After corporate governance became a key issue in the early 1990s, all the developed
countries adopted significant legal and regulatory measures to ensure protection of the
stakeholders. In the late 1990s, the developing economies also followed suit and adopted corporate governance mechanisms. However, the effectiveness of such mechanisms in these countries is not up to the mark in comparison to the developed economies. This provides a basis for researchers to analyze various issues related to corporate governance in these countries. This issue focuses on corporate governance study in two developing countries, namely, India and Pakistan.
Prior research studies on the performance of State-Owned Enterprises (SOEs) vis-à-vis private ones empirically concluded that SOEs underperform in comparison. It is mainly due to weaker incentives for SOEs in the absence of market for corporate control as well as for managerial talent. In the first paper, “Ownership Structure and Performance of Listed State-Owned Enterprises Vis-à-Vis Comparable Private Enterprises: Evidence from India”, the author, Malla Praveen Bhasa, explains the rationale behind the state’s ownership of industry and how SOEs are organized in India. The author then compares the performance of the listed SOEs with that of their private competitors. In the literature, high ownership is reported to have a major negative influence on firm performance. Based on this, one can theoretically assume that majority state ownership is likely to lead to lesser value creation. After studying 39 Central Public Sector Enterprises (CPSEs) and an equal number of private enterprises listed on Bombay Stock Exchange (BSE) for the period 2006-2014, the study found mixed evidence as the CPSEs perform marginally better in terms of Return on Assets (ROA) and Return on Sales (ROS) than their private counterparts. However, on the other performance measures such as Return on Equity (ROE), they were inferior to their private competitors. Overall, the research findings show that Indian CPSEs were marginally better than the private enterprises.
Board diversity is defined as board composition of the qualities, characteristics, skills, and expertise of individual members who help to make decisions in the board. Board diversity, characterized by attributes such as gender, age, nationality and functionality, is increasingly considered as a significant mechanism of good corporate governance as well as firm performance. Therefore, the economic impact of board diversity aspects needs to be investigated empirically. The second paper, “The Relationship Between Board Diversity and Firm Performance: Evidence from the Banking Sector in Pakistan”, focuses on another developing economy, Pakistan. In this paper, the authors, Sumbul Sajjad and Kashif Rashid, examine the relationship between board diversity and firm’s performance in the developing financial market. They study the relationship between demographic diversity such as gender diversity, foreign diversity and age diversity of the board of directors and firm financial performance based on the panel data of 20 commercial banks publicly listed on Karachi Stock Exchange (KSE), Pakistan for the period 2007-2012. The characteristics of directors affect their ability to perform their services, and hence board diversity results in better problem solving, effective decision making and mutual monitoring of the board members. Therefore, firms need to maintain a proper mix and composition of board in order to benefit from it. The results suggest that a higher proportion of female and young directors on the board leads to lower firm value. On the other hand, higher representation of foreign directors improves the firm value, as measured by Tobin’s Q.
Literature suggests that MNC subsidiaries and cross-listed firms have higher corporate governance and disclosure level as compared to domestic firms. In the third paper, “Corporate Governance and Disclosure Practices of MNC Subsidiaries and Cross-Listed Firms: An Institutional Environment Perspective”, the author, Pankaj M Madhani, seeks to identify whether corporate governance and disclosure practices of MNC subsidiaries and cross-listed firms are significantly different by studying a sample of 28 firms listed in the Indian stock market, BSE for the financial year 2011-12. The research findings indicate that subsidiaries of MNCs and cross-listed firms have statistically significant differences in corporate governance and disclosure practices. The findings also reveal that domestic cross-listed firms disclose more information than MNC subsidiaries listed only in host country. This is because of the quite different institutional and legal environment for MNC subsidiaries listed in India as compared to the listing environment of the US/Europe where domestic firms are cross-listed. The research provides insight into the question of how a country’s institutional, legal and regulatory environment may influence the effectiveness of firm-level corporate governance mechanisms.
--Pankaj M Madhani
Consulting Editor |