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492 Corporate Governance: An International Review, 2009, 17(4): 492509
Board Structure and Firm Performance: Evidence from Indias Top Companies
Beverley Jackling* and Shireenjit Johl**
ABSTRACT Manuscript Type: Empirical Research Question/Issue: This paper investigates the relationship between internal governance structures and nancial performance of Indian companies. The effectiveness of boards of directors, including board composition, board size, and aspects of board leadership including duality and board busyness are addressed in the Indian context using two theories of corporate governance: agency theory and resource dependency theory. Research Findings/Insights: The study used a sample of top Indian companies taking into account the endogeneity of the relationships among corporate governance, corporate performance, and corporate capital structure. The study provides some support for aspects of agency theory as a greater proportion of outside directors on boards were associated with improved rm performance. The notion of separating leadership roles in a manner consistent with agency theory was not supported. For instance, the notion that powerful CEOs (duality role, CEO being the promoter, and CEO being the only board manager) have a detrimental effect on performance was not supported. There was some support for resource dependency theory. The ndings suggest that larger board size has a positive impact on performance thus supporting the view that greater exposure to the external environment improves access to various resources and thus positively impacts on performance. The study however failed to support the resource dependency theory in terms of the association between frequency of board meetings and performance. Similarly the results showed that outside directors with multiple appointments appeared to have a negative effect on performance, suggesting that busyness did not add value in terms of networks and enhancement of resource accessibility. Theoretical/Academic Implications: The two theories of corporate governance, namely agency and resource dependence theory, were each only partially supported, by the ndings of this study. The ndings add further to the view that no single theory explains the nexus between corporate governance and performance. Practitioner/Policy Implications: This study demonstrates that corporate governance measures utilized in developed economies related to boards of directors have some synergies and relevance to emerging economies, such as India. However, the nature of business structures in India, for example the large number of family businesses, may limit the generalizability of the ndings and signals the need for further investigation of these businesses. The evidence related to multiple appointments of directors suggests that there may be support for restricting the number of directorships held by any one individual in emerging economies, given that the busyness of directors was negatively associated with rm performance. Keywords: Corporate Governance, Board of Directors, Firm Performance, Clause 49, India
INTRODUCTION
n recent years the attention and interest in corporate governance1 has grown exponentially especially with the major corporate collapses (e.g., Enron, WorldCom, HIH,
Address for correspondence: *Faculty of Business and Law, Victoria University, City Flinders Campus, 300 Flinders Street, Melbourne, Victoria 3000, Australia. Tel: 61 3 9919 1541; E-mail: beverley.jackling@vu.edu.au; **School of Accounting, Economics and Finance, Deakin University, Burwood Campus, 70 Elgar Road, Burwood, Victoria 3125, Australia. Tel: 61 3 9251 7360; E-mail: shireenjit.johl@deakin.edu.au
Harris Scarfe, One.Tel) in the US and Australia. The need for strong governance is evidenced by the various reforms and standards developed not only at the country level, but also at an international level (e.g., the Sarbanes-Oxley Act in the US, CLERP 9 in Australia, Combined Code in the UK, and the Organization for Economic Development [OECD] Code). Typically, corporate governance research has focused on developed economies (Daily, Dalton, & Cannella, 2003; Rajagopalan & Zhang, 2008). However, limited research exists on the extent to which the corporate governance issues
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of developed economies are applicable to emerging economies. A major impetus for investigating the corporate governance of emerging economies such as India is the signicant growth in the listing of companies from emerging economies on international stock exchanges. This development has been accompanied by a drive within emerging economies to attract more foreign direct investment as a means of promoting a countrys long-term economic development. As such the focus on foreign investment development in India has necessitated a more transparent approach to corporate operations. Effective corporate governance also assists in the attainment of high level nancial performance and market valuation (Klapper & Love, 2004; Rajagopalan & Zhang, 2008). La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000) argue that emerging economies have traditionally been discounted in nancial markets because of their weak governance. Therefore an investigation of aspects of the composition and operation of boards as an important driver in corporate governance may provide insights to improvements in corporate governance in an emerging economy such as India. This paper specically investigates aspects of corporate governance in India linked to the board-performance nexus. The research is motivated by the Securities and Exchange Board of Indias (SEBI) recommendations to address the corporate governance challenges that face the country as its opportunities for investment and growth emerge. The study includes an examination of various aspects of the effectiveness of boards of directors, including board composition, board size, aspects of the board leadership, and board activity in relation to nancial performance. These aspects of corporate governance have been identied as central to the development of good corporate governance in organizations. The paper is expected to contribute to research by expanding the understanding of the governance structures and rm performance in India. The study focuses on the board of directors composition, activity, and size as measures of corporate governance given that boards play a central role in the corporate governance of publicly listed companies. Aspects of board leadership and composition are particularly important in the Indian context given recent changes in legislation and regulations that outline specic requirements for board structure (Lange & Sahu, 2008). Furthermore as there is evidence to suggest that there are country specic factors that may impact on corporate governance relationships (Guest, 2008) this study provides an opportunity to examine if factors traditionally linked with corporate governance in western economies hold for the Indian market. As there is limited research on corporate governance in India the examination of specic features of corporate governance related to the role of the board of directors provides insights for Indias engagement with the global nancial market. The paper is structured as follows: the next section provides a background on corporate governance in India, followed by a review of the literature relating to board structure (board size, board composition, board leadership, and board activity), and its association or relationship to rm performance. The fourth section describes the data selection procedures and research methods employed. Find-
ings and analysis are presented in the fth section, while the nal section summarizes and concludes the paper.
BACKGROUND TO CORPORATE GOVERNANCE IN INDIA

The study of corporate governance in India is important as this type of economy possibly has a number of unique governance issues not prevalent in more widely researched developed economies. This section of the paper provides an overview of signicant regulatory changes related to corporate governance in India that have taken place in recent times and provides a background to the unique aspects of governance. Evidence is provided that the legal and institutional structures that underpin governance practices employed in western developed economies may not be applicable in emerging countries such as India. Furthermore, governance issues in India may be compounded by the nature of corporate ownership where family-run businesses dominate the ownership structure. Various reforms were undertaken in the 1990s to improve corporate governance in India, the most important event being the formation of the Securities and Exchange Board of India (SEBI) in 1992. The establishment of the SEBI resulted in the formation of four major committees (Bajaj Committee in 1996, Birla Committee in 2000, Chandra Committee in 2002, and the Narayanan Murthy Committee in 2003) to review governance issues and to propose governance laws and reforms. The governance reforms and recommendations advocated by these committees were formally implemented by the SEBI, for example through the enactment of Clause 49 of the Listing Agreements. These reforms include increasing the number of outside directors,2 dealing with the issue of duality and the existence of nancial expertise of directors. There has also been change to Clause 49 of the Listing Agreement by the SEBI in 2005 (effective from January 1, 2006) requiring a minimum number of outside directors on boards of directors. It is anticipated that these changes to the composition and operation of boards of directors as measures designed to improve corporate governance, may also be reected in improved rm performance. Signicant differences also exist in enforcement standards, the ownership structures and business practices, between western economies and those of India. For example, although India as a former British colony has a tradition of a highly developed judicial system, the legal system has been clogged and the courts overburdened (Chakrabarti, Megginson, & Yadav, 2008). There have also been difculties in enforcing compliance with security market regulation, particularly in areas such as price manipulation and insider trading (Bose, 2005). Of the top Indian companies3 60 per cent (making up 65 per cent of the total market capitalization), are family-run business groups.4 The actual ownership of family-run companies is opaque given the widespread use of pyramiding, cross-holdings, and the use of non-public trusts (Chakrabarti et al., 2008). The characteristics of family-owned businesses are expected to have unique agency problems linked with corporate governance and rm performance. Familyrun companies may also present challenges in terms of
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CORPORATE GOVERNANCE
monitoring the transparency of operations in order to meet international standards of corporate governance. The literature review that follows addresses the role of the board of directors in meeting the needs of good corporate governance leading to the formulation of hypotheses addressing aspects of governance of boards of directors in the Indian context.
LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT

