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Corporate Governance: An International Review, 2009, 17(4): 492–509

Board Structure and Firm Performance:

Evidence from India’s Top Companies
Beverley Jackling* and Shireenjit Johl**

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This paper investigates the relationship between internal governance structures and financial
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 firm 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 findings 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 appoint-
ments 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 findings of this study. The findings 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 findings 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 firm
performance.

Keywords: Corporate Governance, Board of Directors, Firm Performance, Clause 49, India

INTRODUCTION Harris Scarfe, One.Tel) in the US and Australia. The need for
strong governance is evidenced by the various reforms and

I n recent years the attention and interest in corporate gov-

ernance1 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
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; Raja-
gopalan & Zhang, 2008). However, limited research exists
on the extent to which the corporate governance issues

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00760.x
BOARD STRUCTURE AND FIRM PERFORMANCE
of developed economies are applicable to emerging econo-
mies. A major impetus for investigating the corporate
governance of emerging economies such as India is the sig-
nificant growth in the listing of companies from emerging
economies on international stock exchanges. This develop-
ment has been accompanied by a drive within emerging
economies to attract more foreign direct investment as a
means of promoting a country’s long-term economic devel-
opment. As such the focus on foreign investment develop-
ment in India has necessitated a more transparent approach
to corporate operations.
Effective corporate governance also assists in the
attainment of high level financial 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 financial 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 improve-
ments in corporate governance in an emerging economy
such as India.
This paper specifically investigates aspects of corporate
governance in India linked to the board-performance nexus.
The research is motivated by the Securities and Exchange
Board of India’s (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 compo-
sition, board size, aspects of the board leadership, and board
activity in relation to financial performance. These aspects of
corporate governance have been identified as central to the
development of good corporate governance in organiza-
tions.
The paper is expected to contribute to research by expand-
ing the understanding of the governance structures and firm
performance in India. The study focuses on the board of
directors’ composition, activity, and size as measures of cor-
porate governance given that boards play a central role in the
corporate governance of publicly listed companies. Aspects
of board leadership and composition are particularly impor-
tant in the Indian context given recent changes in legislation
and regulations that outline specific requirements for board
structure (Lange & Sahu, 2008). Furthermore as there is evi-
dence to suggest that there are country specific 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 specific features of corporate governance
related to the role of the board of directors provides insights
for India’s engagement with the global financial market.
The paper is structured as follows: the next section pro-
vides a background on corporate governance in India, fol-
lowed 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
firm performance. The fourth section describes the data
selection procedures and research methods employed. Find-
© 2009 Blackwell Publishing Ltd
493
ings and analysis are presented in the fifth section, while the
final 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 gov-
ernance issues not prevalent in more widely researched
developed economies. This section of the paper provides an
overview of significant regulatory changes related to corpo-
rate governance in India that have taken place in recent times
and provides a background to the unique aspects of gover-
nance. 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 corpo-
rate 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 financial expertise of directors.
There has also been change to Clause 49 of the Listing Agree-
ment 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 com-
position and operation of boards of directors as measures
designed to improve corporate governance, may also be
reflected in improved firm performance.
Significant differences also exist in enforcement stan-
dards, 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 difficulties 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 com-
panies is opaque given the widespread use of pyramiding,
cross-holdings, and the use of non-public trusts (Chakra-
barti et al., 2008). The characteristics of family-owned busi-
nesses are expected to have unique agency problems linked
with corporate governance and firm performance. Family-
run companies may also present challenges in terms of
Volume 17 Number 4 July 2009
494
monitoring the transparency of operations in order to meet
international standards of corporate governance. The litera-
ture 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 firm
performance. The relationship between the board of direc-
tors and firm performance is more “varied and complex”
than can be covered by any single governance theory
(Nicholson & Kiel, 2007). However, in examining prior lit-
erature 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 corpora-
tions and the essential resources that are needed to maxi-
mize performance. This involves an examination of board
size and board activity. The combining of these two theoreti-
cal 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 findings 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 firm perfor-
mance 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 conflict of inter-
est between the shareholders and managers occurs. Agency
theory is based on the premise that there is an inherent
conflict between the interests of a firm’s owners and its
management (Fama & Jensen, 1983). In the context of corpo-
rate governance, agency theory implies that adequate moni-
toring mechanisms need to be established to protect
shareholders from management’s self-interests. Therefore a
high proportion of outside directors on the board is viewed
Volume 17 Number 4 July 2009
CORPORATE GOVERNANCE
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 com-
position on performance has varied. Differences in findings
have in part been attributable to the differences in the theo-
retical bases of investigation. A preference for greater repre-
sentation 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 finan-
cial 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 identifiable
announcement of the appointment of an outside director led
to an increase in shareholder wealth.
There have been differences in findings related to the
dominance of outside directors on performance when dif-
ferent measures of firm performance have been utilized in
academic research. For instance, studies utilizing Tobin’s 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 firm performance. Other
studies, for example Dalton, Daily, Ellstrand, and Johnson
(1998), found no significant association between board
composition and firm performance using moderator analy-
ses incorporating firm size, the nature of financial perfor-
mance indicator and operationalization aspects of board
composition.
In India the recommendations of the Birla Committee
enacted Clause 49 of the Listing Agreements that first 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 firm’s 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 efficiency and access to legal
recourse. The first 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 perfor-
mance (Nicholson & Kiel, 2007). Accordingly the following
hypothesis is presented.
H1: The proportion of outside directors on the board of
directors of Indian firms is positively associated with firm
performance.
© 2009 Blackwell Publishing Ltd
BOARD STRUCTURE AND FIRM PERFORMANCE
Board Leadership and CEO Power
Prior literature acknowledges that the type of board leader-
ship and role of the Chief Executive Officer (CEO) can have
an influence on firm performance. For instance, Adams,
Almeida, and Ferreira (2005) argue that the ability of a CEO to
influence decisions can have an impact on firm 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 gover-
nance reforms worldwide have pressured firms 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 firm 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 influence 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 CEO’s power and position and will
influence 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 conflicts between parties
that delegate (principals) and those who execute (i.e., agents)
(Jensen & Meckling, 1976). Therefore from an agency per-
spective 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 leader-
ship of a single individual (as both chairman and CEO) leads
to higher firm performance (Donaldson & Davis, 1991).
Given the differences in theoretical perspectives, evi-
dence 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 financial performance
(Coles et al., 2001; Peel & O’Donnell, 1995). In part the dif-
ferences in results are also linked to the measures of finan-
cial performance. Adams et al. (2005) for example, show
mixed findings in that the CEO being the sole manager is
negatively correlated with ROA, but positively correlated
with Tobin’s Q. Dalton et al.’s (1998) meta-analytic analysis
of prior empirical studies failed to find a substantive rela-
tionship between board leadership structure and relation-
ships to financial performance. A further complexity is
added when the relationship between duality and perfor-
mance is tested in family-controlled public firms (Braun &
Sharma, 2007).
© 2009 Blackwell Publishing Ltd
495
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 rec-
ommended 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 lead-
ership structures and firm performance for Indian firms.
The next section of the literature review addresses ele-
ments of resource dependency theory linked to the board-
performance nexus. This theory maintains that the board is
an essential link between the firm 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 definition 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 firm 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 company’s access to various
resources thus improving corporate governance and firm
performance. The resources that have been investigated as
having added value to the firm include finance and capital
(Burt, 1983; Mizruchi & Stearns, 1988), links to key suppliers
(Banerji & Sambharya, 1996), customers (Frooman, 1999)
and significant 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 specifically
linked with the ability of the board to tap into significant
resources that would flow 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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496 CORPORATE GOVERNANCE

