Jan'19

The IUP Journal of Corporate Governance

Focus

The board of directors is a central mechanism by which a large part of corporate oversight is carried out. The board also plays an important role in aiding strategic decision making within the firm and hence affects many strategic outcomes. A firm’s board of directors, which serves as its ultimate decision making authority, safeguards shareholders’ interests. The primary duty of the corporate board is to serve as a monitoring mechanism that helps protect shareholders from opportunistic behavior by managers. Therefore, independent directors are believed to be more effective at carrying out the monitoring functions and reducing agency costs, leading to superior firm performance. The first three papers of this issue focus on the theme of corporate board.

The first paper, “Are Indian Boards Truly Independent? Evidence from IPO-Issuing Firms”, by Rekha Handa, examines the relationship between board independence and performance through a comprehensive sample of Indian IPOs. Independent directors on the board of a company are expected to usher in unbiased decision making and thus contribute to better performance. With a sample of 626 IPOs, the study explores the contribution of independent directors and establishes a quadratic relation to initial returns of IPOs, which first has a negative impact on initial returns and then generates positive returns. The research questions the real independence of these directors on boards of Indian IPOs, which seem to be governed solely by the notion of fulfilling regulatory requirements in letter. It is concluded that the purported contribution of independent directors becomes discernible only after regulatory compulsions are settled.

Gender diversity on board of directors of companies has been receiving critical attention all over the world. Women and men have different cognitive patterns and, therefore, are likely to differ in beliefs, norms and behaviors. Gender-based behavioral differences between males and females may lead to differences in a firm’s board structure. In this context, the second paper, “Women Directors on Corporate Boards: An Empirical Study of Indian Banks”, by Kamal Kishore, analyzes women representation on bank boards in India. Many jurisdictions have introduced measures aimed at improving women representation in corporate high offices. The Indian government initiated its first step towards gender diversity on corporate boards by promulgating a provision in the new Companies Act, 2013, which enjoined companies to include at least one woman on their boards. The law was made applicable to all listed companies as also to non-listed public companies having paid up share capital of 100 cr (one billion) or a turnover of 300 cr (three billion). The Indian banking sector, which is dominated by government-owned public sector banks and has a significant presence of new private sector banks, responded to the new norm regarding women directors in a manner that reflected mere tokenism. The Government of India which took a bold step to usher in an era of better gender ratio on company boards is expected to exhibit a role model act in its own banking entities, but it has not done so.

In the next paper, “The Impact of Appointment of Women Directors on the Financial Performance of Mining and Minerals Sector Companies in India: A Study”, the authors, Neelam Rawat and Sunita Sharma, examines the financial performance of companies before and after the mandatory requirement of appointment of at least one woman director on corporate board. The research sample comprised 14 companies listed on NSE in the mining and minerals sector. The study examined the relationship between gender diversity on boards and financial performance of sample companies for the period 2013-2017. The study found that the presence of women on board did not significantly impact the financial performance of companies post the appointment of women directors on boards, as there was no significant difference in the financial performance of the companies with one woman director and firms with more than one woman director on board.

In the last paper, “ESG and Corporate Financial Performance: A Panel Study of Indian Companies”, the authors, Karishma K Dalal and Nimit Thaker, explain the importance of sustainable and responsible investment strategies. The need for such investment strategies has significantly risen due to the increasing cognizance concerning environmental stability and socioeconomic development of countries. Responsible investment strategies take Environmental, Social and Governance (ESG) aspects into investment consideration to enhance risk management and generate sustainable yields for investors. The paper examines the influence of ESG factors on the performance of Indian public limited companies in terms of profitability and the value of the firm through multiple measures of return on asset and Tobin’s Q ratio. The research sample comprised annual ESG data of 65 Indian firms listed on the NSE 100 ESG Index database, covering the period from 2015 to 2017. Random Effect Panel Data regression analysis was used to test the influence of ESG factors on the economic performance of the firms. Companies with lower ESG risks have better chances of delivering a sustainable financial performance and are thereby able to attract investors for longer duration. The study highlights the need for adoption of sustainability reporting, including disclosure of ESG scores. This would go a long way in improving sustainable business practices and long-term viability of the shareholders’ wealth. The findings of the study indicate that good corporate ESG performance enhances financial performance evaluated through accounting as well as market-based measures.