It is acknowledged that no single theory explains the general pattern of links between the board of directors and rm performance. The relationship between the board of directors and rm performance is more varied and complex than can be covered by any single governance theory (Nicholson & Kiel, 2007). However, in examining prior literature and developing the research hypotheses in this project two theories of corporate governance are employed. First, agency theory will be used to examine the role that directors may play in contributing to the performance of the organizations they govern. This involves an examination of board composition and board leadership in terms of the impact on performance. Second, resource dependency theory is employed to examine the link between corporations and the essential resources that are needed to maximize performance. This involves an examination of board size and board activity. The combining of these two theoretical perspectives is consistent with the earlier work of Hillman and Dalziel (2003) that asserts boards of directors serve two important functions: monitoring management on behalf of shareholders (agency theory) and providing resources (resource dependency theory). For each of these main aspects of good governance, the literature review addresses the ndings of prior research in terms of the impact on company performance and where appropriate, makes reference to studies related to corporate governance in India. The review of prior literature within the context of agency theory and resource dependency theory forms the basis for the development of the hypotheses presented in this section of the paper.
Board Composition
Most corporate governance rules and codes worldwide require boards of directors of listed companies to have a combination of inside and outside directors. The question of whether outside directors have an impact on rm performance is, however, one of the most debated and researched areas of corporate governance. Theoretically, from an agency perspective, it is claimed that a greater proportion of outside directors on boards act to monitor independently in situations where conict of interest between the shareholders and managers occurs. Agency theory is based on the premise that there is an inherent conict between the interests of a rms owners and its management (Fama & Jensen, 1983). In the context of corporate governance, agency theory implies that adequate monitoring mechanisms need to be established to protect shareholders from managements self-interests. Therefore a high proportion of outside directors on the board is viewed
as potentially having a positive impact on performance (Fama & Jensen, 1983; Jensen & Meckling, 1976; Shleifer & Vishny, 1997). Overall the literature supporting the impact of board composition on performance has varied. Differences in ndings have in part been attributable to the differences in the theoretical bases of investigation. A preference for greater representation of outside directors is structured around the notion of the separation of ownership and control aligned with agency theory. Support for the agency view of the positive relationship between board composition and nancial performance has been noted by numerous studies. For example, Baysinger and Butler (1985) found that companies perform better if boards include more outsiders. Similarly, Rosenstein and Wyatt (1990) found that a clearly identiable announcement of the appointment of an outside director led to an increase in shareholder wealth. There have been differences in ndings related to the dominance of outside directors on performance when different measures of rm performance have been utilized in academic research. For instance, studies utilizing Tobins Q as a measure of performance (e.g., Agrawal & Knoeber, 1996) and Market Value Added (e.g., Coles, McWilliams, & Sen, 2001) have found that greater representation of outside directors has a negative impact on rm performance. Other studies, for example Dalton, Daily, Ellstrand, and Johnson (1998), found no signicant association between board composition and rm performance using moderator analyses incorporating rm size, the nature of nancial performance indicator and operationalization aspects of board composition. In India the recommendations of the Birla Committee enacted Clause 49 of the Listing Agreements that rst came into effect in 2001 with further amendments in 2004. Under Clause 49 the board of directors of a company is required to have an optimum combination of inside and outside directors with not less that 50 per cent of boards consisting of outside directors where the chairman is an insider. The requirement for outside directors on the board is reduced to 30 per cent where the chairman is an outsider. Although prior research on the issue of whether outside directors add value to a rms performance is mixed, the agency theory approach is adopted for the examination of board composition in this study. In general the changes in regulation in India have emphasized an implied need for outsider directors capable of acting independently. The unique characteristics of corporate governance in India highlight that the formal separation of ownership and control may be clouded by the dominance of family owned enterprises and the limited efciency and access to legal recourse. The rst hypothesis is based on agency theory and it is proposed that a greater proportion of outside directors will monitor any self-interested actions by managers, and therefore will be associated with high corporate performance (Nicholson & Kiel, 2007). Accordingly the following hypothesis is presented. H1: The proportion of outside directors on the board of directors of Indian rms is positively associated with rm performance.
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Board Leadership and CEO Power

