SUMMARY A) Conceptual Framework The concept of corporate govea.rnance has gained importance globally after the failure of big corporate giants in USA and UK namely Enron (2001), Xerox (2002), WorldCom (2002) and Tyco (2002), etc. It is the system through which the companies are directed and controlled. Quality of corporate governance depends on the integrity, ability and cohesiveness of board members, fairness on the part of management, quality of corporate and financial reporting and participation of all the stakeholders in decision making process. The board of directors, senior management officials and stakeholders are the main players of corporate governance system prevailing in a co. Good governance provides stability and growth to the enterprise as well as builds confidence among the investors. But after a series of scams in India namely Harshad Mehta Scam (1992), Vanishing Company Scam (1994), M.S Shoes Scam (1994), CRB Scam (1997) and recently occurred Satyam Computers Services Ltd. Scam (2009) have shaken the faith of the investors. In the year 2000, SEBI set up a committee under the chairmanship of Kumar Mangalam Birla to suggest the corporate governance code to be followed by all the companies listed in India. Birla Committee s recommendations for corporate governance were somewhat in line with the recommendations of Cadbury Committee (1992). The recommendations of Kumar Mangalam Birla committee were introduced by SEBI through clause 49 of the listing agreement. Later on, Department of Company Affairs (DCA) also constituted a committee under the chairmanship of Naresh Chandra on August, 2002 to give the recommendations for improving the governance standards. The recommendations given by Naresh Chandra committee were in line with the Sarbanes Oxley Act, 2002 of USA. In the year 2002, another committee had been formed by SEBI under the chairmanship of Narayana Murthy to review the existing corporate governance code as suggested by Birla Committee and to give the recommendations for its further improvement. This revised clause 49 of the listing agreement had been implemented by SEBI vide circular dated Oct. 29 th, 2004, to be effective from Jan. 1, 2005.
B) Review of Relevant Literature Dalton et al. (1999) examined the relationship between size of the board and firm performance by using meta analysis technique on 131 samples. A positive relationship has been observed between board size and firm performance. Ghosh (2000) outlined the ten basic issues of the board which had impact on governance. Knowledge and expertise of directors, time and resources available for governance issues, educational qualification of non-executive directors, separation of position of chairman and CEO, business ethics, interests of stockholders, short term and long term objectives, board culture and self evaluation of the board are the ten important issues. Kant (2002) in his unpublished thesis examined the disclosure practices, quality of governance and shareholder value of first hundred most valuable companies mentioned in BT-500 list. The study covered a period of 5 years from 1996 to 2000. No significant variations had been observed in the quality of governance among the sampled companies. The companies had been performing well in context with certain governance parameters such as board of directors, its composition and financial performance. Gupta et al. (2003) studied the corporate governance reporting practices of 30 selected Indian companies for the years 2001-02 and 2002-03. By using ordinary least square regression technique, the researchers found variations in the reporting practices of the companies. It had also been observed that in certain cases the companies were not following the mandatory requirements as per clause 49 of the listing agreement. Weir et al. (2003) investigated the effectiveness of internal as well as external governance systems and its impact on firm s performance measured by Tobin s Q ratio. A weak relationship had been observed between the internal governance mechanisms and firm performance. It had been further stated that the internal governance structure should not be taken as effective measure to protect shareholders interests. 2
Brown and Caylor (2004) reported the factors representing good governance and its association with firm s performance. Corporate governance score based on total no. of 51 factors and divided into 8 categories had been computed for 2327 firms as on Feb 2003. It had been concluded that the firms with better governance had high net profit margin on sales, high ROE and high dividend yield. Marisetty and Vedpuriswar (2004) in their study found out that share mispricing was low for good governed companies as compared to bad governed companies. The good governed companies were usually highly mispriced during event announcement. Collet and Hrasky (2005) examined the relationship between voluntary disclosure of information by the companies and their intention to raise equity share capital and debt by using the sample of 299 companies listed on Australian Stock Exchange. It had been observed that 29 Australian companies made voluntary disclosure and there was significant association between voluntary disclosure and equity share issue. Khiari et al. (2005) conducted a study on 320 large American firms for a period of 8 years i.e. from 1994 to 2001 in order to study the association between firm performance and its characteristics through governance efficiency index. It had been observed that governance mechanisms such as managerial discretion, ownership concentration and dominance of the board by CEO had negative impact on firm s performance. Prasanna (2005) focused on the relationship between independent directors and financial performance. A negative relationship had been observed between independent board and value maximization. Further, debates on some issues related to independent directors as discussed by Irani committee and SEBI had also been pointed out. Gupta (2006) identified the differences in corporate governance practices of three companies namely Hero Honda Motors Ltd, Maruti Udyog Ltd and Escorts Ltd for the year 2004-05. 90% compliance of corporate governance code had been observed in case of Hero Honda Ltd followed by Maruti Udyog Ltd (80%) and Escorts Ltd (70%). No 3
