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Dynamics of Corporate Boards

The issue of corporate governance has been attracting huge amount of attention from the policy makers, regulators as well as from the academicians. The increasing attention on corporate governance in the last two decades has made it a global issue for the several reasons. On one hand, there is growing awareness amongst the companies in market-oriented economy to become internationally competitive in the liberalized as well as globalized scenario and on the other, global investors, in order to diversify their risks, are moving beyond their domestic markets for seeking attractive opportunities abroad. Due to this, investors are regularly pressing for greater transparency in the governance standards, particularly, the accountability of company’s board of directors. Furthermore, 1997/1998 Asian financial crisis and the collapse of business giants such as Enron, WorldCom, Xerox, Adelphia, Commerce Bank and XL holidays, have also raised concerns on the efficacy of existing corporate governance practices in the modern corporate institutions. Coupled with this, recent financial crisis can also be, to an important extent, attributed to the failure and weaknesses in corporate governance practices followed in financial services companies[1]. However, in India, the concept of corporate governance started gaining significance since after the integration of Indian economy with World economy around the last decade of twentieth century which had allowed the entry of foreign institutional investors into the Indian financial market. Thereafter, a spate of crises[2], particularly, the recently committed massive accounting fraud at Satyam Computers Services limited had shaken the structure of corporate governance in India. Over the world, regulators are continually struggling to deal with the issue of ensuring sound governance to improve the confidence of investors, and hence, they have contemplated some considerable changes to the regulations for corporate governance. Therefore, the need of hour is to move towards corporate governance restructuring in order to promote both transparent as well as globally acceptable standards of corporate governance. There are several mechanisms, internal as well as external, through which sound corporate governance can be ensured. This article focuses upon the most important internal corporate mechanism, i.e. board of directors[3]. The corporate board’s effectiveness can be judged through a number of characteristics, for example, board size, board composition, functioning and diligence level of the board, its leadership structure, skill sets and other demographics of board members etc. Agency theory is a fundamental theory of corporate governance which has theorized the structure of corporate boards by relying upon the type 1 agency problem, i.e. conflicts between shareholders and managers arising due to the separation between ownership and control. Since in India, the changing nature of agency problem i.e. the conflicts between controlling (generally promoters) and non-controlling shareholders, has made it even more crucial to understand the nature of corporate board dynamics and to identify how they can be linked to the firm performance. Although the empirical research on some of the above-stated board characteristics (i.e. board size, board composition) and their relationship with firm performance has been started conducting in India from the recent few years, yet their findings have been observed to be mixed as well as unconvincing. For example, the empirical studies available on the association between board size and firm performance in India provide no clear direction (see, ‘Relationship between Board Size and Corporate Performance: Evidences from India’)[4]. These inconsistencies further aggravate when empirical analysis could not locate any linkage between board size and firm performance (for example, see Board Size and Corporate Performance: An Empirical Investigation)[5]. The similar phenomenon holds for the board composition as well. Moreover, keeping in view the dominance of promoters (insiders) on the make-up of corporate boards characterised by type 2 agency problem, also provides additional insights into the understanding of corporate board dynamics (see Corporate Boards, Insider Ownership and Firm-Related Characteristics: A Study of Indian Listed Firms)[7]. In addition, the role of firm-related characteristics (firm size, firm age) in studying the behavior of corporate board characteristics has also occupied a significant place in the related arena (see Corporate Boards, Insider Ownership and Firm-Related Characteristics: A Study of Indian Listed Firms). Overall, the above discussion highlights the limited availability of empirical research work available on board characteristics in India which needs to be further scaled up to a much advanced level so as to offer suitable guidance to the concerned policy makers and regulators.

[1] http://www.oecd.org/dataoecd/32/1/42229620.pdf [2] Harshad Mehta Securities scam (1992), Vanishing companies (1993-94), Plantation Companies scam (1995-96), Ketan Parekh’s fraud (2002), Global Trust Bank (2002-03), Satyam Computers Scandal (2009) [3] Jensen (1993), ‘The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems', Journal of Finance. [4] Relationship between Board Size and Corporate Performance: Evidences from India- Paper published in the proceedings of UGC sponsored National Seminar on ‘Corporate Growth in India: Challenges and Opportunities” by Shivan Sarpal at Doaba College, Jalandhar. [5] Board Size and Corporate Performance: An Empirical Investigation – Paper published in an International Journal of Business Ethics in Developing Economies by Shivan Sarpal in Vol. 2, Issue 1, 2013 (June). [7] Corporate Boards, Insider Ownership and Firm-Related Characteristics: A Study of Indian Listed Firms – Paper published in a refereed Journal by Shivan Sarpal, Asia-Pacific Journal of Management Research and Innovation, Vol. 9, Issue 3, 2013 (September).