REVIEW OF LITERATURE Rechner and Dalton (1991) Cadbury (1992)

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1 REVIEW OF LITERATURE Review of literature is helpful in gaining background knowledge of the research topic and identifying the various issues related to it. In this way, it prepares the ground for justification of research plan. It is also helpful in understanding the research problems thoroughly, formulating the objectives and research design of the study. The present study extends the previous literature by examining the impact of corporate governance on financial performance of companies in a developing country like India. The literature is available in abundance on this emerging topic of research covering all the dimensions of corporate governance namely board structure, board size, its role and composition, board sub committees, risk management, investors protection, manager s/ceo incentives, shareholders rights, etc. Hence, every attempt has been made to include all the important studies dealing with various aspects of corporate governance. Various articles, working papers, books and reports of the regulatory authorities have been studied for the purpose of thorough understanding of this concept. The review of relevant literature is as follows: Rechner and Dalton (1991) in their study examined the choice between CEO duality and independent board leadership structure and further its impact on organizational performance. A sample of 141 companies for a period of 6 years i.e. from 1978 to 1983 had been selected from Fortune 500. The data with respect to performance measures had been collected from Compustat database and Standard & Poor (S&P) stock reports. It was observed that the firms having independent director as a chairman were consistently performing better than the CEO duality firms. The authors had also suggested the scope of further research by examining the impact of board leadership structure on shareholders return. Cadbury (1992) chaired a committee on Financial Aspects of Corporate Governance. In his committee report, he discussed the Code of Best Practices to be followed by the companies. The code had 19 recommendations related to independent directors, non-executive directors, executive directors, reporting and control. The committee s report had also stressed on the formation of audit committee with independent members. The committee also recommended the disclosure of executive

2 directors remuneration in detail along with the performance incentives. So far as internal control system was concerned, it had been recommended to report on the effectiveness of the internal control system adopted by the companies. On the whole, the main focus of the report was to assess the accountability of the board towards its shareholders and society at large. Daily and Dalton (1994) focused on the relationship between governance structure and corporate bankruptcy. The study covered a period of ten years from 1972 to 1982 for 57 bankrupt and 57 surviving firms. Board composition and board structure were taken as governance variables. On the other hand, profitability, liquidity, leverage, common stock holdings and quality of firm s board were taken as control variables. Logistic regression analysis technique had been used for data analysis. It was concluded that bankrupt firms had lower profitability, lower leverage and lesser equity in the hands of institutional investors as compared to surviving firms. It was also observed from the analysis that the bankrupt firms often had duality on their boards. The authors had also stated the scope of further research in terms of factors affecting bankruptcy, implementation of effective counter strategies adopted by the firms during slowdown period and further permitting the firms to survive after bankruptcy. Greenbury (1995) chaired a committee on Directors Remuneration. In his committee report, he focused on the guidelines for determining the directors remuneration as well as its disclosure in the annual reports. The committee gave the recommendations in the form of Code of Best Practices, divided into four categories viz. remuneration committee, disclosure and approval provisions, remuneration policy, and service contracts and compensation. It had been recommended to set up remuneration committee of non-executive directors. The committee should report on remuneration policy including performance criteria, pension funds, service contracts, severance fee, etc., to the shareholders. The committee recommended to all the listed companies in UK to comply with the code of best practices and any non-compliance related to this code should be clearly disclosed in the annual reports of the companies. 22

3 Yermack (1996) examined the association between board size in terms of no. of directors on the board and market value of firms by using Tobin s Q as a measure of market valuation. A sample of 452 companies had been drawn from Forbes Magazine list for a period of eight years starting from 1984 to An inverse association was found between board size and firm value. Moreover, the author had also observed inverse relationship between board size, return on sales and return on assets. It had been suggested that CEOs of smaller board companies received stronger compensation or incentives than large and medium boards companies. Albo et al. (1998) assessed the financial structure, efficiency of investment and the effectiveness of current corporate governance mechanisms of Thai firms. The study covered a period from 1994 to 1997 of the firms listed on Thai Stock Exchange. The authors had focused on the financial crisis in Thailand which was the main cause of deterioration of corporate sector. It was concluded that the firms with highly concentrated ownership showed a deteriorating performance in relation to firms with less concentrated ownership. Empirical findings also revealed the weakness of corporate governance and the risky corporate financing structure. The researchers suggested that better enforcement of corporate governance rules, improvement in disclosure and accounting practices, strengthening of institutions and fourthly and lastly improving the corporate governance framework would improve the corporate financing and corporate governance practices. Farrer and Ramsay (1998) discussed the relationship between the directors shareholdings and the corporate performance of Australian companies. A sample of 180 listed Australian companies, classified into large, medium and small had been taken. The data had been collected from annual reports of the companies and ASX Statex database for the year Tobin s Q, shareholders returns and growth in earning per share were used as performance variables. Ordinary least square (OLS) regression technique had been used for analysis purpose. The results revealed the variations according to the performance measures used. A positive correlation had been found between directors shareholdings and returns to the shareholders. However, a negative relationship was observed between Tobin s Q, growth in EPS and directors share ownership. It had been 23

