.79 311.599
1 705 31.399 451.67 -191.09 51.312
CAP_STRUC
0 317 34.578 635.941 0.007 76.735
1 705 17.867 319.248 0.003 33.568
OWN_CON
0 317 61.760 87.25 40.14 8.753
1 705 65.594 90.4 36.29 10.604
ROA
0 317 0.861 3.569 0.126 0.506
1 705 0.940 3.716 0.017 0.712
TQ
0 317 2.113 14.214 0.421 1.631
1 705 3.526 69.809 0.040 4.503
CF
0 317 10.193 35.186 -7.506 6.939
1 705 10.498 54.367 -129.412 12.053
127
4.3 Classification Analysis
Tables 4.4 and 4.5 present test for differences in corporate governance characteristics
between firms categorised on the basis of leadership style and promoter ownership
concentration. Before applying any statistical test for differences, the data on corporate
governance was tested for normality. The Shapiro-Wilk test for normality showed that
the data series are not normal (Annexures: Table A.1). The null hypothesis of the test
is that the data is normal. The p-values are significant at 5% level of confidence that
confirms the non-normal nature of the data set. Because of non-normal distribution of
the data non-parametric Mann-Whitney test is applied to assess the differences among
corporate governance characteristics between the previously specified categories.
The study uses real world data comprising of listed companies of different magnitudes
with respect to size, return, market capitalisation, liquidity, etc. Therefore, the data is
likely to follow various non-normal distributions, yet no method is applied to make the
data normal as it causes loss of valuable information and ability to draw meaningful
interpretations (Pande and Ansari, 2013). The non-parametric Mann-Whitney test for
difference between firms having CEO as chairman of the board and firms not having
CEO as chairman is conducted first, followed by test for difference between firms
having ownership concentrated to promoters as against to ownership concentrated to
non-promoters.
Table 4.4 for Mann-Whitney test results for grouping variable CEO duality shows no
significant difference for board size, board independence, meeting frequency of board,
attendance at board meeting, board busyness, related party transactions, and dividend
decision parameters of corporate governance. However the results suggested significant
difference exists for auditors’ independence, CEO remuneration, non-executive
directors’ remuneration, and capital structure and ownership concentration parameters
of corporate governance.
Table 4.5 for Mann-Whitney test results for grouping variable promoter ownership
concentration shows that significant difference exists for board size, board
independence, related party transactions, CEO remuneration, non-executive directors’
128
remuneration, capital structure and ownership concentration parameters of corporate
governance. However the results suggested no significant difference exists for meeting
frequency of the board, attendance at board meeting, board busyness, auditors’
independence and dividend decision parameters of corporate governance.
The non-parametric Mann-Whitney test results showed that few corporate governance
parameters differ significantly between the aforesaid categories. The study tries to
explore whether such differences are reflected in the financial performance parameters
is yet to be explored. To assess the impact of differences of the aforesaid categories on
the relationship between corporate governance and financial performance of firms the
study uses dummy variables for CEO duality and promoter ownership concentration
which are multiplied by corporate governance variables of significant differences to
create interaction terms. The generated variables are then used for moderated regression
analysis to know whether the differences between aforesaid categories impacting the
financial performance positively or negatively.
129
Table 4.4: Mann-Whitney Test: Grouping Variable – CEO Duality
CEO Duality - 366 obs.; Non-Duality – 656 obs.

Variables Statistics p-value
BOARD_SIZE 1.5965 0.1104
BOARD_IND 1.6524 0.0985
BOARD_MEET 1.6210 0.1050
BOARD_ATND 0.6267 0.5309
BUSY_DIR 1.2746 0.2025
CAP_STRUC 3.5550 0.0004
DIV_DECN 0.0871 0.9306
AUD_IND 2.4388 0.0147
L_RPTS 1.6603 0.0969
L_CEO_REM 2.4658 0.0137
L_NED_REM 6.4956 0.0000
OWN_CON 2.3090 0.0209
Table 4.5: Mann-Whitney Test: Grouping Variable – Promoter Concentration
Promoter Concentration - 705 obs.; Non-Promoter Concentration – 317 obs.

Variables Statistics p-value
BOARD_SIZE 3.2151 0.0013
BOARD_IND 5.4989 0.0000
BOARD_MEET 0.5378 0.5907
BOARD_ATND 0.9083 0.3637
BUSY_DIR 0.8159 0.4146
CAP_STRUC 5.2235 0.0000
DIV_DECN 0.2441 0.8071
AUD_IND 0.4187 0.6754
L_RPTS 4.9077 0.0000
L_CEO_REM 5.2921 0.0000
L_NED_REM 3.0151 0.0026
OWN_CON 5.4835 0.0000
130
4.4 Panel Unit Root Test
The study applied Levin, Lin and Chu (LLC) panel unit root test. The null hypothesis
for LLC unit root test for panel assumes presence of unit root. The test applied on the
variables of the study revealed that the panel data is free from unit root problem. The
data were found to be stationary at I(0). The results for LLC test are summarised in
Table 4.6. The stationarity of data implies that there is no need to take the differences
of the variables and estimation of equation can be done with variables at their base
values.
Table 4.6: Levin, Lin and Chu Test for Panel Unit Root
Variables Test Statistics p-value

BOARD_SIZE -36.7693 0.0000
BOARD_IND -33.7738 0.0000
BOARD_ATND -29.9047 0.0000
BOARD_MEET -36.0974 0.0000
BUSY_DIR -34.1011 0.0000
CAP_STRUC -181.842 0.0000
DIV_DECN -49.8789 0.0000
AUD_IND -32.7375 0.0000
L_RPTS -35.1008 0.0000
L_CEO_REM -38.7000 0.0000
L_NED_REM -41.2276 0.0000
OWN_CON -32.5956 0.0000
L_SIZE_TA -36.1958 0.0000
GROWTH -41.2646 0.0000
AGE -34.1066 0.0000
ROA -25.6956 0.0000
TQ -41.0514 0.0000
CF -45.6425 0.0000
131
4.5 Regression Analysis
The regression analysis is carried for estimating the models and knowing the impact of
corporate governance variables on financial performance of Indian companies. The
equation estimation is done as explained in the following sections. The models are
tested for various checks before estimation.
4.5.1 Diagnostic Tests
The diagnostic tests are conducted to assess the validity of the models. As these tests
are model specific, we conducted these tests for each model. Therefore, each model is
tested for multicollinearity, heteroskedasticity and autocorrelation.
4.5.1.1 Multicollinearity Test
The first diagnostic test we conducted is to check for the presence of multicollinearity.
The correlation matrix is developed for all the variables. Table 4.7 contains information
on multicollinearity test. The table shows that the highest collinearity for the explained
variable ROA is with explanatory variable L_SIZE_TA which is -19.1%. In the same
way, the highest collinearity for explained variable TQ is also with the explanatory
variable L_SIZE_TA which is 44.9%. The highest collinearity of explained variable CF
is with the explanatory variable L_CEO_REM 19.5%. It suggests no multicollinearity
problem. However, the explanatory variables DD and CAP_STRUC are found to be
correlated at 60.5% level, followed by BOARD MEET and L_SIZE_TA at 47.2% and
BOARD_SIZE and L_SIZE_TA at 41.5%. The correlation between DD and
CAP_STRUC is a bit alarming. So, to confirm the severity of correlation we further
checked Variance Inflation Factor (VIF). It is required because the problem of
multicollinearity can impact the parameters of a regression model (Uwuigbe et al.,
2012). Following this notion, we further confirmed our findings of the pairwise
correlation analysis by conducting variance inflation factor analysis. The results for VIF
is presented in Table 4.8. The highest value of variance inflation factor is 2.069 for
132
L_SIZE_TA and lowest tolerance value is 0.483 for the same variable. A tolerance
value less than 0.1 and a VIF value greater than 10 shows severe multicollinearity and
calls for corrective steps (Uwuigbe et al., 2012). The results confirm that data is free
from the problem of multicollinearity.
133
Table 4.7: Correlations Matrix of the Variables entered into Regression Analysis
BOARD BOARD DIVER DUALI BOARD BOARD BUSY_ AUD_I L_RPT CAP_S DIV_ L_CE L_NED OWN_C PROMO L_SIZE GRO
Variables _SIZE _IND SITY TY _MEET _ATND DIR ND S TRUC DECN O_RE _REM ON _D _TA WTH AGE ROA TQ CF
BOARD_SIZE 1.000
BOARD_IND -0.284 1.000
DIVERSITY 0.171 0.031 1.000
DUALITY 0.063 0.059 0.042 1.000
BOARD_MEET 0.388 -0.209 0.014 0.137 1.000
BOARD_ATND -0.371 0.299 -0.016 -0.016 -0.233 1.000
BUSY_DIR -0.190 0.241 0.043 -0.052 -0.058 0.309 1.000
AUD_IND -0.210 0.133 0.020 -0.079 -0.288 0.167 0.009 1.000
L_RPTS 0.090 -0.004 0.097 -0.062 -0.121 0.032 0.134 0.059 1.000
CAP_STRUC 0.056 0.040 -0.017 0.127 -0.021 -0.002 -0.053 -0.092 0.044 1.000
DIV_DECN 0.038 0.019 -0.003 0.066 -0.042 0.045 -0.063 -0.034 0.002 0.605 1.000
L_CEO_REM 0.157 0.047 0.195 -0.040 -0.149 0.200 0.045 0.135 0.267 0.174 0.138 1.000
L_NED_REM 0.165 0.104 0.196 -0.215 0.059 0.126 0.091 0.030 0.169 0.032 -0.007 0.262 1.000
OWN_CON 0.111 -0.025 -0.068 0.072 0.218 -0.025 0.008 -0.106 -0.157 -0.045 0.047 -0.055 0.059 1.000
PROMO_D -0.085 -0.163 -0.016 0.024 0.066 -0.026 -0.013 -0.014 -0.161 -0.150 -0.093 -0.139 -0.099 0.174 1.000
L_SIZE_TA 0.415 -0.092 0.085 0.190 0.469 -0.060 0.060 -0.224 0.355 0.168 0.014 0.109 0.227 0.146 -0.071 1.000
GROWTH 0.029 -0.007 0.039 0.059 0.009 -0.019 -0.009 0.025 0.061 0.054 0.000 0.000 0.008 -0.020 -0.029 0.054 1.000
AGE 0.199 -0.041 0.030 -0.056 0.091 0.010 -0.030 -0.082 0.093 0.138 0.051 0.135 0.125 -0.123 -0.247 0.185 -0.012 1.000
ROA 0.047 -0.136 0.015 -0.140 -0.041 -0.028 -0.020 0.055 0.114 -0.048 0.078 0.009 -0.043 -0.269 0.056 -0.191 -0.025 0.137 1.000
TQ -0.125 0.006 0.073 -0.109 -0.164 0.113 -0.053 0.131 -0.077 -0.107 -0.007 0.031 0.013 -0.037 0.167 -0.449 -0.006 -0.089 0.218 1.000
CF 0.029 -0.037 0.072 -0.112 -0.108 0.044 -0.063 0.118 0.029 -0.124 0.120 0.195 0.007 -0.097 0.013 -0.075 -0.025 0.036 0.339 0.033 1.000
134
Table 4.8: Variation Inflation Factors
Variable Collinearity Statistics

VIF Tolerance
BOARD_SIZE 1.726 0.579
BOARD_IND 1.227 0.815
DIVERSITY 1.113 0.899
DUALITY 1.192 0.839
BOARD_MEET 1.697 0.589
BOARD_ATND 1.446 0.692
BUSY_DIR 1.201 0.833
CAP_STRUC 1.774 0.564
DIV_DECN 1.645 0.608
AUD_IND 1.168 0.856
L_RPTS 1.455 0.687
L_CEO_REM 1.347 0.742
L_NED_REM 1.299 0.770
OWN_CON 1.152 0.868
L_SIZE_TA 2.069 0.483
GROWTH 1.016 0.984
AGE 1.126 0.888
4.5.1.2 Heteroscedasticity Test
The next diagnostic test applied is Breusch-Pagan-Godfrey test for heteroscedasticity

in panel data for all the three equations. The null hypothesis for the test is that the data
is homoscedastic which is desirable. The p-values for all the equations for the Breusch-
Pagan test for heteroscedasticity are statistically significant. Hence we rejected the null
hypothesis of homoscedasticity and concluded that the data is having the problem of
heteroscedasticity. The summarised result for the Breusch-Pagan-Godfrey test for
heteroscedasticity is presented in Table 4.9.
135
Table 4.9: Breusch-Pagan-Godfrey Test for Heteroskedasticity
Models H0: Homoscedasticity; H1: Heteroskedasticity