panies. For example, there has been some empirical evi- H3: There is a positive association between the size of the board
dence to suggest that increased board size can have a and firm performance for Indian firms.
positive association with performance. Van den Berghe and
Levrau (2004) argue that expanding the number of directors
Board Activity (number of meetings and busyness). One
provides an increased pool of expertise and thus larger
aspect of resource dependency theory linked with corporate
boards are likely to have more knowledge and skills at their
governance and performance is the intensity of board activ-
disposal than smaller boards. Furthermore, there is evidence
ity, as measured by the frequency of board meetings. Lipton
to suggest that larger boards may reduce the domination of
and Lorsch (1992) suggest that the greater frequency of
the CEO (Forbes & Milliken, 1999; Goodstein, Gautam, &
meetings is likely to result in superior performance. An
Boeker, 1994).
opposing view professed by Jensen (1993) is that routine
There is however evidence that supports the assertion that
tasks absorb much of a board’s meeting time and thus limit
there is an inverse association between firm performance
the opportunities for outside directors to exercise meaning-
and size of the board. Yermack (1996) presents evidence that
ful control over management. Jensen (1993) suggests that
small boards of directors are more effective than large
boards should be relatively inactive and evidence of higher
boards as the benefits of increased size can be out-weighted
board activity is likely to symbolize a response to poor
by the costs in terms of poorer communication and decision-
performance.
making associated with larger groups. According to Jensen
Some evidence suggests that the association between
(1993:865) “as groups increase in size they become less effec-
number of meetings and performance is more complex than
tive because the coordination and process problems over-
previously reported. For example, a study of 307 firms over
whelm the advantages from having more people to draw
a 5-year period by Vafeas (1999:140) showed that boards that
on.” When boards get beyond seven or eight people Jensen
met more frequently were valued less by the market.
(1993:865) claims that they are less likely to function effec-
However, this association disappeared when prior stock
tively and are easier for the CEO to control. These views
performance was included in the model, suggesting that
have been supported by Yermack (1996) using Tobin’s Q as
operating performance rises following years of abnormally
an approximation of market valuation, where it was found
high meeting frequency.
that there was an inverse association between board size and
Overall prior results suggest that boards respond to poor
firm value in a sample of large US industrial corporations.
performance by raising their level of board activity, which in
Similar results have been reported using European data (Van
turn is associated with improved operating performance in
den Berghe and Levrau, 2004). In contrast, various studies
the following years thus suggesting a lag effect. The litera-
have predicted a positive association between board size
ture suggests that there are various aspects of board meet-
and firm performance (for example, Dalton et al., 1998;
ings that need to be considered in terms of the impact on
Pearce & Zahra, 1992). Proponents of this view argue that a
firm performance. For example, questions that relate to the
larger board will bring together a greater depth of intellec-
“quality of meetings” that need to be addressed include:
tual knowledge and therefore improve the quality of strate-
How free flowing are the exchange of ideas in board meet-
gic decisions that ultimately impact on performance.
ings and to what extent are meetings used for routine tasks
In an attempt to reconcile the differences in findings on
as opposed to time devoted to substantive issues? However,
“optimal” board size, Bennedsen, Kongsted, and Nielson
generally there is reason to believe board meetings on face
(2008) acknowledge that the association between board size
value, may be an important resource and therefore fre-
and performance may be linked with various firm character-
quency of board meetings, may influence the governance
istics such as size, age, and industry affiliation as well as
performance nexus.
unobserved factors.
The following hypothesis is therefore proposed:
In India statutory governance codes have emphasized
both the structure and size of boards of directors. It is H4: There is a positive association between board activity (in
however, unclear as to what extent the literature that has terms of meeting frequency) and firm performance for Indian
largely been derived from western developed economies is firms.
applicable to emerging economies. There is clearly a lack of
qualified outside directors in developing economies such as
India’s and this perceived resource inadequacy has to some
Board Busyness
extent been an impetus for governance reform. Furthermore, The number of positions that directors accept on company
the large proportion of family owned firms in India has boards has become known as the “busyness hypothesis”
meant that the role of outside directors may be minimized as (Ferris, Jagannathan, & Pritchard, 2003). Some studies have
family firms tend to restrict executive management positions reported that directors with multiple appointments have a
to family members, thus limiting the pool of potential quali- positive impact on firm performance (Brown & Maloney,
fied and talented labour resources. 1999; Ferris et al., 2003; Harris & Shimizu, 2004; Miwa &
Given these unique characteristics of the Indian context, it Ramseyer, 2000). Directors with multiple appointments can
is hypothesized that the larger number of members of the generate benefits given that they have many networks and
board of directors will potentially provide a company with can produce benefits (and increase firm value) by accessing
greater resource capabilities. Based on resource dependency resources, suppliers and customers to the corporation
theory the increased pool of expertise would be anticipated (Booth & Deli, 1995; Mizruchi & Stearns, 1994; Pfeffer, 1972).
to improve firm performance. Board busyness has therefore been linked with the resource
The third hypothesis is presented as follows. dependency theory as there appears to be a theoretical argu-

