Question:
Discuss about the Impact Of Composition Of Board And Corporate Governance On Performance Of Firms Australian As Well As Indian Evidence.
Definitions and key concepts
Financial performance: The financial performances of business concerns can be considered to be of utmost significance to firm’s stakeholders. On one hand, financial performance of firms is an important source for financing present economic activities of the firm, thus can help in maintaining a going concern and increase the value of the business. On the other hand, financial performance can be considered as the basis for allotting dividends that subsequently might lure investors as well as their funds. Therefore, identifying as well as evaluating diverse facets that exert impact on financial performance of business concerns is of great significance both to practice along with academia. Whilst it is reasonable to suppose that the managerial capabilities of board members would have considerable influence on the financial performance of the entity (Hermalin & Weisbach, 1991). However, it is not clear whether the composition of the board would considerably influence the performance of the business concern.
Several prior studies have examined the influence of diverse corporate governance features on performance of business concerns. However, the current issue is analysing outcomes of prior researches along with the conclusions that are mixed. The role of professional accountant in a specific business is necessarily application of an inquisitive mind founded on the awareness as regards financials of the corporation. This profession involves using skills along with in depth understanding of firms along with the environment in which the business functions (Daily & Dalton, 1994). Thus, professional training in accountancy specifically can assist me in taking on a pragmatic and at the same time objective approach to resolve diverse matters. Being a future accounting professional, I will be able to help the company in developing corporate strategy, delivering advice and assisting business in reducing the cost, enhancing the top line and alleviating the risk.
Board composition has several issues associated to the independence rate of different board of directors, diversity subsisting amongst different members of the board together with the duality of CEO. In this case, the directors are also categorized in three different broad classes that include inside directors, affiliated outside directors as well as outside directors (Kiel and Nicholson, 2003).
Corporate governance can be referred to as a system designed by a corporation that comprises of certain set of rules as well as regulations for the effectual management of the corporation (Kang et al., 2007). Fundamentally, it majorly focuses on shielding the interests of the financiers taking into account interests of the management as well as other parties related to the business (Bernardi et al., 2002).
Majority of the research carried out considers two extensively accepted theories of corporate governance that includes agency theories as well as the resource dependency themes. Sarkar & Sarkar (2009) study indicates sample of certain top Indian corporations and observes situations as well as several aspects of corporate governance as Indian market is considered as a developing market. Again, it also declares that research undertaken in this area is more focussed on the nations that are comparatively developed and hence there remains a variance in the issues when it comes to the nations that are in the developing stage (Dwivedi & Jain, 2005).
As mentioned in the introduction, there are several academic research papers that examined the nature of association between characteristics of corporate governance and overall business performance. Ghosh (2006) study in their often cited research paper the overall influence of corporate governance on performance of corporation during the period 1990’s. Utilizing 24 governance regulations, the writers construct a governance index in order to proxy for the level of rights of shareholders (Barnhart et al., 1994). Again, the outcomes of the study reflect that business concerns with greater shareholder rights had superior value of the firm, higher level of performance and higher growth in sales than corporations with weaker rights of shareholders. Again et al., (2015) showed that in the first decade of this current century, corporations with strong rights of shareholders do not outperform corporations with weaker rights of shareholders. Again, another seminal research paper regarding association between corporate governance and business performance, based on a previous European study declared substantiation of a negative association between these two constructs (Baysinger & Butler). Again, taking into account the endogeneity of the association between firm’s governance, performance of the group, corporate structure and ownership framework, the writers discovered that better corporate governance is considerably positively correlated with both superior contemporaneous and subsequent operating performance of a corporation (Welch, 2003). Pertinent to this current study is also the study conducted by Jackling & Johl (2009) who scrutinizes the overall influence of the size of the board on performance of corporations for a large number of corporations.
The current research study intends to develop an understanding the way variances in board composition and structures of governance exerts impact on the performance of companies operating in both Australian as well as Indian market. The composition of the board comprises of outside directors, directors having duality in the profile, female directors. On the other hand, corporate governance concentrates on enhanced and stringent rules as well as regulations that mainly concentrate on protection of interests of shareholders.
The research question framed for the study is:
The current research proposes to use the positivism philosophy since this assists in the process of substantiation. The selection of the research philosophy of positivism is justified as this philosophy declares that authentic knowledge accepts that only effectual knowledge is scientific and it originates from derived knowledge. In addition to this, the learner intends to employ the deductive research approach for the present study. Furthermore, the learner also proposes descriptive research design for the current study as this helps in observing and at the same time illustrating behaviour of different subjects without affecting it in any way (Hillman & Dalziel, 2003).
The learner intends to utilize secondary data collected from journal articles, books, official websites of corporations, news papers and many others. The proposed interpretation approach for evaluation of this study includes qualitative method. Qualitative methods of analysis that can be taken into consideration include uncovering particular trends in thoughts as well as opinions, and delving deeper into the problems. The learner intends to gain comprehensive understanding different facets that contribute towards changes in profitability of corporation. In addition to this, the researcher also intends to analyse impacts of diverse theories of corporate governance utilized in corporations operating in both Indian as well as Australian markets. Moreover, the learner also proposes to utilize secondary data obtained from the financial assertions of business corporations and put emphasis on values of key financial ratio such as profitability ration as well as solvency ratio. Essentially, these ratios can be utilized as performance indicators in the process of determination of diverse impacts of variables (Schultz, 2003).