4 suggested to the directors of small companies to enhance their personal shareholdings over there. Hample (1998) chaired a committee on Corporate Governance. In his committee report he supplemented the earlier reports of Cadbury and Greenbury committees by giving some additional recommendations on the roles of directors, shareholders, annual general meetings and auditors. It had been recommended to provide training to the directors after their appointment on board. So far as non-executive directors were concerned, it had been proposed to make their composition as 1/3 rd of total members on the board along with independent board structure. It had been further recommended in line with the Greenbury Committee Report to reduce the directors contract period to one year but at the same time, the committee also recognized that this could not be implemented immediately because of existing contracts of directors. It had been further recommended that the directors should report on company s internal control system. This recommendation was considered to be an improvement over the Cadbury committee s recommendation of reporting the effectiveness of internal control system. Further, it was suggested that auditors should report privately to the directors on internal control system. Klein (1998) in his study examined the association between firm performance and board composition through the structure of board committees and directors roles within these committees. The study covered a period of two years from 1992 to 1993 of 485 U.S.A firms. The data were collected from proxy statements, annual reports and 10 K filings of U.S. firms. Return on assets, Jensen Productivity measure and market returns were used as firm s performance variables. Percentage of inside and outside directors on the board had been taken as explanatory variables. The researcher had applied OLS regression technique for data analysis. The boards with more CEO s influence were found to have higher percentage of insiders than the low CEO s influence boards. The researcher had concluded a positive and significant relationship between insider directors on finance and investment committees and firm performance measures. The study also highlighted the advantage of having inside directors on the board and it had been suggested not to rely totally on independent directors. The researcher had suggested reevaluating the nominating procedure and composition of board members. 24

5 Core et al. (1999) examined the association between the level of CEO compensation and quality of firm s corporate governance. It had been further assessed whether firms with weaker governance structure had poor performance. The data with respect to CEO compensation had been collected through mail survey of 495 respondents of 205 public traded U.S firms for a period of 3 years. Return on assets and stock returns were taken as firm performance variables and total compensation, cash compensation and salary drawn were taken as measures of CEO compensation. The findings revealed that the board and ownership structure were associated with CEO compensation after controlling the factors such as firm s demand for well qualified CEO, firm s performance in the past years and risk. It was also concluded that CEO earned higher compensation in case of less effective governance structure due to the more agency problems in these firms. Dalton et al. (1999) examined the relationship between size of the board and firm performance by using Meta analysis technique on 131 samples, consisting of 20,620 firms. Both accounting based and market based (Jensen s alpha, Treynor measure and Sharpe measure) indicators were used to study the relationship. A positive relationship was found between board size and financial performance. It had been suggested that resource dependency of directors and their linkage with external environment could enhance the company s performance in case of critical situations. La Porta et al. (1999) examined the difference in laws and effectiveness of their enforcement across the countries and further discussed how well investors were protected by law from the expropriation of the insiders. The study covered the data of 49 countries divided on the basis of legal origin. It was concluded that common law countries had stronger protection of outside investors as compared to others. It was also pointed out that strong investor protection associated with effective corporate governance led to the developed financial markets, efficient allocation of real resources and dispersed ownership of shares. The researchers suggested that corporate governance reforms should be introduced and it could be only possible through the introduction of more changes in the legal structure of a country. 25

6 Vafeas (1999) empirically examined the relationship between board meeting frequency and firm value. The sample consisted of 307 firms for the period of 5 years i.e. from 1990 to The data with respect to corporate governance and ownership structure had been collected from annual proxy statements. The results indicated that the boards who met more frequently were valued less by market and hence resulted in decline in share prices. Further, it had been observed that operating performance showed improvement in the years by following high meeting frequency. Moreover, board responded to poor performance by raising their level of activity which resulted in improved operating performance. The author suggested the firms to reconsider the timings and frequency of board meetings for strategic planning process Fuerst and Kang (2000) analyzed the impact of ownership structure and governance characteristics on firms operating performance and stock prices. A sample of 947 firms had been taken for the purpose of study. Tobin s Q ratio and residual income were taken as measures of market valuation and operating performance of the firms respectively. Insider ownership, holdings by controlling shareholders, etc., were taken as measures of ownership structure of the firm. Similarly, proportion of outside directors on the board, board size, CEO s tenure and his position were taken as governance variables. Finally, it was concluded that increase in the size of outside directors without impairing with their share ownership had adverse impact on the firm performance. The results further revealed the negative impact of block holdings of external shareholders on firm s operating performance. CEO chairmanship was also found to be negatively associated with market value and his tenure too was negatively related to the operating performance. Ghosh (2000) outlined the ten basic issues of the board which had impact on the quality of governance. The issues discussed included information, time and resources that directors were devoting for governance, their expertise, educational qualification of outside members on the board, separation of CEO and chairman, business ethics, interests of stockholders, short term and long term objectives, board culture and self evaluation of the board. The author had also focused on the need of self discipline among the members of the board. 26