Test Statistics p-value
Model 1 91.015 0.0000
Model 2 60.491 0.0000
Model 3 168.165 0.0000
4.5.1.3 Serial Correlation Test
The next diagnostic test applied is Breusch-Godfrey LM Test for autocorrelation. The
null hypothesis for the test is that there is no serial correlation in the data which is
desirable. The p-values for model 2 and model 3 are not significant (p-values = 0.3986
and 0.5929 respectively) which means that these models are free from the problem of
serial correlation. However, the null hypothesis for model 1 with explained variable
ROA is significant (p-value = 0.0017) which means the model is having the problem of
serial correlation. The summarised result for the Wooldridge test for autocorrelation is
presented in Table 4.10.
Table 4.10: Breusch-Godfrey LM Test for Autocorrelation
Models H0: No serial correlation; H1: Serial correlation

Model 1 12.735 0.0017
Model 2 1.839 0.3986
Model 3 1.046 0.5929
In order to control the problems of heteroskedasticity and serial correlation, we have

estimated the robust standard errors in the models.
136
4.6 Model Specification Tests
The heterogeneity tests are conducted to know the existence of variations in cross-
section and time-series. Depending upon the results of heterogeneity tests Hausman
tests are conducted to choose between FEM and REM.
4.6.1 Heterogeneity Test
The null hypothesis for the Likelihood Ratio test is that no difference exists in
alphas/lambdas of the cross-sections/time-period. Heterogeneity Test results are
presented in Table 4.11. The test is significant for the cross-sections of all the three
models which shows that the heterogeneity is present in the alphas of the cross-sections
in the data. However, no such heterogeneity is detected in time-period. The results show
that the data cannot be pooled and panel data regression estimation is required for
hypotheses testing. Therefore, the study applies one-way variable intercept model in
cross-sections for the three models of the study.
Table 4.11: Likelihood Ratio Test for Heterogeneity
H0: No difference exists; H1: Difference exists

Likelihood Ratio Test Test Statistics p-value
Model 1 (ROA)
Cross-section 209.213 0.0004
Period 0.260 0.9997
Model 2 (TQ)
Period 2.307 0.8894
Model 3 (CF)
Period 6.128 0.409
137
4.6.2 Hausman Test
The presence of heterogeneity indicated that the study should check whether fixed
effect model is appropriate for the estimation of the models or random effect model is
appropriate. To choose between the two models the study applied Hausman Test under
the null hypothesis of REM is appropriate. The results of Hausman Test is shown in
Table 4.12. The p-value of the test for Model 1, Model 2 and Model 3 is significant. It
means the rejection of null hypothesis that REM is appropriate. Therefore, the study
applies one-way variable intercept model in cross-sections estimated by Fixed Effect
Model for all the three models of the study.
Table 4.12: Hausman Test for Random Effects
Model H0: REM is appropriate; H1: FEM is appropriate

Model 1 55.065 0.0000
Model 2 53.118 0.0000
Model 3 33.646 0.0139
The above results have determined the methods for estimation of the model as:
 Model 1 (ROA-1): One-way variable intercept model in cross-section estimated

by FEM
 Model 2 (TQ-1): One-way variable intercept model in cross-section estimated
by FEM
 Model 3 (CF-1): One-way variable intercept model in cross-section estimated
by FEM
The next step is to estimate the models as per the discussion and results for tests derived
so far.
138
4.7 Regression Results
The purpose of the study is to explore the impact of corporate governance parameters
on financial performance of Indian listed companies. The study argued that good
governance practices improve financial performance of companies. The internal
corporate governance is regulated by a mechanism called as the board of directors. The
study identified various aspects of good governance supposed to be implemented by a
competitive board of directors. This chapter presents the results derived from regression
analysis. The summarised panel data regression results are presented in Tables 4.13,
4.14, 4.15, 4.16, 4.17, 4.18 and 4.19.
4.7.1 Regression Results: ROA, TQ and CF
The regression results without introducing interaction dummy are presented in Table
4.13. The regression results for model ROA-1 shows that the BOARD_SIZE,
BOARD_IND, DIVERSITY, DUALITY, BOARD_MEET, BUSY_DIR,
CAP_STRUC, DIV_DECN, L_RPTS, L_NED_REM, OWN_CON, PROMO_D,
L_SIZE_TA and AGE are having significant impact on the regressand ROA. However,
no significant impact of BOARD_ATND, AUD_IND, L_CEO_REM, and GROWTH
is found on ROA. While, of the significant variables BOARD_SIZE, BOARD_MEET,
BUSY_DIR, DIV_DECN, L_RPTS, PROMO_D and AGE are having positively
impacted the ROA; BOARD_IND, DIVERSITY, DUALITY, CAP_STRUC,
L_NED_REM, OWN_CON and L_SIZE_TA negatively impacted the ROA.
The regression results for model TQ-1 shows that the BOARD_SIZE, BOARD_MEET,
BOARD_ATND, BUSY_DIR, L_RPTS, L_NED_REM, PROMO_D and L_SIZE_TA
are significantly impacting the market value of companies measured by TQ. No
significant impact of BOARD_IND, DIVERSITY, DUALITY, CAP_STRUC,
DIV_DECN, AUD_IND, L_CEO_REM, OWN_CON, GROWTH and AGE is found
on TQ. While BOARD_SIZE, BOARD_MEET, BOARD_ATND, L_RPTS,
L_NED_REM and PROMO_D impacted TQ positively and significantly, BUSY_DIR
and L_SIZE_TA impacted TQ negatively and significantly.
139
The regression results for model CF-1 shows that the DUALITY, BUSY_DIR,
CAP_STRUC, DIV_DECN, AUD_IND, L_CEO_REM, OWN_CON and PROMO_D
are significantly impacting the liquidity position of companies measured by CF. No
significant impact of BOARD_SIZE, BOARD_IND, DIVERSITY, BOARD_MEET,
BOARD_ATND, L_RPTS, L_NED_REM, L_SIZE_TA, GROWTH and AGE is found
on CF. While DUALITY, DIV_DECN, AUD_IND, L_CEO_REM and PROMO_D
impacted CF positively and significantly BUSY_DIR, CAP_STRUC and OWN_CON
impacted TQ negatively and significantly.
R-squares for models ROA-1, TQ-1 and CF-1 are 36.56%, 39.93% and 29.24%
respectively. The adjusted R-square for models ROA-1, TQ-1 and CF-1 are 24.51%,
28.52% and 15.79% respectively. The R-square of a regression model explains the
degree of variation in the dependent variable explained by the independent variables.
The R-square may keep increasing with every explanatory variable added to the model
irrespective of its significance in explaining the model. The adjusted R-square penalizes
for adding more explanatory variables to the model, which do not improve the existing
model.
BOARD_SIZE is found to be positively and significantly associated with ROA and TQ

at 1% level of significance, but no association of BOARD_SIZE is found with CF. The
coefficient of BOARD_SIZE is 0.038, that implies an increase in return of asset by
0.038 with every member added to the board. The regression results for TQ shows an
increase in the market value of the firm by 0.216 with every member added to the board.
BOARD_IND is found to be negatively and significantly impacted ROA at 1% level of
significance, but no such association of BOARD_IND is found with TQ and CF. The
results indicated a decrease of -0.005 in the return on assets with one percent increase
in the independence of the board. The regression results for gender DIVERSITY of
board has shown a negative and significant impact on ROA 1% level of significance.
The ROA is decreased by -0.08 with the presence of woman director on board. No
relationship of gender DIVERSITY is found with TQ and CF. The CEO DUALITY is
found to have an inverse relationship with accounting performance measure of ROA
and liquidity measure of CF at 1% level of significance and 5% level of significance
respectively. No relationship of DUALITY is found to have existed with market value
140
of TQ. The Indian firms with CEOs having vested with the responsibility of the board
chairmanship have shown a reduction in ROA by -0.096 and in CF by -1.861.
A positive and significant relationship of BOARD_MEET is found with ROA and TQ at

1% level of significance and 5% level of significance respectively. However,
BOARD_MEET is not having any significant relationship with CF. An increase of 0.039
in return on asset is reported with every board meeting held. In the same way, an
increase of 0.197 in the market value is shown by the results with every incremental
meeting held by a company. The results showed a positive and significant relationship
of BOARD_ATND with TQ at 1% level of significance. However, no significant
relationship of BOARD_ATND is found with ROA and CF. With an increase of 1% in
the attendance of directors an increase of 0.048 in the market value is exhibited by the
regression results. While, the regression results showed that the BUSY_DIR has a
positive and significant impact on ROA at 10% level of significance, a negative and
significant impact of BUSY_DIR is found on TQ and CF at 5% level of significance and
10% level of significance respectively. An increase of board busyness by 1% brought
an increase of 0.001 in ROA. A reduction of -0.010 in market value and a reduction of
-0.038 in the cash flows due to increase in board busyness is revealed by the regression
results.
CAP_STRUC is found to impact ROA and CF negatively and significantly at 1% level

of significance, however no such impact or relationship of CAP_STRUC is found with
TQ. A decrease in ROA by -0.002 and a decrease in CF by -0.071 with one unit increase
in debt is reported by the regression results. DIV_DECN is significantly and positively
affecting the ROA and CF at 1% level of significance and TQ at 5% level of
significance. An increase of 0.001 in ROA and an increase of 0.017 in CF is reported
due to an increase in dividend payment by the company. Similarly, an increase of 0.011
in TQ is witnessed because of an increase in dividend payment by the company.
AUD_IND is significantly and positively impacting CF at 1% level of significance,

though no significant impact of AUD_IND is found on ROA and TQ. An increase in
auditor independence by one percent brought an increase in CF by 0.041. L_RPTS is
significantly and positively impacting the ROA and TQ at 1% level of significance, but
no such relationship of L_RPTS with CF is shown by regression results. The regression
141
results showed that an increase of one percent in related party transactions brought
increase in ROA by 0.0014 (change in dependent variable due to change in independent
log transformed variable is given by β/100 = 0.137/100) and increase in TQ of firms by
0.0052 (0.515/100).
While L_CEO_REM is positively and significantly impacting CF at 1% level of

significance, no such significant impact is witnessed on ROA and TQ. The results
showed that one percent increment in CEO remuneration resulted in increase in cash
flows of Indian firms by 0.0379 (3.787/100). The Non-executive directors’
remuneration has showed a significant but inverse impact on ROA at 5% level of
significance but a significant and positive impact on TQ at 1% level of significance, no
such impact is witnessed on CF. The results showed that an increase of one percent in
non-executive directors’ remuneration brought a decrease in ROA by -0.0004 (-
0.038/100) but an increase of one percent in non-executive directors’ remuneration
brought an increase in TQ by 0.0052 (0.516/100).
OWN_CON is negatively and significantly impacting ROA and CF at 1% level of

significance however, no such impact is found on TQ. The results showed that an
increase of one percent in ownership concentration brought a decrease in ROA by -
0.015. Similarly, an increase of one percent in ownership concentration brought a
decrease in CF by -0.104. PROMO_D is having a positive and significant impact on all the
parameters of financial performance at 1% level of significance. The Indian firms which
are having promoter concentrated ownership have shown an increase in ROA by 0.217,
an increase in TQ by 1.54 and in CF by 1.846.
The size of the firms measured by the log of the total assets (L_SIZE_TA) has
significantly and negatively affected the ROA and TQ at 1% level of significance. No
such impact of L_SIZE_TA is found on CF. An increase in the size of the firm by one
percent shown to have reduced the ROA by -0.004 (-0.395/100) and reduction in CF
by -0.039 (-3.891/100). GROWTH is not impacting any financial performance
parameters. The firms’ AGE has found to have a significant and positive impact on
ROA, but no significant impact on TQ and CF is found. A rise in ROA by 0.003 is
reported with every year of existence achieved by firms.
142
Table 4.13: Fixed Effect Regression Results of ROA, TQ and CF
Independent Variables Dependent Variables