Prior literature acknowledges that the type of board leadership and role of the Chief Executive Ofcer (CEO) can have an inuence on rm performance. For instance, Adams, Almeida, and Ferreira (2005) argue that the ability of a CEO to inuence decisions can have an impact on rm performance. This ability is considered to be contingent on the level of power5 of the CEO (Finkelstein, 1992). CEO duality has been blamed for the governance failures in corporate giants such as Enron, WorldCom, and HIH, and hence, most of the governance reforms worldwide have pressured rms to split the chairman and CEO roles. The argument for splitting these two roles arises from the fact that one of the main tasks of the board is to evaluate top management, especially the CEO. In circumstances where the person who manages the rm also chairs the board meetings and controls the information given to the board, then it is questionable as to whether such a board is capable of seriously evaluating and challenging the CEO. A CEO who is the sole manager on the board is argued to be more powerful than boards consisting of other managers and thus may inuence decision-making, which in turn can have a negative impact on performance (Adams et al., 2005). This notion stems from the idea that other executives on the board could be rivals for the CEOs power and position and will inuence decision making together with the CEO therefore making the CEO less powerful. Using agency theory, it would be anticipated that the separation of the chairman and CEO roles leads to greater scrutiny of managerial behavior and thus leads to better performance (Lorsch & MacIver, 1989; Millstein, 1992). It is assumed that there are inevitable conicts between parties that delegate (principals) and those who execute (i.e., agents) (Jensen & Meckling, 1976). Therefore from an agency perspective the roles of CEO and chair of the board should be separated. This nonduality permits the board of directors, as representatives of shareholders, to effectively monitor and control the actions of executives as self-interested managers on the board of directors. It is acknowledged however, that stewardship theory adopts a contrasting view of the duality-performance debate (Braun & Sharma, 2007). Advocates of stewardship theory argue that authoritative decision-making under the leadership of a single individual (as both chairman and CEO) leads to higher rm performance (Donaldson & Davis, 1991). Given the differences in theoretical perspectives, evidence of the impact of duality on performance is mixed. Some studies show that splitting the role of the chairman and the CEO has led to greater nancial performance (Coles et al., 2001; Peel & ODonnell, 1995). In part the differences in results are also linked to the measures of nancial performance. Adams et al. (2005) for example, show mixed ndings in that the CEO being the sole manager is negatively correlated with ROA, but positively correlated with Tobins Q. Dalton et al.s (1998) meta-analytic analysis of prior empirical studies failed to nd a substantive relationship between board leadership structure and relationships to nancial performance. A further complexity is added when the relationship between duality and performance is tested in family-controlled public rms (Braun & Sharma, 2007).
The regulatory changes in India in recent times suggest that there is a desire to limit the powerfulness of board leaders particularly given the importance of family owned companies in India. For instance, the Birla Committee recommended through the enactment of Clause 49 of the Listing Agreements, that if there is a full-time chairman, 50 per cent of the directors must be outside directors. This regulatory approach is consistent with the nonduality agency theory, arguing that the separation of the roles enables greater scrutiny of managerial behaviour thus leading to higher corporate performance. Therefore based on the regulatory changes in India, this paper takes the agency theory perspective that powerful CEOs have the potential to have a detrimental effect on performance. The second hypothesis is presented as follows. H2: There is a negative association between concentrated leadership structures and rm performance for Indian rms. The next section of the literature review addresses elements of resource dependency theory linked to the boardperformance nexus. This theory maintains that the board is an essential link between the rm and the resources that it needs to maximize performance (Pfeffer, 1972). Nicholson and Kiel (2007) have indicated that as resource dependency theory draws from sociology and management disciplines, there is no universally accepted denition of what is an important resource. They propose that a board with a high level of links to the external environment will provide a company with a high level of access to various resources and consequently high corporate performance. The following part of the literature review and hypotheses development addresses issues related to board size, board activity, and board busyness linked to resource dependency theory in corporate governance that may impact on rm performance.
Board Size
Using resource dependency theory it would be anticipated a board of directors with high levels of links to the external environment would improve a companys access to various resources thus improving corporate governance and rm performance. The resources that have been investigated as having added value to the rm include nance and capital (Burt, 1983; Mizruchi & Stearns, 1988), links to key suppliers (Banerji & Sambharya, 1996), customers (Frooman, 1999) and signicant stakeholders (Freeman & Evan, 1990). Literature from the management discipline views the board of directors as a potentially important resource for companies, and thus supports a resource dependency theory of corporate governance (Nicholson & Kiel, 2007). For instance, Hillman, Cannella, and Paetzold (2000) and Palmer and Barber (2001) conclude that the board of directors is an important resource for companies especially in terms of the association with the external environment. Others have viewed the board-performance nexus as more specically linked with the ability of the board to tap into signicant resources that would ow from a larger rather than a smaller sized board (Korac-Kakabadse, Kakabadse, & Kouzmin, 2001; Zahra & Pearce, 1989). The size of corporate boards has received much attention particularly given prominent business failures of large com-
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panies. For example, there has been some empirical evidence to suggest that increased board size can have a positive association with performance. Van den Berghe and Levrau (2004) argue that expanding the number of directors provides an increased pool of expertise and thus larger boards are likely to have more knowledge and skills at their disposal than smaller boards. Furthermore, there is evidence to suggest that larger boards may reduce the domination of the CEO (Forbes & Milliken, 1999; Goodstein, Gautam, & Boeker, 1994). There is however evidence that supports the assertion that there is an inverse association between rm performance and size of the board. Yermack (1996) presents evidence that small boards of directors are more effective than large boards as the benets of increased size can be out-weighted by the costs in terms of poorer communication and decisionmaking associated with larger groups. According to Jensen (1993:865) as groups increase in size they become less effective because the coordination and process problems overwhelm the advantages from having more people to draw on. When boards get beyond seven or eight people Jensen (1993:865) claims that they are less likely to function effectively and are easier for the CEO to control. These views have been supported by Yermack (1996) using Tobins Q as an approximation of market valuation, where it was found that there was an inverse association between board size and rm value in a sample of large US industrial corporations. Similar results have been reported using European data (Van den Berghe and Levrau, 2004). In contrast, various studies have predicted a positive association between board size and rm performance (for example, Dalton et al., 1998; Pearce & Zahra, 1992). Proponents of this view argue that a larger board will bring together a greater depth of intellectual knowledge and therefore improve the quality of strategic decisions that ultimately impact on performance. In an attempt to reconcile the differences in ndings on optimal board size, Bennedsen, Kongsted, and Nielson (2008) acknowledge that the association between board size and performance may be linked with various rm characteristics such as size, age, and industry afliation as well as unobserved factors. In India statutory governance codes have emphasized both the structure and size of boards of directors. It is however, unclear as to what extent the literature that has largely been derived from western developed economies is applicable to emerging economies. There is clearly a lack of qualied outside directors in developing economies such as Indias and this perceived resource inadequacy has to some extent been an impetus for governance reform. Furthermore, the large proportion of family owned rms in India has meant that the role of outside directors may be minimized as family rms tend to restrict executive management positions to family members, thus limiting the pool of potential qualied and talented labour resources. Given these unique characteristics of the Indian context, it is hypothesized that the larger number of members of the board of directors will potentially provide a company with greater resource capabilities. Based on resource dependency theory the increased pool of expertise would be anticipated to improve rm performance. The third hypothesis is presented as follows.
H3: There is a positive association between the size of the board and rm performance for Indian rms. Board Activity (number of meetings and busyness). One aspect of resource dependency theory linked with corporate governance and performance is the intensity of board activity, as measured by the frequency of board meetings. Lipton and Lorsch (1992) suggest that the greater frequency of meetings is likely to result in superior performance. An opposing view professed by Jensen (1993) is that routine tasks absorb much of a boards meeting time and thus limit the opportunities for outside directors to exercise meaningful control over management. Jensen (1993) suggests that boards should be relatively inactive and evidence of higher board activity is likely to symbolize a response to poor performance. Some evidence suggests that the association between number of meetings and performance is more complex than previously reported. For example, a study of 307 rms over a 5-year period by Vafeas (1999:140) showed that boards that met more frequently were valued less by the market. However, this association disappeared when prior stock performance was included in the model, suggesting that operating performance rises following years of abnormally high meeting frequency. Overall prior results suggest that boards respond to poor performance by raising their level of board activity, which in turn is associated with improved operating performance in the following years thus suggesting a lag effect. The literature suggests that there are various aspects of board meetings that need to be considered in terms of the impact on rm performance. For example, questions that relate to the quality of meetings that need to be addressed include: How free owing are the exchange of ideas in board meetings and to what extent are meetings used for routine tasks as opposed to time devoted to substantive issues? However, generally there is reason to believe board meetings on face value, may be an important resource and therefore frequency of board meetings, may inuence the governance performance nexus. The following hypothesis is therefore proposed: H4: There is a positive association between board activity (in terms of meeting frequency) and rm performance for Indian rms.
Board Busyness
The number of positions that directors accept on company boards has become known as the busyness hypothesis (Ferris, Jagannathan, & Pritchard, 2003). Some studies have reported that directors with multiple appointments have a positive impact on rm performance (Brown & Maloney, 1999; Ferris et al., 2003; Harris & Shimizu, 2004; Miwa & Ramseyer, 2000). Directors with multiple appointments can generate benets given that they have many networks and can produce benets (and increase rm value) by accessing resources, suppliers and customers to the corporation (Booth & Deli, 1995; Mizruchi & Stearns, 1994; Pfeffer, 1972). Board busyness has therefore been linked with the resource dependency theory as there appears to be a theoretical argu-
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ment that a board with a high level of engagement with the external environment provides access to various resources that improve performance. An alternate view is that a large number of appointments can make directors over-committed and consequently compromise their ability to monitor company management effectively on behalf of shareholders and adversely affect rm value (Fich & Shivdasani, 2004). Some studies have also found that multiple directorships is correlated with excessive remuneration of CEOs (Core, Holthausen, & Larcker, 1999) suggesting that such directors provide an inadequate check on management. Other studies, for example, Shivdasani and Yermack (1999) provide evidence that multiple directorships are not consistent with the interests of shareholders and increase the probability of accounting fraud (Beasley, 1996). The extent to which directors have multiple appointments has been shown to differ between emerging economies when compared with developed economies such as the US. Ferris et al. (2003) and Fich and Shivdasani (2004) suggest that the mean busyness for outside directors for US companies is between 1.6 and three, in contrast to estimates of mean busyness of ve, for outside directors for large companies in India. However, it is debatable as to what constitutes a busy director. Ferris et al. (2003), using a US-based sample, showed that only 6 per cent of directors held three or more board seats, based on the assumption that three directorships dene a busy director. The busyness of Indian directors is partly explained by the fact that multiple directorships have evolved largely due to the lack of industrial leadership and adequacy of experience. Sarkar and Sarkar (2008) using data from 2003 show that 71.6 per cent of Indian directors held more than one directorial position and 56 per cent of directors would be dened as busy based on the three directorship benchmark. Multiple directorships in India have also been inuenced by supply constraints in the managerial labor market. Additionally, given that family owned business groups typically dominate corporations in emerging economies multiple directorships are likely to be based on kinship and social and family ties for both inside and outside directors (Kang & Shivdasani, 1995; Khanna & Rivkin, 2001). Chakrabarti et al. (2008) report that in a study of 500 Indian companies higher rm value was associated with outside directors having multiple directorships. Overall given the Indian context of limited expertise in the managerial labor market, it is proposed that multiple directorships have the potential to improve rm performance consistent with the resource dependency theory. Therefore proposed Hypothesis 5 is: H5: There is a positive association between multiple directorships and rm performance for Indian rms.
TABLE 1 Number and Proportion of Firms by Industry Classication Industry Oil and Petroleum Chemicals Engineering services, Construction, and Building Materials Iron, Steel, and Metals Industrial Manufacturing, Textile, and Automobiles Media and Publishing Electronics and Electrical Equipment Consumer Products and Tobacco Drugs and Health Care Machinery and Industrial Equipment Computer Software and Services Electrical utilities, water works/supply, gas, and telecommunications Others Total Number Percentage 8 30 15 4.44 16.67 8.33
12 23 5 10 9 20 13 14 6
6.67 12.78 2.78 5.56 5.00 11.11 7.22 7.78 3.33
15 180
8.33 100.00
DATA AND MODEL DEVELOPMENT