7 Kar (2000) discussed certain theoretical issues on corporate governance in relation to investor protection. The main objective of the study was to find out as to why corporate governance should be considered as an essential tool for investor protection. An attempt had also been made to analyze the corporate governance system across the major markets of the world and it was inferred that no single system of good governance existed because of difference in culture, goals and histories of the countries. The researcher also pointed out the initiatives taken by SEBI to improve corporate governance practices and he further suggested the changes in technology, business environment and competitive forces in India. It was also suggested that the various disclosure practices of the companies regarding the perquisites, salaries drawn by the managers of the firm, transfer pricing, related party transactions, etc., should be considered as an important instrument of corporate governance and investor protection. Saeed (2000) listed certain developments in corporate governance in U.K., Pakistan, Hong Kong and Malaysia. The author suggested that implementation of the practical aspects of corporate governance for strengthening the efficient operations has become the need of the hour. Turnbull (2000) chaired a committee on Internal Control. In his committee report, he provided the guidance for the directors on the combined code of internal control system. The committee recommended that board should assess the effectiveness of internal control system in relation to identifying, evaluating and managing the significant risks. The board must perform the internal audit on annual basis where the company had not set up any internal audit department. Moreover, the committee recommended that board should establish a sound internal control system to protect the shareholders interests. Chen (2001) analyzed the relationship between ownership structure and corporate performance. A sample of 434 manufacturing firms, listed on the Shanghai Stock Exchange and The Shenzhen Stock Exchange had been taken for the purpose of study. Firm performance had been measured with Tobin s Q ratio. Ownership concentration and classification of owners such as shares held by state agencies, domestic institutions, 27

8 management shareholdings and individual shareholdings were taken as ownership structure variables. While on the other hand, age of the firm, debt-equity ratio, growth of firm, size of firm in terms of log of assets, stability of business environment and profitability measured in terms of ROA had been taken as control variables. Ordinary least square regression technique had been applied for data analysis. A strong relationship had been observed between ownership structure and corporate performance. The results also revealed a positive and significant relationship between domestic institutional shareholding and corporate performance. On the other hand, a significant negative relationship was observed between proportion of shares traded on the market and corporate performance. The author also found positive but insignificant association of management ownership with corporate performance. Patiabandla (2001) in his research paper examined the role of large outside investors especially the foreign institutional investors and its impact on corporate performance in terms of profitability. The above objective had been verified on the basis of firm level data of 11 Indian industries for a period of ten years from 1989 to The data with respect to shareholdings of foreign institutional investors, public financial institutions and general public had been collected from Prowess database of CMIE. The study revealed a positive association between foreign equity holdings and profitability. However, large chunk of share ownership of Govt. financial institutions led to the lower profitability due to higher agency cost. The researcher had also pointed out the various reasons due to which the agency cost was high namely employment security to agents of the public institutions, poor monitoring by the Government and the possibility of collusion between the agents of the institution and managers of the firm. The scholar suggested that the foreign institutional investors were able to monitor and discipline the managers of the firms as they were major source of capital for the firm. The role of foreign institutional investors would definitely improve the existing corporate governance mechanisms of the firms. Rhoades et al. (2001) examined the relationship between board leadership structure and organizational performance by performing Meta analysis on 22 independent samples across 575 companies. A significant positive association had been found 28