significant deviations had been observed in the corporate governance disclosure made by the companies from the requirements of clause 49 of the listing agreement. Mollah et al. (2007) measured the relationship between ownership structure, corporate governance attributes and firm performance. It had been concluded that board size and audit committee having sponsor directors as chairman had significant negative relationship with firm performance. However, sponsor directors and Government holdings were found out to be positively associated with firm performance. A considerable amount of work has been carried out on this emerging topic at world wide. Very few studies are available in India on the relationship between corporate governance disclosure as per clause 49 of the listing agreement and firm performance. So, the present study aims to explore the impact of corporate governance on financial performance of the sampled companies. Moreover, voluntary corporate governance disclosure made by the companies over and above the requirements of clause 49 of the listing agreement has also been studied. The following specific objectives have been framed for the present study: 1. To study the corporate governance disclosure practices as per clause 49 of the listing agreement; 2. To conduct the case studies on corporate governance disclosure practices of a few award winning sampled companies; 3. To study the voluntary corporate governance disclosure practices of the selected companies over and above the requirements of clause 49 of the listing agreement; 4. To measure the financial performance of the companies under study and 5. To examine the impact of corporate governance disclosure practices as per clause 49 of the listing agreement on financial performance. 4
C) Research Methodology The following research methodology has been applied to achieve the above stated objectives: Data Description The study covers a period of 5 years i.e from 2000-01 to 2004-05 for 112 listed companies in India. The sample has been drawn from nine industries such as power, iron & steel, cement, textiles, paper, pharmaceuticals, sugar, automobile and software. The study is based on both secondary and primary data. The data with respect to first two objectives have been collected from the annual reports of the sampled companies. So far as third objective is concerned, the data with respect to this have been collected from the Prowess database of CMIE. Two corporate governance checklists have been developed to achieve the first two objectives of the study. The first checklist is based on clause 49 of the listing agreement and covers 64 items. All the items have been divided into 12 main dimensions namely company s philosophy on corporate governance, board of directors, shareholders grievances committee, general body meetings, means of communication, disclosures, general shareholders information, auditor certificate on corporate governance, remuneration committee and shareholders rights. While on the other hand, second checklist is based on the voluntary corporate governance disclosure made by the companies over and above the statutory one. All the items of this checklist have been divided into seven dimensions namely board of directors (functions of the board, training, shareholdings of the directors, etc.), meetings (duration of meetings, procedure of meetings, attendance record of directors, etc.), formation of committees (corporate governance committee, strategy committee, nomination committee, etc.), corporate governance initiatives (whistle blower policy, corporate governance ratings, succession planning, etc.), reports of committees and others (compliance reports of audit, nomination and investors grievance committees, compliance with OECD principles on corporate governance, etc.), shareholders (dividend history, top ten shareholders of the co., changes in equity share capital, etc.) and awards or accolades. Unequal and equal weights methods have been used to rate the items of checklist based on clause 49 of the listing agreement. However, the items of voluntary governance checklist have been rated under equal weight method only. Under equal weight method, one score has been assigned to a company for disclosing a particular item or zero for 5
