Author(s) :

Shweta Jain.

Volume/Issue :

Abstract :

Board structure and board diversity are an important internal governance mechanisms. The present study involves the investigation of the association between the quality of a firm’s corporate governance practices and its performance measured in terms of Tobin’s Q by constructing a firmspecific board structure index and board diversity index for Indian listed companies. Relationship between board size and financial performance has also been examined in this study. Analysis has been carried out by applying regression analysis between different board characteristics and financial performance parameters. Evidences obtained from the empirical analysis indicate strong positive relationship between board structure index and corporate financial performance concluding that better governed companies are always valued higher and they shows a better financial performance in the long run. Results also exhibit a positive and significant relationship between board size and board diversity index and Tobin’s Q (proxy for company performance) suggesting that investors reward the companies having a diverse and larger board.

No. of Downloads :

9

KEYWORDS:

Corporate Governance, Board Structure Index, Board Diversity Index, Board Size, Corporate Financial Performance

INTRODUCTION & OBJECTIVES:

Corporate governance has attracted much interest and attention in the past few years, especially in the wake of collapse of some of the world’s most high profile corporations. In order to determine the quality of governance in a firm, internal and external mechanisms of corporate governance play a significant role. The internal governance mechanisms such as board structure, board diversity, size and composition of the board and the equity ownership structure of the firm are based on specific actions and mechanisms undertaken by the individual firm to enforce control and accountability (Varshney et al.2015). Whether these internal governance mechanisms are related to firm financial performance indicators is the question that has been answered in the present study. In 1990s, numerous reforms were undertaken in order to advance corporate governance in India. The most important reform was the establishment of the Securities and Exchange Board of India (SEBI) in 1992. Four major committees (Bajaj Committee in 1996, Birla Committee in 2000, Chandra Committee in 2002, and the Narayanan Murthy Committee in 2003) were formed as a result of the establishment of the SEBI. These committees aimed to examine governance issues and to propose governance reforms and laws. Through the enactment of Clause 49 of the Listing Agreements, SEBI implemented the governance reforms and recommendations given by these committees. These reforms include dealing with the issue of duality, increasing the number of outside directors and the existence of financial expertise of directors. Certain changes were made in Clause 49 of the Listing Agreement by the SEBI in 2005 requiring the presence of minimum number of outside directors on board. Enactment of Companies Act, 2013 introduced new provisions related to board of directors and board diversity to enhance corporate governance in India such as presence of at least one women director on board of listed companies in case of certain specified companies, policy of familiarisation programme for independent directors, formal policy for succession planning at senior levels of management. It is expected that these changes in the operation and composition of the boards of directors as measures considered to improve corporate governance, may also be shown in improved firm performance (Jackling et. al (2009). Good corporate governance helps in achieving high level market valuation and financial performance (Klapper et al. 2004; Rajagopalan et al. 2008). La Porta et al. (2000) stated that emerging economies have traditionally been discounted in financial markets due to their weak governance. Therefore, an examination of aspects of board structure and board diversity as an important driver in corporate governance may provide insights that may lead to improvement in corporate governance in an emerging economy like India. As a result, in this study, an attempt has been made to explore the relationship between board structure, board diversity and board size, and financial performance of Indian listed companies This paper has been divided into five parts. Section I highlights the review of existing literature. Section II provides relevance, objectives and hypothesis of the study followed by section III which is concerned with the research design and methodology. Section IV has been devoted to the findings and analysis that include descriptive statistics and regression analysis. Last section of the paper gives implications and conclusions of the study.

DOI:

10.58426/cgi.v2.i2.2020.79-93