9 between an independent board structure and firm performance. The author had also stated the further scope of research by covering other organizational perspectives such as stewardship theory and resource dependency of the directors in order to understand the impact of duality on firm performance. Carson (2002) identified the factors associated with the board sub committees especially audit, remuneration and nomination committees with the sample of top 361 Australian companies for the year Big 6 auditors, non-executive directors, nonexecutive chairman, no. of intercorporate relationships of the board and shareholders were taken as dependent variables. However, company size, board size and leverage were used as control variables. Logit regression technique had been used for data analysis. Audit committees were found to be positively associated with Big Six auditors, intercorporate relationships and size. However, remuneration committee also found to be associated with Big 6 auditors, intercorporate relationships and higher level of institutional investment. Further, the results revealed that the nomination committee was not related to auditors, directors or investors but was related to board size and leverage. The researcher also observed that the remuneration committee was at a maturity stage and nomination committee was relatively immature. Gibson (2002) investigated the link between CEO turnover and firm performance for 1200 non financial firms in 8 emerging markets for the period of The study concluded that CEOs of emerging market firms were more likely to lose their jobs when the firm performance was poor, indicating that corporate governance was effective in emerging markets. The scholar had also mentioned the difficulties faced by him to identify the top managers of the firm. It had been observed that the presence of large shareholders negated the link between poor performance and CEO s turnover. It was suggested that the minority shareholders in the emerging market firms, controlled by a large shareholders, should be aware of this fact that the managers might favour the large shareholders at the expense of the minority shareholders. As the emerging markets continue to grow, more research would be required to see the maturity level of corporate governance system over there. 29

10 Kant ( 2002) in his unpublished thesis studied the disclosure practices, quality of governance and shareholder value of first hundred most valuable companies, based on the list of BT-500, published by Business Today magazine. The study covered a period of 5 years from 1996 to A governance index was developed to measure the governance practices of 44 companies for the year and a questionnaire was framed to obtain the scores of the items mentioned in the disclosure index. The researcher didn t get significant variations in the quality of corporate governance among the sampled firms. Some of the companies performed well so far as governance practices were concerned and received awards or recognitions for their excellent practices. In context with the governance parameters such as board of directors, its composition and financial performance, most of the companies performed well. In case of company attributes such as sales, total assets and net worth, the researcher found insignificant association with quality of governance. On the contrary, a positive relationship had been observed between quality of governance and financial variables like PAT, ROE and ROI. King (2002) chaired a committee on Corporate Governance. In his committee report he recommended the guidelines to promote the standards of corporate governance in South Africa. The committee gave its recommendations related to composition and structure of the board, board meetings and committees, risk management, internal audit, sustainability reporting, code of ethics, accounting and auditing, etc. Moreover, the committee focused on the need of self evaluation of board members in terms of skills, knowledge, experience and certain other demographic characteristics. Klapper and Love (2002) examined the corporate governance practices of 374 firms in 14 emerging Markets namely Brazil, Chile, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, South Africa, Taiwan, Thailand and Turkey. The researcher used the CLSA questionnaire based on 57 qualitative statements. The questionnaire used by CLSA had been divided into seven broad dimensions namely discipline, transparency, independence, accountability, responsibility, fairness and social awareness but the researcher excluded the category of social awareness to study the governance practices of the firms. Tobin s Q and ROA had been used as measures of financial performance. Moreover, judicial efficiency index constructed by International 30

11 Country Risk Guide (2000), shareholders rights and legality had been used as three country level measures to check the effectiveness of legal system. A positive correlation had been observed between Tobin s Q and ROA of the firms. It had been further concluded that corporate governance played a major role in the countries having weak legal environments. Further, it had been suggested to improve the system of investor protection and poor judicial system as the corporate governance and performance of the firms found to be low in the countries having weak legal environments. Mohanty (2002) examined the role of institutional investors in the corporate governance system of companies in India. Further, an attempt had been made to study the relationship between corporate governance and firm performance. The researcher had developed a corporate governance index based on nineteen measures of corporate governance. The sample consisted of 113 non-finance companies and the data with respect to financial performance variables as on 31 st March, 2001 have been collected from the Prowess database of CMIE. Tobin s Q and stock returns had been used as measures of financial performance. Price to book value ratio, beta, age of the company and industry effects had been used as control variables. The researcher had used the simultaneous equation model to test the results. An attempt had been made to relate the corporate governance index with the financial performance of these 113 companies. The study revealed that the corporate governance index was positively associated with the financial performance and with the stakes of mutual funds (except UTI) but negatively associated with the stake of banks due to the reason that mutual funds generally invested their money in the companies having good governance records. Gunasingh (2003) in his article discussed certain changes in statutory and self regulating bodies in India during the last decade. The author highlighted that the concept of corporate governance was based on the values and principles. So the regulation of the firms in governance matters would not serve much purpose. Being an artificial entity, good governance of a company was depended on the certain features such as fairness, integrity and loyalty of the people associated with it. 31

