This study is an attempt at analyzing the relationship between product market competition and corporate governance practices in Indian firms. In more precise terms, the paper studies the effect of the independence of the board of any firm on the performance of the firm in a high and low competitive product market. The study empirically shows, using publicly available data, that a firm in a highly competitive market is monitored by the market forces and does not require many independent directors on its board.

The need for corporate governance arises in business organizations primarily because of the presence of what is called agency problem or conflict of interest, involving members of the organization like owners, managers, workers or consumers. Another reason for the issue of corporate governance is the conflict of interest between the controlling shareholders and the minority shareholders. Such conflicts are present in family owned business entities. Problems arising out of conflicting interests can be solved through perfect contracts, because of the existence of transaction costs. These transaction costs are such that agency problems cannot be dealt with through contracts (Hart, 1995).

Market forces can supplement incomplete contracts. The impact of the capital market in improving corporate governance practices are well proven in the existing literature. But, the product and labor markets also have some influence on corporate governance practices of firms. A study by Verrechia in 1983, highlighted that product market competition, as an important factor in determining the level of disclosure by the management, was an important corporate governance tool. Globalization of product and labor markets also influences and improves the corporate governance practices of firms in the Indian software industry, as was proved by Khanna and Palepu in 2004.

Corporate Governance Journal, Corporate Governance Practices, Product Market, Business Organizations, Governance Mechanism, Decision Making System, Indian Firms, Bombay Stock Exchange, BSE, National Stock Exchange, NSE, Fast Moving Consumer Goods, FMCG, Healthcare, Information Technology, Infrastructure, Centre for Monitoring Indian Economy Pvt. Ltd., CMIE.