ROA-1 TQ-1 CF-1
CONSTANT 2.393 12.069 7.842
0.000*** 0.000*** 0.311
BOARD_SIZE 0.038 0.216 0.024

0.000*** 0.000*** 0.910
BOARD_IND -0.005 0.002 -0.021

0.000*** 0.723 0.380
DIVERSITY -0.080 0.019 0.455

0.004*** 0.872 0.419
DUALITY -0.096 0.047 -1.861

0.000*** 0.862 0.017**
BOARD_MEET 0.039 0.157 -0.197

0.000*** 0.026** 0.377
BOARD_ATND 0.003 0.048 0.017

0.187 0.000*** 0.553
BUSY_DIR 0.001 -0.010 -0.038

0.051* 0.022** 0.056*
CAP_STRUC -0.002 -0.001 -0.071

0.001*** 0.728 0.001***
DIV_DECN 0.001 0.011 0.017

0.001*** 0.028** 0.000***
AUD_IND 0.001 0.004 0.041

0.201 0.346 0.000***
L_RPTS 0.137 0.515 -0.204

0.000*** 0.004*** 0.638
L_CEO_REM -0.034 -0.157 3.787

0.251 0.602 0.000***
143
Independent Variables Dependent Variables
ROA-1 TQ-1 CF-1
L_NED_REM -0.038 0.516 -0.645
0.016** 0.003*** 0.273
OWN_CON -0.015 0.010 -0.104

0.000*** 0.254 0.000***
PROMO_D 0.217 1.540 1.846

0.000*** 0.000*** 0.000***
L_SIZE_TA -0.395 -3.891 0.828

0.000*** 0.000*** 0.761
GROWTH 0.000 0.000 0.001

0.789 0.561 0.772
AGE 0.003 -0.001 0.007

0.000*** 0.522 0.540
R-Squared 0.366 0.399 0.292
Adj. R-Squared 0.245 0.285 0.158
F-Statistic 3.034 3.500 2.175

0.000*** 0.000*** 0.000***
The table reports estimates from fixed effect regression of ROA, TQ and CF on corporate governance
and control variables. The p-values (in parentheses) are based on heteroskedasticity consistent robust
standard errors and asterisks denote significance level: * = 10%, ** = 5% and *** = 1%
144
4.7.2 Regression Results: ROA (Interaction Effect: DUALITY)
In the next step, interaction terms are introduced in regression analysis. First,
DUALITY is interacted with corporate governance variables to assess its impact on
ROA, TQ and CF. Then PROMO_D is interacted with corporate governance variables
to assess its impact on the ROA, TQ and CF.
The regression results for interaction effect of DUALITY on the relationship between
corporate governance variables and ROA is presented in Table 4.14. In the Model
ROA-2 DUALITY is interacted with AUD_IND (DUALITY*AUD_IND). In the main
regression (ROA-1) AUD_IND was not having a significant relationship with ROA.
But the results showed that there is a significant difference in the impact of AUD_IND
on ROA between firms with CEO Duality and firms with non-duality. The results
implied that the auditors’ independence is negatively and significantly impacting the
return on assets of a firm when the firm changes from non-duality to CEO Duality.
In the Model ROA-3 DUALITY is interacted with CAP_STRUC

(DUALITY*CAP_STRUC). The results showed that there is no significant difference
in the impact of CAP_STRUC on ROA between firms with CEO Duality and firms
with non-duality. DUALITY and CAP_STRUC are negatively significant in the main
regression (ROA-1), but the interaction of both the terms is insignificant which means
that the impact of DUALITY and CAP_STRUC on ROA is independent of each other.
In the Model ROA-4 DUALITY is interacted with L_CEO_REM

(DUALITY*L_CEO_REM). In the main regression (ROA-1) L_CEO_REM was not
having a significant relationship with ROA. But the results showed that there is a
significant difference in the impact of L_CEO_REM on ROA between firms with CEO
Duality and firms with non-duality. The results implied that the CEO remuneration is
negatively and significantly impacting the return on assets of a firm when the firm
changes from non-duality to CEO Duality.
In the Model ROA-5 DUALITY is interacted with L_NED_REM (DUALITY*

L_NED_REM). The results showed that there is a significant difference in the impact
of L_NED_REM on ROA between firms with CEO Duality and firms with non-duality.
DUALITY and L_NED_REM are negatively significant in the main regression (ROA-
145
1). The interaction between DUALITY and L_NED_REM is also significant. The
results implied that the non-executive directors’ remuneration is negatively and
significantly impacting the return on assets when the firm changes from non-duality to
CEO Duality.
In the Model ROA-6 DUALITY is interacted with OWN_CON (DUALITY*

OWN_CON). The results showed that there is a significant difference in the impact of
OWN_CON on ROA between firms with CEO Duality and firms with non-duality.
DUALITY and OWN_CON are negatively significant in the main regression (ROA-1).
The interaction between DUALITY and OWN_CON is also significant. The results
implied that the ownership concentration is negatively and significantly impacting the
return on assets of a firm when the firm changes from non-duality to CEO Duality.
146
Table 4.14: Fixed Effect Regression Results of ROA with Interaction terms
Modeled with CEO Duality
Independent Variables Dependent Variable: ROA
ROA-2 ROA-3 ROA-4 ROA-5 ROA-6
CONSTANT 2.476 2.451 2.411 2.317 1.574

0.000*** 0.000*** 0.000*** 0.0000*** 0.000***
DUALITY*AUD_IND -0.002 - - - -
0.000***
DUALITY*CAP_STRUC - 0.000 - - -
0.975
DUALITY*L_CEO_REM - - -0.041 - -
0.007***
DUALITY*L_NED_REM - - - -0.256 -
0.000***
DUALITY*OWN_CON - - - - -0.002
0.000***
BOARD_SIZE 0.038 0.040 0.037 0.041 0.037

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BOARD_IND -0.005 -0.006 -0.005 -0.005 -0.005

0.001*** 0.000*** 0.000*** 0.000*** 0.000***
DIVERSITY -0.078 -0.079 -0.084 -0.079 -0.054

0.006*** 0.006*** 0.002*** 0.004*** 0.149
BOARD_MEET 0.036 0.042 0.040 0.042 0.037

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BOARD_ATND 0.003 0.003 0.003 0.003 0.003

0.159 0.090* 0.176 0.150 0.159
BUSY_DIR 0.001 0.002 0.001 0.002 0.001

0.051* 0.018** 0.051** 0.006*** 0.219
CAP_STRUC -0.002 - -0.002 -0.002 -0.002

0.002*** 0.001*** 0.001*** 0.004***
DIV_DECN 0.001 0.000 0.001 0.001 0.000

0.000*** 0.037** 0.0004*** 0.000*** 0.002***
147
ROA-2 ROA-3 ROA-4 ROA-5 ROA-6
AUD_IND - 0.001 0.001 0.001 0.001

0.076* 0.253 0.310 0.034**
L_RPTS 0.141 0.150 0.135 0.145 0.161

0.000*** 0.0000*** 0.000*** 0.000*** 0.000***
L_CEO_REM -0.029 -0.051 - -0.032 -0.041

0.325 0.076* 0.305 0.222
L_NED_REM -0.043 -0.018 -0.036 - -0.075

0.006*** 0.109 0.074* 0.000***
OWN_CON -0.015 -0.014 -0.015 -0.015 -

0.000*** 0.000*** 0.000*** 0.000***
PROMO_D 0.216 0.222 0.214 0.208 0.175

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
L_SIZE_TA -0.403 -0.445 -0.400 -0.409 -0.429

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
GROWTH 0.000 0.000 0.000 0.000 0.000

0.963 0.571 0.779 0.786 0.781
AGE 0.003 0.003 0.003 0.003 0.004

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
R-Squared 0.368 0.350 0.364 0.373 0.330
Adj. R-Squared 0.249 0.228 0.244 0.255 0.204
F-Statistic 3.088 2.858 3.034 3.160 2.615

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
The table reports estimates from fixed effect regression of ROA on corporate governance and control
variables along with interaction effect of CEO Duality on the relationship between corporate
governance and ROA. The non-parametric Mann-Whitney test suggested significant differences exist
among AUD_IND, CAP_STRUC, L_CEO_REM, L_NED_REM and OWN_CON for grouping
variable CEO Duality. Based on the findings of non-parametric Mann-Whitney test the relationship
between corporate governance variables (AUD_IND, CAP_STRUC, L_CEO_REM, L_NED_REM
and OWN_CON) and ROA are examined for interaction effect of CEO Duality.
The p-values (in parentheses) are based on heteroskedasticity consistent robust standard errors and
asterisks denote significance level: * = 10%, ** = 5% and *** = 1%
148
4.7.3 Regression Results: TQ (Interaction Effect: DUALITY)
corporate governance variables and TQ is presented in Table 4.15. In the Model TQ-2
DUALITY is interacted with AUD_IND (DUALITY*AUD_IND). In the main
regression (TQ-1) AUD_IND was not having a significant relationship with TQ. Also,
the interaction effect of DUALITY and AUD_IND is insignificant which means that
the impact of DUALITY and AUD_IND on TQ is independent of each other.
In the Model TQ-3 DUALITY is interacted with CAP_STRUC (DUALITY*

CAP_STRUC). In the main regression (TQ-1) CAP_STRUC was not having a
significant relationship with TQ. Also, the interaction effect of DUALITY and
CAP_STRUC is insignificant which means that the impact of DUALITY and
CAP_STRUC on TQ is independent of each other.
In the Model TQ-4 DUALITY is interacted with L_CEO_REM (DUALITY*

L_CEO_REM). In the main regression (TQ-1) L_CEO_REM was not having a
significant relationship with TQ. But the results showed that there is a significant
difference in the impact of L_CEO_REM on ROA between firms with CEO Duality
and firms with non-duality. The results implied that the CEO remuneration is negatively
and significantly impacting the market value of a firm when the firm changes from non-
duality to CEO Duality.
In the Model TQ-5 DUALITY is interacted with L_NED_REM (DUALITY*

L_NED_REM). In the main regression (TQ-1) L_NED_REM was having a positively
significant relationship with TQ. But, the interaction effect of DUALITY and
L_NED_REM is insignificant which means that the impact of DUALITY and
L_NED_REM on TQ is independent of each other.
In the Model TQ-6 DUALITY is interacted with OWN_CON (DUALITY*

OWN_CON). In the main regression (TQ-1) OWN_CON was not having a significant
relationship with TQ. Also, the interaction effect of DUALITY and OWN_CON is
insignificant which means that the impact of DUALITY and OWN_CON on TQ is
independent of each other.
149
Table 4.15: Fixed Effect Regression Results of TQ with Interaction terms
Independent Variables Dependent Variable: TQ
TQ-2 TQ-3 TQ-4 TQ-5 TQ-6
CONSTANT 12.363 12.062 11.783 11.065 12.679

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
DUALITY*AUD_IND 0.000 - - - -
0.919
DUALITY*CAP_STRUC - -0.002 - - -
0.413
DUALITY*L_CEO_REM - - -0.183 - -
0.025**
DUALITY*L_NED_REM - - - 0.079 -
0.806
DUALITY*OWN_CON - - - - 0.003
0.445
BOARD_SIZE 0.215 0.217 0.213 0.228 0.216

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BOARD_IND 0.003 0.003 0.004 0.005 0.002

0.658 0.719 0.515 0.530 0.805
DIVERSITY 0.023 0.018 0.037 0.071 -0.003

0.852 0.893 0.769 0.579 0.978
BOARD_MEET 0.153 0.158 0.164 0.162 0.157

0.033** 0.013** 0.025** 0.030** 0.025**
BOARD_ATND 0.048 0.048 0.047 0.051 0.047

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BUSY_DIR -0.010 -0.010 -0.011 -0.010 -0.010

