Corporate Governance and Firm Performance in Indian Textile Companies: Evidence from NSE 500

Abstract

This article endeavours to study the relationship between corporate governance and performance for a sample of 11 textile firms listed on Nifty 500 Index in India. The article examines whether the board characteristics have any impact on performance measures. The data covers the time period from 2014 to 2018. The study uses board size, board meetings, board independence as corporate governance surrogates from different dimensions along with other widely uses of independent variables to assess their impact in a panel data-based regression. The findings provide mixed results between the board characteristics and the firm performance. Board size and firm performance is statistically significant with return on assets and Tobin’s Q. Whereas, board independence, board meetings and CEO duality are not statistically significant with both accounting-based measure of performance and market-based measure of performance. The article provides empirical evidence that board independence, board meetings and CEO duality is not necessary for listed textile companies in India and would be of interest to regulatory bodies, business practitioners and academic researchers. The main value of this article is the analysis of the effect of corporate governance on performance measures on listed Indian textile industries.

Keywords

Corporate governance performance textile industry NSE India

Introduction

Corporate governance implies to a set of codes of conduct for directing and controlling the activities of a company and its stakeholders (Cadbury Report, 1992). Corporate governance is the mechanism in which various stakeholders and management participate to exchange, validate ideas and also involve debates and discussions. Corporate governance features are statutory requirements which impose fiduciary duty upon management to act in the best of interest of all shareholders and stakeholders and restrains management against acting in any fraudulent practices. In absence of such mechanism, difficulties of monitoring are suffered by outside investors while administrators find it convenient to misuse organisational assets, usually at the cost of small shareholders and long run performance of firm (Rezaee, 2009). In this way, it is a framework through which management takes effective control to protect, promote and assure the interests of all stakeholders.

An effective corporate governance plays a crucial role for enhancing profitability of a business. The improvement of firm’s profit is crucial to achieve overall corporate objectives (Gill et al., 2012). Strong and vibrant policies of corporate governance are vital for any business organisation because corporate governance plays pivotal role in the management of organisations in both developed and emerging markets across the world. Advanced economies differ from developing countries in various perspectives (Achchuthan, 2013). For emerging economies like India, good corporate governance is a critical tool for growth of business organisations especially for catering worldwide markets and competing global business across divergent nations. Good corporate governance is a mix of several principles of transparency, fairness, responsibility, independence and accountability which directly impact on the performance of an organisation (Nur’ainy et al., 2013). Good corporate governance ensures balance of power and eventually elevates the value of a firm and also improves overall financial performance of a business organisation. The need for corporate governance originated due to non-conformity of laws and regulation framed over a period of time with respect to the financial reporting and accountability of management and board members which caused heavy amount of loss to investors. In India, a full-scale debate on corporate governance occurred after the appointment of several committees such as Kumar Mangalam Birla committee in 1999, Naresh Chandra committee in 2002 and Narayan Murthy committee in 2003, Dr J. J. Irani committee in 2005 prior to this Companies Act 1956 acted as a basic framework for regulation of companies followed by Clause 49 of equity Listing Agreement which consists of both mandatory and non-mandatory provisions. However, companies Act 2013 was enacted to replace Companies Act 1956 which is much more vibrant with the corporate governance standards across developed nations.

Research in the area of corporate governance and firm performance has been mainly focussed in advanced countries (Fan et al., 2011; Rajagopalan & Zhang, 2008). The literature, however, is inconclusive on the role of corporate governance on firm performance in developing nation specially in the Indian context (Bhatt & Bhattacharya, 2015; Ghazali, 2010; Leng, 2004; Nicholson & Kiel, 2007).

Corporate governance is a part of Indian corporate sector since inception but consequent upon the collapse of some giant businesses and fraudulent practices like ‘Big bull’, Harshad Mehta’s scam and Satyam Computers biggest accounting fraud, corporate governance became a serious issue. Corporate governance frauds have become reminiscent from last decade and time and again various committees have been appointed to frame various laws and regulations which are in line with the international requirements. Some of major issues which raised concern to study corporate governance in India’s textile are discussed in the below part.

