AEDEM

Introduction

Corporate governance has become a popular discussion topic in developed and developing countries. Corporate governance comprises several elements of the structure of the government, which includes capital, labour, market, organisation along with their regulatory mechanisms. The widely held view that corporate the interests of shareholders has led to increasing global attention. Today corporate governance has become a worldwide issue and the development of corporate governance practices has become a prominent issue in all countries in the world. Corporate governance is a system of structures and processes to direct and control the functions of an organization by setting up rules, procedures and formats for managing decisions within an organization. It specifies the distribution of rights and responsibilities among company’s stakeholders (including shareowners, directors, and managers) and articulates the rules and procedures for making decisions on corporate affairs. It thus provides the structure for defining, implementing and monitoring a company’s goals and objectives and ensuring accountability to appropriate stakeholders. Hence, the corporate governance issue widely debated in the developed market economies needs to be discussed in a different vein in the Indian context. India for example did not share the set of factors responsible for the Asian crisis, which were largely macroeconomic and related to bank failure due to unprecedented and unchecked growth (Manju Jaiswal & Ashok Banerjee, 2010). Similarly structural characteristics in the Indian corporate sector are quite different from that of US and UK leading to a different set of corporate governance issues here.

Corporate governance norms in India have evolved well over the year’s post-economic liberalization, with SEBI constituting a number of committees to suggest codes of conduct for good governance of corporate organizations. This was followed by the listing agreement under Clause 49 and by the voluntary guidelines of corporate governance in 2009 laid out by the ministry of corporate affairs. These norms are inherently related to the legal and institutional environment in the country. India has had the legal framework for regulating corporate form of organizations since the formulation of the Companies Act 1956 and the new companies Act, 2013 and also with fairly functional stock exchanges and their detailed listing requirements and companies must be ensured that globally accepted standards. India is one of the major, emerging economies in the world and the importance in the global economy has increased in recent years in the aspects of global commerce is expected to grow in the future. The Indian approach to corporate governance, accounting, and auditing while differs in many ways from the U.S. model (and the Chinese model). India, as well as many other developing countries, often has the form but not the substance of the governance when it comes to matters of law. Strict enforcement of laws and speedy punishment of the violators are as much a part of the rule of law as the written law itself (Narayanasamy et.al, 2012). After Satyam scam lot has been said and done in India related to board mechanisms. After Clause 49 implementation it was mandatory to comply with its recommendations. The Clause 49 listing agreement of independent director for listed companies was deferred for nine months till 31 December, 2005. Finally it was implemented from January 1, 2006. In response, many companies have done shuffling at their board level. The question arises whether these changes pertaining to internal governance structures are related to firm performance measures. In Indian context, the term corporate governance is defined more in terms of agency problem. Managers and researchers see a corporate governance problem as a conflict between management and shareholders. The limited data available so far has confirmed that among corporate only those companies who are going global follow strict international accounting standards and policies. Presently, Indian business system is moving towards the Anglo-American model of corporate governance. The Anglo-American model gives importance to the shareholders over other stakeholders. Here, the usefulness of this model to current Indian system can always be questioned (Ritika Gugnani, 2013).

Literature Review

The effect of corporate governance on firm performance is the focus of extensive analysis in majority of the previous studies (Choi, Park & Yoo, 2007; Donaldson & Davis, 1991; Jensen, 1993). In order to understand corporate governance in Indian Context, a review of relevant literature is essential one to deliberating corporate governance practices and firm performance in the organization perspective. Moreover, studies of Hermalin and Weisbach (2003), Dwivedi and Jain (2005), Garg (2007), Bhagat and Bolton (2008), Jackling and Johl (2009), have shown that the relationship between board composition and firm performance is endogenous in nature.

Gompers et. al (2003) developed a governance index from a sample of 1500 large firms using the governance rules and investment strategy. They also found that the firm with strong shareholder’s rights has higher fund value and higher growth. Block (2001) found that the governance practices are strongly related to implied price-earnings ratio and similar results with Klapper and Love (2004). Shleifer and Vishny (1997) view corporate governance as a set of mechanisms which ensures that potential providers of external capital receive a fair return on their investment, because the ownership of firms is separated from their control. It also increases the firms’ responsiveness to the need of the society and results in improving long-term performance (Gregory & Simms 1999).