0.023** 0.022** 0.020** 0.058* 0.028**
CAP_STRUC -0.001 - -0.001 -0.001 -0.002

0.729 0.770 0.751 0.670
DIV_DECN 0.000 0.000 0.000 0.000 0.000

0.826 0.649 0.802 0.922 0.756
150
TQ-2 TQ-3 TQ-4 TQ-5 TQ-6
AUD_IND - 0.004 0.003 0.005 0.004

0.386 0.514 0.255 0.363
L_RPTS 0.521 0.509 0.501 0.531 0.504

0.003*** 0.002*** 0.001*** 0.003*** 0.005***
L_CEO_REM -0.141 -0.157 - -0.089 -0.154

0.645 0.590 0.762 0.603
L_NED_REM 0.505 0.487 0.420 - 0.564

0.002*** 0.002*** 0.001*** 0.002***
OWN_CON 0.009 0.009 0.010 0.013 -

0.270 0.308 0.232 0.142
PROMO_D 1.536 1.520 1.509 1.491 1.569

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
L_SIZE_TA -3.905 -3.882 -3.844 -3.843 -3.889

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
GROWTH 0.001 0.001 0.001 0.000 0.000

0.511 0.518 0.451 0.552 0.575
AGE -0.002 -0.002 -0.002 -0.001 -0.002

0.471 0.267 0.281 0.716 0.488
R-Squared 0.399 0.399 0.400 0.395 0.399
Adj. R-Squared 0.286 0.286 0.287 0.280 0.286
F-Statistic 3.522 3.527 3.539 3.457 3.525

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
The table reports estimates from fixed effect regression of TQ on corporate governance and control
151
4.7.4 Regression Results: CF (Interaction Effect: DUALITY)
corporate governance variables and CF is presented in Table 4.16. In the Model CF-2
DUALITY is interacted with AUD_IND (DUALITY*AUD_IND). In the main
regression (CF-1) AUD_IND was having a positively significant relationship with CF.
The results for interaction effect of DUALITY and AUD_IND showed that there is a
significant difference in the impact of AUD_IND on CF between firms with CEO
Duality and firms with non-duality. The results implied that the auditors’ independence
is negatively and significantly impacting the cash flows of a firm when the firm changes
from non-duality to CEO Duality.
In the Model CF-3 DUALITY is interacted with CAP_STRUC (DUALITY*

CAP_STRUC). In the main regression (CF-1) CAP_STRUC was having a negatively
significant relationship with CF. The results for interaction effect of DUALITY and
CAP_STRUC showed that there is a significant difference in the impact of
CAP_STRUC on CF between firms with CEO Duality and firms with non-duality. The
results implied that the capital structure decision of board is negatively and significantly
impacting the cash flows of a firm when the firm changes from non-duality to CEO
Duality.
In the Model CF-4 DUALITY is interacted with L_CEO_REM (DUALITY*

L_CEO_REM). In the main regression (CF-1) L_CEO_REM was having a positively
significant relationship with CF. But the interaction effect of DUALITY and
L_CEO_REM is insignificant which means that the impact of DUALITY and
L_CEO_REM on CF is independent of each other.
In the Model CF-5 DUALITY is interacted with L_NED_REM (DUALITY*

L_NED_REM). In the main regression (CF-1) L_NED_REM was having no significant
relationship with CF. The results for interaction effect of DUALITY and L_NED_REM
showed that there is a significant difference in the impact of L_NED_REM on CF
between firms with CEO Duality and firms with non-duality. The results implied that
the non-executive directors’ remuneration is negatively and significantly impacting the
cash flows of a firm when the firm changes from non-duality to CEO Duality.
152
In the Model CF-6 DUALITY is interacted with OWN_CON (DUALITY*
OWN_CON). In the main regression (CF-1) OWN_CON was having a negatively
significant relationship with CF. The results for interaction effect of DUALITY and
OWN_CON showed that there is a significant difference in the impact of OWN_CON
on CF between firms with CEO Duality and firms with non-duality. The results implied
that the ownership concentration of board is negatively and significantly impacting the
cash flows of a firm when the firm changes from non-duality to CEO Duality.
153
Table 4.16: Fixed Effect Regression Results of CF with Interaction terms
Independent Dependent Variable: CF
Variables CF-2 CF-3 CF-4 CF-5 CF-6
CONSTANT 12.053 9.369 8.169 8.688 2.188

0.067* 0.295 0.350 0.235 0.797
DUALITY*AUD -0.023 - - - -
_IND
0.084*
DUALITY*CAP - -0.038 - - -
_STRUC
0.002***
DUALITY*L_C - - -0.136 - -
EO_REM
0.753
DUALITY*L_N - - - -1.481 -
ED_REM
0.063*
DUALITY*OW - - - - -0.032
N_CON
0.004***
BOARD_SIZE 0.011 0.067 0.196 0.026 0.013

0.958 0.741 0.261 0.905 0.951
BOARD_IND -0.017 -0.041 -0.028 -0.028 -0.022

0.445 0.105 0.222 0.302 0.349
DIVERSITY 0.408 0.428 0.537 0.349 0.603

0.433 0.459 0.368 0.511 0.346
BOARD_MEET -0.270 -0.101 -0.370 -0.184 -0.206

0.242 0.638 0.173 0.441 0.374
BOARD_ATND 0.023 0.033 0.056 0.015 0.018

0.389 0.209 0.005*** 0.593 0.543
BUSY_DIR -0.038 -0.034 -0.039 -0.034 -0.040

0.056* 0.104 0.075* 0.106 0.054*
CAP_STRUC -0.072 - -0.067 -0.073 -0.068

0.002*** 0.002*** 0.001*** 0.001***
DIV_DECN 0.017 0.012 0.017 0.017 0.016

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
154
Independent Dependent Variable: CF
Variables CF-2 CF-3 CF-4 CF-5 CF-6
AUD_IND - 0.047 0.055 0.041 0.044

0.009*** 0.001*** 0.001*** 0.001***
L_RPTS -0.101 0.017 0.228 -0.151 -0.068

0.817 0.971 0.540 0.739 0.870
L_CEO_REM 3.945 3.342 - 3.754 3.732

0.000*** 0.000*** 0.000*** 0.000***
L_NED_REM -0.523 -0.578 0.154 - -0.853

0.382 0.345 0.789 0.156
OWN_CON -0.108 -0.090 -0.099 -0.107 -

0.000*** 0.000*** 0.000*** 0.000***
PROMO_D 1.847 1.652 1.907 1.860 1.591

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
L_SIZE_TA 0.445 -0.288 0.550 0.537 0.584

0.867 0.919 0.848 0.846 0.829
GROWTH 0.001 0.001 -0.001 0.000 0.000

0.586 0.746 0.736 0.888 0.805
AGE 0.006 -0.006 0.016 0.007 0.010

0.591 0.390 0.216 0.541 0.414
R-Squared 0.287 0.239 0.258 0.289 0.286
Adj. R-Squared 0.153 0.096 0.119 0.155 0.152
F-Statistic 2.137 1.668 1.848 2.154 2.128

0.000*** 0.000*** 0.000*** 0.000*** 0.000***
The table reports estimates from fixed effect regression of CF on corporate governance and control
155
4.7.5 Regression Results: ROA (Interaction Effect: PROMO_D)
The regression results for interaction effect of PROMO_D on the relationship between
corporate governance variables and ROA is presented in Table 4.17. In the Model
ROA-7 PROMO_D is interacted with BOARD_SIZE (PROMO_D*BOARD_SIZE).
In the main regression (ROA-1) BOARD_SIZE was having a positively significant
relationship with ROA. The regression results of interaction effect showed that there is
a significant difference in the impact of BOARD_SIZE on ROA between firms having
promoters. The results implied that the size of the board is positively and significantly
impacting the return on assets of a firm when the firm changes its ownership
concentration from non-promoters to promoters.
In the Model ROA-8 PROMO_D is interacted with BOARD_ IND (PROMO_D*

BOARD_ IND). In the main regression (ROA-1) BOARD_ IND was having a
negatively significant relationship with ROA. The regression results of interaction
effect showed that there is a significant difference in the impact of BOARD_ IND on
ROA between firms having ownership concentrated with promoters and ownership
concentrated with non-promoters. The results implied that the board independence is
positively and significantly impacting the return on assets of a firm when the firm
changes its ownership concentration from non-promoters to promoters.
In the Model ROA-9 PROMO_D is interacted with CAP_STRUC (PROMO_D*

CAP_STRUC). In the main regression (ROA-1) CAP_STRUC was having a negatively
significant relationship with ROA. The regression results of interaction effect showed
that there is a significant difference in the impact of CAP_STRUC on ROA between
firms having ownership concentrated with promoters and ownership concentrated with
non-promoters. The results implied that the capital structure decision is negatively and
significantly impacting the return on assets of a firm when the firm changes its
ownership concentration from non-promoters to promoters.
In the Model ROA-10 PROMO_D is interacted with L_RPTS (PROMO_D*L_RPTS).

In the main regression (ROA-1) L_RPTS was having a positively significant
relationship with ROA. The regression results of interaction effect showed that there is
156
a significant difference in the impact of L_RPTS on ROA between firms having
promoters. The results implied that the related party transaction is positively and
In the Model ROA-11 PROMO_D is interacted with L_CEO_REM (PROMO_D*

L_CEO_REM). In the main regression (ROA-1) L_CEO_REM was having no
that there is a significant difference in the impact of L_CEO_REM on ROA between
non-promoters. The results implied that the CEO remuneration is positively and
In the Model ROA-12 PROMO_D is interacted with L_NED_REM (PROMO_D*

L_NED_REM). In the main regression (ROA-1) L_NED_REM was having a
negatively significant relationship with ROA. The regression results of interaction
effect showed that there is a significant difference in the impact of L_NED_REM on
ROA between firms having ownership concentrated with promoters and ownership
concentrated with non-promoters. The results implied that the non-executive directors’
remuneration is positively and significantly impacting the return on assets of a firm
when the firm changes its ownership concentration from non-promoters to promoters.
In the Model ROA-13 PROMO_D is interacted with OWN_CON (PROMO_D*

OWN_CON). In the main regression (ROA-1) OWN_CON was having a negatively
that there is a significant difference in the impact of OWN_CON on ROA between
non-promoters. The results implied that the ownership concentration is positively and
157
Table 4.17: Fixed Effect Regression Results of ROA with Interaction terms Modeled with Promoter Concentration
ROA-7 ROA-8 ROA-9 ROA-10 ROA-11 ROA-12 ROA-13
CONSTANT 2.713 2.274 2.547 2.660 2.562 2.724 1.763

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
PROMO_D*BOARD_SIZE 0.021 - - - - - -
0.000***
PROMO_D*BOARD_IND - 0.003 - - - - -
0.000***
PROMO_D*CAP_STRUC - - -0.002 - - - -
0.001***
PROMO_D*L_RPTS - - - 0.067 - - -
0.000***
PROMO_D*L_CEO_REM - - - - 0.066 - -
0.000***
PROMO_D*L_NED_REM - - - - - 0.055 -
0.001***
PROMO_D*OWN_CON - - - - - - 0.001
0.049**
158
BOARD_SIZE - 0.041 0.037 0.039 0.034 0.034 0.035

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BOARD_IND -0.006 - -0.007 -0.005 -0.006 -0.007 -0.006

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
DIVERSITY -0.059 -0.097 -0.060 -0.084 -0.081 -0.085 -0.051

0.052* 0.001*** 0.013** 0.004*** 0.001*** 0.001*** 0.163
DUALITY -0.093 -0.128 -0.125 -0.095 -0.099 -0.073 -0.109

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BOARD_MEET 0.042 0.042 0.044 0.030 0.043 0.040 0.038

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BOARD_ATND 0.001 0.002 0.004 0.002 0.002 0.002 0.003

