Author(s) :

Rachna Mahalwala, Sonika Sharma, Girish Ahuja.

Volume/Issue :

Abstract :

As the separation between ownership and control in public listed companies steers the managershareholder agency problem and therefore, independent directors on board have become an essential element of good corporate governance and laws of different countries have also mandated the same. However, the question arises “Does the existence of independent directors on the board lead to improved corporate performance as well?” The present study aims to investigate the impact of independent directors on the financial performance of select companies listed on the S&P BSE100 Index during the period 2016-17 to 2022-23. The study employs regression analysis on longitudinal data using panel least squares, fixed effects model, and random effects model. The results of the study confirm that the higher the percentage of independent directors on the board, the higher the corporate performance measured with return on assets. The results provide insight to owners of the business to decide the board structure of their companies wisely to protect their interest to get desired financial results.

No. of Downloads :

28

KEYWORDS:

Board Independence, Fixed Effects Model, Hausman Test, Return on Assets

INTRODUCTION & OBJECTIVES:

A member of the board of directors who brings a distinct, objective viewpoint is the independent director and is commonly referred to as an outside director. As a watchdog and support in risk management, the independent director's responsibility involves enhancing business credibility and governance standards. Independent directors are expected to actively participate in the numerous committees that the company sets up to provide improved governance. The need for independent directors (INDR) arises from their ability to resist and oppose controlling owners’ pressures and protect the interests of all stakeholders, largely the minority shareholders. It is the obligation of the board of companies, especially with highly concentrated ownership structures, to design such a board structure that helps prevent insiders and executive owners from exercising undue control in the decision-making process. Although it is obvious that all directors, executive and independent, play a significant role in decision-making, the independent directors’ role is more critical as they must ensure that all shareholders' interests are safeguarded. The independent directors' responsibility is to oversee the corporate boards' management decisions and actions and to make sure the executive is held accountable (Fama, 1980). Independent directors are trusted to monitor the management and remain impartial to the company and its chief executive officer (Daily et al. 1996). Many studies substantiate that independent directors who have financial knowledge guide financial reporting (Agrawal & Chadha, 2005; Beasley, 1996; Persons, 2005). Due to having their crucial position in the decision-making of the board, it is advocated that the existence of independent directors on the board will help in improving corporate performance (CO_PER) and ultimately contribute to enhancing the shareholders’ wealth. Against this backdrop, this study is structured in five sections. After the introduction, the brief literature review is presented in section II. In section III, the research design of the study is discussed, and in section IV, the empirical results are explained. Finally, in section V, the conclusions and the scope for future research are deliberated.

DOI:

10.58426/cgi.v5.i2.2023.1-11