CEO duality is an important issues in corporate governance because the status of the CEO and chairman may have an influence on firm performance. There are arguments in favour of CEO duality, meaning CEO duality has a positive impact on firm performance and the result consistent favour of the stewardship theory. Likewise, there are arguments against CEO duality asserting that it has a negative impact on firm performance and these support the agency theory (Huining Chen, 2014). The monitoring role of the boards and its effectiveness on the behalf of shareholders depends upon its size and composition is carrying out for the functional areas of the corporate governance (John & Senbet, 1998). The board characteristics like size, independence and meetings has an impact on current or prior performance and found a weak association between the two in the case of Indian firms (Arora and Sharma, 2015). Another study by Brick and Chidambaran (2010) also stated the intensity of board activity as an important dimension of oversight function performed by the board. Furthermore, it had used number of ‘director-days’ to proxy for the level of board monitoring activity. Some studies used board composition and board size to represent the board’s monitoring ability it is the outside directors that have the ability to provide more effective internal monitoring more specifically, appointment of the independent directors (Mak and Li, 2001), (Choi et al., 2007) (Agarwal & Knoeber, 1996). The board index which consist of composition and meetings has been found that negative and significant association on firm performance of selected IT companies in India (Palaniappan and Rao, 2015). Kathuria and Dash (1999) observed that size of the board had increased with the size of the corporation. Using the sample of top Indian BSE listed companies, Jackling and Johl (2009) had also showed significant positive correlation between firm size and size of the board (Kumar and Singh, 2013). The average board size was significantly different between small and large firms. However, in contrast, Lange and Sahu (2008) in their study on Nifty Indian listed companies found an insignificant (but negative) effect of firm size (measure for scale) on board size. Substantiating the same, Linck et al. (2008) found that small firms had smallest boards with greatest proportion of insiders. In addition to the frequency, board meeting attendance also acts as a proxy for supervising quality of the board (Lin, Yeh & Yang, 2013). The measures of board attendance to determine the participation of directors in meetings, also called board diligence that have been tested in supplement to the one followed in a study which was conducted on the firms listed on NSE in India (Ghosh, 2007).

As far as the relationship between board characteristics and firm-specific characteristics is concerned, the past literature has established that large firms need more number of directors due to the complexity involved in their operations (Boone et al., 2007; Chen & Al-Najjar, 2012; Coles et al., 2008; Monem, 2013). However, those studies, in the percentage of non-executive directors (NEDs) on the board was not found as statistically different. Connell and Cramer (2010) also noticed a significant difference between the average board size of small and large firms listed on Irish stock markets. Indeed, previous studies in several other countries also find a negative relationship between board size and firm performance. A positive relationship between the variables of corporate governance and firm’s performance found in Sri Lankan companies (Velnampy and Pratheepkanth, 2012). According to the studies of Black, Jang and Kim, 2006; Drobetz, Schillhofer and Simmermann (2004); Ong, Wan and Ong (2003), and Gedajlovic and Shapiro (2002), there was a positive significant relationship between corporate governance practices and firm performance in various countries, in contrast, based on the studies of Gugler, Mueller and Yurtoglu (2001), Hovey, Li, and Naughton (2003) and Alba, Claessens And Djankov (1998), there was no significant relationship between corporate governance and firm performance. The primary contribution of the study is that it examines the determinants of firm performance on board characteristics for which existing literature is limited, especially in the Indian context. This study further contributes to the literature by providing a comprehensive analysis of the relationship between board characteristics and firm performance. The empirical analysis focuses on a large number of companies (around 275 firms) covering 18 important industries of the manufacturing sector in India moreover, instead of considering just a single measure of firm performance, consider three alternate measures of performance covering both accounting (ROA, ROE) and market-based (Tobin’s Q) measures. Finally, this study also proposes another governance measure; board meeting which is also related to firm performance.

Table 1

Summary of Literature Review

Conceptual model and research hypothesis

Based on the previous section explains, extensive literature shows that corporate board characteristics effect on firms financial performance.

This sense, the current research makes the contributions of empirically test the effect of the board characteristics on firm’s performance. In line with extent literature, the current study hypothesizes directional relationships between the measures of corporate governance on firm’s performance. Fig. 1 summarised the relational paths among governance related board characteristics and the firm’s performance both accounting and market based measures. The following subsections discuss in depth the hypotheses related to each selected board characteristics.