otherwise. A questionnaire has also been framed to assess the weights of the items mentioned in clause 49 of the listing agreement. The respondents were asked to assign the weights on the main dimensions of corporate governance namely board of directors, audit committee, remuneration of directors, investors grievance committee, general body meetings, disclosures, means of communication and general shareholders information. Out of 50 filled questionnaires, only 45 questionnaires were found in order for analysis purpose. Due to the presence of subjectivity in unequal weight method, equal weight method has been applied for calculating the governance score for achieving the first and third objective. However, in order to study see the impact of corporate governance on financial performance, an attempt has been made to regress the models with the help of both the methods. Financial performance of the companies has been measured in terms of net profit margin on sales ratio, return on assets ratio, return on equity ratio and Tobin s Q ratio. Age, size of the firm in terms of log of net sales, risk in terms of Beta, leverage in terms of debt-equity ratio and industry dummies have been used as control variables. Statistical Framework A blend of statistical and econometric techniques has been used for analyzing the data. A brief description of statistical framework has been given as follows: a) Descriptive Analysis In order to achieve the first two objectives of the study, descriptive statistics i.e. measure of central tendency, measure of dispersion and percentages have been used. Moreover, certain ratios have also been computed for financial performance measures. b) Non-Parametric Test Kruskal Wallis Test H has been applied in order to study the significance of difference among the disclosure score of the industries. c) Regression Analysis Multiple Regression models of Ordinary Least Square (OLS) have been used to study the impact of corporate governance on financial performance of the companies under study. The assumptions of multiple regression models have been tested in order to 6
avoid any type of biasness or misleading results. The assumption of normality of data has been checked through Skewness and Kurtosis and assumption of multicollinearity through Variance Inflation Factor (VIF). The age and risk variables have been found to be normal. However, sales have been normalized by taking its log values. Similarly, the problem of autocorrelation has been tested through Durbin Watson statistic value. The following regression model has been applied: Firm Performance = 0 + 1 (Corporate Governance) + 2 (Control Variables) + 3 (Industry Dummies) + ε The above stated model has been run with both equal and unequal weightage method. There exists difference in the number of companies for first three years of analysis as the listed companies were required to adopt the provisions of clause 49 of the listing agreement up to the year 2002-03. Therefore, regression models have been applied year wise. An attempt has also been made to separate those companies which had adopted the requirements of clause 49 of the listing agreement from the very first year of its implementation. Hence, a total no. of 68 companies has been selected from sample. After applying year and industries dummies, the following regression model has been used. Firm Performance = 0 + 1 (Corporate Governance) + 2 (control variables) + 3 (Industry Dummies) + (Year Dummies) + e D) Findings and Conclusions of the Study The objective wise salient findings of the study are given as follows: a) Corporate Governance Disclosure as Per Clause 49 of the Listing Agreement This objective explains the corporate governance disclosure made by the companies as per clause 49 of the listing agreement. Both company wise and industry wise analysis have been carried out for sampled companies for the period of five years. 7
Year wise and industry wise findings of corporate governance disclosure are given as follows: i) For the year 2000-01 Mean disclosure score has been observed to be highest for software industry i.e. 72.42 and lowest for paper industry i.e. 55.47. Standard deviation has been observed to be highest in case of power industry (19.78) while it is lowest in case of software industry (5.75). ii) For the year 2001-02 In this year, automobile industry has been leading among all the industries as it has highest mean value (73.02). On the other hand, power industry has lowest mean value i.e. 61.45 and highest standard deviation (21.8). iii) For the year 2002-03 Mean disclosure score is again observed to be maximum in case of software industry (75.26) and minimum in case of power industry (66.32). Standard deviation has been observed to be lowest for pharmaceutical industry i.e. 3.12. iv) For the year 2003-04 In this year also software industry has been leading among all the industries by disclosing 76.24% of items of governance checklist. Automobile industry occupies second rank by disclosing 75.35% of items of checklist. Sugar industry has lowest mean value i.e. 70.31. Standard deviation is highest in case of power industry (12.05) and lowest in case of software industry (4.70). v) For the year 2004-05 Software industry in this year also has the highest mean value (76.49) while on the other hand, sugar industry has lowest mean value (71.81). Standard deviation has 8