0.600 0.393 0.073* 0.343 0.283 0.229 0.149
BUSY_DIR 0.001 0.001 0.002 0.002 0.001 0.001 0.001

0.192 0.198 0.018** 0.020** 0.033** 0.035** 0.164
CAP_STRUC -0.002 -0.002 - -0.002 -0.002 -0.002 -0.002

0.000*** 0.002*** 0.000*** 0.000*** 0.001*** 0.005***
159
DIV_DECN 0.001 0.001 0.000 0.001 0.001 0.001 0.000

0.000*** 0.000*** 0.009*** 0.000*** 0.000*** 0.000*** 0.002***
AUD_IND 0.001 0.001 0.001 0.001 0.001 0.001 0.001

0.130 0.312 0.194 0.101 0.334 0.245 0.026**
L_RPTS 0.140 0.141 0.138 - 0.123 0.128 0.162

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
L_CEO_REM -0.006 -0.035 -0.044 -0.012 - -0.043 -0.042

0.805 0.234 0.087* 0.678 0.166 0.210
L_NED_REM -0.021 -0.063 -0.059 -0.026 -0.051 - -0.072

0.132 0.000*** 0.000*** 0.146 0.002*** 0.000***
OWN_CON -0.015 -0.015 -0.013 -0.017 -0.015 -0.014

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
L_SIZE_TA -0.351 -0.392 -0.405 -0.322 -0.388 -0.399 -0.439

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
GROWTH 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.935 0.690 0.342 0.982 0.851 0.626 0.686
160
Dependent Variable: ROA
AGE 0.004 0.003 0.002 0.003 0.003 0.002 0.003

0.000*** 0.000*** 0.001*** 0.000*** 0.000*** 0.000*** 0.000***
R-Squared 0.358 0.347 0.342 0.353 0.356 0.349 0.316
Adj. R-Squared 0.237 0.224 0.218 0.231 0.234 0.226 0.187
F-Statistic 2.958 2.819 2.760 2.898 2.928 2.844 2.450

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
The table reports estimates from fixed effect regression of ROA on corporate governance and control variables along with interaction effect of Promoter Ownership
Concentration on the relationship between corporate governance and ROA. The non-parametric Mann-Whitney test suggested significant differences exist among
BOARD_SIZE, BOARD_IND, CAP_STRUC, L_RPTS, L_CEO_REM, L_NED_REM and OWN_CON for grouping variable Promoter Ownership Concentration. Based
on the findings of non-parametric Mann-Whitney test the relationship between corporate governance variables (BOARD_SIZE, BOARD_IND, CAP_STRUC, L_RPTS,
L_CEO_REM, L_NED_REM and OWN_CON) and ROA are examined for interaction effect of Promoter Ownership Concentration.
The p-values (in parentheses) are based on heteroskedasticity consistent robust standard errors and asterisks denote significance level: * = 10%, ** = 5% and *** = 1%
161
4.7.6 Regression Results: TQ (Interaction Effect: PROMO_D)
corporate governance variables and TQ is presented in Table 4.18. In the Model TQ-7
PROMO_D is interacted with BOARD_SIZE (PROMO_D*BOARD_SIZE). In the
main regression (TQ-1) BOARD_SIZE was having a positively significant relationship
with TQ. The regression results of interaction effect showed that there is a significant
difference in the impact of BOARD_SIZE on TQ between firms having ownership
concentrated with promoters and ownership concentrated with non-promoters. The
results implied that the size of the board is positively and significantly impacting the
market value of a firm when the firm changes its ownership concentration from non-
promoters to promoters.
In the Model TQ-8 PROMO_D is interacted with BOARD_IND

(PROMO_D*BOARD_IND). In the main regression (TQ-1) BOARD_IND was having
no significant relationship with TQ. The regression results of interaction effect showed
that there is a significant difference in the impact of BOARD_IND on TQ between
non-promoters. The results implied that the board independence is positively and
significantly impacting the market value of a firm when the firm changes its ownership
In the Model TQ-9 PROMO_D is interacted with CAP_STRUC (PROMO_D*

CAP_STRUC). In the main regression (TQ-1) CAP_STRUC was not having a
significant relationship with TQ. Also, the interaction effect of PROMO_D and
CAP_STRUC is insignificant which means that the impact of PROMO_D and
CAP_STRUC on TQ is independent of each other.
In the Model TQ-10 PROMO_D is interacted with L_RPTS (PROMO_D* L_RPTS).

In the main regression (TQ-1) L_RPTS was having a positively significant relationship
with TQ. The regression results of interaction effect showed that there is a significant
difference in the impact of L_RPTS on TQ between firms having ownership
results implied that the related party transaction is positively and significantly
162
impacting the market value of a firm when the firm changes its ownership concentration
from non-promoters to promoters.
In the Model TQ-11 PROMO_D is interacted with L_CEO_REM (PROMO_D*

L_CEO_REM). In the main regression (TQ-1) L_CEO_REM was having no significant
relationship with TQ. The regression results of interaction effect showed that there is a
significant difference in the impact of L_CEO_REM on TQ between firms having
promoters. The results implied that the CEO remuneration is positively and
In the Model TQ-12 PROMO_D is interacted with L_NED_REM (PROMO_D*

L_NED_REM). In the main regression (TQ-1) L_NED_REM was having a positively
significant relationship with TQ. The regression results of interaction effect showed
that there is a significant difference in the impact of L_NED_REM on TQ between
non-promoters. The results implied that the non-executive directors’ remuneration is
positively and significantly impacting the market value of a firm when the firm changes
its ownership concentration from non-promoters to promoters.
In the Model TQ-13 PROMO_D is interacted with OWN_CON (PROMO_D*

OWN_CON). In the main regression (TQ-1) OWN_CON was having no significant
relationship with TQ. The regression results of interaction effect showed that there is a
significant difference in the impact of OWN_CON on TQ between firms having
promoters. The results implied that the ownership concentration is positively and
163
Table 4.18: Fixed Effect Regression Results of TQ with Interaction terms Modeled with Promoter Concentration
TQ-7 TQ-8 TQ-9 TQ-10 TQ-11 TQ-12 TQ-13
CONSTANT 14.090 12.519 13.310 13.450 13.249 12.857 12.684

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
0.000***
0.000***
PROMO_D*CAP_STRUC - - 0.009 - - - -
0.166
PROMO_D*L_RPTS - - - 0.364 - - -
0.000***
PROMO_D*L_CEO_REM - - - - 0.468 - -
0.000***
PROMO_D*L_NED_REM - - - - - 0.731 -
0.000***
PROMO_D*OWN_CON - - - - - - 0.024
0.000***
164
TQ-7 TQ-8 TQ-9 TQ-10 TQ-11 TQ-12 TQ-13
BOARD_SIZE - 0.218 0.205 0.218 0.185 0.197 0.211

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BOARD_IND -0.003 - -0.006 0.001 -0.002 -0.005 0.003

0.656 0.307 0.934 0.727 0.463 0.683
DIVERSITY 0.135 -0.025 0.050 0.010 0.014 0.041 0.042

0.219 0.836 0.698 0.936 0.898 0.678 0.732
DUALITY 0.054 -0.014 0.001 0.048 0.028 0.001 0.035

0.847 0.959 0.998 0.860 0.915 0.997 0.899
BOARD_MEET 0.178 0.168 0.184 0.137 0.187 0.174 0.161

0.018** 0.015** 0.010** 0.031** 0.017** 0.023** 0.022**
BOARD_ATND 0.038 0.044 0.051 0.046 0.042 0.048 0.048

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
BUSY_DIR -0.012 -0.012 -0.009 -0.009 -0.009 -0.009 -0.011

0.008*** 0.010** 0.056* 0.046** 0.053* 0.048** 0.017**
CAP_STRUC -0.002 -0.002 - -0.003 -0.002 -0.002 -0.001

0.606 0.700 0.534 0.614 0.694 0.798
165
TQ-7 TQ-8 TQ-9 TQ-10 TQ-11 TQ-12 TQ-13
DIV_DECN 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.623 0.850 0.700 0.759 0.879 0.975 0.807
AUD_IND 0.004 0.003 0.004 0.004 0.003 0.004 0.005

0.358 0.401 0.324 0.279 0.594 0.353 0.224
L_RPTS 0.521 0.525 0.495 - 0.421 0.475 0.534

0.003*** 0.002*** 0.002*** 0.006*** 0.009*** 0.003***
L_CEO_REM -0.009 -0.151 -0.188 -0.103 - -0.141 -0.167

0.972 0.612 0.522 0.707 0.635 0.576
L_NED_REM 0.594 0.462 0.424 0.543 0.433 - 0.518

0.003*** 0.012** 0.027** 0.003*** 0.004*** 0.005***
OWN_CON 0.010 0.012 0.020 0.006 0.012 0.018 -

0.233 0.162 0.030** 0.481 0.160 0.052*
L_SIZE_TA -3.656 -3.875 -3.995 -3.686 -3.845 -3.826 -3.931

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
GROWTH 0.001 0.000 0.000 0.001 0.001 0.000 0.000

0.461 0.603 0.580 0.478 0.525 0.704 0.538
166
Independent Dependent Variable: TQ
Variables TQ-7 TQ-8 TQ-9 TQ-10 TQ-11 TQ-12 TQ-13
AGE -0.001 -0.003 -0.009 -0.002 -0.006 -0.006 -0.001

0.791 0.265 0.000*** 0.308 0.025** 0.013** 0.721
R-Squared 0.386 0.395 0.380 0.390 0.386 0.381 0.401
Adj. R-Squared 0.270 0.281 0.263 0.275 0.270 0.264 0.288
F-Statistic 3.334 3.459 3.245 3.396 3.331 3.258 3.555

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
The table reports estimates from fixed effect regression of TQ on corporate governance and control variables along with interaction effect of Promoter Ownership
L_CEO_REM, L_NED_REM and OWN_CON) and TQ are examined for interaction effect of Promoter Ownership Concentration.
167
4.7.7 Regression Results: CF (Interaction Effect: PROMO_D)
corporate governance variables and CF is presented in Table 4.19. In the Model CF-7
PROMO_D is interacted with BOARD_SIZE (PROMO_D*BOARD_SIZE). In the
main regression (CF-1) BOARD_SIZE was not having a significant relationship with
CF. The regression results of interaction effect showed that there is a significant
difference in the impact of BOARD_SIZE on CF between firms having ownership
results implied that the size of the board is positively and significantly impacting the
cash flows of a firm when the firm changes its ownership concentration from non-
promoters to promoters.
In the Model CF-8 PROMO_D is interacted with BOARD_IND

(PROMO_D*BOARD_IND). In the main regression (CF-1) BOARD_IND was not
having a significant relationship with CF. The regression results of interaction effect
showed that there is a significant difference in the impact of BOARD_IND on CF
between firms having ownership concentrated with promoters and ownership
concentrated with non-promoters. The results implied that the board independence is
positively and significantly impacting the cash flows of a firm when the firm changes
its ownership concentration from non-promoters to promoters.
In the Model CF-9 PROMO_D is interacted with CAP_STRUC (PROMO_D*

CAP_STRUC). In the main regression (CF-1) CAP_STRUC was having a negatively
significant relationship with CF. The regression results of interaction effect showed that
there is a significant difference in the impact of CAP_STRUC on CF between firms
having ownership concentrated with promoters and ownership concentrated with non-
promoters. The results implied that the capital structure is negatively and significantly
impacting the cash flows of a firm when the firm changes its ownership concentration
In the Model CF-10 PROMO_D is interacted with L_RPTS (PROMO_D* L_RPTS).