Board Size : The corporate governance literature is highly contradictory on board size is linked with corporate performance. The number of directors on board is an important variable, though literature does not have a consensus on the influence of board size towards increasing its firm’s performance. Some studies report a positive association between firms performance and board size due to lag in decision making due to lack of consensus. Valenti et al. (2011) pointed out that when there is some dispute regarding the effect of board size on performance in general (Alexander, Fennell & Halpern, 1993; Yermack, 1996), the evidence suggests that larger boards are preferable than smaller boards (Dalton et al., 1999). This is in line with, board size increases to the optimal board size to achieve higher financial performance (Coles et al., 2008). In the previous literature, both smaller boards and larger boards have been favoured on different grounds. For instance, larger boards have been favoured on the grounds of greater monitoring and effective decision making. According to Shivdasani (2004), board composition of a firm is affected by the fall in financial performance because companies react to performance downturns by adding outside directors to the board for corrective actions and effective decision making Bradbury et al. (2006) report no association. Board size is known to be correlated with observable and unobservable firm characteristics that potentially correlated with firm financial performance (Bennedsen et al., 2007). This endogenous effect in line with, significant relationship of firm’s financial performance and board size (Black et al., 2003). Thus, the study observe based on inconclusive evidence of association without predicting its direction and hypothesize as:

Hypothesis 1: There is no significant association between board size and firm’s performance.

Board Independence: The number of independent director in the board is often used as proxy of good governance. The role of board of directors as effective monitoring mechanism for management is dependent upon them being non-executive and independent. Further, the inclusion of independent directors on corporate boards is an effective mechanism to reduce the potential divergence between management and shareholders. Fama (1980) argued that more non-executive directors in the board act as professional referees and work for value maximization of shareholders. The independent directors are invited onto the board for oversight on behalf of shareholders (Baysinger & Butler, 1985). Rosenstein and Wyatt (1990) also suggested that higher proportion of independent directors is positively associated with excess returns. Similarly, Mak and Kusnadi (2005) revealed that a higher fraction of independent directors on the board is linked to greater firm value. Outsider dominated boards in terms of percentage of independent directors enhances the reputation of the firm as following good corporate governance improving the reliability of its financial disclosures. These shortcomings can be taken care of by choosing efficient board members. Bhagat and Black (2002) in their studies found that there is no significant relationship between number of independent directors and performance of a firm. This conflicting results on the association between board independence and firm’s performance, with studies by Beasley (1996), Klein (2002) and Davidson et al., (2005) finding significant negative association between the two. On the other hand Park & Shin (2004), Peasnall et al. (2005) and Bradbury et al. (2006) fail to report any association between earnings management and independence of the board. Board independence is measured by the number of non-executive independent directors working on the board. The study measure the independence of a board as percentage of independent directors in a board and is expected to have a positive relationship with firm performance. Thus, to examine the following hypothesis:

Hypothesis 2: There is a positive and significant association between firm’s performance and board independence.

Board Meetings: Next, the study estimated the impact of firm performance on board meetings, which is measured by the frequency of meetings annually. According to Vafeas (1999), board meeting is an important board attribute; but the relationship between firm performance and board meetings is not clearly established. There are several costs associated with board meetings such as managerial time, travel expenses and directors’ remuneration. If a firm is not performing well, it might be possible that it may reduce the number of board meetings to avoid the costs associated with them. Jensen (1993) also pointed out that the meeting time might not be utilized for a significant dialogue among directors. Hence, the company might try to save upon the meeting costs by reducing the number of board meets. On the contrary, it is also likely that for a relatively poor performing firms to conduct more meetings to discuss crucial issues like the reasons for their poor performance and setting strategies for improvement in performance. When directors meet frequently, they are more prone to discuss the concerned issues and monitor the management effectively, thereby performing their duties with better coordination (Lipton & Lorsch, 1992). If a firm is reasonably efficient in setting the frequency of its board meetings, it will also likely to attain high efficiency in agency costs. Thus, the impact of firm performance on board meetings is a valid research question which should be examined empirically by following hypothesis.

Hypothesis 3: There is a significant negative association between attendance of directors in board meetings and firm’s performance.