The plethora of research has been conducted in the area of corporate governance, but no study was found to analyse the nexus between corporate governance and financial performance in the context of India’s textile sector. The textile sector is a dynamic, growth-oriented industry with strong technological bases. India’s textile sector is predominantly self-sufficient in terms of raw material and enjoys major strengths in the global market as India being the third largest producer of cotton in the world. This article mainly assesses the link between various variables of corporate governance and the performance measures of Indian listed textile companies, as it is important to ascertain how ongoing issues in corporate governance affect the value of Indian textile industry.

The outline of the article is divided as follows: the first part of the article aims to provide the overview and empirical studies related to this area; the next section addresses the methodology and the last portion discusses the results and analysis along with the conclusions and suggestions.

Literature Review

In this section, previous studies are reviewed to measure corporate governance and firm performance using two performance measures, that is, accounting and market value-based measures. Various studies across the globe have concentrated on corporate governance and firm performance using different measures of performance.

Bhat et al. (2018) identified a positive and significant relationship between board independence and firm value in state-owned organisations in Pakistan. Bhagat and Bolton (2007) found that the interrelation between corporate governance and firm performance is essentially endogenous which causes regression results highly responsive for estimation methods. Selarka (2011) found positive and consistent impact of governance variable on stock market operating performance measures. Further, corporate governance is a multi-dimensional measure and need to be reformed as competitive product market is not an alone factor to determine improvement of corporate governance in India. Meanwhile, other studies, Pant and Pattanayak (2008), have found non-monotonic and non-linear relationship between insider equity shareholding and firm value. Arora and Sharma (2016) used generalised method of moments for 20 industries of the manufacturing sector and found that board attributes such as board size and board independence have a weak association with performance of firm.

Mishra and Mohanty (2014) employed three parameters, namely, ‘legal compliance, board efficiency and proactive indicators’ to study the effect of corporate governance on financial performance and established a weak relationship between legal indicators and financial performance implying that the existing legal compliance mechanisms are not adequate to boost investors’ confidence and improve financial performance in Indian companies. Velnampy (2013) found from the listed companies of Colombo Stock Exchange that corporate governance measures do not significantly affect return on equity and return on assets of manufacturing companies in Sri Lanka.

Researchers also focused on the issue of ‘CEO duality and firm performance’, but the empirical studies have been very contradictory and conflicting (Boyd, 1995). Elsayed (2007) uses both industry parameters and performance measures from the listed firm of Egypt and found that CEO duality does not impact on the firm performance and concluded that it depends on the type of industry and varies across industries. Ya’acob (2016) has found that there is a positive association of CEO duality on compensation and compensation schemes.

There are very few studies that have focussed on a particular industry excluding the overall sector wise distribution expect like banking, finance or manufacturing. Therefore, this study is particular in the context of Indian textile sector. The past studies identified the activity of board of directors in satisfying the needs of good corporate governance which leads us to formulate the hypothesis addressing various aspects of governance of board of directors (BODs) in the context of Indian with special focus in India’s textile sector.

Theoretical Framework and Hypothesis Development

The following section shows the conceptual framework of the study and the establishment of hypotheses with the respect to literature review.