Data and Sample Selection
The initial sample for this study is drawn from OSIRIS database and comprises a sample from the top Indian companies listed on the Bombay Stock Exchange (BSE) by market capi-
talization in the year ended March 21, 2006. Banks and nance companies were excluded due to the difculty in calculating Tobins Q and their intensity of regulation. In addition, rms with 2005-06 annual reports6 (together with corporate governance statement) available on the database were considered. Other databases such as Directorsdatabase and SEBIs Corporate Filing and Dissemination System database were used to supplement some of the directors information. Firms with insufcient director and nancial data were dropped automatically by STATA in the regression analysis. Thus, the process led to a total of 180 observations from a sample of top listed Indian companies being considered for the 3 Stage Least Squares (3SLS) analysis in this study. Table 1 provides a summary of industry representation by sample rms. Apart from the banking and nance industry groups excluded from the analysis as outlined above, Table 1 shows that there is a relatively even spread of industry groups represented in the study. Changes to corporate governance requirements that include modication to Clause 49 have been introduced in India in recent years. It is important to note that the implementation of these changes to Clause 49 were staggered, with large companies classied as Group A on the BSE required to comply by 2001. Medium-sized rms with share capital of at least Rs100 million or net worth of at least Rs250 million at any time in the companys history, were required to comply a year later in 2002. The nal set of companies that were required to comply with amendments to Clause 49 were those with share capital of at least Rs30 million. This set of companies was initially required to comply in 2003 but this was deferred to April 1, 2005. Thus, as of March 31, 2006
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TABLE 2 Descriptive Statistics N Minimum Maximum Mean Median Std. Deviation
Panel A: Performance Variables 2005-06 Return on Assets (%) (ROA) 2004-05 Return on Assets (%) (LAGROA) 2005-06 Tobins Q (TQ) 2004-05 Tobins Q (LAGTQ) Panel B: Governance Variables Number of Outside Directors Proportion of Outside Directors (OUTSIDE) CEO Chair (DUALITY) Promoter CEO (CEOPRO) CEO only Employee (CEOOEMP) Powerful CEO (PWCEO) Busyness All Directors (BUSYALL) Busyness Outside Directors (BUSYOUT) Board Size (BODSIZE) Number of Board Meetings (MEET) Panel C: Other Variables Total Assets (Rs000) Log of Total Assets (ASSET) Leverage (Non-current Liabilities/Total Assets) (LEV) Growth Capital Expenditure to Sales (CAPEXP) Growth Research and Development Expenditure to Sales (RDEV) Firm Age (AGE)
180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180 180
-40.58 -30.83 .45 .38 0 0 0 0 0 .23 .80 4 4 25,975 10.16 .00 -23.45 0 3
37.53 44.81 221.09 52.93 10 1.00 1 1 1 1 8.11 12.00 18 15 968,700,000 20.69 1.01 51.85 .30 144
8.44 8.45 4.84 2.44 4.62 .48 .35 .42 .28 .06 2.94 3.48 9.56 6.32 42,200,200 16.32 .28 .24 .003 42.21
7.84 7.80 2.20 1.49 4.00 .50
7.95 8.12 18.54 4.68 1.83 .15 .48 .49 .45 .19 1.34 1.64 2.63 2.18 121,000,000 1.49 .20 4.28 .02 27.37
2.6 3.25 9.00 6.33 11,300,000 16.23 .29 .06 .00 34.00
(Annual Report 2005-06), all companies in the sample considered for this study were required to comply with the revised Clause 49 listing requirements. Table 2 below summarizes the descriptive statistics for rm performance, board characteristics, rm characteristics, and industry representation. The rm size in terms of total assets ranges from Rs25.98 million to Rs968.70 billion, while the mean, median, and the standard deviation of the sample is Rs42.20, Rs11.30, and Rs121,00 billion respectively. The total debt (both mean and median) of the sample rms seems fairly low (only .28 and .29 of total assets respectively) and ranges between 0 and 1.01 of total assets. In terms of performance, the sample rms appear to be nancially stable as indicated by their Return on Assets (ROA mean 8.4 per cent) and Tobins Q (TQ mean of 4.84). The descriptive results also indicate that the rms in the sample are fairly mature in that the mean and median age (from date of incorporation) is 42 and 34 respectively and ranges between 3 and 144 years of operation. Turning to corporate governance characteristics, only 48 per cent of the directors in the sample were classied as outside directors. Interestingly, two boards in the sample consisted exclusively of outside directors, while seven boards did not have any outside directors. Clause 49 of the
SEBIs listing agreement requires boards to consist of at least 50 per cent outside (non-executive) directors when the board chair is an inside director. Focusing on leadership characteristics of the board, almost half of the sample have a CEO (or Managing Director) who is a promoter (founder of the rm or belongs to the founding family) of the rm. This nding is expected given 60 per cent of the top Indian companies are family run businesses. In terms of duality, 35 per cent of the rms have one person with the dual role of chairman and CEO. The results of the role separation between the chairman and CEO suggest that about two-thirds of the rms are voluntarily complying with the suggestions for best practice as advocated by various international bodies. In situations where the CEO is also the chairman, as discussed in the earlier section, Clause 49 of the BSE Listing Agreement, requires at least half of the board be represented by outside directors. Our results indicate that about 10 per cent of the sample (29 rms) did not comply with the listing rules, thus indicating top listed rms of the BSE were not prepared for the change in corporate governance requirements. This is not surprising as about 60 per cent of companies listed on the BSE are yet to comply with the SEBIs guidelines on Clause 49 of the listing agreement (The Financial Express,
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2007).7 One clear reason acknowledged for the lack of compliance with Clause 49 is the lack of supply of outside directors with directorship expertise and professional qualications (India Knowledge@Wharton, 2007). In addition, 28 per cent (51 rms) of the CEOs in the sample were the only employee (executive) sitting on the board. Of these, 17 CEOs were also promoters of the rm. The results show 6 per cent of the sample had a CEO who was powerful, in that he/she was a chairman, promoter, and the only employee on the board. The results shown in Table 2 indicate that for this sample of top rms, on average there were 9.56 directors on each rms board of directors. In terms of board activity, the sample rms held between 4 and 15 meetings in the nancial year, with a mean and standard deviation 6.32 and 2.18 respectively. Given that Clause 49 requires a minimum of four board meetings a year, all rms complied with the rule, while 20 per cent (36 rms) met four times during the year. Turning to the variable busyness of the directors, the average number of directorships held by a director (outside director) of a rm in the sample ranges between .23 and 8.11 (.80 and 12) with a mean (and median) of about 2.9 (2.60) [3.48 (3.25)] directorships per director [outside director]. The Pearson correlations presented in Table 3 generally suggest that the performance variables (ROA and TQ) are positively correlated with the proportion of outside directors, board size, and busyness; and negatively correlated with duality, CEO promoter, and CEO being the only employee on the board. In relation to number of meetings held in the year, the correlation sign is either positive or negative depending on the performance variable used. The results show that the highest degree of correlations are between average directors busyness (BUSYALL) and average outside directors busyness (BUSYOUT) correlation = .87, and between leverage (LEV) and previous years performance for ROA (LAGROA) correlations = .46 (.46). To test for multicollinearity, the VIF was calculated for each independent variable. Myers (1990) suggests that a VIF value of 10 and above is cause for concern. The results (not shown in paper) indicate that all the independent variables had VIF values of less than 10.8