CEO Duality: The literature argues that the status of CEO has direct impact on governance of firm. CEO position should be independent of the chairperson of the board to enable balance and check on misuse of power by the same. Agency theory supports the same to avoid conflict of interest for the board chairman to formulate the strategies and be responsible for implementing the same. This in turn would check firms’ performance through better monitoring. Jensen (1993) argued that lack of independent leadership creates a difficulty for boards to respond for any failure. Fama and Jensen (1983) also argued that concentration of decision making makes it difficult for the board in independent decision making and affect the performance of a firm. Contrary to this view Rechnar & Dalton, (1991) argue for role duality as it would provide better incentives by linking CEO pay with firm performance. Klein (2002) shows that role duality leads to unchecked powers and finds significant positive association with firms performance. Sanda et al., (2005) found a positive relation between CEO duality and performance of a firm while Daily and Dalton (1992) could found no significant relationship between CEO duality and firm performance. A number of studies report no significant relationship. Berg and Smith (1978) and Brickley et al. (1997) stated that it increases the conflict of interest and the agency cost increases when CEO and the board chair is same person. However in another study Rechner and Dalton (1991) argued that it’s good of board chair and the CEO is the same person as it reduces the bureaucracy in decision making. The study used CEO duality as a dummy variable and used 1 when CEO holds both position and 0 otherwise. This suggests that in our sample of firms segregating the role of the Chairman from the CEO does positive and significantly contribute towards firm’s performance.

Hypothesis 4: There is a significant negative association between CEO duality and firms’ performance.

Methodology

With the aim of analysing the proposed model to explore the effect of board characteristics on firms performance and to empirically test the proposed hypothesis, the study conducted a content analysis in Indian manufacturing firms during 2011-2015 using firms annual reports. Indian has become one of the most attractive destinations for investments in the manufacturing sector because strong integrations of governance and control mechanism. The Government of India has taken several initiatives to promote a healthy environment for growth of manufacturing sector in the country (Media Reports, 2016). The data set were collected with consists of detailed governance related and financial information & indicators about the most actively traded and listed companies on the Bombay Stock Exchange of India (BSE) during 2011-2015.

Sample selection and data collection

The data for empirical analysis is extracted from PROWESS (Release 4.0), a research database widely used in India; and from the corporate governance and annual reports of companies. The firms in our sample are chosen from important firms of the manufacturing sector. Banking and finance sector and government companies are completely excluded for the purpose of analysis because these firms have different type of structure and governance (Faccio and Lasfer, 2000). The firm classification of these 18 sectors is given in Table 2. The total manufacturing firms listed under Bombay Stock Exchange in these sectors are 3230 firms. The firms with missing data are excluded from the sample and left with the final sample size of 275 firms. This study covers the time period of 2011–2015.

Variables Construction

For the estimation purposes, the study use both accounting and market based performance measures such as ROA, ROE, and TQ as the firm performance measures whereas in respect of board characteristics like size, independence, board meetings and CEO duality as the dependent variables in the analysis (Gompers et al. 2003). The calculation of these variables has been shown in detail in Table 3.

Empirical research results

In the analysis of the relationship between board characteristics and firm performance, the below regression equation will be used to test the main hypothesizes. To test the hypotheses, this study adopt following empirical model:

ROA = a + b₁ BS + b₂ BI + b₃ BM + b₄ CEODUAL + b₅ AGE + b₆ LEV + b₇ SIZE + b₈ GROWTH + e

ROE = a + b₁ BS + b₂ BI + b₃ BM + b₄ CEODUAL + b₅ AGE + b₆ LEV + b₇ SIZE + b₈ GROWTH + e

TQ = a + b₁ BS + b₂ BI + b₃ BM + b₄ CEODUAL + b₅ AGE + b₆ LEV + b₇ SIZE + b₈ GROWTH + e

in which, ROA, ROE and TQ are firm performance of company and b₁, b₂, b₃, b₄, b₅, b₆, b₇, and b₈ are the parameters for the explanatory variables. a is the constant number of the formula and e is the standard error.

This section presents the analysis and discussion of the empirical results.

Assumption of normality test: The normality assumption assumes that the errors of prediction are normally distributed. The Jarque-Berra statistics might be used to check the null hypothesis that the sample is drawn from normally distributed population (Park, 2002). The statistics Jarque-Bera has an asymptotic chi-square distribution with two degree of freedom and can be used to test the null hypothesis that the data from a normal distribution. The Jarque-Bea statistic would not be significant and p-value should be greater than 5% if the residuals are normally distributed (Brooks, 2008). The results in Table 4 report a p-value of 0.4166 higher than 0.5, suggesting that normality assumption holds.