Board Size and Firm Performance

Board size means the total number of directors constituting the board. Prior studies associated with the board size are by and large contradictory as the board size and firm performance provide a mixed result. Larger board size can signify both positive and negative effects due to substantial monitoring power compared to rigid decisiveness of the board (Harford et al., 2008). The literature does not provide uniformity on the number of directors towards increasing firm’s performance. Rubino et al. (2017) found a positive relationship between return on assets (ROA) as a firm performance measure and board size in non-family Italian firms. Dalton et al. (1998) uses meta-analysis approach to establish the relationship and found that smaller boards indicate a systematic and positive relationship and are more effective than larger boards. However, Van den Berghe and Levrau (2004) argue that substantial boards bring diversified knowledge, experience and skills in the organisation which enable boards to dispose their duties at lesser costs. However, contrary to this various researchers found ‘negative relationship between board size and firm performance’ (Goodstein et al., 1994). Some researchers argue that substantial boards are difficult to manage which is why other researchers posited a ‘negative relationship between board size and firm performance’. There is also a lot of disagreement as to the number of directors who can serve the board. Dalton et al. (1998), Jensen (1993) and Yermack (1996) supported small size of the board. Hermalin and Weisbach (1998) did not find any association between firm value and the composition of board. Considering these intricacies, we develop the hypothesis for the study as:

H₁: There is no significant ‘relationship between board size and performance of firm’.

Board Independence and Firm Performance

Independent board is related to the proportion of directors who are independent and non-executive ‘who do not have any material or pecuniary relationship with the company’. Board independence enables directors to effectively monitor management. Agency theory states that a considerable portion of independent directors ameliorate performance. The agency conflicts and misunderstandings that lie amongst management and shareholders are effectively resolved by the board of directors (Bathala & Rao, 1995). More heterogeneity on the board more will bring more independence on the board along with better ability of management to monitor the functions properly. ‘Agency theory’ propounds that heterogeneous boards are more resilient and better able to oversee the functions properly (Abdullah 2014; Adams & Ferreira, 2009).

There is a contrasting view on the issue of board performance as various committees and regulations have recommended that directors on the board should consist of maximum number of non-executive directors with appropriate mix of experience. Rashid (2018) uses simultaneous equation approach to control endogeneity problem for 135 companies of Dhaka Stock Exchange and found that board independence does not positively affect economic performance of firm. Grace et al. (2012) have found a negative relationship between ‘board independence and firm performance’ in Anglo American countries. Similarly, Zeiler (2004) does not find any significant correlation between board composition and financial performance.

Various researchers have reported conflicting results and established that conventional accounting measures of performance and proportion of independent directors have insignificant relationships (Baysinger et al., 1985; Bhagat & Black, 1999; Hermalin & Weisbach, 2007). Whereas, another approach suggested by Morck et al. (1988) is to use Tobin’s Q as a market-based measure of performance, as the basic aim is that it reflects the value added abstract factors of governance. Tobin’s Q is a simple formula to obtain comparatively better and Timely Q values with minimum computational iterations (Chung & Pruitt, 1994). The study measures board independence as a percentage of outside directors on the board. Based on the above discussion, following hypothesis is constructed below as:

H₂: There is a ‘positive relationship between board independence and performance of firm’.

Board Meetings and Firm Performance

Next, the study subsequently focuses on how financial performance of textile companies is affected by board meetings as the latter measured by the frequency of meetings. Ntim and Osei (2011) found a positive and significant association of board meetings with respect to firm performance after investigating a sample of 169 companies from South African and concluded that as the frequency of meetings on the board increases it eventually tends to generate higher profits. Al Daoud et al. (2016) and Arora and Sharma (2016) found significance with positive impact of board meeting on the corporate performance as more meetings generate more value for firms. Whereas, Palaniappan (2017) has found a contradictory result regarding firms performance. Similarly, Jensen (1993) did not found any association between ‘board meetings and firm performance’. Frequent meetings of board increase costs like ‘managerial time, travel expenses, and directors sitting fees’ and are equally less valued by the market (Vafeas, 1999). Directors should meet frequently to allow them properly disburse their duties, and the additional meeting time will bring coherence among outside directors (Lipton & Lorsch, 1992). If a firm is efficiently utilising resources in a manner to attain higher growth and long-term shareholder value, then decision-making of board with reference to their frequency is a valid research point, which should be thoroughly examined by following hypothesis:

H₃: There is a ‘negative relationship between board of director’s attendance and firm’s performance’.