composition in response to rm performance. As argued by Hermalin and Weisbach (1988), poorly performing rms may change their board composition by increasing the proportion of outside directors as a measure to improve their performance. Also studies have shown that perspectives on the optimal choice of debt may differ between shareholders and managers (Novaes & Zingales, 1999). On one hand it is expected that level of debt is negatively related to performance, however Jensen (1986) suggests that rms with larger debt levels pre-commit managers to work harder to generate cash ows for investors, which in turn increases performance. Harris and Raviv (1988) and Stulz (1988) argue that managers may increase debt level in order to increase their voting power, which in turn may reduce the likelihood of a takeover and/or loss of employment. Thus, in order to take into account the inter-relationships amongst board structure, rm performance, and capital structure (leverage), this paper utilizes a system of simultaneous equations to examine the stated hypotheses. This approach has been used in a number of studies in the US. For example, Hermalin and Weisbach (1991) considered the interaction between insider ownership and board composition; Holthausen and Larker (1993) investigated the interrelationships among insider ownership, debt policy, and rm performance; Agrawal and Knoeber (1996) examined the interdependence among seven mechanisms of corporate governance; Demsetz and Villalonga (2001) investigated the interrelationships between managerial or Top 5 shareholders ownership and performance; and Bhagat and Bolton (2008) examined the relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. Following the approach used in Bhagat and Bolton (2008), three simultaneous equations are specied for this study as follows:
PERFORM = + 1OUTSIDE + 2 LEADERSHIP + 3 BODSIZE + 4 MEET + 5 BUSY + 6 LEV + 7 ASSET + 8CAPEXP + 9 RDEV + 10 LAGPERFORM + 12 AGE (2) + n Industry Dummies + OUTSIDE = + 1PERFORM + 2 LEADERSHIP + 3 BODSIZE + 4 MEET + 5 BUSY + 6 LEV + 7 ASSET + 8 RDEV + 9 AGE + 9 PWCEO + n Industry Dummies + (3) LEV = + 1OUTSIDE + 2 LEADERSHIP + 3 BODSIZE + 4 MEET + 5 BUSY + 6 LEV + 7 ASSET + 8 9 RDEV + 12 AGE + 12 FCF + 12 ZSCORE + n Industry Dummies + (4)
The equations of interest are Equation 1 and Equation 2, which capture the relationship between governance mechanisms and rm performance. The above system of equations is estimated using three-stage least squares (3SLS) rather than the OLS and the two-stage least squares (2SLS)9 because it allows for potential endogeneity and cross-correlation between the equations. In using this technique, the choice of instrumental variables is important. As indicated by Bhagat and Bolton (2008), the choice of appropriate instruments can
Model
The relationship between performance and board structure is tested using the following base model:
PERFORM = + 1OUTSIDE ) + 2 LEADERSHIP + 3 BODSIZE + 4 MEET + 5 BUSY + 6 LEV + 7 ASSET + 8CAPEXP + 9 RDEV + 10 LAGPERFORM + 12 AGE (1) + n Industry Dummies +
One concern in the above model if an OLS regression analysis is used is the potential endogeneity problem as pointed out by Hermalin and Weisbach (1988, 2000). For example, on one hand it is argued that a higher proportion of outside directors would increase rm performance and on the other hand, it is also possible that rms change board
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TABLE 3 Pearson Correlations for Variables in the Regression Model 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1 1 1 1 -.21** .22** .03 .05 -.15** -.18** .02 .07 -.04 -.02 -.03 1 .32** -.16** -.11 .06 .14* -.12* -.03 -.03 .06 -.01 1 -.03 1 -.04 -.02 .04 .02 .03 .01 .05 .35** .03 .05 -.02 .07 .05 -.04 .00 .13* .26** -.16** .26** .04 .15** -.12* -.16** .14* .01 -.01 .01 .02 .11 .12* .06 .18** -.05 -.13* .13* .17** -.01 -.00 .02 .06 -.10 .75** .04 -.01 .03 -.06 .03 .15* -.01 -.03 -.06 -.36** -.21** -.27** .03 -.02 1 .06 -.07 -.06 .01 .01 .18** -.03 -.08 -.06 -.12 -.28** .04 .02 -.07 1 .25** .33** .01 -.03 .06 -.01 .02 .02 .04 -.04 -.09 .01 -.46** -.02 -.00 -.00 1 -.19** 1 -.19** .86** 1 .06 .20** .21** 1 .02 .04 .07 .21** 1 -.02 -.04 -.05 .12* .04 1 .03 -.09 -.07 -.22** -.02 .02 1 -.03 .17** .16** .13* -.03 .02 .02 1
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
ROA LAGROA TQ LAGTQ OUTSIDE DUALITY CEOPRO CEOOEMP PWCEO BODSIZE MEET BUSYOUT BUSYALL ASSET LEV CAPEXP RDEV AGE
295 295 233 212 295 295 295 295 295 295 295 295 295 295 295 295 295 295
.68** .33** .33** .05 -.02 -.01 -.12* -.03 .09 .00 .04 .00 -.07 -.46** -.01 -.02 .06
**Correlation is signicant at the .01 level (2-tailed). *Correlation is signicant at the .05 level (2-tailed).
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be challenging as . . . almost any instrument variable identied for a particular endogenous variable in equation (1) will plausibly (based on extant theory and/or empirical evidence) be related to at least another, or possibly more endogenous variable(s) in (1) (Bhagat & Bolton, 2008:6). A similar view was expressed by Ashbaugh-Skaife, Collins, and LaFond (2006). Thus careful consideration was given in this study to the choice of instruments motivated by prior literature. Lag performance is the unique exogenous variable in equation 2,10 powerful CEO is the unique exogenous variable in equation 3, and Altman z score is the unique exogenous variable in Equation 4. The measurement, operationalization and source of the dependent, test and control variables are listed below in Table 4. In order to assess the relationship between rm performance and governance variables, most US studies have utilized Tobins Q as a measure of performance. However, capital markets in India are not well developed and tend to be volatile, thus market-based performance may not accurately reect the performance of a rm. There is support for the choice of accounting performance measures provided by Bhagat and Bolton (2008) given stock market measures are susceptible to investors anticipation. Bhagat and Bolton (2008:8) argue that [i]f investors anticipate the corporate governance effect on performance, long-term stock returns will not be signicantly correlated with governance even if a signicant correlation between performance and governance indeed exists. Other studies, for example, Erhardt, Werbel, and Sharder (2003) and Muth and Donaldson (1998) have used accounting measures such as ROA in measuring rm performance. However, to aid comparison of our results with prior studies using market-based performance, results using Tobins Q are also reported. The primary variables of interest in this analysis are board composition (OUTSIDE H1), board leadership (DUALITY, CEOPRO, CEOOEMP, and PWCEO H2), board size (BODSIZE H3), and board activity (MEET H4 and BUSYALL and BUSYOUT H5). The study expects a positive association between board composition (OUTSIDE) and performance, anticipating that rms with a greater proportion of outside directors have better performance. Also, the coefcient of LEADERSHIP (DUALITY, CEOPRO, and CEOOEMP) is expected to be negative, signifying that higher agency costs in the case of dual leadership and CEO being the sole employee, and loss of potential expertise from a larger pool of talent in the case of selecting a family CEO, leads to lower performance. The direction of association is predicted to be positive for board size (BODSIZE), reecting the need to enhance the external engagement of boards of directors. Finally, for board activity, a positive relationship is expected for number of meetings (MEET) and rm performance based on resource dependency theory. A positive relationship is also expected for the number of directorships held (BUSY) and rm performance, consistent with the resource dependency theory. All models in this study control for: (1) rm size measured using the natural log of assets and no direction is predicted; (2) leverage, which is expected to be negatively associated
with performance; (3) rm growth opportunities, proxied by capital expenditure to total sales and research development to total sales, which is expected to be inversely related to performance; (4) prior years performance, which is expected to be positively associated with performance; (5) rm age from the date of incorporation with no direction predicted; and (6) industry variations. This approach is consistent with prior studies of corporate governance and performance (e.g., Bhagat & Bolton, 2008).
REGRESSION RESULTS AND DISCUSSION