Assumption of homoscedasticity test: To test for homoscedasticity, the Breush-Pagan Test and the White test will be used and the results reported in Table 5 indicate that the null hypothesis cannot be rejected since the p-value of both tests are considerably greater than 0.05. The results conclude that there is homoscedasticity so no further corrections for the sample are required.

Table 5

Breusch-Pagan Test for homoscedasticity

Assumption of Autocorrelation Test: The presence of residuals autocorrelation, statistical inferences can be misleading. Since the Durbin-Watson test is only applicable to test autocorrelation in time series, this study also uses Wooldridge (2002) test appropriate in panel-data models where a significant test statistic indicates the presence of serial correlation. The p-value of the test is greater than 5% as shown in table 6, suggesting the presence of no autocorrelation of errors. Drucker (2003) and Maladjian and Khoury (2014) used simulation results showing that the test has good size and power proprieties in reasonably sized samples.

Table 6

Wooldridge Test for autocorrelation

Assumption for the Multicollinearity Test: Multicollinearity is the undesirable situation where the correlations among the independent variables are strong. Hence, if multicollinearity problem exists among the independent variables then the regression results will not provide correct results. Lewis-Beck and Michael in their book Applied Regression: An Introduction have stated that if the correlation among the independent variables is greater than or equal to 0.80 then multicollinearity problem is assumed to exist. The same logic has been applied in this paper to define high correlation among the independent variables to give rise to multicollinearity problem. The multicollinearity problem is checked through correlation matrix. Correlation matrix is developed through SPSS between ‘firms’ performance’ and other independent variables. It is observed from Table 7 (Correlation Matrix) that none of the independent variables are having correlation greater than 0.8 hence we can safely deduce that multicollinearity does not exist among the independent variables.

From Table 7, Pearson correlation for selected explanatory variables show that the Pearson correlation coefficient between Board size and ROA is (-0.733), ROE (-0.764) and Tobin Q (-0.752) which is found to be significant at 0.05 level. This indicates board size and firm performance has been found a strong negative and significant association with firm performance of manufacturing firms in India. The results constant with (Alexander, Fennell & Halpern, 1993; Yermack, 1996). The factor of Board independence has been found a weak negative association among the firms performance factor of ROA (-0.110), ROE (-0.101) and Tobins Q (-0.034) and results statistically insignificant and consistent evident with (Lipton & Lorsch, 1992). It is evident that board meeting has been found that moderate negative and significant relationship with firms performance indicators for ROA (-0.491), ROE (-0.551) and Tobins Q (-0.638) and results found to be significant at 0.05 level. The factor of CEO Duality has been found a weak positive relationship among the firms performance factor of ROA (0.061), ROE (0.086) and Tobins Q (0.183) and results statistically insignificant except Tobins Q (0.05 level). This indicates that market based performance (TQ) are increased if the positions of the CEO and chairman are combined. The age of the firm and ROA has positive and significant relationship for 0.481 and result significant at 0.01 level. The size of the firm and Tobins Q has been found that positively associated and significant at 0.01 level. The growth of the firm and ROE has been evident that positive and significant association and the results statistically significant at 0.01 level. The remaining factors are resulted with insignificant association with the firms’ performance characters.

Furthermore, the existence of multicollinearity is tested by calculating the Variance Inflation Factor (VIF) where a VIF coefficient greater than 10 indicates the presence of multicollinearity (Chetterjee & Price, 1977). Also the mean of all VIFs is considerably larger than 1. The VIFs for individual variables was also very low, supporting the previous conclusion that the explanatory variables included in the model are not substantially correlated with each other. The results VIF among all the cases shown in Table 8.