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BOARD STRUCTURE AND FIRM PERFORMANCE 497

ment that a board with a high level of engagement with the TABLE 1
external environment provides access to various resources Number and Proportion of Firms by
that improve performance. Industry Classification
An alternate view is that a large number of appointments
can make directors over-committed and consequently com- Industry Number Percentage
promise their ability to monitor company management
effectively on behalf of shareholders and adversely affect Oil and Petroleum 8 4.44
firm value (Fich & Shivdasani, 2004). Some studies have also
Chemicals 30 16.67
found that multiple directorships is correlated with exces-
sive remuneration of CEOs (Core, Holthausen, & Larcker, Engineering services, 15 8.33
1999) suggesting that such directors provide an inadequate Construction, and Building
check on management. Other studies, for example, Shiv- Materials
dasani and Yermack (1999) provide evidence that multiple Iron, Steel, and Metals 12 6.67
directorships are not consistent with the interests of share- Industrial Manufacturing, Textile, 23 12.78
holders and increase the probability of accounting fraud and Automobiles
(Beasley, 1996). Media and Publishing 5 2.78
The extent to which directors have multiple appointments Electronics and Electrical Equipment 10 5.56
has been shown to differ between emerging economies Consumer Products and Tobacco 9 5.00
when compared with developed economies such as the US. Drugs and Health Care 20 11.11
Ferris et al. (2003) and Fich and Shivdasani (2004) suggest
Machinery and Industrial Equipment 13 7.22
that the mean “busyness” for outside directors for US com-
panies is between 1.6 and three, in contrast to estimates of Computer Software and Services 14 7.78
mean “busyness” of five, for outside directors for large com- Electrical utilities, water 6 3.33
panies in India. However, it is debatable as to what consti- works/supply, gas, and
tutes a busy director. Ferris et al. (2003), using a US-based telecommunications
sample, showed that only 6 per cent of directors held three Others 15 8.33
or more board seats, based on the assumption that three Total 180 100.00
directorships define 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. talization in the year ended March 21, 2006. Banks and
Sarkar and Sarkar (2008) using data from 2003 show that 71.6 finance companies were excluded due to the difficulty in
per cent of Indian directors held more than one directorial calculating Tobin’s Q and their intensity of regulation. In
position and 56 per cent of directors would be defined as addition, firms with 2005-06 annual reports6 (together with
“busy” based on the three directorship benchmark. corporate governance statement) available on the database
Multiple directorships in India have also been influenced were considered. Other databases such as Directorsdatabase
by supply constraints in the managerial labor market. Addi- and SEBI’s Corporate Filing and Dissemination System data-
tionally, given that family owned business groups typically base were used to supplement some of the directors’ infor-
dominate corporations in emerging economies multiple mation. Firms with insufficient director and financial data
directorships are likely to be based on kinship and social and were dropped automatically by STATA in the regression
family ties for both inside and outside directors (Kang & analysis. Thus, the process led to a total of 180 observations
Shivdasani, 1995; Khanna & Rivkin, 2001). Chakrabarti et al. from a sample of top listed Indian companies being consid-
(2008) report that in a study of 500 Indian companies higher ered for the 3 Stage Least Squares (3SLS) analysis in this
firm value was associated with outside directors having mul- study. Table 1 provides a summary of industry representa-
tiple directorships. tion by sample firms. Apart from the banking and finance
Overall given the Indian context of limited expertise in the industry groups excluded from the analysis as outlined
managerial labor market, it is proposed that multiple direc- above, Table 1 shows that there is a relatively even spread of
torships have the potential to improve firm performance industry groups represented in the study.
consistent with the resource dependency theory. Therefore Changes to corporate governance requirements that
proposed Hypothesis 5 is: include modification to Clause 49 have been introduced in
India in recent years. It is important to note that the imple-
H5: There is a positive association between multiple director-
mentation of these changes to Clause 49 were staggered,
ships and firm performance for Indian firms.
with large companies classified as Group A on the BSE
required to comply by 2001. Medium-sized firms with share
capital of at least Rs100 million or net worth of at least Rs250
DATA AND MODEL DEVELOPMENT million at any time in the company’s history, were required
to comply a year later in 2002. The final set of companies that
Data and Sample Selection were required to comply with amendments to Clause 49
The initial sample for this study is drawn from OSIRIS data- were those with share capital of at least Rs30 million. This set
base and comprises a sample from the top Indian companies of companies was initially required to comply in 2003 but
listed on the Bombay Stock Exchange (BSE) by market capi- this was deferred to April 1, 2005. Thus, as of March 31, 2006