CEO Duality and Firm Performance

When one person is supposed to hold the position of both Chairman and Chief executive officer at a time, CEO duality is said to exist. There are several viewpoints regarding the efficiency and effectiveness of the role of CEO performing dual functions as that of both Chairperson and Chief Executive Officer. Prior literature acknowledges that CEO has a direct impact on firm’s governance. Adams et al. (2005) argue that CEO’s duality can have a profound impact on corporate governance. Nahar Abdullah (2004) findings show that CEO’s duality does not individually or collectively are related to firm performance due to the abstract qualities of leaders in creating firm value and cannot be measured by financial ratios. Combs et al. (2007) and Van Essen et al. (2012) monitoring role of the board should be exclusively assigned to CEO for managerial echelons. Goh et al. (2014) state that family businesses in Malaysia do not engage CEO duality and found no significant impact of ‘CEO duality and firm performance’. Further, the study also mentions that such structure enables businesses to create shaky legal environment for related party transaction. However, some studies, Cannella and Lubatkin (2018) and Sridharan and Marsinko (1997), found that CEO duality allows better performance as they believe that it is vital for an organisation to be managed by the same person because it avoids miscommunication, offers more flexibility and lead to better performance.

Agency theory presumes that objectives of the management are at a variance with those of the principles which creates a hurdle for board of directors in monitoring the management properly (Jensen & Meckling, 2012). Therefore, the role of the CEO and chairman should be distant. However, against agency theory, Stewardship theory discounts the conflict and assumes that mangers are trustworthy to oversee the affairs of business in maximising shareholder’s wealth. Advocates of stewardship theory are in line with the argument that authoritative decision-making under one person (as both chairman and CEO) increases financial returns (Donaldson & Davis, 1991). Using economic value added (EVA) approach, Duru et al. (2016) and Varshney et al. (2013) found insignificant and negative correlation between ‘CEO duality and firm performance indicators’. Baliga et al. (1996) in their research argued that if CEO duality leads to managerial abuses, the performance of such implication will be minimal. Therefore, whether there exists any relationship between ‘CEO duality and firm performance’ is examined in this study:

H₄: ‘There is a negative association between CEO duality and firm performance for Indian firms.

The existing past studies on corporate governance have focussed on both non-financial and financial firm. Only certain studies have focussed on corporate governance in textile sector.

Methodology

Data and Sample

The study focuses on Indian textile companies listed on National Stock Exchange (NIFTY 500) for the time period of five years from 2014 to 2018.There were 13 companies listed on NSE 500 related to textile sector but due to unavailability of data for two companies, our final sample size is restricted to 11 companies. The data is secondary and is collected from the Prowess database of maintained by Centre for Monitoring Indian Economy.

Table 1.

Variables

Variables	Formulation
Panel A: Dependent Variable
Firm Performance Measures
Return on Assets (ROA)—Accounting measureTobin Q (TQ) —Market value measure	PBDIT/Total AssetsTotal assets + market capitalisation-book value of equity – deferred tax liability)/Total assets
Panel B: Independent Variable
Corporate Governance Measures
Board size (BS)Board Independence (BI)Board meetings (BM)Duality	Total number of directors on boardNumber of non-executive independent directors on the board to the company’s board sizeFrequency of annual board meetingsA binary variable which equals 1 if a chairperson of the board is also the CEO of the firm and Zero otherwise
Panel C: Control Variables
Firm specific variable/control variables
Leverage (Lev)Firm age (Age)Growth (Gro)Firm size (Size)	Borrowings/Total assetsTotal number of years of a firm since its incorporationGrowth in net sales over that of previous yearNatural log of company’s sales

Source: The authors.