Analysis of the article “Corporate Governance and Board Composition: diversity and independence of Australian boards” penned by Helen Kang, Mandy Cheng and Sidney J. Gray reveals that board diversity and independence can be considered to be crucial corporate governance matters that the business concerns face (Kang et al., 2007). Again, critical evaluation of the research study “Impact of Firm Performance on Board Characteristics: Empirical Evidence from India” by Akshita Arora and Chandan Sharma reflects the fact that the outcomes of the research study reflect that performance of business entity has a negative influence on characteristics of the board. Furthermore, findings of the study also shows that larger size of the board, outside membership along with more number of meetings can be regarded as pricey affairs in the business concern (Arora & Sharma, 2015). Again, from the review of the article “Corporate Governance and Performance of Indian Firms: The Effect of Board Size and Ownership” penned by Neeraj Dwivedi and Arun Kumar Jain, it is apparent that larger boards can enhance firms’ governance contributing towards lower costs of agency and can have a positive relationship with value of the corporation in the Indian perspective. Nevertheless, the association is observed to be weak (Dwivedi & Jain, 2005). Evaluation of the article “The Relationship between Ownership Structure and Performance in Listed Australian Companies” reflect that there exists a limited evidence of a non-linear association between managerial share ownership and performance of corporations. Thus, it can be said that endogeneity problem recognized in the American perspective is also existent in Australia, in which ordinary least-squares testing suggests that performance of firm is statistically reliant on managerial ownership (Welch, 2003). Nevertheless, at the time when endogeneity is considered, performances demonstrate no statistical reliance on ownership dimensions. Thus, based on the results of the prior study, it can be said that firm’s performance is said to be influenced by the board structure and corporate governance.
References
Arora, A., & Sharma, C. (2015). Impact of Firm Performance on Board Characteristics: Empirical Evidence from India. IIM Kozhikode Society & Management Review, 4(1), 53-70.
Arora, A., & Sharma, C. (2015). Impact of Firm Performance on Board Characteristics: Empirical Evidence from India. IIM Kozhikode Society & Management Review, 4(1), 53-70.
Barnhart, S. W., Marr, M. W., & Rosenstein, S. (1994). Firm performance and board composition: Some new evidence. Managerial and Decision Economics, 15(4), 329-340
Baysinger, B. D., & Butler, H. N. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), 101-124.
Bernardi, R. A., Bean, D. F., & Weippert, K. M. (2002). Signaling gender diversity through annual report pictures: A research note on image management. Accounting, Auditing & Accountability Journal, 15(4), 609-616;
Daily, C. M., & Dalton, D. R. (1994). Bankruptcy and corporate governance: The impact of board composition and structure. Academy of Management journal, 37(6), 1603-1617.
Dwivedi, N., & Jain, A. K. (2005). Corporate governance and performance of Indian firms: The effect of board size and ownership. Employee Responsibilities and Rights Journal, 17(3), 161-172.
Dwivedi, N., & Jain, A. K. (2005). Corporate governance and performance of Indian firms: The effect of board size and ownership. Employee Responsibilities and Rights Journal, 17(3), 161-172.
Ghosh, S. (2006). Do board characteristics affect corporate performance? Firm-level evidence for India. Applied Economics Letters, 13(7), 435-443.
Hermalin, B. E., & Weisbach, M. S. (1991). The effects of board composition and direct incentives on firm performance. Financial management, 101-112.
Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management review, 28(3), 383-396.
Jackling, B., & Johl, S. (2009). Board structure and firm performance: Evidence from India’s top companies. Corporate Governance: An International Review, 17(4), 492-509.
Kang, H., Cheng, M., & Gray, S. J. (2007). Corporate governance and board composition: Diversity and independence of Australian boards. Corporate Governance: An International Review, 15(2), 194-207.
Kang, H., Cheng, M., & Gray, S. J. (2007). Corporate governance and board composition: Diversity and independence of Australian boards. Corporate Governance: An International Review, 15(2), 194-207.
Kiel, G. C. and Nicholson, G. J. (2003), Board Composition and Corporate Performance: how the Australian experience informs contrasting theories of corporate governance. Corporate Governance: An International Review, 11: 189–205. doi:10.1111/1467-8683.00318
Sarkar, J., & Sarkar, S. (2009). Multiple board appointments and firm performance in emerging economies: Evidence from India. Pacific-Basin Finance Journal, 17(2), 271-293.
Schultz, E. (2003). The relationship between ownership structure and performance in listed Australian companies.
Sharma, A. A. C. Corporate governance and firm performance in developing countries: evidence from India.
Welch, E. (2003). The relationship between ownership structure and performance in listed Australian companies. Australian journal of management, 28(3), 287-305.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of financial economics, 40(2), 185-211.
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