Total Sample Findings
Tables 5 and 6 present the 3SLS estimates when ROA and TQ are used as the performance dependent variable respectively. Each table reports the 3SLS results for three different sets of analysis. Analysis 1 report results using Model 2 where the specication includes DUALITY, CEOPRO, and CEOOEMP being variables used for LEADERSHIP; and BUSYALL being the variable used for BUSY. Analysis 2 reports results using an alternative specication, in that the variable powerful CEO (PWCEO) is used as a single composite variable rather than three separate variables DUALITY, CEOPRO, and CEOOEMP (as in Analysis 1), to capture the notion of a powerful leader. Finally, Analysis 3 reports results using an alternative specication which is similar to Analysis 1, but with a focus on the average number of directorships held by outside directors only (BUSYOUT) as an indicator variable for board busyness instead of for all directors (BUSYALL). For the 3SLS, the R2 should not be interpreted as it does not have any statistical meaning (Sribney, Wiggins, & Drukker, 1999). Board Composition. The rst hypothesis of interest is board composition. The ndings as shown in Tables 5 and 6 are mixed depending on the dependent variable examined. The variable percentage of outside directors (OUTSIDE) is positive and marginally signicant in most instances when Tobins Q (TQ) is used as the performance variable (b = 3.44, z = 1.52, p < .10). The signicance disappears when ROA is used as the performance dependent variable. Although the results using TQ are slightly weak, nevertheless the result is important as it demonstrates that the variable is signicant after taking interdependencies of other mechanisms into account. Additionally, the ndings are somewhat consistent (though with lower levels of signicance) with the work of Bhagat and Bolton (2008), Lefort and Urza (2008), and Jermias (2007) where analyses were performed to address the endogeneity problem. One reason for the weaker association compared with prior studies, is the possible lack of independence of outside directors on boards in India, given the strong family ownership pattern. Board Leadership and CEO Power. The second hypothesis tests whether various aspects of board leadership structure affect rm performance. To test this hypothesis four variables are used. Analysis 1 and 3 report the results when three measures of a rms leadership structure are
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TABLE 4 Variables Denition/Measurement and Source Measurement and Operationalization Source OSIRIS Annual Report Annual Report and Directorsdatabase Annual Report Annual Report Annual Report OSIRIS OSIRIS OSIRIS OSIRIS OSIRIS OSIRIS OSIRIS OSIRIS
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PERFORM OUTSIDE LEADERSHIP
BODSIZE MEET
BUSY
Firm performance is measured using two different proxies, Return on Asset (ROA) and Tobins Q (TQ)a Percentage of outside directors (number of outside director/total number of all directors) Four variables are used to represent leadership: (1) DUALITY 1 if the chairman and the CEO is the same person, else 0; (2) CEOPRO 1 if the CEO is the promoter (family CEO))b of the rm; else 0; (3) CEOOEMP 1 if the CEO is the only employee on the board, else 0; (4) PWCEO (powerful CEO) 1 if the CEO is the chair, promoter and only employee (executive) on the board Total number of members on the board of directors Board activity is measured in terms of number of board meetings held in a reporting year (does not include partial boards) Two variables are used to represent busy: (1) BUSYALL average number of directorships held by inside and outside directors of the rm; (2) BUSYOUT average number of directorships held by outside directors of the rm
LEV ASSET CAPEXP RDEV LAGPERFORM AGE FCF ZSCORE
Total non-current liabilities over total assets Natural log of total assets Capital expenditure/total sales Natural log of research and development expenditure/total sales Prior years performance PERFORM (LAGROA or LAGTQ) Natural log of age of rm from the date of incorporation Free cash ow over total assets Altmans Z score (1968), a proxy for nancial distress
Tobins Q is dened as the market value of common stocks and book value of total debt divided by the book value of total assets. Promoter is a person or persons who are in overall control of the company, are instrumental in the formulation of a plan. In the context of this study of Indian corporate governance a promoter is considered to be a family owned business.
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TABLE 5 Results of 3SLS Analysis (Dependent Variables: Return on Assets [ROA]) Analysis 1 Predicted Sign OUTSIDE DUALITY CEOPRO CEOOEMP PWCEO BODSIZE MEET BUSYALL BUSYOUT ASSET LEV CAPEXP RDEV LAGROA AGE CONSTANT R2 F-stat / Chi2 N + + + + + ? + + + ? Coefcient 18.09 -.51 -.54 -1.46 .31 -.17 -.19 .55 -34.60 -.07 -.06 .356 -.51 1.30 .26 206.69 180 Z .82 -.32 -.42 -1.13 1.54 -.72 -.25 .99 -3.97** -.59 -.27 3.05 -.47 .11 Analysis 2 Coefcient 5.42 Z .29 Analysis 3 Coefcient 22.57 -.71 -.74 -1.71 .33 -.20 -2.82 .530 -36.32 -.03 -.06 .34 -.186 -.30 .19 201.25 180 Z 1.08 -.54 -.62 -1.26 1.57 -.88 -1.97* 1.00 -4.30** -.34 -.27 3.25** -.18 -.03 201.25
.54 .31 -.12 .18 .43 -31.15 .06 -.02 .41 -.65 5.84 .39 215.07 180
.19 1.58 -.51 .33 .84 -3.84** .70 -.12 3.78** -.65 .62
ROA = Return on Assets; OUTSIDE = percentage of outside directors, DUALITY = 1 if the chairman is also the CEO of the rm, else 0, CEOPRO = 1 if the CEO is the promoter of the company, CEOOEMP = 1 if the CEO is the only employee on the board, else 0, PWCEO = 1 if the CEO is the chairman, promoter of the company and the only employee on the board, BODSIZE = number of members on the board, MEET = number of board meetings held in the year, BUSYALL (BUSYOUT) = average number of directorships held by directors (outside directors), ASSET = natural log of total assets, LEV = non-current liabilities/total assets, CAPEXP = capital expenditure/sales, RDEV = natural log of research and development expenditure/sales, LAGROA = prior years Return on Asset and Age = natural log of age of rm from date of incorporation. All estimations include dummy variables for industry sector. , *, ** = statistically signicant at less than the .10, .05, and .01 level, based on one tailed (two tailed) tests for variables where direction of relationship with dependent variable is (is not) predicted.
used: duality (DUALITY); CEO promoter (CEOPRO); and CEO is the only employee on board (CEOOEMP). Contrary to expectations the 3SLS ndings for all three variables are not signicant at any conventional level. Specically, the rst variable, DUALITY, does not show that boards whose chairman is not a CEO (or an executive) performs signicantly better than those whose chairman is also a CEO. The insignicance of the duality variable, although not consistent with Coles et al. (2001) and Peel and ODonnell (1995), is consistent with prior ndings of Daily and Dalton (1994), Vafeas and Theodorou (1998), and Elsayed (2007). Likewise, the second (CEOPRO) and third variables (CEOOEMP) are not signicant in all instances. The variable Powerful CEO (PWCEO) is tested in an alternative specication and as shown in Analysis 2 of Tables 4 and 5 the coefcient is not signicant in all instances. These results are contrary to the ndings of Adams et al. (2005) which showed evidence that rm performance will be more variable as decision-making power lies in the hands of one executive (being the CEO). This could possibly be due to the country of investigation and the sample period.12
Taken together, these results do not provide support for the hypothesis that a concentrated leadership structure is negatively associated with performance. Specically, the results seem to suggest: (1) rms with non-promoter (nonfamily) CEOs do not out perform rms whose CEOs are promoters (family); (2) boards consisting of other managers do not outperform those with sole manager (CEO); and (3) the notion that powerful CEOs have a detrimental effect on performance is not supported within the Indian context as reported with this sample. Board Size. The variable tested in hypothesis three is board size (BODSIZE). As hypothesized, the variable BODSIZE is positive and signicant in all 3SLS estimations. The results are particularly strong in estimations when Tobins Q (TQ) is used as the dependent variable (Analysis 1 b = .04, z = 2.37, p < .01; Analysis 2 b = .04, z = 2.51, p < .01; Analysis 3 b = .05, z = 2.67, p < .01). The ndings support prior studies such as Dalton et al. (1998) and Pearce and Zahra (1992) which also indicate that larger boards will bring in greater depth of intellectual knowledge than
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TABLE 6 Results of 3SLS Analysis (Dependent Variable: Tobins Q [TQ]) Analysis 1 Predicted Sign OUTSIDE DUALITY CEOPRO CEOOEMP PWCEO BODSIZE MEET BUSYALL BUSYOUT ASSET LEV CAPEXP RDEV LAGTQ AGE CONSTANT R2 F-stat/Chi2 N + + + + + ? + + + ? Coefcient 3.44 -.13 -.01 -.12 .04 .01 -.10 -.13 -1.21 -.02 -.02 .79 .15 -.23 .32 292.35 180 Z 1.52 1.05 -.10 -.98 2.37** .84 -1.47 -3.24** -2.15* -1.98* -1.15 10.91** 1.55 -.19 Analysis 2 Coefcient 1.21 Z .68 Analysis 3 Coefcient 3.16 -.07 .02 -.13 .05 .02 -.18 -.16 -1.20 -.02 -.02 .80 .13 .17 .36 304.90 180 Z 1.59 -.61 .20 -1.10 2.67** .97 -1.57 -3.75** -2.17** -1.97* -1.11 11.42** 1.57 .19
.06 .04 .01 -.04 -.14 -.67 -.02 -.01 .82 .11 .71 .64 364.98 180
.24 2.51** .83 -.94 -3.70** -1.38 -1.83* -.76 12.77** 1.44 .86
TQ = natural log of Tobins Q; OUTSIDE = percentage of outside directors, DUALITY = 1 if the chairman is also the CEO of the rm, else 0, CEOPRO = 1 if the CEO is the promoter of the company, CEOOEMP = 1 if the CEO is the only employee on the board, else 0, PWCEO = 1 if the CEO is the chairman, promoter of the company and the only employee on the board, BODSIZE = number of members on the board, MEET = number of board meetings held in the year, BUSYALL (BUSYOUT) = average number of directorships held by directors (outside directors), ASSET = natural log of total assets, LEV = non-current liabilities/total assets, CAPEXP = capital expenditure/sales, RDEV = natural log of research and development expenditure / sales, LAGTQ = prior years natural log of Tobins Q; and Age = natural log of age of rm from date of incorporation. All estimations include dummy variables for industry sector. , *, ** = statistically signicant at less than the .10, .05, and .01 level, based on one tailed (two tailed) tests for variables where direction of relationship with dependent variable is (is not) predicted.
smaller boards and hence improve decision making and in turn improve performance. The results contrast with the earlier work of Yermack (1996), which suggested that larger boards are negatively associated with rm performance. Overall, the results provide strong support for the hypothesis and are consistent with the rationale put forth by Nicholson and Kiel (2007) and Van den Berghe and Levrau (2004) that increasing the number of directors provides a larger pool of expertise supporting the resource dependency theory. Board Activity. In terms of the number of meetings (MEET) and busyness (BUSY) of directors, the 3SLS results shown in Tables 4 and 5 indicate that the number of board meetings (variable MEET) is unrelated to performance in all estimations. The insignicance of this nding may suggest that the relationship between number of meetings and performance may be more complex than a mere linear relationship or the possibility of a lag effect in that boards respond to poor performance by increasing board activity which in turn affects following years performance (Vafeas, 1999).
Board Busyness. Moving to busyness, the ndings for the variables BUSYALL and BUSYOUT are mixed. Contrary to expectations, the variable BUSYALL is marginally signicant and negatively associated with Tobins Q (TQ). The variable is not signicant when ROA is used as the performance variable. When the variable BUSYALL is substituted with BUSYOUT (as in Analysis 3), the variable is negative and signicant in all the 3SLS estimations (b = -2.82, z = -1.97 p < .05 (dependent variable is ROA); b = -.18, z = -1.57 p < .10 (dependent variable is TQ). Contrary to expectations the overall ndings in this study of Indian rms, do not support the resource dependency hypothesis argument that directors with multiple appointments generate benets in terms of rm value. The ndings are inconsistent with the work of Harris and Shimizu (2004) and Miwa and Ramseyer (2000) who reported that directors with multiple directorships have a positive impact on performance. The ndings appear to be more consistent with Core et al. (1999), Shivdasani and Yermack (1999), and Fich and Shivdasani (2004), indicating that rms with board members having many directorships may lower the effec-
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tiveness as corporate monitors and hence exhibit lower performance. The results suggest that in the Indian context, directors with multiple directorships fail to provide adequate service and value as board members. The inconsistency between busyness of directors and the resource dependency theory reported in this study suggests that there may be unique factors in the Indian context that explain this variation from the theoretical position proposed in Hypothesis 5. Given that busyness of directors had a negative affect on performance, the result suggests that Indian directors with multiple directorships possibly do not have networking contacts that enhance rm performance. The high proportion of family ownership in India may be linked with this lack of networking that is viewed as a positive resource for organizations. Additionally, busy directors in this sample of rms from India, may not have the skills that are typically present in their counterparts in developed countries. In more sophisticated markets multiple directorships are often linked with a reputation for skill, based on size and complexity of operations that the directors oversee in their various directorship roles (Ferris et al., 2003:1089). The resource dependency theory may have also been violated in this study given that the limited number of skilled directors in India that do take on multiple directorships are overcommitted and therefore unable to provide a meaningful contribution that ultimately enhances rm performance. Core et al. (1999) suggest that multiple director appointments correlates with excess CEO compensation and more generally an inadequate check on management of organizations. Control Variables. As expected, the control variable prior years performance (LAGROA or LAGTQ) is signicant and positively related to rm performance. The results are consistent across all 3SLS estimations. The coefcient for the variable leverage (LEV) is negative and is signicant in all 3SLS estimations.
SUMMARY AND CONCLUSIONS