- Pankaj M Madhani
Consulting Editor

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Article   Price (₹) Buy
Are Indian Boards Truly Independent? Evidence from IPO-Issuing Firms
50
Women Directors on Corporate Boards: An Empirical Study of Indian Banks
50
The Impact of Appointment of Women Directors on the Financial Performance of Mining and Minerals Sector Companies in India: A Study
50
ESG and Corporate Financial Performance: A Panel Study of Indian Companies
50
       
Contents : (Jan'19)

Are Indian Boards Truly Independent? Evidence from IPO-Issuing Firms
Rekha Handa

The present study is an attempt to examine the relationship between board independence and performance through a comprehensive sample of Indian IPOs. An IPO which marks a critical event for a firm calls for thorough preparedness on all fronts for good returns. In this direction, independent directors on the board of a company are expected to usher in unbiased decision making and thus contribute to better performance. With a sample of 626 IPOs, the present study explores the contribution of independent directors and establishes a quadratic relation to initial returns of IPOs, which first has a negative impact on initial returns and then generates positive returns. It is concluded that the purported contribution of independent directors becomes discernible only after regulatory compulsions are settled. The paper questions the real independence of these directors on boards of Indian IPOs, which seem to be governed solely by the notion of fulfilling regulatory requirements in letter.


© 2018 IUP. All Rights Reserved.

Article Price : Rs.50

Women Directors on Corporate Boards: An Empirical Study of Indian Banks
Kamal Kishore

Gender diversity on board of directors of companies has been receiving critical attention all over the world. Many jurisdictions have introduced measures aimed at improving women representation in corporate high offices. The Indian government initiated its first step towards gender diversity on corporate boards by promulgating a provision in the new Companies Act, 2013, which enjoined upon companies to include at least one woman on their boards. The law was made applicable to all listed companies as also to non-listed public companies having paid up share capital of 100 cr (one billion) or a turnover of 300 cr (three billion). The legislative measure and its strict enforcement by regulators led to a virtual scramble to include women members on their boards. Indian banking sector, which is dominated by government-owned public sector banks and has significant presence by new private sector banks, responded to new norm regarding women directors in a manner that reflected mere tokenism. The Government of India which took a bold step to usher in an era of better gender ratio on company boards is expected to exhibit a role model act in its own banking entities but it has not done so. The paper analyzes women representation on bank boards in India.


© 2018 IUP. All Rights Reserved.

Article Price : Rs.50

The Impact of Appointment of Women Directors on the Financial Performance of Mining and Minerals Sector Companies in India: A Study
Neelam Rawat and Sunita Sharma

Women constitute half of the potential talent throughout the world and therefore it is important that they should lead on the economic and social fronts. Many countries across the world have realized that sustainable development of the country is possible only if they make optimum utilization of this talent pool as well. Section 149 of the Companies Act, 2013 and Clause 49 of SEBI guidelines mandated all listed companies in India to appoint at least one woman director from April 1, 2015 in a bid to bring in gender diversity on the boards in India. The percentage of women attending colleges, postgraduating and obtaining doctorate degrees has increased in the last decade in India. However, still the Indian corporate boards find it tough to find and appoint qualified women directors. The old boys’ club is still predominant in the Indian boardrooms and still resisting accepting women at leadership positions in the corporate world. Gender diversity in the boardroom is not only about fair treatment but also about tapping the potential talent which is essential for the sustainable development of the organization and the world at large. Several research studies across the world have found a positive impact of gender diversity at the board level on the financial performance of the company. In this regard, this study was conducted with 14 NSE- listed companies of mining and minerals sector of India. The study found that women were either not represented at board level or underrepresented before the quota system was introduced under the Companies Act, 2013. The study further examined the financial performance of companies before and after the mandatory requirement of appointment of at least one woman director on board, over the period of four consecutive financial years from 2013 to 2017, which revealed that the presence of women directors on boards did not significantly impact the financial performance of companies.


© 2018 IUP. All Rights Reserved.

Article Price : Rs.50

ESG and Corporate Financial Performance: A Panel Study of Indian Companies
Neelam Rawat and Sunita Sharma

The importance of sustainable and responsible investment strategies has significantly risen due to the increasing cognizance concerning environmental stability and socioeconomic development of countries. Responsible investment strategies take Environmental, Social and Governance (ESG) aspects into investment consideration to enhance risk management and generate sustainable yields for investors. Therefore, the purpose of this paper is to examine the influence of ESG factors on the performance of Indian public limited companies in terms of profitability and the value of the firm through multiple measures of return on asset and Tobin’s Q ratio. The authors used annual ESG data of 65 Indian firms listed on the NSE 100 ESG Index database, covering the period from 2015 to 2017. Random effect panel data regression analysis was used to test the influence of ESG factors on the economic performance of the firms. The findings of the study indicate that good corporate ESG performance enhances financial performance evaluated through accounting as well as marketbased measures. The findings have practical implications for corporates, investors, regulators, as well as policymakers. The study highlights the need for adoption of sustainability reporting, including disclosure of ESG scores. This would go a long way in improving sustainable business practices and long-term viability of the shareholders’ wealth.


© 2018 IUP. All Rights Reserved.

Article Price : Rs.50

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