12 Gupta et al. (2003) analysed the corporate governance reporting practices of 30 selected Indian companies, listed on Bombay Stock Exchange. Corporate governance section of the annual reports for the years and had been analysed by using content analysis. The researcher had used the disclosure score as dependent variable and size of the company in terms of total assets, number of independent directors and listing status were taken as independent variables. Ordinary least square regression technique was used for data analysis. The researchers found variations in the reporting practices of the companies. In certain cases, omission of mandatory requirements as per clause 49 had also been observed. Joh (2003) examined the corporate governance and firm profitability of Korean firms before the economic crisis. His findings revealed that weak corporate governance system offered few obstacles against controlling shareholders expropriation of minority shareholders. Weak corporate governance system gave opportunity to poorly managed firms to stay in the business and thus it resulted in inefficiency of resource allocation and low profitability of the firms over the years. Weir et al. (2003) assessed the effectiveness of internal as well as external governance systems and their further impact on company s performance measured by Q ratio. A sample of 312 U.K. firms had been selected from 1996 Times 1000 for the purpose of study. Audit committee, percentage of independent and outside directors on the board, shareholding pattern of CEO, average no. of additional directorships held by non-executive directors and takeover intensity by sector had been taken as governance measures. The data with respect to governance variables and firm performance had been extracted from financial statements of firms and Extel Company Analysis Database respectively. Finally, a weak relationship had been observed between the internal governance mechanisms and the firm performance. It was also concluded that market for corporate control had positive impact on firm performance. The researchers had pointed out in their study that internal governance structure should not be taken as effective measure to protect shareholders interests. 32

13 Aggarwal (2004) observed the changing perception of business ethics after Enron collapse. Business ethics are not only linked with the behaviour of companies towards its employees but also with the nature and quality of relationship with all the stakeholders. It had been suggested in context of corporate governance that the business must balance its desire for profits against the desire and needs of the society while applying ethics to it. So researcher emphasized the need for adopting the corporate social responsibility concept by the firms. Agrawal and Fuloria (2004) analysed the perceived connection between competitive advantage and corporate governance from the perspective of both company and consumers. An attempt had been made to identify the aspects of corporate governance that consumers and companies were considering as important in Information Technology (IT) sector. The authors conducted a consumer survey with 200 consumers and questionnaire was circulated to 5 selected Indian IT companies. The findings revealed the variations between the consumer expectations and companies perceptions regarding the aspects of corporate governance. The author also gave certain recommendations for IT sector to gain the competitive advantage through corporate governance and suggested that corporate governance might become a competitive necessity in future. Bakshi (2004) in his article concluded that mere compliance of the rules of regulatory authorities such as Companies Act 1956 and Stock Exchange regulations did not assure the effectiveness and efficiency on the part of management for conducting the affairs of the company. The author had further observed that the duality on the board indeed did not serve the purpose of good governance. It was suggested that proper model of corporate governance should be there to protect the investors interests. Bathala (2004) described the characteristics of boards of small firms especially of privately owned firms and further tried to relate them with corporate governance and financial policies. A sample of 2870 firms, both private (2251) and public (619), had been drawn from Standard & Poor (S&P) directory of corporations. The data with respect to ownership structure, CEO characteristics, financial policies and control mechanisms of 33

14 firms had been collected with the help of questionnaire. T -test, Chi-square test and multiple regression techniques had been used for data analysis. The results revealed that privately owned firms had higher percentage of outside directors but the real authority of decision making vested in the hands of CEO and major stockholders. Moreover, outside directors were viewed as resource providers because of their external contacts. The authors suggested the small firms to include members on the boards having expertise in various fields as only then they could frame the financial policies more efficiently with respect to raising capital, debt management and dividend policy. Bhasa (2004) discussed the models of corporate governance starting from managing agency system in pre-independence period to the present day model after post liberalization. The author highlighted certain anomalies present in the corporate governance system as well as the regulatory mechanisms such as SEBI s Act, Co s Act 1956 and recommendations of Birla and Naresh Chandra Committee. At the end, the author has given some recently proposed reforms for the corporations in the form of companies (Amendment) Bill, Brown and Caylor (2004) identified the various factors representing good governance and their association with firm s performance. Governance scores based on 51 factors and divided in 8 categories had been computed for 2327 individual firms as on Feb The data with respect to governance scores and firm s performance had been taken from Institutional Shareholders Services (ISS) and Compustat Database respectively. The researchers had taken into consideration the six performance measures such as return on equity, net profit margin, sales growth, Tobin s Q ratio, dividend yield and share repurchase. Pearson, Spearman coefficient of correlation and multivariate regression techniques were used for analysis purpose. Results indicated that firms with better governance had high ROE, high net profit margin, high dividend yield and more shares repurchases. Das and Ghosh (2004) examined the link between CEO turnover and bank performance for 27 public sector banks in India. The study covered a period of 7 years from 1996 to The results revealed that the CEOs of low performing banks had 34