© 2009 Blackwell Publishing Ltd Volume 17 Number 4 July 2009

498 CORPORATE GOVERNANCE

TABLE 2
Descriptive Statistics

N Minimum Maximum Mean Median Std.

Deviation

Panel A: Performance Variables

2005-06 Return on Assets (%) (ROA) 180 -40.58 37.53 8.44 7.84 7.95
2004-05 Return on Assets (%) (LAGROA) 180 -30.83 44.81 8.45 7.80 8.12
2005-06 Tobin’s Q (TQ) 180 .45 221.09 4.84 2.20 18.54
2004-05 Tobin’s Q (LAGTQ) 180 .38 52.93 2.44 1.49 4.68
Panel B: Governance Variables
Number of Outside Directors 180 0 10 4.62 4.00 1.83
Proportion of Outside Directors (OUTSIDE) 180 1.00 .48 .50 .15
CEO Chair (DUALITY) 180 0 1 .35 .48
Promoter CEO (CEOPRO) 180 0 1 .42 .49
CEO only Employee (CEOOEMP) 180 0 1 .28 .45
Powerful CEO (PWCEO) 180 0 1 .06 .19
Busyness – All Directors (BUSYALL) 180 .23 8.11 2.94 2.6 1.34
Busyness – Outside Directors (BUSYOUT) 180 .80 12.00 3.48 3.25 1.64
Board Size (BODSIZE) 180 4 18 9.56 9.00 2.63
Number of Board Meetings (MEET) 180 4 15 6.32 6.33 2.18
Panel C: Other Variables
Total Assets (Rs’000) 180 25,975 968,700,000 42,200,200 11,300,000 121,000,000
Log of Total Assets (ASSET) 180 10.16 20.69 16.32 16.23 1.49
Leverage (Non-current Liabilities/Total Assets) 180 .00 1.01 .28 .29 .20
(LEV)
Growth – Capital Expenditure to Sales (CAPEXP) 180 -23.45 51.85 .24 .06 4.28
Growth – Research and Development 180 0 .30 .003 .00 .02
Expenditure to Sales (RDEV)
Firm Age (AGE) 180 3 144 42.21 34.00 27.37

(Annual Report 2005-06), all companies in the sample con-
sidered for this study were required to comply with the
revised Clause 49 listing requirements.
Table 2 below summarizes the descriptive statistics for
firm performance, board characteristics, firm characteristics,
and industry representation. The firm 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 firms
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 firms appear to be financially
stable as indicated by their Return on Assets (ROA mean 8.4
per cent) and Tobin’s Q (TQ mean of 4.84). The descriptive
results also indicate that the firms in the sample are fairly
mature in that the mean and median age (from date of incor-
poration) 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 classified 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
SEBI’s 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 Direc-
tor) who is a promoter (founder of the firm or belongs to the
founding family) of the firm. This finding is expected given
60 per cent of the top Indian companies are family run busi-
nesses. In terms of duality, 35 per cent of the firms 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 firms 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 firms) did not comply with the listing rules, thus
indicating top listed firms 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 SEBI’s guidelines on
Clause 49 of the listing agreement (The Financial Express,