The Indian government initiated market reforms in 1991. Major elements of the reforms have resulted in the opening of the Indian economy to multinational and foreign investment in the past two decades. The increased foreign investment in India has intensied the interest in good corporate governance and in particular the application of western governance structures to Indian rms. This paper has examined the relationship between established western internal governance structures and nancial performance using a sample of the top listed Indian companies. The issue of endogeneity is a major concern in such investigations, and hence in attempting to address the inter-relationships amongst board structure (proportion of outsiders), rm performance and capital structure (leverage), three stage least squares (3SLS) was employed as the analysis tool. The rst hypothesis posed was that the greater proportion of outside directors would be positively associated with rm performance. The results using 3SLS estimations show some evidence of a positive and signicant relationship between board composition in terms of outside directors and nan-
cial performance as measured by Tobins Q. These results suggest that in the Indian market the requirements of Clause 49 for a specied representation of outside directors on boards may be an important aspect of corporate governance although the recent Satyam Computers (the so-called Indias Enron) episode would question the effectiveness of these directors. It is possible that there is an attitude in some Indian boards that the members (more so the outside directors) are working for those who have brought them onto the board, which is probably a unique phenomena in emerging economies. The importance of the leadership structure of boards of directors in western countries has received much attention in the academic literature addressing corporate governance. The second hypothesis addressed in this paper was that there would be a negative association between various leadership structures and rm performance. Four measures of leadership were identied, however only one CEO as the sole employee on the board, showed some support for the hypothesis. The unique characteristics that dene a family business may explain this difference in results from the other analyses. However, further analysis of the corporate governance structures of family businesses would be useful to support this conclusion. Overall the second hypothesis that there is a negative association between leadership structures and rm performance is accepted, when the CEO is the sole employee on the board. The results for the three other measures were generally mixed which is consistent with prior literature from western economies. Various views have been put forward in attempts to determine the optimum size of boards of directors with some suggesting that as the board size increases the board becomes less efcient and therefore negatively inuences corporate performance. The results of this study overall indicated that there was a signicant and positive association between board size and nancial performance. This result may reect the nature of the environment in which corporations operate in India whereby greater board size supports the resource dependency theory. As the resource dependency hypothesis claims that multiple appointments of directors can generate benets to the rm, the nal hypothesis stated that there would be a positive relationship between multiple directorships by directors and rm performance. Contrary to predictions, the ndings do not support this aspect of the resource dependency hypothesis, instead a negative association was found between busyness of outside directors and rm performance for both ROA and Tobins Q. The ndings suggest that rms whose outside directors have many directorships may lower the effectiveness of their role as corporate monitors. The results also indicate that busy outside directors may not have the necessary reputation and networking contacts that are necessary to generate benets to the entity. One possible reason for this observation is the limited pool of outside directors with the right expertise in India. In addition, Indian companies, especially family owned, may hesitate in bring in the right people on board in lieu of potential loss of control. Hence, the busyness of directors in India may be diluting the effectiveness of the application of the resource benets that are typically seen as part of the busyness of directors in more developed economies.
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Having said this, regulators in an emerging country like India may wish to revisit the policy of limiting the number of directorships held by any one individual. The results presented in this paper are subject to some limitations that should be taken into account when interpreting the results. Firstly, it must be acknowledged that the analysis is exploratory. Further investigations, particularly on the unique aspects of family businesses in India, is warranted, given that they constitute more than 60 per cent of all rms. Prior literature (Demsetz, 1983; Shleifer & Vishny, 1997) suggests that concentrated shareholders (family rms) tend to extract benets from the rm. Also family rms are seen to restrict executive management positions to family members, thus limiting the pool of potential qualied and talented labor resources. On the other hand, it has also been suggested that concentrated ownership can mitigate managerial expropriation and thus enhance performance (Demsetz & Lehn, 1985). Family businesses usually have longer investment horizons and thus their presence and control of management and director posts puts such families in a better position to inuence, monitor and discipline managers, which in turn should facilitate enhanced performance (Andersen & Reeb, 2003). Hence, an examination of inherited control, founderCEOs, number of promoters on the board and the number of shares held by family members that are represented on boards, would be useful extensions of the analysis. Secondly, a restricted number of variables related to corporate governance were addressed in this study, which limits the generalizability of the ndings. Important issues that were not explored include director remuneration, size of rms, and training opportunities for board members. In addition, given that corporate governance itself is a difcult construct to measure and the presence of potential substitutive and complementary effect of a variety of governance practices, future studies may benet by using a carefully designed index as suggested by Larcker, Richardson, and Tuna (2007) to examine the relationship between corporate governance and rm performance. Given the limitations of the ndings outlined above, the ndings from this exploratory study add to the body of literature on corporate governance in emerging economies such as India. Overall the results suggest that changes in regulation that have been undertaken in India by the SEBI, that are similar to corporate governance measures in western countries, appear to be effective in improving rm performance. The ndings have important implications for directors and public policy makers engaged in corporate governance in emerging economies, such as India. The results suggest that overall the direction of regulatory change that has been modelled on the corporate governance changes in western economies generally apply to emerging economies. There is however, some aspects of variation from western economies, at least from the sample of rms used in this study. The failure of multiple directorships labelled busyness of directors to be positively associated with rm performance, suggests that there may be unique characteristics that are linked with resource dependency theory in emerging economies. However the unique characteristics of the Indian market, such as the high proportion of family businesses, suggests that corporate governance measures may be less signicant in businesses where there is an
implied family inuence on the business activities. These features of the Indian market warrant further investigation in progressing corporate governance in emerging economies. Increased interaction with the global economy will mean that corporate governance practices in countries such as India will become critical for all stakeholders. A deeper understanding of corporate governance structures and their links with rm performance have the potential to assist practitioners both local and foreign, to combine western expertise and local knowledge to improve governance in emerging economies such as India.
NOTES
1. Corporate governance deals with the processes by which rms are directed and controlled to ensure rms management acts are aligned with the interest of shareholders (Cadbury Committee, 1992; Parkinson, 1994). 2. Outside directors are dened as directors who are not paid employees of the company or have any family association with the company. This broad denition encapsulates non-executive directors, independent directors (note Clause 49 denes independent directors as having no family connection to the company). 3. As of 2005, about 5000 companies were listed on the National Stock Exchange and/or Bombay Stock Exchange. Although the dollar value of trading on the Indian stock market is much lower than the dollar trading in UK or the US, the number of equity trades on the NSE and BSE is tenfold greater than that on the London Stock Exchange, NASDAQ and the New York Stock Exchange. 4. In contrast in the US, about 35 per cent of S and P 500 Industrials are family rms and on average ownership by families is about 18 per cent of their rms outstanding equity (Andersen & Reeb, 2003). 5. Power is dened as the capacity of individual actors to exert their will (Finkelstein, 1992:506). 6. For the nancial period April, 2005, to March 31, 2006. 7. As disclosed on the BSEs website 4,143 companies listed on the exchange are required to comply with Clause 49, but only 1789 have complied to date (The Financial Express, 2007). 8. Looking at the individual VIFs for each of the independent variable none had values that were greater than 3. Only two variables (industry variable computer software and services; and total assets) had VIF of more than 2 (but less than 3). We carefully checked for potential collinearity by dropping these variables and retesting the estimations. The results were consistent to those reported in this paper. 9. The 2SLS only allows for potential endogeneity, while the 3SLS allows for both potential endogeneity and cross-correlation between the equations. 10. In Bhagat and Bolton (2008), level of treasury stock to total assets was used as the instrumental variable for performance in their main body of results. However, in the robustness check section of the paper and following the suggestion of Larcker and Rusticus (2008) they considered the use of lagged performance. The results using lagged performance as the instrument were found to be consistent with their main results. As such given that treasury stock is not available in OSIRIS, lagged performance is used as the instrumental variable for performance in this study. 11. For three-stage least squares (or two-stage least squares), some regressors enter the model as instruments when the parameters are estimated. However, since our goal is to estimate the
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structural model, the actual values, not the instruments for the endogenous right-hand-side variables, are used to determine the model sum of squares (MSS). The models residuals are computed over a set of regressors different from those used to t the model. This means a constant-only model of the dependent variable is not nested within the two-stage least squares model (or three-stage least squares model), even though the two-stage (or three-stage) model estimates an intercept, the residual sum of squares (RSS) is no longer constrained to be smaller than the total sum of squares (TSS). When RSS exceeds TSS, the MSS and the R2 will be negative. (Sribey et al., 1999:1). 12. Adams et al. (2005) examined Top 500 Fortune US from the years 1992 to 1999.
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Beverley Jackling recently joined Victoria University as Professor of Accounting and Deputy Dean of the Faculty of Business and Law, having previously been an academic at RMIT University. Jacklings research has been informed by the close links she has formed and maintained with industry and professional accounting bodies. Her research interests apart from corporate governance are in accounting education including learning approaches of students, graduate outcomes, and continuing professional development. She also has an interest in researching her main teaching area of
management accounting. Beverley has been the recipient of various awards for her contribution to teaching excellence, including faculty awards for her leadership in teaching and research initiatives. In recognition of her research contribution Beverley received the best manuscript award in 2005 from Accounting Education: An International Journal and in 2007 the inaugural award for Best Reviewer for the journal. Dr. Shireenjit Johl is a senior lecturer at Deakin University and has several years professional accounting experience in Malaysia. Her research interests apart from corporate governance are in the areas of audit markets, earnings management and nancial reporting.
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492 Corporate Governance: An International Review, 2009, 17(4): 492509