been observed to be highest in case of automobile industry (11.45) and lowest in case of paper industry (4.04). It has been observed that overall there is increase in the industry average score from 63.2 in the year 2000-01 to 74.10 in the year 2004-05. Moreover, in order to see the significance of difference among the disclosure score of the industries, Kruskal-Wallis Test H has been applied. No significant difference among the disclosure score of the industries has been observed except for the year 2000-01. Year Wise and Company Wise Major Findings: The year wise and company wise major findings of the study have been given as follows: i) For the year 2000-01 Tata Steel Ltd. has been occupying the first rank by disclosing 85.93% of items of governance checklist. The second rank has been occupied by Tata Power Ltd by disclosing 83.59% of items. Just 68 sampled companies out of total of 112 have implemented the provisions of clause 49 of the listing agreement in this year. Scooters India Ltd has minimum disclosure score of 36.72% amongst all the 68 sampled companies. ii) For the Year 2001-02 Tata Power Ltd has been disclosing maximum no. of items of governance checklist i.e. 86.72%. On the other hand, National Thermal Power Corporation Ltd has been disclosing just 10.16% of items mentioned in the clause 49 of the listing agreement. In this year 108 sampled companies out of 112 have adopted the requirements of clause 49 of the listing agreement iii) For the year 2002-03 Tata Power Ltd has been leading among all the sampled companies by disclosing 87.5% of items of checklist. National Thermal Power Corporation Ltd has 9
minimum disclosure score i.e. 44.53%. 109 sampled companies have been disclosing the requirements of clause 49 of the listing agreement in this year also. iv) For the year 2003-04 Reliance Energy Ltd from power industry and Tata Motors Ltd from automobile industry have been occupying the first rank by disclosing 89.06% of the items of governance checklist. Atul Auto Ltd has minimum corporate governance disclosure score i.e. 52.34%. In this year, both the highest and the lowest corporate governance scores have been gained by the companies from automobile industry. v) For the year 2004-05 Tata Motors Ltd from automobile industry has been occupying the first rank by disclosing 93.75% of items of governance checklist. Reliance Energy Ltd has occupied the second rank (90.62%). Again Atul Auto Ltd has lowest governance score i.e. 53.91%. Item Wise Major Findings of Corporate Governance Disclosure as Per Clause 49 of the Listing Agreement The brief explanation of item wise disclosure score of the companies under each category is given as follows: I) Mandatory Disclosure i) Company s Philosophy on Corporate Governance: - The average value reveals that 99% of the sampled companies have disclosed their philosophy on corporate governance in the corporate governance section of the annual report. ii) Board of Directors: - Under this section, maximum no. of companies has disclosed properly the size of the board. 98.06% of the sampled companies have been complying with the requirement of minimum no. of 4 board meetings held during the year. Just 35.11% of the sampled companies have been disclosing the 10
information to be placed before the board at the time of board meetings. 40.68% of the sampled companies have been disclosing the brief resume of the directors to be appointed or re-appointed during the year in the corporate governance section of the annual report. iii) iv) Audit Committee: - The maximum no. of companies i.e. 99.91% have been complying with the provision of minimum no. of 3 audit committee meetings held during the year. 97.43% of the sampled companies have been disclosing the brief description of terms of reference of audit committee. The average value reveals that 56.67% of the sampled companies have been inviting the head of finance, statutory auditors and chief internal auditors in the audit committee meetings. 49.62% of the sampled companies have disclosed that atleast one of the members has sound financial and accounting knowledge. Remuneration of Directors: - Just 4.56% of the sampled companies have been disclosing the criteria for evaluating the performance of directors. 12.68% of the companies have mentioned that there is no provision of making severance fee to directors. 40.19% of the sampled companies have been disclosing the information regarding the notice period to be given by the companies or directors. v) Investors Grievance Committee: - The mean value reveals that 92.99% of the companies have disclosed that the chairman of the committee is non-executive director. On the other hand, 90.52% of the companies have disclosed the name and designation of compliance officer of the committee. vi) General Body Meetings:- The mean value reveals that 97.8% of the sampled companies have disclosed the time and location where last three AGMs were held. It has been observed from the analysis for the years 2003-04 and 2004-05 that one company has not disclosed the timings of the last three AGMs. v) Disclosures:- 93.65% of the sampled companies have disclosed that there is no materially significant related party transactions entered into by the co. 94.23% of the companies have disclosed that there is no penalty imposed by SEBI or any other regulatory body for any non compliance. 11
vi) vii) II) Means of Communication: - 74.52% of the sampled companies have been disclosing the names of the business newspapers where quarterly results are published. 34.42% of the companies have been disclosing the details of the presentations made to the institutional investors or analysts on its websites. General Shareholders Information: - Under this section, the mean value reveals that more than 95% of the sampled companies have been disclosing the information regarding the time, venue and date of AGM, tentative financial calendar, date of book closure, listing on stock exchanges, stock code, market price data, share transfer system, address for correspondence and certificate of auditor on compliance with the corporate governance code. Non-Mandatory Requirements i) Remuneration Committee:- The mean value reveals that 57.44% of the sampled companies have formed this committee. In case of 44.44% of the companies, an independent director has been acting as chairman of the committee. ii) Shareholders Rights: -. 