In the main regression (CF-1) L_RPTS was not having a significant relationship with
CF. The regression results of interaction effect showed that there is a significant
168
difference in the impact of L_RPTS on CF between firms having ownership
results implied that the related party transaction is positively and significantly
impacting the cash flows of a firm when the firm changes its ownership concentration
In the Model CF-11 PROMO_D is interacted with L_CEO_REM (PROMO_D*

L_CEO_REM). In the main regression (CF-1) L_CEO_REM was having a positively
there is a significant difference in the impact of L_CEO_REM on CF between firms
promoters. The results implied that the CEO remuneration is positively and
significantly impacting the cash flows of a firm when the firm changes its ownership
In the Model CF-12 PROMO_D is interacted with L_NED_REM (PROMO_D*

L_NED_REM). In the main regression (CF-1) L_NED_REM was not having a
significant relationship with CF. Also, the interaction effect of PROMO_D and
L_NED_REM is insignificant which means that the impact of PROMO_D and
L_NED_REM on CF is independent of each other.
In the Model CF-13 PROMO_D is interacted with OWN_CON (PROMO_D*

OWN_CON). In the main regression (CF-1) OWN_CON was having a negatively
there is a significant difference in the impact of OWN_CON on CF between firms
promoters. The results implied that the ownership concentration is positively and
significantly impacting the cash flows of a firm when the firm changes its ownership
169
Table 4.19: Fixed Effect Regression Results of CF with Interaction terms Modeled with Promoter Concentration
Independent Variables Dependent Variable: CF
CF-7 CF-8 CF-9 CF-10 CF-11 CF-12 CF-13
CONSTANT 8.669 7.518 8.476 8.296 7.959 11.648 3.256

0.311 0.346 0.266 0.313 0.330 0.108 0.697
0.000***
0.001***
PROMO_D*CAP_STRUC - - -0.082 - - - -
0.001***
PROMO_D*L_RPTS - - - 0.418 - - -
0.000***
PROMO_D*L_CEO_REM - - - - 2.080 - -
0.000***
PROMO_D*L_NED_REM - - - - - 0.901 -
0.105
PROMO_D*OWN_CON - - - - - - 0.016
0.000***
170
CF-7 CF-8 CF-9 CF-10 CF-11 CF-12 CF-13
BOARD_SIZE 0.038 0.014 0.040 0.159 -0.032 -0.002

0.851 0.948 0.847 0.377 0.881 0.992
BOARD_IND -0.018 - -0.047 -0.019 -0.006 -0.038 -0.028

0.465 0.014** 0.398 0.821 0.132 0.239
DIVERSITY 0.336 0.344 1.041 0.463 0.513 0.331 0.664

0.367 0.521 0.114 0.414 0.388 0.538 0.305
DUALITY -1.895 -2.033 -2.753 -1.839 -1.633 -1.455 -1.949

0.012** 0.014** 0.000*** 0.020** 0.029** 0.051* 0.011**
BOARD_MEET -0.224 -0.175 -0.075 -0.142 -0.323 -0.191 -0.205

0.386 0.429 0.692 0.450 0.208 0.404 0.378
BOARD_ATND 0.024 0.010 0.031 0.022 0.040 0.010 0.018

0.249 0.728 0.216 0.398 0.086* 0.740 0.553
BUSY_DIR -0.036 -0.042 -0.032 -0.039 -0.041 -0.038 -0.040

0.029** 0.039** 0.071* 0.066* 0.066* 0.057* 0.047**
CAP_STRUC -0.070 -0.071 - -0.070 -0.067 -0.072 -0.068

0.001*** 0.001*** 0.001*** 0.002*** 0.001*** 0.001***
171
CF-7 CF-8 CF-9 CF-10 CF-11 CF-12 CF-13
DIV_DECN 0.017 0.017 0.005 0.017 0.018 0.017 0.016

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
AUD_IND 0.042 0.040 0.046 0.039 0.051 0.040 0.045

0.000*** 0.001*** 0.000*** 0.000*** 0.001*** 0.001*** 0.001***
L_RPTS -0.145 -0.176 -0.044 - 0.030 -0.296 -0.011

0.732 0.694 0.922 0.940 0.515 0.981
L_CEO_REM 3.694 3.785 3.456 3.643 - 3.637 3.719

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
L_NED_REM -0.676 -0.778 -1.039 -0.679 -0.156 - -0.868

0.276 0.234 0.093* 0.262 0.789 0.150
OWN_CON -0.107 -0.102 -0.080 -0.096 -0.113 -0.101 -

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
L_SIZE_TA 0.622 0.850 0.628 0.424 0.906 0.742 0.490

0.795 0.757 0.812 0.862 0.749 0.784 0.857
GROWTH 0.001 0.000 -0.002 0.001 0.000 0.000 0.000

0.742 0.807 0.352 0.793 0.920 0.877 0.820
172
CF-7 CF-8 CF-9 CF-10 CF-11 CF-12 CF-13
AGE 0.005 0.005 -0.017 0.006 0.020 0.000 0.008

0.496 0.659 0.021** 0.579 0.151 0.999 0.456
R-Squared 0.294 0.290 0.273 0.292 0.284 0.288 0.284
Adj. R-Squared 0.160 0.157 0.135 0.158 0.149 0.154 0.148
F-Statistic 2.204 2.169 1.987 2.182 2.108 2.147 2.099

0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***
The table reports estimates from fixed effect regression of CF on corporate governance and control variables along with interaction effect of Promoter Ownership
L_CEO_REM, L_NED_REM and OWN_CON) and CF are examined for interaction effect of Promoter Ownership Concentration.
173
Summary
A significant difference in the auditor’s independence, capital structure decision, CEO

remuneration, non-executive directors’ remuneration and ownership concentration is
found between firms with CEO Duality and firms with non-duality. Similarly,
significant differences in the board size, board independence, capital structure decision,
related party transactions, CEO remuneration, non-executive directors’ remuneration
and ownership concentration is found between firms having ownership concentrated
with promoters and ownership concentrated with non-promoters. While, the findings of
the main regression results indicated that the board independence, diversity, capital
structure decision, ownership concentration and size of the firms are negatively
impacting the financial performance of Indian firms; board size, board meetings,
attendance of directors at board meeting, dividend decision, auditors independence,
related party transactions Promoter ownership concentration and age of the firm are
positively affecting the financial performance of Indian firms. Mixed results are found
for the impact of CEO duality, capital structure and non-executive directors’
remuneration on financial performance of Indian firms. The findings on the interaction
effect highlighted the adverse impact of CEO duality on the relationship between
various key corporate governance parameters and financial performance. On the
contrary, Ownership concentration with promoters positively contributed to the
financial performance and wealth creation for shareholders of Indian firms.
174
5.1 Overview
The chapter discusses in detail the findings from the data analysis along with
conclusions and suggestions which is also based on data analysis. It also suggests
various areas of improvements for corporate governance practices among Indian firms.
The limitations of the study are explained followed by opportunities for future research
based on the findings and limitations of the present study.
5.2 Discussion
At the core of the legal foundations of corporate laws, the board of directors are
described as having an important and strategic role for establishing corporate
governance mechanism across the firms (Bainbridge, 2007). Therefore, the study
identified various key dimensions of corporate governance that are supposed to be
implemented through the mechanism of board of directors for achieving desired
objectives of corporate governance system. The study attempted to examine all the
relevant facets of a board that are important for the implementation of a good corporate
governance system, along with the factors that could hamper the effectiveness of a
board. The study also attempted to identify differences among corporate governance
characteristics due to ownership concentration of promoters and power concentration
of CEOs of Indian firms. The study has highlighted findings which are valuable for
improving the corporate governance system among the Indian firms.
1. Board Structure
The board structure measured as board size is characterized as problematic with respect
to communication and coordination when there are large number of members on the
board (Lipton and Lorsch, 1992; Jensen, 1993). On the other hand, a large board is
considered as more efficient in monitoring, less prone to management’s influence and
brings more expertise on board thereby enhances firm performance (Herman, 1981;
Zahra and Pearce, 1989; Zou and Adams, 2008). The significance of small board size
is consistent with agency theory that a small board is considered to be an effective board
175
(Kamardin and Haron, 2011). The regression results of the present study evidenced that
the board size is positively impacting the performance on both the accounting
performance and market value fronts. However, there is no significant relationship
between size of the board and cash flows of a firm. The findings are in line with the
findings of Jackling and Johl, 2009; Shukeri et al., 2012.
The board independence has got huge support in the conceptual literature that
emphasised on the notion that a higher proportion of independent directors/non-
executive directors on board results in improved firm performance (Leung and Horwitz,
2010). The findings from the present study however, portrayed a different picture. The
board independence is negatively and significantly affecting accounting performance
of firms. The results related to impact of board independence on market performance
measured by Tobin’s Q and liquidity measured by cash flows revealed no significant
relationship. Baliga et al. (1996) and Bhagat and Black (1999) evident that the presence
of independent directors/non-executive directors do not contribute to better operating
or market performance.
The findings are in line with the findings of Peasnell et al., 2005; Klein 1996 and
Yermack 1996. The authors concluded that a greater proportion of non-executive
directors is negatively associated with firm performance. One of the main reasons may
be due to lack of time to verify the facts presented by the management during meetings.
This in turn lacks the knowledge about the firm which limits a proper decision or action
on the part of independent directors/non-executive directors. The finding is in
contradiction to the previously noted literature that board independence mitigate agency
problems and improve firm performance (Bathala and Rao, 1995).
The literature suggested that a diverse board is more innovative (Hillman, 2015). A
similar set of literature indicated that the gender diversity is influenced either by welfare
institutions or cultural norms about gender roles in society (Iannotta et al., 2016). The
gender diversity at board level matters because diverse boards are more likely to be
effective boards (Mathew et al., 2016). The results on empirical studies for gender
diversity of board and firm performance demonstrated mixed findings. The present
study indicated negative impact of gender diversity on accounting performance of
firms. The finding is in line with the findings of Adams and Ferreira (2009). The results
of the present study for market value are consistent with the findings of Rose (2007);
176
Farrell and Hersch (2005). The studies found no relationship between gender diversity
of boards and performance of firms measured in terms of Tobin’s Q and ROE. The
results are also not consistent with the resource dependence theory that predict a link
between board diversity and performance of firms (Carter et al., 2010).
It is argued that the CEO duality enhances the performance of a firm as there is one
person to take timely and effective decision (Manna et al., 2016). The stewardship
theory also argues in favour of the CEO duality for better performance of firms. But the
results on the CEO duality and firm performance showed a negative and significant
impact on ROA and cash flows, which is consistent with the agency theory. The Agency
theory argues that the role duality is more likely to hamper the performance because
there are chances of misusing the power given to the same person.
2. Board Processes
All major issues of a firm are processed through a decision-making activity called as
board meeting (Kula, 2005; Vafeas, 1999). Vafeas (1999) argued that the boards that
meet very often are valued less by the market as more meetings required by a firm
indicate poor performance and problem phase for a firm. However, the author reported
improved operating performance due to increased board activities. The results of the
present study showed a positive and significant impact of board meeting frequency on
operating performance and market value of firms. Noor and Fadzil (2013) also reported
similar results and reported significant relationship between board meeting frequency
and firm performance.
Sarkar et al. (2008) argued that attendance at board meeting is important to control
manipulations in accounts. Adams and Ferreira (2009) giving a similar argument
mentioned that the meeting and attendance at the meeting are a gateway through which
directors obtain firm specific information. The information is processed to evaluate that
the managers are managing the firms in the best interest of the shareholders. A high
percentage of attendance indicates that the directors are trying to acquire information
about the business operations and diligently monitoring the strategy implementation
(Kamardin and Haron, 2011). The results have indicated that the attendance at the board
meetings is not associated with the accounting measure of ROA and liquidity measure
177
of cash flows. However, the study evident that the market values the attentiveness
quality of directors. The finding is in line with the findings of Bhatt and Bhattacharya
(2015) with the exception that the authors reported a positive and significant impact of
attendance at board meeting with ROA and Tobin’s Q. In the present study no such
relationship of attendance at board meeting is found with ROA.
The relationship between the numbers of directorships on board effectiveness is also