Econometric Model

Panel data methodology is employed to analyse the nexus between the corporate governance and financial performance of a firm. This technique comprises both the time series and the cross-section dimensions for each member in the data set which are not usually found in individual time series or cross-sectional data sets. In panel equation model, double subscript is added with each individual variable that is both time series (i) and cross-section (t) regression which is quite different from the usual time series or cross-sectional regression equations. There are broadly two types of models mainly used by the researchers in estimation of panel model. These are fixed effects model and random effects model (Gujarati, 2003). To find out which technique is suitable between fixed effects and random effects model, Hausman (1978) test can be used. Both fixed and random effects models have been used and Hausman test has been employed to find the suitability of the model. The null hypothesis associated with Hausman test is that random effect model is valid.

The hypothesis for Hausman test is as follows:

H₀ = Random effects

H₁ = Fixed effects

If P value is significant, reject the null hypothesis, that is, fixed effects model is appropriate for the analysis. However, if P value is insignificant, then we go for random effects model (Akbar et al., 2016; Gujarati et al., 2012). STATA software has been used for the data analysis.

Equation of panel data model can be specified more easily as follows:

Y_it = a_i + βX_it + ε_it

where

i = denotes the cross-sectional attribute of equation,

t = specifies the time series dimension,

Y_it = represents the dependent variable with both cross-section and time series dimensions,

X_it = denotes the set of explanatory variables,

a_i = intercept which is time invariant for and specific to the individual cross-sectional unit,

β = the slope coefficient,

ε_it = a random error term assumed to have a normal distribution.

The model specified in the study is as follows:

where signifies individual textile firm from 1 to 11 and t denotes time period from 2014 to 2018. captures the potential impacts of various board characteristics on textile firms

\begin{matrix} ROA = α_{i} + β 1 {BSize}_{i t} + β 2 {BI}_{i t} + β 3 {BM}_{i t} + β 4 {CEOD}_{i t} + β 5 {AGE}_{i t} + β 6 {SIZE}_{i t} + \\ β 7 {LEV}_{i t} + β 8 {GROWTH}_{i t} + ε_{i t} \end{matrix}

\begin{matrix} TQ = α_{i} + β 1 {BS}_{i t} + β 2 {BI}_{i t} + β 3 {BM}_{i t} + β 4 {CEOD}_{i t} + β 5 {AGE}_{i t} + β 6 {SIZE}_{i t} + \\ β 7 {LEV}_{i t} + β 8 {GROWTH}_{i t} + ε_{i t} \end{matrix}

Empirical Results

Descriptive Statistics

Descriptive statistics for the dependent variables and other explanatory variables are provided in Table 1. ROA reaches to a maximum of 40 per cent with an average of 17 per cent increase in the performance of firms. Similarly, TQ also has an average of 254 per cent gain with a standard deviation of 0.09 during the period of our study. The average board size is nine and also an average of five directors hold the position of independent directorship as revealed by the above statistics. Averages of 11 per cent of CEO’s hold the dual position of both chairman and CEO of the sample of firms. The average frequency of board meetings is five for the period of our study. The average age of a firm is 52.54 years for the textile firms in India for profit firms ranging from a minimum of 19 years to a maximum of 139 years. Average growth of the sample is 5.335, firm size 10.103 and leverage 0.151.

Testing of Multicollinearity

To check the interrelation between the independent variable, multicollinearity test is conducted by variance inflation factor (VIF) test. It indicates the degree of variance or behaviour of a coefficient inflates due to linear dependence with other explanatory variables. Multicollinearity occurs when the explanatory variables are correlated with each other. In such situation, VIF test is employed to check whether multicollinearity occurs or not and the usual rule of thumb is that VIF should be less than 10 for any predictor. (Gujarati et al., 2012). In this article, the VIF values of the independent variables are within bounds. Table 3 depicts the collinearity statistics of the variables.

Table 2.