14.36% of the sampled companies have been sending half yearly reports to the shareholders. 7.22% of the sampled companies have passed special resolutions through postal ballot. It has been concluded that 15% increase has been observed in the mean disclosure score over a period of time with base year 2000-01. But overall compliance level is not found to be 100% for all the items. Software industry has been leading among all the industries for the entire period of the study except for the year 2001-02. It has been further concluded from the analysis that Tata Group companies have been leading among all the sampled companies. Moreover, the highest governance disclosure score has been gained by the companies from power industry. b) Case Studies on Corporate Governance Disclosure Practices It has been observed from the analysis that the compliance level regarding the few items of clause 49 of the listing agreement is not 100%. The companies are not paying the attention to disclose the information regarding brief resumes of the directors to be 12
appointed or re-appointed, notice period, severance fee, performance evaluation criteria of directors, etc. Moreover, a few items of revised clause 49 of the listing agreement namely training provided to directors, information on performance evaluation criteria of non-executive directors, risk management disclosure and accounting treatment have not been disclosed by most of the companies from the year 2005-06 onwards. However, the companies have been disclosing the information regarding the code of conduct for its directors and senior management personnel. c) Voluntary Corporate Governance Disclosure Practices of the Selected Companies This objective explains the voluntary corporate governance disclosure made by the sampled companies in addition to the requirements of clause 49 of the listing agreement. Both company wise and industry wise analysis have been carried out for the period of five years. I Year Wise and Industry Wise Findings of Voluntary Corporate Governance Disclosure The year wise and industry wise findings of voluntary corporate governance disclosure are given as follows: i) For the year 2000-01 The mean value reveals that software industry has been leading among all the industries by disclosing 7.68% of items of voluntary corporate governance checklist. On the other hand, iron & steel industry has minimum mean disclosure score i.e. 0.89. ii) For the year 2001-02 Like the previous year, again software industry has highest mean value i.e. 5.06 while the lowest mean value has been observed for iron & steel industry i.e. 1.07. Standard deviation is also highest in case of software industry (6.45%). 13
iii) For the year 2002-03 In this year also software industry has been leading among all the industries by disclosing maximum no. of items of voluntary governance checklist i.e. 5.6%. On the other hand, iron & steel industry has lowest mean disclosure i.e. 1.25. Standard deviation is again highest in case of software industry (8.67) and lowest in case of iron & steel industry (1.69). iv) For the year 2003-04 Again in this year, mean disclosure score has been observed to be highest in case of software industry i.e. 6.8. Just like the earlier years, iron & steel industry has lowest mean disclosure score (1.43). Standard deviation is also observed to be highest in case of software industry (9.44) and lowest for iron & steel industry (2.35). v) For the year 2004-05 For this year also, software industry has been leading among all the industries as it has highest mean disclosure score (8.6). On the other hand, iron & steel industry has minimum mean disclosure score i.e. 3.39. On the whole, an increase has been observed in the mean disclosure score of all the industries from 2.83 in the year 2000-01 to 5.38 in the year 2004-05. Similarly, standard deviation has also increased from 3.07 in the year 2000-01 to 6.42 in the year 2004-05. This signifies the variation in the disclosure of the items over a period of time. In order to see the significance of difference among the disclosure score of industries, Kruskal-Wallis Test H has been applied for the period of five years. No significant difference among the disclosure score of the industries has been observed. II Year Wise and Company Wise Major Findings: The year wise and company wise major findings of the study have been given as follows: i) For the year 2000-01 Infosys Technologies Ltd has been leading among all the sampled companies by disclosing 36% of items of checklist followed by GTL Ltd (17.86%), Dr. Reddy s 14
Laboratories Ltd (10.71%), Pentamedia Graphics Ltd, Bajaj Auto Ltd and Gujarat Ambuja Cement Ltd recording the same score of 8.93% and subsequently followed by Polaris Software Lab. Ltd (5.36%) and so on. ii) For the year 2001-02 In this year also Infosys Technologies Ltd has been disclosing the maximum no. of items of voluntary governance checklist i.e. 23.21% followed by Reliance Energy Ltd (19.64%), Bajaj Hindustan Ltd (14.29%), Bajaj Auto Ltd. (12.50%), Pentamedia Graphics Ltd (8.93%) and so on. iii) For the year 2002-03 Infosys Technologies Ltd has gained the highest score i.e. 28.6% followed by Bajaj Hindustan Ltd (21.43%), ITC Ltd (19.64%), GTL Ltd (17.86%), Dr. Reddy s Laboratories Ltd and Reliance Energy Ltd recording the governance score at same level i.e. 14.29% and subsequently followed by Bajaj Auto Ltd (12.50%) and so on. iv) For the year 2003-04 Infosys Technologies Ltd has recorded the highest voluntary corporate governance score i.e. 34% followed by Bajaj Hindustan Ltd (27%), ITC Ltd (21.43%), Dr. Reddy s Laboratories Ltd (19.64%), GTL Ltd (14.29%) and so on. v) For the year 2004-05 In this year, again Infosys Technologies Ltd has occupied the first rank by disclosing 42.86% of items of governance checklist followed by Reliance Energy Ltd (32.14%), Bajaj Hindustan Ltd (25%), NTPC Ltd (21.43%), ITC Ltd (19.64%), Polaris Software Lab Ltd (16.07%) and so on. 15