Table 8

Variance Inflation Factor (VIF) of the explanatory variables

Test to check whether the data is stationery or time series: Before proceeding with the study have to check if the data have time series influence or is a stationary one. Durbin Watson test has been conducted using SPSS to check the nature of the data. Computation of Durbin Watson taking the dependent variables (ROA, ROE and Tobins Q) and all the independent variables together. The result observed from Table 4 reflects that Durbin Watson test results are 1.946, 1.772, and 1.689 which falls within the acceptable range of 1.50 to 2.00 and satisfies the assumption of independence of errors. The Durbin-Watson test result is out of the range of -1.5 to +1.5, which proves that the data are not the time series data and are the stationery one. Also, that by checking the Durbin-Watson table it is observed that d_u < d < 4-d_u (d_u is derived from the table and d is the Durbin-Watson test result). The results becomes closer to 2 that is acceptable range, which proves that the data are not a time series data and are stationary. Thus, there is no auto correlation between the dependent and independent variables. It concludes that from the above analysis that the data do not have time series influence and are stationary. Hence, we can utilize regression for the present study.

Regression Results: The correlation analysis indicates that there exists a negative relationship between Board Characteristics such as board size, board independence and board meetings with firms’ performance indicators of ROA, ROE and Tobins Q. So as to further analyze these relationships and to test the hypothesis and the OLS regression was run and to be find out the predictors of firms performance factors as dependent variable and Board characters as independent variable, controlling for other variables also used.

Tables 9 and 10 sum up the results of regression analysis. It can be seen from Table 9 that in model 1, board variables with ROA is fitted the regression equation and explains 44.6% variance in firms performance as shown by R square. The F-ratio is 10.653 and is highly significant at less than 1% level. The R-square value of model 2 is 0.438 which means that 43.8% of the dependent variable (ROE) is explained by independent variables. The R-square value of model 3 is 0.570 which means that 57.0% of the dependent variable (ROE) is explained by independent variables. It can be observed from it that F statistics of the respective models are 10.653, 10.183 and 19.170 respectively and the results which is highly significant at 0.000. Hence, as the p-value is less 0.05 there can be a linear relationship between the dependent variables (ROA, ROE and Tobins Q) and selected independent variables.

Table 9

Regression Model Summary

The regression results as shown in Table 10 indicate that there is a statistically significant correlation between firms’ performance and board effectiveness. It is also observed from the regression analysis (Model 1) in Table 10 that “Leverage” has a p-value of 0.960 and the corresponding, t-value of 0.150. It signifies that this particular variable is not important in the model. Similarly, “Growth of the firm” (p-value of 0.768 and the corresponding t-value of -0.295), and “Size of the firm” (p-value of 0.166 and the corresponding t-value of 1.389) have p-value more than 0.05 and t-values within the range of -2 to +2. These variables also seem not to be important enough in the model, so they need to be removed. While it is also observed that “Board Size” having a p-value of 0.046 and a t-value of -2.082, “Board Independence” having a p-value of 0.021 and a t-value of 3.115, “Board Meetings” having a p-value of 0.047 and a t-value of -2.369, “CEO Duality” having a p-value of 0.049 and a t-value of -2.058 and “Age” having a p-value of 0.000 and a t-value of 8.680 are highly significant variables in determining the firms performance (ROA) of manufacturing firms in India.

Table 10

Regression Result

Note: Significant, p<0.05

It is also observed from the regression analysis (Model 2) in Table 10 that “Leverage” has a p-value of 0.413 and the corresponding, t-value of -0.819. It signifies that this particular variable is not important in the model. Similarly, “Board Meetings” (p-value of 0.529 and the corresponding t-value of 0.631), and “Age” (p-value of 0.299 and the corresponding t-value of -1.104) have p-value more than 0.05 and t-values within the range of -2 to +2. These variables also seem not to be important enough in the model, so they need to be removed. While it is also observed that “Board Size” having a p-value of 0.010 and a t-value of -2.791, “Board Independence” having a p-value of 0.000 and a t-value of -4.580, “CEO duality” having a p-value of 0.003 and a t-value of 4.164, “Size” having a p-value of 0.018 and a t-value of 2.385 and “Growth” having a p-value of 0.000 and a t-value of 8.383 are significant variables in determining the firms performance (ROE) of manufacturing firms in India.