unclear. Fama and Jensen (1983) and Perry and Peyer (2005) argue that firms that look
for highly qualified directors might prefer directors who serve on other boards, because
multiple appointments can signal director quality. Kaplan and Reishus (1990) and
Ferris et al. (2003) find that successful directors are also more likely to receive more
offers to serve on other boards. On the contrary, the “busy director" hypothesis argues
that too many board assignments might dissipate board members’ time and attention,
thereby undermining their ability to monitor management. The financial and academic
press also raise this issue by pointing out that directors who take on too many
directorships are over committed across multiple boards confound their abilities to
attend meetings and therefore to properly monitor and advise management. However,
the present study found a significant and positive impact of board busyness on return
on assets which is in line with the resource dependence theory. The results are dissimilar
for market value and cash flows of firms. The board busyness is negatively and
significantly impacting the market value and cash flows of Indian firms. On one hand
the multiple directorship seems promising but, on the other hand the multiple
directorship hampers the ability of independent directors to perform their duties Sarkar
et al. (2012).
3. Board Decisions
The board of directors are considered as a strategic decision making mechanism for an
effective corporate governance system and better firm performance (Fama and Jensen,
1983; Forbes and Milliken, 1999). Choosing an optimum capital structure is among the
fiduciary duties of the board of directors that should optimise the profitability and
market value of a firm (Gygax et al., 2017). The results indicated that the capital
structure decision adversely impacted the return on assets and cash flows of Indian
178
firms. This may have resulted from the use of high debt fund in the capital structure.
The findings are in line with the findings of Arulvel and Ajanthan (2014) and
Pratheepkanth (2011). The present study revealed that the dividend decision of the
board of directors showed a positive impact on all the financial performance parameters
of the Indian firms. The dividend is a reward to shareholders for investing their money.
There are number of factors that a board needs to keep in mind while declaring dividend
payment. Similar positive relationship between dividend policy and firm performance
were reported by Khan et al. (2016).
4. Board Vigilance
The literature suggested identifying the manipulations in the books of accounts depend
upon the ability of the auditors but reporting the same depends upon the independence
of auditors from management. Though no significant impact of auditors’ independence
is indicated by the present study, the auditors’ independence is positively impacting the
cash flows of the Indian firms. It shows that the auditors’ independence is important to
improve the liquidity position of the Indian firms. The auditors’ independence assures
objectivity and builds trust and confidence among stakeholders (Hassan and Farouk,
2014). Therefore, the board of directors are required to maintain an appropriate level of
relationship between auditors and management to ensure the independence of auditors.
The regression results on the relationship between related party transactions and firm
financial performance revealed a positive and significant impact on return on assets and
market value of Indian firms. The findings supported the ‘efficient transaction’ view
which regards related party transactions as rational economic decision of a firm to get
resources at a reduced cost (Khanna and Palepu, 2000). The results are consistent with
the findings of Umobong (2017). It implies that the audit committee is efficiently
performing its duties and ensuring an optimum level of auditors’ independence and
related party transactions not exceeding the specified limits.
179
5. Board Compensation
The directors are required to undertake a greater responsibility and high job associated
risk (Hoskisson et al., 2009), therefore the compensation of the board should be
substantial so that they do not serve their own interest. The agency theory emphasises
to link CEO compensation with performance to mitigate the agency issues. The present
study has found a positive and significant impact of CEO compensation on cash flows
of Indian firms, but insignificant impact on the return on assets and market value. The
finding is consistent with the findings of Jaiswall and Bhattacharya (2016). In contrast
with this, the non-executive directors’ remuneration is negatively impacting the return
on assets, but positively impacting the market value of firms. It implies that the non-
executive directors’ are not compensated substantially in spite of greater
responsibilities vested upon them.
6. Ownership Structure
The literature has regarded the ownership concentration as the root of all corporate
governance issues that creates conflict of interest for minority groups. The regression
results of the present study have also shown a negative impact of ownership
concentration on return on assets and cash flows. On the other hand, the dummy for
ownership concentration has revealed a positive and significant impact on return on
assets, market value and cash flows of Indian firms. It indicates that the ownership
concentration in the hand of non-promoters creates more conflict of interest issues for
minority shareholders. High ownership concentration imparts promoters a strong
incentive to follow value-maximizing goal that may lead to more interest alignment
effect (Jensen and Meckling, 1976).
7. Interaction Effect – CEO Duality
The interaction effect of CEO duality with auditors’ independence has shown a negative
impact of auditors’ independence on return on assets and cash flows of Indian listed
firms. The capital structure of Indian firms with CEO as the chairman of the board has
180
also found to be negatively impacting the cash flows. Also, the monitoring power of
non-executive directors is reduced because of assigning more power to a single person.
Further, when CEO is the chairman of the board, he himself approves his remuneration
contributing to ineffective monitoring and control (Manna et al., 2015;
Balasubramanian et al., 2015), which is also demonstrated by the findings of the present
study. The firms with concentrated ownership coupled with CEO duality has also found
to be negatively impacting the performance, which is not in the interest of minority
shareholders and other stakeholders. The CEO duality provides sufficient opportunities
for managerial discretions that may impact the true independence of the independent
directors and auditors.
8. Interaction Effect – Promoter Ownership
The regression results for interaction terms of promoter concentrated ownership

dummy with corporate governance parameters have also supported the finding that the
performance of the firms with promoter concentrated ownership has outperformed the
firms with non-promoter concentrated ownership. However, the capital structure for
promoter concentrated ownership firms have indicated a negative impact on return on
assets and cash flows. This may have resulted from the use of high debt securities in
the capital structure. While the promoter concentrated ownership firms showed
improved performance, the regression results for interaction terms of CEO duality with
corporate governance parameters have shown disappointing results.
181
5.3 Key Findings
market.
182
5.4 Recommendations


183
Table 5.1: Summary of Key Findings and Recommendations
1.
directors.
2.
firms.
3.
4.
5.
6.
concentration of ownership with ownership concentration the benefits of
promoters has positively interest alignment effect gets disappear.
contributed to the firm
performance.
7.
184
5.6 Directions for Future Research

185
Summary
The corporate governance system of the Indian firms is adversely affected by the dual
power vested in a single person. Stringent laws are required for regulating the behaviour
of key participants of the corporate governance system. The board of directors are
required are to be periodically appraised and CEOs opportunistic behaviour is needed
to be aligned with the interest of shareholders. Auditors’ independence is needed to be
protected and board independence is needed to be established. The promoters are
needed to be motivated to keep contributing to the wealth creation of the firm. To
conclude, the mechanism of corporate governance needs a regular appraisal with
respect to the practices of the people (directors, executive officer, auditors, chairman,
etc.), in order to ensure that they work in accordance with the predefined objectives
(purpose) in line with well-stipulated principles, so that the chances of adverse impact
of their practices on the performance of the firms can be minimised.
186
5.1 Overview
The chapter discusses in detail the findings from the data analysis along with
conclusions and suggestions which is also based on data analysis. It also suggests
various areas of improvements for corporate governance practices among Indian firms.
The limitations of the study are explained followed by opportunities for future research
based on the findings and limitations of the present study.
5.2 Discussion
At the core of the legal foundations of corporate laws, the board of directors are
described as having an important and strategic role for establishing corporate
governance mechanism across the firms (Bainbridge, 2007). Therefore, the study
identified various key dimensions of corporate governance that are supposed to be
implemented through the mechanism of board of directors for achieving desired
objectives of corporate governance system. The study attempted to examine all the
relevant facets of a board that are important for the implementation of a good corporate
governance system, along with the factors that could hamper the effectiveness of a
board. The study also attempted to identify differences among corporate governance
characteristics due to ownership concentration of promoters and power concentration
of CEOs of Indian firms. The study has highlighted findings which are valuable for
improving the corporate governance system among the Indian firms.
1. Board Structure
The board structure measured as board size is characterized as problematic with respect
to communication and coordination when there are large number of members on the
board (Lipton and Lorsch, 1992; Jensen, 1993). On the other hand, a large board is
considered as more efficient in monitoring, less prone to management’s influence and
brings more expertise on board thereby enhances firm performance (Herman, 1981;
Zahra and Pearce, 1989; Zou and Adams, 2008). The significance of small board size
is consistent with agency theory that a small board is considered to be an effective board
175
(Kamardin and Haron, 2011). The regression results of the present study evidenced that
the board size is positively impacting the performance on both the accounting
performance and market value fronts. However, there is no significant relationship
between size of the board and cash flows of a firm. The findings are in line with the
findings of Jackling and Johl, 2009; Shukeri et al., 2012.
The board independence has got huge support in the conceptual literature that
emphasised on the notion that a higher proportion of independent directors/non-
executive directors on board results in improved firm performance (Leung and Horwitz,
2010). The findings from the present study however, portrayed a different picture. The
board independence is negatively and significantly affecting accounting performance
of firms. The results related to impact of board independence on market performance
measured by Tobin’s Q and liquidity measured by cash flows revealed no significant
relationship. Baliga et al. (1996) and Bhagat and Black (1999) evident that the presence
of independent directors/non-executive directors do not contribute to better operating
or market performance.
The findings are in line with the findings of Peasnell et al., 2005; Klein 1996 and
Yermack 1996. The authors concluded that a greater proportion of non-executive
directors is negatively associated with firm performance. One of the main reasons may
be due to lack of time to verify the facts presented by the management during meetings.
This in turn lacks the knowledge about the firm which limits a proper decision or action
on the part of independent directors/non-executive directors. The finding is in
contradiction to the previously noted literature that board independence mitigate agency
problems and improve firm performance (Bathala and Rao, 1995).
The literature suggested that a diverse board is more innovative (Hillman, 2015). A
similar set of literature indicated that the gender diversity is influenced either by welfare
institutions or cultural norms about gender roles in society (Iannotta et al., 2016). The
gender diversity at board level matters because diverse boards are more likely to be
effective boards (Mathew et al., 2016). The results on empirical studies for gender
diversity of board and firm performance demonstrated mixed findings. The present
study indicated negative impact of gender diversity on accounting performance of
firms. The finding is in line with the findings of Adams and Ferreira (2009). The results
of the present study for market value are consistent with the findings of Rose (2007);
176
Farrell and Hersch (2005). The studies found no relationship between gender diversity
of boards and performance of firms measured in terms of Tobin’s Q and ROE. The
results are also not consistent with the resource dependence theory that predict a link
between board diversity and performance of firms (Carter et al., 2010).
It is argued that the CEO duality enhances the performance of a firm as there is one
person to take timely and effective decision (Manna et al., 2016). The stewardship
theory also argues in favour of the CEO duality for better performance of firms. But the
results on the CEO duality and firm performance showed a negative and significant
impact on ROA and cash flows, which is consistent with the agency theory. The Agency
theory argues that the role duality is more likely to hamper the performance because
there are chances of misusing the power given to the same person.
2. Board Processes
All major issues of a firm are processed through a decision-making activity called as
board meeting (Kula, 2005; Vafeas, 1999). Vafeas (1999) argued that the boards that
meet very often are valued less by the market as more meetings required by a firm
indicate poor performance and problem phase for a firm. However, the author reported
improved operating performance due to increased board activities. The results of the
present study showed a positive and significant impact of board meeting frequency on
operating performance and market value of firms. Noor and Fadzil (2013) also reported
similar results and reported significant relationship between board meeting frequency
and firm performance.
Sarkar et al. (2008) argued that attendance at board meeting is important to control
manipulations in accounts. Adams and Ferreira (2009) giving a similar argument
mentioned that the meeting and attendance at the meeting are a gateway through which
directors obtain firm specific information. The information is processed to evaluate that
the managers are managing the firms in the best interest of the shareholders. A high
percentage of attendance indicates that the directors are trying to acquire information
about the business operations and diligently monitoring the strategy implementation
(Kamardin and Haron, 2011). The results have indicated that the attendance at the board
meetings is not associated with the accounting measure of ROA and liquidity measure
177
of cash flows. However, the study evident that the market values the attentiveness
quality of directors. The finding is in line with the findings of Bhatt and Bhattacharya
(2015) with the exception that the authors reported a positive and significant impact of
attendance at board meeting with ROA and Tobin’s Q. In the present study no such
relationship of attendance at board meeting is found with ROA.
The relationship between the numbers of directorships on board effectiveness is also