Item Wise Major Findings of Voluntary Corporate Governance Disclosure Score of the Companies The brief explanation of item wise voluntary corporate governance disclosure score of the companies under each category is given as follows: i) Board of Directors: The average value reveals that maximum no. of companies have been disclosing the information regarding functions of the board. Nothing has been disclosed about the mechanisms of evaluating the performance of nonexecutive directors till the year 2003-04.The companies have not been providing the training to its board members from the year 2001-02 to 2003-04. ii) iii) iv) Meetings & Attendance: Under this category, the mean value reveals that maximum no. of sampled companies have been providing information regarding the attendance record of individual directors at board or committee meetings. Just 1% of the sampled companies have disclosed the time spent in hours or minutes at board or committee meetings. Formation of Committees: 23.51% of the sampled companies have formed the committee of directors. Just 0.71% of the sampled companies have formed risk management committee. 1.56% of the sampled companies have set up corporate governance committee to frame the corporate governance policies and code of conduct for the directors and other senior management personnel. Corporate Governance Initiatives: 15.53% of the sampled companies have implemented the insider trading code for its management personnel. The companies have not adopted the whistle blower policy till 2003-04. However, in the year 2004-05, 7.14% of the sampled companies have adopted this mechanism. 2.63% of the sampled companies on the basis of an average have disclosed the code of conduct for its directors and senior management personnel. 16
v) Reports of Committees: Just a single company named as Infosys Technologies Ltd. has disclosed the information regarding the CEO & CFO certification on financial statements in the year 2004-05. 1.38%, 0.77%, 1.85% and 1.31% of the sampled companies have been providing the compensation committee report, nomination committee report, audit committee report and investors grievance committee report respectively. vi) vii) Shareholders: Under this category, the average figure reveals that 15.75% of the sampled companies have been disclosing the information of unclaimed dividends. 15.03% of the sampled companies have been filing the quarterly results, shareholding pattern, etc., to SEBI EDIFAR website. 2.10% of the sampled companies have conducted shareholder s satisfaction survey during the period of study and 0.72% of the companies have been disclosing the top ten shareholders of the company. Awards and Accolades: 2.94%, 0.90% and 1.79% of the companies have won the awards for having best corporate governance practices in the years 2000-01, 2003-04 and 2004-05 respectively. Though there is slight increase in the mean disclosure score of voluntary governance items over a period of time yet the overall disclosure score is less than 50%. The companies are not paying attention to adopt the practices other than those as required by law. A few items of the voluntary governance checklist namely whistle blower policy, code of conduct for directors or senior management personnel, CFO/CEO certification on financial statements, training of board members and mechanism for evaluating the performance of non-executive directors have now become the part of revised clause 49 of the listing agreement. 17
d) Impact of Corporate Governance on Financial Performance of the Companies This objective focuses on the impact of corporate governance on financial performance of the companies under study. Corporate governance disclosure score in this chapter has been computed with the help of both equal and unequal weights method. The major findings of this chapter are given as follows:- i) Corporate governance has been found out to be significantly positively associated with net profit margin on sales for just one year out of a period of five years. It is also significantly positively associated with return on assets for the years 2001-02 and 2002-03. On the other hand, no significant impact of corporate governance has been observed for corporate governance on return on equity and Tobin s Q of the companies under study. ii) iii) iv) Vexing results have been observed for relationship between age and financial performance. For accounting based measures of firm performance, a significant negative relationship has been observed with age. While on the other hand, a positive relationship has been observed with measure of market valuation i.e. Tobin s Q ratio. Size has been found out to be positively associated with all the measures of firm performance. It is positively associated with net profit margin on sales for the period of four years out of total of five years. A positive and significant relationship has been found out between size and return on assets for the entire period of study. Return on equity is found to be positively associated with size for the year 2003-04 only. Similarly, positive relationship has been observed between Tobin s Q and size for the years 2003-04 and 2004-05. A significant negative relationship has been observed between risk and return on assets for the entire period of study. Similarly, a significant negative relationship has been observed between risk and return on equity for the years 2000-01 and 18