15 higher turnover than the CEOs of well performing firms. Similar results were obtained when sample extended to entire banking system and it was inferred that corporate governance was effective in emerging market. The researchers suggested that as the Indian economy grew, there is need to reorganize the corporate governance system. Doidge et al. (2004) tried to examine the relationship between country characteristics like legal protection to investors, economic and financial development and the adoption of corporate governance measures by the firm. The data with respect to firm characteristics such as sales growth, total assets, ownership, cash holdings and standard industrial classification code (SIC) had been obtained from Thomson Financial Worldscope database. Anti-director rights and rule of law had been used as country characteristics variables. The sample consisted of 15,000 non-financial firms available on Worldscope. Logit regression technique had been used to analyze the data. By using CLSA (Credit Lyonnais Securities Asia) corporate governance rating of 495 firms of 25 countries and Standard and Poor (S&P) transparency and disclosure ratings of 711 firms of 39 countries, it was concluded that the larger variations in these ratings were mainly due to the country s characteristics. In case of developed nations, firm characteristics had greater impact on the governance ratings. Moreover, the study also revealed that the investor protection mechanism adopted at the country level was to be considered as an important determinant of corporate governance. The economic and financial development of a particular country affects the firm s decision to adopt good measures of corporate governance. Gupta (2004) made a comparison of the recommendations of different committees set up in India. He raised certain issues like non-audit assignments given to the auditors, the present remuneration structure framed by the directors, their professional competencies and busy schedule. It had been pointed out to deliberate upon these issues in-depth. The author suggested that present regulations should be made more realistic and practical and moreover a complete legal backing of committees recommendations should be there. 35

16 Jog and Dutta (2004) described the link between the quality of corporate governance, firm s performance and CEO s remuneration. A sample of 260 Canadian firms, belonging to Standard & Poor (S&P) and Toronto Stock Exchange (TSE) index had been selected from Globe & Mail. Return on Assets, return on equity, stock market returns, and Tobin s Q ratio or price earning ratio were taken as performance variables. Similarly, size and composition of board, board ownership of equity, board independence, capital market environment, ownership structure and CEO incentives were taken as governance variables. Risk, age, average of size, average of R&D, average total assets of the firms were taken as control variables. The data with respect to governance and financial performance variables had been collected from Canadian Financial Market Research Centre database, stock guide publications and annual reports of the companies. Multivariate regression analysis had been performed to ascertain the results. The authors found insignificant relationship between firm performance and corporate governance but so far as CEO s salary was concerned, the researcher found a positive and significant correlation with the board size. Lal (2004) discussed certain theoretical issues on corporate governance. He gave three aspects i.e. accountability, transparency and equality of treatment for all stakeholders for managing the corporations efficiently. He raised the issue of excessive benefits or perquisites drawn by the CEO of the company and stated that the full disclosure of these benefits in the annual reports was absent. It was suggested that the business managers should come forward with the ideas of self regulation in order to render more effective services to the whole community. Marisetty and Vedpuriswar (2004) in their study used the data of NSE top 100 companies for a period of 1996 to 2003 in order to study the dividend policy, mergers and takeover issues, preferential allotment of shares and sale of assets. Standard and Poor (S&P) rating criteria was used to identify good and bad governance companies. It was concluded that the share mispricing was low for good governance companies as compared to bad governance companies. However, good governed companies were found to be highly mispriced during the event announcement. 36

17 Morck (2004) focused on certain advantages of family control business such as freedom from agency problems, absence of takeover and challenges by the institutional investors at shareholders meetings. The researcher concluded that the extensive corporate control by few old families was not desirable from shareholders point of view because the managers of these firms served at the pleasure of the family and not at the pleasure of general public. It was also observed that the countries with corruption, poor legal shareholder s protection and presence of corrupt judiciaries generally have highly concentrated ownership. Mukherjee and Ghosh (2004) focused on the financial decisions taken by the managers and their impact on performance. The study covered the period of 6 years from for 4 selected Indian industries viz. electrical machinery, pharmaceutical, software and textiles. An ordinary least square (OLS) regression model and the correlation coefficients were used for analysis purpose. The results of the study varied from industry to industry but on the whole, they showed that certain important decisions on R&D and import were not taken by the firm s managers seriously. Moreover, the factors such as shareholder s concentration and director s shareholding were also found to be ineffective for value maximisation in most of the industries. The researcher had also concluded that the decisions taken by the managers on some important issues were still considered as a matter of routine nature. Srikrishna (2004) concluded that due to globalization, the changing perspectives of investors and changing concept of risk, there was need for the professionals to raise their competencies and capabilities to manage company s resources effectively with high standards of ethics. He further stated that the evolution of this corporate governance concept had changed the perspectives of accountants also. Collett and Hrasky (2005) studied the relationship between the voluntary disclosure of corporate governance information by the companies and their intention to raise both equity share capital and debt. A sample of 299 companies, listed on Australian stock exchange had been taken for the year 1994 and Connect 4 data base had been used for collection of annual reports of the companies. The data with respect to voluntary disclosure had been collected for the year 1994 as later it became mandatory for the 37