unclear. Fama and Jensen (1983) and Perry and Peyer (2005) argue that firms that look
for highly qualified directors might prefer directors who serve on other boards, because
multiple appointments can signal director quality. Kaplan and Reishus (1990) and
Ferris et al. (2003) find that successful directors are also more likely to receive more
offers to serve on other boards. On the contrary, the “busy director" hypothesis argues
that too many board assignments might dissipate board members’ time and attention,
thereby undermining their ability to monitor management. The financial and academic
press also raise this issue by pointing out that directors who take on too many
directorships are over committed across multiple boards confound their abilities to
attend meetings and therefore to properly monitor and advise management. However,
the present study found a significant and positive impact of board busyness on return
on assets which is in line with the resource dependence theory. The results are dissimilar
for market value and cash flows of firms. The board busyness is negatively and
significantly impacting the market value and cash flows of Indian firms. On one hand
the multiple directorship seems promising but, on the other hand the multiple
directorship hampers the ability of independent directors to perform their duties Sarkar
et al. (2012).
3. Board Decisions
The board of directors are considered as a strategic decision making mechanism for an
effective corporate governance system and better firm performance (Fama and Jensen,
1983; Forbes and Milliken, 1999). Choosing an optimum capital structure is among the
fiduciary duties of the board of directors that should optimise the profitability and
market value of a firm (Gygax et al., 2017). The results indicated that the capital
structure decision adversely impacted the return on assets and cash flows of Indian
178
firms. This may have resulted from the use of high debt fund in the capital structure.
The findings are in line with the findings of Arulvel and Ajanthan (2014) and
Pratheepkanth (2011). The present study revealed that the dividend decision of the
board of directors showed a positive impact on all the financial performance parameters
of the Indian firms. The dividend is a reward to shareholders for investing their money.
There are number of factors that a board needs to keep in mind while declaring dividend
payment. Similar positive relationship between dividend policy and firm performance
were reported by Khan et al. (2016).
4. Board Vigilance
The literature suggested identifying the manipulations in the books of accounts depend
upon the ability of the auditors but reporting the same depends upon the independence
of auditors from management. Though no significant impact of auditors’ independence
is indicated by the present study, the auditors’ independence is positively impacting the
cash flows of the Indian firms. It shows that the auditors’ independence is important to
improve the liquidity position of the Indian firms. The auditors’ independence assures
objectivity and builds trust and confidence among stakeholders (Hassan and Farouk,
2014). Therefore, the board of directors are required to maintain an appropriate level of
relationship between auditors and management to ensure the independence of auditors.
The regression results on the relationship between related party transactions and firm
financial performance revealed a positive and significant impact on return on assets and
market value of Indian firms. The findings supported the ‘efficient transaction’ view
which regards related party transactions as rational economic decision of a firm to get
resources at a reduced cost (Khanna and Palepu, 2000). The results are consistent with
the findings of Umobong (2017). It implies that the audit committee is efficiently
performing its duties and ensuring an optimum level of auditors’ independence and
related party transactions not exceeding the specified limits.
179
5. Board Compensation
The directors are required to undertake a greater responsibility and high job associated
risk (Hoskisson et al., 2009), therefore the compensation of the board should be
substantial so that they do not serve their own interest. The agency theory emphasises
to link CEO compensation with performance to mitigate the agency issues. The present
study has found a positive and significant impact of CEO compensation on cash flows
of Indian firms, but insignificant impact on the return on assets and market value. The
finding is consistent with the findings of Jaiswall and Bhattacharya (2016). In contrast
with this, the non-executive directors’ remuneration is negatively impacting the return
on assets, but positively impacting the market value of firms. It implies that the non-
executive directors’ are not compensated substantially in spite of greater
responsibilities vested upon them.
6. Ownership Structure
The literature has regarded the ownership concentration as the root of all corporate
governance issues that creates conflict of interest for minority groups. The regression
results of the present study have also shown a negative impact of ownership
concentration on return on assets and cash flows. On the other hand, the dummy for
ownership concentration has revealed a positive and significant impact on return on
assets, market value and cash flows of Indian firms. It indicates that the ownership
concentration in the hand of non-promoters creates more conflict of interest issues for
minority shareholders. High ownership concentration imparts promoters a strong
incentive to follow value-maximizing goal that may lead to more interest alignment
effect (Jensen and Meckling, 1976).
7. Interaction Effect – CEO Duality
The interaction effect of CEO duality with auditors’ independence has shown a negative
impact of auditors’ independence on return on assets and cash flows of Indian listed
firms. The capital structure of Indian firms with CEO as the chairman of the board has
180
also found to be negatively impacting the cash flows. Also, the monitoring power of
non-executive directors is reduced because of assigning more power to a single person.
Further, when CEO is the chairman of the board, he himself approves his remuneration
contributing to ineffective monitoring and control (Manna et al., 2015;
Balasubramanian et al., 2015), which is also demonstrated by the findings of the present
study. The firms with concentrated ownership coupled with CEO duality has also found
to be negatively impacting the performance, which is not in the interest of minority
shareholders and other stakeholders. The CEO duality provides sufficient opportunities
for managerial discretions that may impact the true independence of the independent
directors and auditors.
8. Interaction Effect – Promoter Ownership
The regression results for interaction terms of promoter concentrated ownership

dummy with corporate governance parameters have also supported the finding that the
performance of the firms with promoter concentrated ownership has outperformed the
firms with non-promoter concentrated ownership. However, the capital structure for
promoter concentrated ownership firms have indicated a negative impact on return on
assets and cash flows. This may have resulted from the use of high debt securities in
the capital structure. While the promoter concentrated ownership firms showed
improved performance, the regression results for interaction terms of CEO duality with
corporate governance parameters have shown disappointing results.
181
5.3 Key Findings
market.
182
5.4 Recommendations


183
Table 5.1: Summary of Key Findings and Recommendations
1.
directors.
2.
firms.
3.
4.
5.
6.
concentration of ownership with ownership concentration the benefits of
promoters has positively interest alignment effect gets disappear.
contributed to the firm
performance.
7.
184
5.6 Directions for Future Research

185
Summary
The corporate governance system of the Indian firms is adversely affected by the dual
power vested in a single person. Stringent laws are required for regulating the behaviour
of key participants of the corporate governance system. The board of directors are
required are to be periodically appraised and CEOs opportunistic behaviour is needed
to be aligned with the interest of shareholders. Auditors’ independence is needed to be
protected and board independence is needed to be established. The promoters are
needed to be motivated to keep contributing to the wealth creation of the firm. To
conclude, the mechanism of corporate governance needs a regular appraisal with
respect to the practices of the people (directors, executive officer, auditors, chairman,
etc.), in order to ensure that they work in accordance with the predefined objectives
(purpose) in line with well-stipulated principles, so that the chances of adverse impact
of their practices on the performance of the firms can be minimised.
186
Eicher Motors Ltd. Mphasis Ltd.
Emami Ltd. N H P C Ltd.
N M D C Ltd. Sun Pharma Advanced Research Co. Ltd.
N T P C Ltd. Sun Pharmaceutical Inds. Ltd.
Natco Pharma Ltd. Sun T V Network Ltd.
National Aluminium Co. Ltd. Suzlon Energy Ltd.
Oberoi Realty Ltd. T V S Motor Co. Ltd.
Oil & Natural Gas Corpn. Ltd. Tata Chemicals Ltd.
Oil India Ltd. Tata Communications Ltd.
Oracle Financial Services Software Ltd. Tata Consultancy Services Ltd.
P I Industries Ltd. Tata Global Beverages Ltd.
Page Industries Ltd. Tata Motors Ltd.
Petronet L N G Ltd. Tata Power Co. Ltd.
Pidilite Industries Ltd. Tata Steel Ltd.
Piramal Enterprises Ltd. Tech Mahindra Ltd.
Power Grid Corpn. Of India Ltd. Titan Company Ltd.
Prestige Estates Projects Ltd. Torrent Pharmaceuticals Ltd.
Procter & Gamble Hygiene & Health Care Ltd. Torrent Power Ltd.
Rajesh Exports Ltd. Tv18 Broadcast Ltd.
Ramco Cements Ltd. U P L Ltd.
Reliance Communications Ltd. Ultratech Cement Ltd.
Reliance Industries Ltd. United Breweries Ltd.
Reliance Infrastructure Ltd. United Spirits Ltd.
Reliance Power Ltd. Vakrangee Ltd.
Rural Electrification Corpn. Ltd. Vedanta Ltd.
S R F Ltd. Voltas Ltd.
Shree Cement Ltd. Welspun India Ltd.
Siemens Ltd. Wipro Ltd.
Steel Authority Of India Ltd. Wockhardt Ltd.
Strides Shasun Ltd. Zee Entertainment Enterprises Ltd.
Annexure 3: Publications
1. The Interrelationship Between Corporate Governance and Corporate Social

Responsibility in Indian Companies
2. A Comparative Study of Gender Equality in Public and Private Sector Boards in India

Corporate Governance and Financial Performance An Empirical Study of Indian

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Acknowledgement

ABSTRACT OF THE THESIS

Under the Supervision of

DEPARTMENT OF BUSINESS ADMINISTRATION

India has generally been proactive in promulgating corporate governance regulations.

The importance of corporate governance lies in tracking the performance of companies.

Corporate governance thus normally revolves around a set of worldwide attributes,

Origination of Corporate Governance

Theories of Corporate Governance

Corporate governance is often analysed around major theoretical frameworks. The

Further, the stakeholder theory complemented stewardship theory in that it specified

Indian Corporate Governance: A Legal Perspective

 Shareholder and Stakeholder Rights and Protection

Board Structure and Processes

The CEO compensation of Indian firms usually comprises of salary, performance

The job of a non-executive director/independent director requires greater responsibility

Corporate Governance and Financial Performance

1. The existing literature has examined the corporate governance mechanism in a

To achieve this the study addresses the following research questions:

Research Question1: What are the key dimensions of corporate governance

Research Question2: Is there any impact of the identified corporate governance

Research Question3: Is there a difference exists between corporate governance

Research Question4: Is there a difference exists between corporate governance

Research Question5: If difference exists between corporate governance characteristics

1. To identify the key features of corporate governance and financial performance

Conceptual Framework of the Study

Ownership Structure Control Variables

Figure 1: Conceptual Framework of the Study

Table 3.1: Measurement of Variables, Acronym and Scale type

Variables Acronym Measurement Scale

Return on Assets ROA Net income before interest divided Ratio

The research hypotheses were created into three categories to:

Population of the study – NSE 200 Index Companies 200 firms

Less: Banks and Financial firms (41) firms

Less: Incorporation after 2008-09 (01) firms

Less: Unavailable reports and other data (12) firms

Final sample size 146 firms

Approach for Analysis

General Model: Performance = Constant Coefficient + Corporate Governance +

Where, performance is a vector of corporate performance measured in terms of return

Model 1 (ROA-1): Explained variable – ROA

ROAit = α0 + β1BOARD_SIZEit + β2BOARD_INDit + β3DIVERSITYit +

Model 2 (TQ-1): Explained Variable TQ

TQit = α0 + β1BOARD_SIZEit + β2BOARD_INDit + β3DIVERSITYit + β4DUALITYit

Model 3 (CF-1): Explained variable CF

Where in Model 1, 2 and 3 –

β1, β2, β3, β4, β5 ….. β17 = Slope coefficients;

εit = Error term in the year t for firm i.

2. Diagnostic tests for multicollinearity, heteroskedasticity and autocorrelation is

4. If rejected the heterogeneity, pooled data regression estimation method is applied.

6. Robust standard errors are calculated to control the problems of heteroskedasticity

Descriptive Analysis Classification Analysis Regression Analysis

Panel Data Regression

Promoter vs. Non Promoter

Hausman Test FEM vs. REM

Interaction term for

Figure 2: Approach for Analysis

The non-parametric Mann-Whitney test results for grouping variable promoter

A significant difference in the auditor’s independence, capital structure decision, CEO

The exploration of the relationship between corporate governance parameters and

1. A balance of power is needed to be established among CEOs, chairman of the

Table 2: Summary of Key Findings and Recommendations