2001-02. Risk is also significantly negatively associated with Tobin s Q for the years 2000-01 and 2003-04. v) Leverage has significant negative relationship with net profit margin on sales and return on assets for the year 2003-04 only. However, it has also negative but significant association with return on equity from the year 2001-02 to 2004-05. vi) Industry effects reveals that textiles, iron & steel, automobile, cement and sugar industries have significant negative association with net profit margin on sales. Drugs and pharmaceutical and software industries have positive impact on return on assets. In case of return on equity, vexing results have been observed for iron & steel industry. For the measure of market valuation, textiles and software industries have positive and significant association. Moreover, an attempt has also been made to study the impact of corporate governance on financial performance of those sampled companies which had implemented the provisions of clause 49 of the listing agreement in the year 2000-01. Hence, a total no. of 68 companies had been selected from the sample of 112 which started following the corporate governance code from the very first year of its implementation. No significant association has been observed between corporate governance and financial performance of these 68 companies. The almost same results have been observed with both equal and unequal weights methods while examining the impact of corporate governance on firm s financial performance. So far as other explanatory variables are concerned, we didn t find much variations in their β coefficients under both the methods. It can be concluded on the basis of measure of profitability that there exists a very weak relationship between corporate governance and firm performance. 19
E) Implications of the Study The findings of the present study can be beneficial in firm s decision making process. Based on the findings, the followings are the implications of the study: a) Corporate governance has found to be very weakly associated with the measures of profitability. Managers of the firm should try to implement the governance code with true spirit. Good governed companies are able to attract more capital from foreign institutional investors. Hence, it will affect the profitability in a positive manner. b) Findings of the study could be beneficial for general and institutional investors also. Various institutional investors look for the governance record of the company before making investment in it. Industry wise analysis of corporate governance will be helpful for investors in balancing their portfolios. c) Age is found to be negatively associated with measures of profitability. The managers of the older firms should try to adopt the new technologies with latest means of production so that the more output could be produced with lesser cost. Hence, it will increase the profitability position of the concern. d) Managers must try to minimize the risk before making investment in a risky project as the negative relationship has been observed between risk and profitability. Moreover, an appropriate debt-equity mix must be adopted by the firms in order to increase the profitability position of the company. e) Two dimensions namely Board of directors and audit committee have been viewed as important dimensions of corporate governance code by the respondents. So, the companies should focus more on its composition, structure and meetings, etc. The recently occurred scam of Satyam Computer Services India Ltd. raised several questions on the role of board of directors, integrity of independent directors and role of audit committee on Satyam's board. Moreover, there is need to streamline the internal and external audit systems. F) Scope for the Further Research The followings are the few suggestions recommended for further research. 20
a) This study focused on Indian clause 49 of the listing agreement. However, the researchers can make the cross country comparison on the basis of common items of corporate governance codes. b) Broad based Inter Industry wise comparison can be made by including more no. of companies in a particular industry. c) Only corporate governance code in the form of clause 49 of the listing agreement has been studied. Moreover, ownership structure variables such as share of foreign institutional investors, Indian institutional investors, general public, promoters, etc., can be used as proxies for corporate governance. d) Study can be made at micro level also by analyzing the impact of each corporate governance mechanisms such as board size, board structure and composition of the board, etc., on firm performance. e) The researcher can compare the performance of the firm before and after the implementation of the revised clause 49 of the listing agreement. f) In addition to Tobin s Q, other market based measures such as price earning ratio, excess stock returns and earning per share, etc., can be used as indicators of financial performance. Moreover, researcher can use certain value based measures also like EVA and MVA. g) Period and sample of the study can be extended in order to draw more meaningful conclusions. 21