18 Australian companies to disclose corporate governance practices. The multivariate logistic regression technique had been used. The researchers had found out that only 29 Australian companies made voluntary corporate governance disclosure and the degree of disclosure varied from company to company. On one hand, significant association was found between voluntary disclosure and equity share issue but on the other hand, the researcher found no significant association between debt raising and voluntary disclosure. Dwivedi and Jain (2005) investigated the relationship between corporate governance and firm s performance of 340 large listed Indian firms for the period of 1997 to Tobin s Q ratio had been taken as a measure of financial performance and board size, shares held by FIs, foreign shareholdings, directors and public shareholdings were considered as corporate governance variables. However, R&D expenditure, return on capital employed no. of shares transactions, debt-equity ratio of the firm were taken as control variables. It was concluded that foreign shareholdings had positive impact on firm performance and public shareholdings contributed negatively to the firm performance. Moreover, insignificant positive association was also found out between board size and firm value. Similarly, the author observed insignificant but positive impact of Indian institutional investors shareholdings on firm s performance. The author had also stated the future scope of the study in context of other attributes of governance related to board. Kang and Zardkoohi (2005) highlighted the required conditions for the adoption of duality. By analyzing the 30 empirical studies on duality and performance relationship, the researcher suggested the five propositions such as reward, solution, power, social exchange reciprocity and institutional. The researcher had suggested for testing these propositions on public listed companies having changed from non-dual to dual board leadership structure. It had been further suggested to take excessive care in adopting duality on the board because the increase or decrease in firm performance depended on the conditions of its adoption. Khiari et al. (2005) in their study investigated the association between firm performance and its characteristics by using Governance Efficiency Index. The researcher had also tried to study the interdependence between governance mechanisms. The study conducted on 320 large American firms for a period of 8 years from 1994 to 38

19 2001 of. Tobin s Q was taken as a measure of firm performance. Dividend yield, leverage, firm size and ROE had been used as control variables. Non linear factorial analysis technique had been used for analysis purpose. The firm s characteristics such as size, dividend yield and ROE had a positive impact on firm s performance. It had been further observed that inside control efficiency and financial control efficiency had also significant positive impact on firm s performance. However, governance mechanisms such as managerial discretion, ownership concentration, dominance of the board by CEO and manager s entrenchment had negative impact on firm s performance. Kim (2005) analysed the board network characteristics such as board network density and board external social capital and its further impact on firm s performance. The author had also discussed in detail the three important roles of board namely monitoring, service role and resource dependency. The researcher had explained the resource dependency in terms of acquiring the scarce resources for the company with the help of board network characteristics. The study covered a time period of 10 years from 1990 to 1999 of 199 large public traded Korean companies. ROA was used as a measure of firm s financial performance. Leverage, size in terms of total assets, board size and age of the firm had been used as control variables. The data with respect to executives had been collected from Korean Listed Companies Associations. However, the data with respect to financial performance variables had been obtained from the annual reports of the listed companies. Generalized least square regression (GLS) with year dummies had been used to analyse the data. Year dummies had been introduced to control the effect of year specific heterogeneity due to Asian financial crisis. It was concluded that the board network density had a positive effect on the firm s performance. A positive relationship had been observed between board members elite school network and firm s performance but the external associate s network had no significant impact on firm s performance. Kula (2005) studied the impact of role, structure and process of boards on the performance of Turkish companies. A sample of 386 small and non-listed stocks ownership companies had been taken for the purpose of study. The data with respect to roles, structure and board process attributes had been collected with the help of questionnaire duly filled up by the directors of the companies. Growth in dividends, sales 39