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BOARD STRUCTURE AND FIRM PERFORMANCE
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 quali-
fications (India Knowledge@Wharton, 2007). In addition, 28
per cent (51 firms) of the CEOs in the sample were the only
employee (executive) sitting on the board. Of these, 17 CEOs
were also promoters of the firm. 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 firms, on average there were 9.56 directors on each
firm’s board of directors. In terms of board activity, the
sample firms held between 4 and 15 meetings in the financial
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 firms complied with the rule,
while 20 per cent (36 firms) 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 firm 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 direc-
tors, 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 direc-
tors busyness (BUSYALL) and average outside directors
busyness (BUSYOUT) correlation = .87, and between lever-
age (LEV) and previous year’s performance for ROA
(LAGROA) correlations = .46 (.46). To test for multicollinear-
ity, 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
Model
The relationship between performance and board structure
is tested using the following base model:
PERFORM = α + β1OUTSIDE ) + β2 LEADERSHIP
+ β3 BODSIZE + β4 MEET + β5 BUSY + β6 LEV
+ β7 ASSET + β8CAPEXP + β9 RDEV
+ β10 LAGPERFORM + β12 AGE
+ βn Industry Dummies + ε (1)
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 firm performance and
on the other hand, it is also possible that firms change board
© 2009 Blackwell Publishing Ltd
499
composition in response to firm performance. As argued by
Hermalin and Weisbach (1988), poorly performing firms
may change their board composition by increasing the pro-
portion 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 perfor-
mance, however Jensen (1986) suggests that firms with
larger debt levels pre-commit managers to work harder to
generate cash flows 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, firm performance, and capital structure (lever-
age), 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, Herma-
lin 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 firm performance;
Agrawal and Knoeber (1996) examined the interdependence
among seven mechanisms of corporate governance;
Demsetz and Villalonga (2001) investigated the interrela-
tionships between managerial or Top 5 shareholders’ own-
ership and performance; and Bhagat and Bolton (2008)
examined the relationships among corporate governance,
corporate performance, corporate capital structure, and cor-
porate ownership structure. Following the approach used in
Bhagat and Bolton (2008), three simultaneous equations are
specified for this study as follows:
PERFORM = α + β1OUTSIDE + β2 LEADERSHIP
+ β3 BODSIZE + β4 MEET + β5 BUSY + β6 LEV
+ β7 ASSET + β8CAPEXP + β9 RDEV
+ β10 LAGPERFORM + β12 AGE
+ βn Industry Dummies + ε (2)
OUTSIDE = α + β1PERFORM + β2 LEADERSHIP
+ β3 BODSIZE + β4 MEET + β5 BUSY + β6 LEV
+ β7 ASSET + β8 RDEV + β9 AGE + β9 PWCEO
+ βn Industry Dummies + ε (3)
LEV = α + β1OUTSIDE + β2 LEADERSHIP + β3 BODSIZE
+ β4 MEET + β5 BUSY + β6 LEV + β7 ASSET
+ β8 β9 RDEV + β12 AGE + β12 FCF + β12 ZSCORE
+ βn Industry Dummies + ε (4)
The equations of interest are Equation 1 and Equation 2,
which capture the relationship between governance mecha-
nisms and firm 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
Volume 17 Number 4 July 2009
 500

Volume 17
Number 4
TABLE 3
Pearson Correlations for Variables in the Regression Model

N 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

July 2009
1 ROA 295 1
2 LAGROA 295 .68** 1
3 TQ 233 .33** .25** 1
4 LAGTQ 212 .33** .33** .75** 1
5 OUTSIDE 295 .05 .01 .04 .06 1
6 DUALITY 295 -.02 -.03 -.01 -.07 .11 1
7 CEOPRO 295 -.01 .06 .03 -.06 .12* .26** 1
8 CEOOEMP 295 -.12* -.01 -.06 .01 .06 -.16** -.21** 1
9 PWCEO 295 -.03 .02 .03 .01 .18** .26** .22** .32** 1
10 BODSIZE 295 .09 .02 .15* .18** -.05 .04 .03 -.16** -.03 1
11 MEET 295 .00 .04 -.01 -.03 -.13* .15** .05 -.11 -.04 -.02 1
12 BUSYOUT 295 .04 -.04 -.03 -.08 .13* -.12* -.15** .06 .04 .02 -.19** 1
13 BUSYALL 295 .00 -.09 -.06 -.06 .17** -.16** -.18** .14* .03 .01 -.19** .86** 1
14 ASSET 295 -.07 .01 -.36** -.12 -.01 .14* .02 -.12* .05 .35** .06 .20** .21** 1
15 LEV 295 -.46** -.46** -.21** -.28** -.00 .01 .07 -.03 .03 .05 .02 .04 .07 .21** 1
16 CAPEXP 295 -.01 -.02 -.27** .04 .02 -.01 -.04 -.03 -.02 .07 -.02 -.04 -.05 .12* .04 1
17 RDEV 295 -.02 -.00 .03 .02 .06 .01 -.02 .06 .05 -.04 .03 -.09 -.07 -.22** -.02 .02 1
18 AGE 295 .06 -.00 -.02 -.07 -.10 .02 -.03 -.01 .00 .13* -.03 .17** .16** .13* -.03 .02 .02 1

