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The IUP Journal of Corporate Governance
The Effect of Corporate Governance Structure
on the Performance of Companies Listed in India†
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Corporate governance research has increased dramatically, especially during the past few decades, becoming a burning issue amongst academics, practitioners and policy makers. This increasing interest is driven by a growing string of business scandals worldwide, lack of and ineffective monitoring mechanisms and governance practices, and failure of board of directors. The emerging literature shows a linkage between corporate governance and performance of only large listed companies. In this study, an effort has been made to investigate the nature of corporate governance structure and its contribution to the determination of performance of large cap and mid-cap companies listed in India. A total 100 companies, i.e., top 50 large cap companies and top 50 mid-cap companies, were considered. The data was analyzed separately for both large cap and mid-cap companies by using multiple regression models to identify the variables that affect company performance. The study found that there is significant effect of selected measures of corporate board structure on the performance of both large cap and mid-cap companies listed in India, except for board meeting in the case of large cap samples and gender diversity in the case of mid-cap samples.

 
 
 

The importance of corporate governance is increasing due to the proliferation of corporate scandals over the past few decades. The collapse of Enron, WorldCom, Tyco International in USA, HIH Insurance in Australia, Paramalat in Italy and Satyam in India, became evidence of lack and ineffective monitoring mechanisms and governance practices together with failure of Board of Directors (BOD). In the entire corporate governance structure or mechanism, board structure is the most important because the effectiveness of BOD decides the future of a firm. The agency theory promotes the primary role of BOD as controlling and monitoring of management, while the stewardship theory emphasizes on the advisory role of board. Past literature has identified several elements such as board size (Dalton et al., 1999) board chair and CEO positions (Lorsch and MacIver, 1989; and Daily and Dalton, 1997), non-executive directors (Bhagat and Black, 1998; and Roberts et al., 2005), women on the boards (Burke, 1997; Singh and Vinnicombe, 2004; and Huse and Solberg, 2006), board activity (Jackling and Johl, 2009) etc., as key determinants of corporate governance structure, which make a board more effective and thus perform efficiently by raising corporate governance standards. Board members have to perform many responsible tasks within their capacity. Boards are expected to perform different functions, for example, monitoring of management, hiring and firing of management, providing and giving access to resources and providing strategic direction to the firm. The effectiveness of board lies in board attributes such as board size, board independence, board leadership structure, and board diversity that significantly influence board performance, leading to better company performance. Various studies in diverse domains like Accounting, Economics, Finance, Law and Management (Anderson and Reeb, 2004; Coles et al., 2007; and Jackling and Johl, 2009) have been conducted as to whether corporate governance has any impact on the determination of company’s performance.

 
 
 

Corporate Governance Journal,Corporate governance research, Practitioners and policy makers, business scandals worldwide, Lack of and ineffective monitoring mechanisms ,Governance practices, Failure of board of directors.