20 volume, market share, resistance to competitive forces and adoption of products by market were taken as firm s performance variables. Firm performance had been considered as dependent variable. Factor analysis and ordinary least square regression techniques were used for analysis purpose. It was concluded that board structure had significant positive impact on firm s performance. So far as board process attributes, its effectiveness and access to information were concerned, a positive relationship was found with firm s performance. Out of three board roles i.e. control, service and resource acquisition, the researcher observed that only resource acquisition was positively linked with firm s performance. The researcher had also pointed out the possibility of biasness of respondents while furnishing the relevant information. Phani et al. (2005) in their paper investigated the relationship between insider ownership and firm performance of Indian firms. The study covered the period of 12 years from 1989 to 2000 divided into four sub periods of 3 years each for all manufacturing companies listed on BSE. Promoter s holdings in the firm had been taken as insider ownership variable. Similarly, ROA, profit margin, asset turnover ratio, interest coverage ratio, manpower ratio, reinvestment rate, debt-equity ratio and foreign borrowings/total debt had been used as firm performance variables. Size of the firm in terms of sales and age were used as control variables. The researcher found no link between insider ownership and firm performance in case of majority of the industries. So far as other industries were concerned, the impact of insider ownership on performance was observed for a particular time period of study only. Prasanna (2005) in her study of 130 Indian companies, focused on relationship between independent directors and financial performance. The study covered a period of three years from 2002 to Composition of independent directors, participation in board meetings, annual general meetings, audit committee meetings and chairmanship of governance committee were taken as independent variables. However, value creation as measured by market value to book value ratio had been taken as a dependent variable. Multivariate regression analysis technique had been used to analyze the data. She found negative relationship between independent board and value maximization. Further, 40

21 debates on some issues related to independent directors as discussed by Irani committee and SEBI had been pointed out. Sheu and Yang (2005) studied the relationship between insider stock ownership and firm s performance of 333 Taiwanese electronic companies for a period of 5 years from 1996 to Total factor productivity had been taken as firm performance measure and age, research and development expenses were taken as control variables. Restricted (or residual) Maximum Likelihood (REML) had been employed for estimating the desired results. A positive relationship had been found out between firm productivity and executive to insider holding ratio. On the other hand, insignificant correlation was observed between board to insider holding ratio and total factor productivity. The author had further stated that increase in executive stock ownership would improve firm productivity because of high technology expertise of executive members. The board members and block holders did not possess managerial talents and expertise to deal with crucial strategic issues. It had been suggested that the firms should increase the stock ownership of executives in high tech firms to improve firm s performance. Wan and Ong (2005) in their paper studied the gap between board structure and board performance through board process. A sample of 212 public listed companies in Singapore stock exchange had been taken and the information on board process and roles had been obtained by circulating a questionnaire to the directors of the companies. CEO- Chairman Duality and insider vs. outsider directors relationships were taken as measures of board structure. Similarly, board process had been measured in terms of effort norms, conflicts, skills and knowledge of directors. Board size, industry and company size were used as control variables. A transparency index, given in the The Business Times newspaper of Singapore had been used to measure the board performance. Reliability and validity regression analysis had been performed to assess the relevant results. It was concluded that board structure did not affect board process and performance. However, board process was related to board performance. From governance point of view, only board structure was the determining component but so far as board reforms were concerned, a need arose to concentrate on crucial issues such as board meetings, debates 41

22 in the meetings on certain items, personal conflicts of board members, their skills and knowledge. Barako et al. (2006) examined the extent of voluntary disclosure by Kenyan companies over and above the mandatory requirements. The researcher also measured the extent to which corporate governance attributes, ownership structure and company characteristics influence voluntary disclosure practices of the companies. The study covered a period of ten years from 1992 to It comprised of all the companies listed on Nairobi stock exchange, classified into agriculture, commercial and service, finance and investment and industrial and allied sectors. Weighted disclosure index had been used for analysis purpose. The results revealed that the audit committee was a significant factor associated with the level of voluntary disclosure while the proportion of non executive directors on the board was negatively associated. It was also observed that institutional and foreign ownerships had significant positive impact on voluntary disclosure but on the other hand, board leadership structure, liquidity, profitability and type of external audit firm had no influence on the level of voluntary disclosure Dhawan (2006) identified the role of board of directors in corporate governance in large listed firms of India. The primary data had been collected through a questionnaire from 89 companies listed on Bombay Stock Exchange and Delhi Stock Exchange. It was concluded that increase in turnover influenced the board size only up to a certain level. However, the skills and knowledge of directors were of paramount importance. The appropriate age group of directors was found to be years. So far as meetings of directors were concerned, it was found that these should be convened bi monthly or quarterly and each director must have information and details about the meetings and agenda. Gupta (2006) traced out the differences in corporate governance practices of few locally based selected companies of automobile industry in Haryana. Three companies namely Hero Honda Ltd, Maruti Udhyog Ltd and Escorts Ltd were selected on the basis of their size and reputation in the market. The data with respect to governance practices had been obtained from the annual reports of the companies for the year The 42