**Correlation is significant at the .01 level (2-tailed).

*Correlation is significant at the .05 level (2-tailed).
CORPORATE GOVERNANCE

© 2009 Blackwell Publishing Ltd

BOARD STRUCTURE AND FIRM PERFORMANCE
be challenging as “. . . almost any instrument variable iden-
tified for a particular endogenous variable in equation (1)
will plausibly (based on extant theory and/or empirical evi-
dence) be related to at least another, or possibly more endog-
enous 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 litera-
ture. Lag performance is the unique exogenous variable in
equation 2,10 powerful CEO is the unique exogenous vari-
able in equation 3, and Altman z score is the unique exog-
enous 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 firm perfor-
mance and governance variables, most US studies have uti-
lized Tobin’s 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 accu-
rately reflect the performance of a firm. 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 per-
formance, long-term stock returns will not be significantly
correlated with governance even if a significant correlation
between performance and governance indeed exists.
Other studies, for example, Erhardt, Werbel, and Sharder
(2003) and Muth and Donaldson (1998) have used account-
ing measures such as ROA in measuring firm performance.
However, to aid comparison of our results with prior studies
using market-based performance, results using Tobin’s 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 posi-
tive association between board composition (OUTSIDE) and
performance, anticipating that firms with a greater propor-
tion of outside directors have better performance. Also, the
coefficient 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), reflecting
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 firm perfor-
mance based on resource dependency theory. A positive
relationship is also expected for the number of directorships
held (BUSY) and firm performance, consistent with the
resource dependency theory.
All models in this study control for: (1) firm size measured
using the natural log of assets and no direction is predicted;
(2) leverage, which is expected to be negatively associated
© 2009 Blackwell Publishing Ltd
501
with performance; (3) firm 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 year’s performance, which is
expected to be positively associated with performance; (5)
firm age from the date of incorporation with no direction
predicted; and (6) industry variations. This approach is con-
sistent with prior studies of corporate governance and per-
formance (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 respec-
tively. Each table reports the 3SLS results for three different
sets of analysis. Analysis 1 report results using Model 2
where the specification 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 specification, in that the
variable powerful CEO (PWCEO) is used as a single com-
posite 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 specification 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 first hypothesis of interest is
board composition. The findings 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 significant in most instances when
Tobin’s Q (TQ) is used as the performance variable (b = 3.44,
z = 1.52, p < .10). The significance 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 significant
after taking interdependencies of other mechanisms into
account. Additionally, the findings are somewhat consistent
(though with lower levels of significance) with the work of
Bhagat and Bolton (2008), Lefort and Urzúa (2008), and
Jermias (2007) where analyses were performed to address
the endogeneity problem. One reason for the weaker asso-
ciation 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 hypoth-
esis tests whether various aspects of board leadership
structure affect firm performance. To test this hypothesis
four variables are used. Analysis 1 and 3 report the results
when three measures of a firm’s leadership structure are
Volume 17 Number 4 July 2009
 502

Volume 17
TABLE 4
Variables Definition/Measurement and Source

Number 4
Variable Measurement and Source
Operationalization

PERFORM Firm performance is measured using two different proxies, Return on Asset (ROA) and Tobin’s Q (TQ)a OSIRIS
OUTSIDE Percentage of outside directors (number of outside director/total number of all directors) Annual Report

July 2009
LEADERSHIP Four variables are used to represent leadership: Annual Report and
(1) DUALITY – 1 if the chairman and the CEO is the same person, else 0; Directorsdatabase
(2) CEOPRO – 1 if the CEO is the promoter (family CEO))b of the firm; 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
BODSIZE Total number of members on the board of directors Annual Report
MEET Board activity is measured in terms of number of board meetings held in a reporting year (does not Annual Report
include partial boards)
BUSY Two variables are used to represent busy: Annual Report
(1) BUSYALL – average number of directorships held by inside and outside directors of the firm;
(2) BUSYOUT – average number of directorships held by outside directors of the firm

LEV Total non-current liabilities over total assets OSIRIS

ASSET Natural log of total assets OSIRIS
CAPEXP Capital expenditure/total sales OSIRIS
RDEV Natural log of research and development expenditure/total sales OSIRIS
LAGPERFORM Prior year’s performance PERFORM (LAGROA or LAGTQ) OSIRIS
AGE Natural log of age of firm from the date of incorporation OSIRIS
FCF Free cash flow over total assets OSIRIS
ZSCORE Altman’s Z score (1968), a proxy for financial distress OSIRIS
a
Tobin’s Q is defined as the market value of common stocks and book value of total debt divided by the book value of total assets.
b
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.
CORPORATE GOVERNANCE

© 2009 Blackwell Publishing Ltd

BOARD STRUCTURE AND FIRM PERFORMANCE 503

TABLE 5
Results of 3SLS Analysis (Dependent Variables: Return on Assets [ROA])

Analysis 1 Analysis 2 Analysis 3

Predicted Sign Coefficient Z Coefficient Z Coefficient Z

OUTSIDE + 18.09 .82 5.42 .29 22.57 1.08

DUALITY - -.51 -.32 -.71 -.54
CEOPRO - -.54 -.42 -.74 -.62
CEOOEMP - -1.46 -1.13 -1.71 -1.26
PWCEO - .54 .19
BODSIZE + .31 1.54 .31 1.58 .33 1.57
MEET + -.17 -.72 -.12 -.51 -.20 -.88
BUSYALL + -.19 -.25 .18 .33
BUSYOUT + -2.82 -1.97*
ASSET ? .55 .99 .43 .84 .530 1.00
LEV - -34.60 -3.97** -31.15 -3.84** -36.32 -4.30**
CAPEXP + -.07 -.59 .06 .70 -.03 -.34
RDEV + -.06 -.27 -.02 -.12 -.06 -.27
LAGROA + .356 3.05 .41 3.78** .34 3.25**
AGE ? -.51 -.47 -.65 -.65 -.186 -.18
CONSTANT 1.30 .11 5.84 .62 -.30 -.03
R2 .26 .39 .19 201.25
F-stat / Chi2 206.69 215.07 201.25
N 180 180 180