It is also observed from the regression analysis (Model 3) in Table 10 that “Leverage” has a p-value of 0.054 and the corresponding, t-value of –1.935. It signifies that this particular variable is not important in the model. Similarly, “Age” (p-value of 0.547 and the corresponding t-value of -0.603), and “Growth” (p-value of 0.332 and the corresponding t-value of 0.972) have p-value more than 0.05 and t-values within the range of -2 to +2. These variables also seem not to be important enough in the model, so they need to be removed. While it is also observed that “Board Size” having a p-value of 0.045 and a t-value of -2.833, “Board Independence” having a p-value of 0.031 and a t-value of -3.763, “Board Meetings” having a p-value of 0.003 and a t-value of -3.505, “CEO Duality” having a p-value of 0.035 and a t-value of 2.859 and “Size” having a p-value of 0.000 and a t-value of 11.629 are significant variables in determining the firms performance (Tobin’s Q) of manufacturing firms in India. This positive sign consistent signal of stewardship theory which explain CEO duality positively influence on firm performance (Huining Chen, 2014).

Table 11

Summary of Hypothesis Testing Results

Discussion, conclusion and implications

This study has investigated the influence the board characteristics of corporate governance measures has on the financial performance of Indian manufacturing industries. Using a sample of 275 from across 18 different sectors cross-sectionally analysed with the help of OLS regression method. From the study, it can be said that “Leverage”, “Age”, “Growth” and “Board Meetings” seem not to be statistically important and they do not influence the profitability of the firms of the manufacturing firms in India, whereas “Board Size, Board Independence, CEO Duality, and Size of the firm are important variables for determining the firms performance (ROA, ROE and Tobins Q) of the manufacturing firms in India. It can be easily inferred from the results derived above that board characteristics and firms performance of manufacturing concerns in India. Theoretically, the effectiveness of board of directors, a central governance mechanism, is expected to be positively related to corporate governance quality. The study explores this relationship empirically, and uses Board Size, Board Independence and Board Meeting, found that contradictory results of firms performance parameters. This results with consistent of previous studies (Arora & Sharma, 2015, Palaniappan & Rao, 2015, Sivan Sarapal & Fulbrg Singh, 2013). The study found that board size of a firm has emerged as an important determinants of firm’s performance but the interesting part is that it is negatively related with firm performance (Ritika Gugnani, 2013). The results indicate that among the various factors affecting the corporate governance related board characteristics is strongly and negatively related with firms performance measurement both accounting and market based indicators. This result is as expected and supports the hypothesis that the optimum size of the board, is the improvement of firm’s performance. The use of ROA and ROE as proxies for financial performance has its own limitations. The results suggest that the marketing-based measures of financial performance (Tobin’ Q, P/E and P/B) were not able to establish any relationship with corporate governance. It shows that the stock market performance of a firm is not related with it corporate governance measures and indicators (Ritika Gugnani, 2016).

The result of the study do indicate that the influence that board characteristics of corporate governance has on firm performance is significant. Hence, this study recommends that corporate entities should promote corporate governance measures effectively to send a positive signal to potential investors. In addition, the regulatory agencies including government should promote and socialise corporate governance regulatory measures and its relationships to firm performance across industries. So when policy makers of a nations within India context decide that manufacturing firms should have attention of board characteristics on the basis of an improvement in firm performance. The contribution of this study has been to find that board characteristic does have such influence on firm’s performance in manufacturing firms in India. The outcome of the study has been learned about the relevance and in lined with regard to other countries, the board characteristics has strongly influenced on the performance of the firms. Despite this benefits, much can still be said about the ongoing debate between the agency theory and stewardship theory.

Limitations and further research

As with all empirical studies, the current research has several limitations, and overcoming this can be a guide for future research. First, the data are based on board characteristics; therefore, the research is exempt from the board composition that is the presence of women director on the board, board meeting attendance of especially by independent directors concern, Annual General Meeting and number of meetings conducted by the firms with beyond the required statutory level. Future research could combine measures of presence of women directors, meeting of independent directors and AGM attendance which includes some effects on firm’s performance. Second, the current research explores the effect of some board elements such as audit committee and other committees on overall firm’s performance. Further research could extend the model to include additional dimensions of the audit committee based measures in order to better understand the firm financial performance. Third, the current study does not include all possible board characteristics that is large shareholders dominance on the board, promoter’s shareholding and institutional shareholding to support their firm’s performance. Further research might include the ownership structure on board to improve the firm’s performance. Finally, this research is limited to Indian manufacturing firms. Future research should consider different countries, inter-differences with medium and large scale firms and private & public undertaking firms. There are certain limitations of this study because it focuses on internal governance mechanisms, ignoring external factors which can have a more significant impact on corporate financial performance.

Acknowledgement

Indian Council for Social Science Research, New Delhi, India

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