BOARD STRUCTURE AND FIRM PERFORMANCE

BACKGROUND TO CORPORATE GOVERNANCE IN INDIA

2009 Blackwell Publishing Ltd

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT

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BOARD STRUCTURE AND FIRM PERFORMANCE

Board Leadership and CEO Power

2009 Blackwell Publishing Ltd

2009 Blackwell Publishing Ltd

BOARD STRUCTURE AND FIRM PERFORMANCE

6.67 12.78 2.78 5.56 5.00 11.11 7.22 7.78 3.33

DATA AND MODEL DEVELOPMENT

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TABLE 2 Descriptive Statistics N Minimum Maximum Mean Median Std. Deviation

7.84 7.80 2.20 1.49 4.00 .50

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BOARD STRUCTURE AND FIRM PERFORMANCE

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BOARD STRUCTURE AND FIRM PERFORMANCE

REGRESSION RESULTS AND DISCUSSION

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PERFORM OUTSIDE LEADERSHIP

LEV ASSET CAPEXP RDEV LAGPERFORM AGE FCF ZSCORE

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BOARD STRUCTURE AND FIRM PERFORMANCE

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2009 Blackwell Publishing Ltd

BOARD STRUCTURE AND FIRM PERFORMANCE

SUMMARY AND CONCLUSIONS

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2009 Blackwell Publishing Ltd

BOARD STRUCTURE AND FIRM PERFORMANCE

2009 Blackwell Publishing Ltd

2009 Blackwell Publishing Ltd

BOARD STRUCTURE AND FIRM PERFORMANCE

2009 Blackwell Publishing Ltd

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