ROA = Return on Assets; OUTSIDE = percentage of outside directors, DUALITY = 1 if the chairman is also the CEO of the firm, 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 year’s Return on Asset and Age = natural log of
age of firm from date of incorporation. All estimations include dummy variables for industry sector.
†, *, ** = statistically significant 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 findings for all three variables are not
significant at any conventional level. Specifically, the first
variable, DUALITY, does not show that boards whose chair-
man is not a CEO (or an executive) performs significantly
better than those whose chairman is also a CEO. The insig-
nificance of the duality variable, although not consistent with
Coles et al. (2001) and Peel and O’Donnell (1995), is consistent
with prior findings of Daily and Dalton (1994), Vafeas and
Theodorou (1998), and Elsayed (2007). Likewise, the second
(CEOPRO) and third variables (CEOOEMP) are not signifi-
cant in all instances. The variable “Powerful CEO” (PWCEO)
is tested in an alternative specification and as shown in Analy-
sis 2 of Tables 4 and 5 the coefficient is not significant in all
instances. These results are contrary to the findings of Adams
et al. (2005) which showed evidence that firm 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. Specifically, the
results seem to suggest: (1) firms with non-promoter (non-
family) CEOs do not out perform firms 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 significant in all 3SLS estimations.
The results are particularly strong in estimations when
Tobin’s 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 findings
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

© 2009 Blackwell Publishing Ltd Volume 17 Number 4 July 2009

504 CORPORATE GOVERNANCE

TABLE 6
Results of 3SLS Analysis (Dependent Variable: Tobin’s Q [TQ])

Analysis 1 Analysis 2 Analysis 3

Predicted
Sign Coefficient Z Coefficient Z Coefficient Z

OUTSIDE + 3.44 1.52† 1.21 .68 3.16 1.59†

DUALITY - -.13 1.05 -.07 -.61
CEOPRO - -.01 -.10 .02 .20
CEOOEMP - -.12 -.98 -.13 -1.10
PWCEO - .06 .24
BODSIZE + .04 2.37** .04 2.51** .05 2.67**
MEET + .01 .84 .01 .83 .02 .97
BUSYALL + -.10 -1.47† -.04 -.94
BUSYOUT + -.18 -1.57†
ASSET ? -.13 -3.24** -.14 -3.70** -.16 -3.75**
LEV - -1.21 -2.15* -.67 -1.38† -1.20 -2.17**
CAPEXP + -.02 -1.98* -.02 -1.83* -.02 -1.97*
RDEV + -.02 -1.15 -.01 -.76 -.02 -1.11
LAGTQ + .79 10.91** .82 12.77** .80 11.42**
AGE ? .15 1.55 .11 1.44 .13 1.57
CONSTANT -.23 -.19 .71 .86 .17 .19
R2 .32 .64 .36
F-stat/Chi2 292.35 364.98 304.90
N 180 180 180

TQ = natural log of Tobin’s Q; OUTSIDE = percentage of outside directors, DUALITY = 1 if the chairman is also the CEO of the firm, 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 year’s natural log of Tobin’s Q;
and Age = natural log of age of firm from date of incorporation. All estimations include dummy variables for industry sector.
†, *, ** = statistically significant 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 firm performance.
Overall, the results provide strong support for the hypoth-
esis 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 insignificance of this finding may suggest
that the relationship between number of meetings and per-
formance may be more complex than a mere linear relation-
ship 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 findings for
the variables BUSYALL and BUSYOUT are mixed. Contrary
to expectations, the variable BUSYALL is marginally signifi-
cant and negatively associated with Tobin’s Q (TQ). The
variable is not significant when ROA is used as the perfor-
mance variable. When the variable BUSYALL is substituted
with BUSYOUT (as in Analysis 3), the variable is negative
and significant 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 findings in this study
of Indian firms, do not support the resource dependency
hypothesis argument that directors with multiple appoint-
ments generate benefits in terms of firm value. The findings
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 per-
formance. The findings appear to be more consistent with
Core et al. (1999), Shivdasani and Yermack (1999), and Fich
and Shivdasani (2004), indicating that firms with board
members having many directorships may lower the effec-

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BOARD STRUCTURE AND FIRM PERFORMANCE
tiveness as corporate monitors and hence exhibit lower per-
formance. 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 firm performance.
The high proportion of family ownership in India may be
linked with this lack of networking that is viewed as a posi-
tive resource for organizations. Additionally, busy directors
in this sample of firms from India, may not have the skills
that are typically present in their counterparts in developed
countries. In more sophisticated markets multiple director-
ships 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 vio-
lated 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 meaning-
ful contribution that ultimately enhances firm performance.
Core et al. (1999) suggest that multiple director appoint-
ments correlates with excess CEO compensation and
more generally an inadequate check on management of
organizations.
Control Variables. As expected, the control variable prior
year’s performance (LAGROA or LAGTQ) is significant and
positively related to firm performance. The results are con-
sistent across all 3SLS estimations. The coefficient for the
variable leverage (LEV) is negative and is significant 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 invest-
ment in the past two decades. The increased foreign invest-
ment in India has intensified the interest in good corporate
governance and in particular the application of western gov-
ernance structures to Indian firms. This paper has examined
the relationship between established western internal gov-
ernance structures and financial 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), firm per-
formance and capital structure (leverage), three stage least
squares (3SLS) was employed as the analysis tool.
The first hypothesis posed was that the greater proportion
of outside directors would be positively associated with firm
performance. The results using 3SLS estimations show some
evidence of a positive and significant relationship between
board composition in terms of outside directors and finan-
© 2009 Blackwell Publishing Ltd
505
cial performance as measured by Tobin’s Q. These results
suggest that in the Indian market the requirements of Clause
49 for a specified representation of outside directors on
boards may be an important aspect of corporate governance
although the recent Satyam Computers (the so-called India’s
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 direc-
tors) 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 lead-
ership structures and firm performance. Four measures of
leadership were identified, however only one – CEO as the
sole employee on the board, showed some support for the
hypothesis. The unique characteristics that define a family
business may explain this difference in results from the other
analyses. However, further analysis of the corporate gover-
nance 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 firm performance is accepted, when the CEO is the sole
employee on the board. The results for the three other mea-
sures were generally mixed which is consistent with prior
literature from western economies.
Various views have been put forward in attempts to deter-
mine the optimum size of boards of directors with some
suggesting that as the board size increases the board
becomes less efficient and therefore negatively influences
corporate performance. The results of this study overall indi-
cated that there was a significant and positive association
between board size and financial performance. This result
may reflect the nature of the environment in which corpora-
tions operate in India whereby greater board size supports
the resource dependency theory.
As the resource dependency hypothesis claims that mul-
tiple appointments of directors can generate benefits to the
firm, the final hypothesis stated that there would be a posi-
tive relationship between multiple directorships by direc-
tors and firm performance. Contrary to predictions, the
findings do not support this aspect of the resource depen-
dency hypothesis, instead a negative association was found
between “busyness” of outside directors and firm perfor-
mance for both ROA and Tobin’s Q. The findings suggest
that firms whose outside directors have many directorships
may lower the effectiveness of their role as corporate moni-
tors. The results also indicate that busy outside directors
may not have the necessary reputation and networking con-
tacts that are necessary to generate benefits to the entity. One
possible reason for this observation is the limited pool of
outside directors with the right expertise in India. In addi-
tion, Indian companies, especially family owned, may hesi-
tate 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 benefits that are typically seen as part of the
“busyness” of directors in more developed economies.
Volume 17 Number 4 July 2009
506
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 interpret-
ing 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 firms.
Prior literature (Demsetz, 1983; Shleifer & Vishny, 1997) sug-
gests that concentrated shareholders (family firms) tend to
extract benefits from the firm. Also family firms are seen to
restrict executive management positions to family members,
thus limiting the pool of potential qualified and talented
labor resources. On the other hand, it has also been suggested
that concentrated ownership can mitigate managerial expro-
priation 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
influence, monitor and discipline managers, which in turn
should facilitate enhanced performance (Andersen & Reeb,
2003). Hence, an examination of inherited control, founder-
CEOs, 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 cor-
porate governance were addressed in this study, which
limits the generalizability of the findings. Important issues
that were not explored include director remuneration, size
of firms, and training opportunities for board members. In
addition, given that corporate governance itself is a difficult
construct to measure and the presence of potential substitu-
tive and complementary effect of a variety of governance
practices, future studies may benefit by using a carefully
designed index as suggested by Larcker, Richardson, and
Tuna (2007) to examine the relationship between corporate
governance and firm performance.
Given the limitations of the findings outlined above, the
findings 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 firm
performance. The findings 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 firms used in
this study. The failure of multiple directorships labelled
“busyness” of directors to be positively associated with firm
performance, suggests that there may be unique character-
istics 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 significant in businesses where there is an
Volume 17 Number 4 July 2009
CORPORATE GOVERNANCE
implied family influence on the business activities. These
features of the Indian market warrant further investigation
in progressing corporate governance in emerging econo-
mies. 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 firm 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 firms
are directed and controlled to ensure firm’s management acts
are aligned with the interest of shareholders (Cadbury Com-
mittee, 1992; Parkinson, 1994).
2. Outside directors are defined as directors who are not paid
employees of the company or have any family association with
the company. This broad definition encapsulates non-executive
directors, independent directors (note Clause 49 defines inde-
pendent 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 Indus-
trials are family firms and on average ownership by families is
about 18 per cent of their firm’s outstanding equity (Andersen
& Reeb, 2003).
5. Power is defined as “the capacity of individual actors to exert
their will” (Finkelstein, 1992:506).
6. For the financial period April, 2005, to March 31, 2006.
7. As disclosed on the BSE’s 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 con-
sistent 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 perfor-
mance. 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 perfor-
mance 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
© 2009 Blackwell Publishing Ltd
BOARD STRUCTURE AND FIRM PERFORMANCE
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 model’s residuals are computed
over a set of regressors different from those used to fit 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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BOARD STRUCTURE AND FIRM PERFORMANCE
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Beverley Jackling recently joined Victoria University as Pro-
fessor of Accounting and Deputy Dean of the Faculty of
Business and Law, having previously been an academic at
RMIT University. Jackling’s 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 educa-
tion including learning approaches of students, graduate
outcomes, and continuing professional development. She
also has an interest in researching her main teaching area of
© 2009 Blackwell Publishing Ltd
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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 con-
tribution 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 gov-
ernance are in the areas of audit markets, earnings manage-
ment and financial reporting.
Volume 17 Number 4 July 2009