Summary of Descriptive Statistics

Variable	Obs	Mean	Std. Dev.	Min	Max
ROA	55	0.17	0.09	−0.001	0.404
Tobin’s Q	55	2.545	3.785	0.136	17.744
Board size	55	9.418	3.017	2	17
Board indp	55	5.055	1.704	1	9
Board meeting	55	5.436	1.823	4	11
CEO duality	55	0.109	0.315	0	1
Leverage	55	0.151	0.124	−0.004	0.574
Firm age	55	52.545	38.69	19	139
Growth	55	5.335	8.636	−17.596	39.6
Firm size	55	10.103	0.876	8.374	11.256

Source: Authors results of descriptive statistics from Stata.

Correlation Matrix

Correlation matrix is represented in Table 2.

Table 3.

Correlation Matrix

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)
(1) ROA	1.000
(2) TQ	0.680	1.000
(3) Lev	−0.197	−0.445	1.000
(4) Age	−0.758	−0.316	0.191	1.000
(5) Gro	0.575	0.900	−0.518	−0.390	1.000
(6) Size	−0.212	−0.462	0.599	0.206	−0.476	1.000
(7) BS	0.407	0.476	−0.356	−0.025	0.282	−0.021	1.000
(8) BI	−0.581	−0.541	0.419	0.490	−0.575	0.261	−0.339	1.000
(9) Duality	−0.031	−0.178	0.220	−0.054	−0.148	0.273	−0.028	−0.033	1.000
(10) BM	−0.537	−0.188	−0.034	0.592	−0.217	−0.122	−0.094	0.155	−0.129	1.000

Source: The authors.

Table 4.

Variance Inflation Factor

Variable	VIF	1/VIF
Firm Age	2.32	0.431358
Leverage	2.08	0.479792
Board independence	2.05	0.486719
Growth	2.04	0.489764
Firm size	2.00	0.499031
Board meetings	1.89	0.530309
Board size	1.38	0.725732
Duality	1.13	0.885964
Mean VIF	1.86

Source: The authors.

Homoscedasticity Test

Breush Pagan/Cook Weisberg test are used to check whether the error variances are normally distributed against the alternative that error variances are not constant for one or more variable (Griffiths, 2007). To test homoscedasticity in data, Breush Pagan and White test were used to find any linear form of heteroscedasticity. Null hypothesis is greater than 0.05 which is insignificant. Therefore, there is no heteroscedasticity in our model ROE. Whereas, in case of Tobin’s Q we use ‘Panel robust standard errors’, where the errors are clustered around firms.

Autocorrelation Test

Auto correlation indicates that the error term of current time period t depends on previous time period error term (t − 1). The data uses Wooldridge (2002) test to check for autocorrelation. No autocorrelation is found in data as the P value is greater than significance level.

Panel Regression Results

Table 4 depicts the result of all three models of panel data. Panel regression model is used to determine the relationship between estimates of ‘corporate governance and firm performance’. Firm performance measures are computed at both accounting-based measure (ROA) and market-based measure (Tobin Q.)

The results from the fixed effect model as suggested by Hausman test are positive because the test statistics were significant at (P < 0.000) at both measures of performance. The results indicate positive coupled with significant relationship between board size and firm performance measure for ROA at a significance level of 5 per cent and also in case of Tobin’s Q significant at 5 per cent significance level which holds up our hypothesis. Our results are supported by Van den Berghe and Levrau (2004) and Dalton et al. (1998) who suggest that larger boards increase pool of expertise and the value of firm. However, our results are inconsistent with the study of Jensen (1993) and Yermack (1996) who found that there is a ‘negative relationship between board size and firm performance’. Further our results suggest that larger boards improve performance of firm by having larger decision-making with diversified ideas to improve the value of a business.

Table 5.

Panel Regression Results of Tobin Q and ROA

	Dependent Variable ROA			Dependent Variable Tobin Q (Robust)
Variables	1	2	3	1	2	3
	OLS	Fixed Effect	Random Effect	OLS	Fixed Effect	Random Effect
Leverage	0.221***(0.0659)	0.0301(0.0675)	0.186***(0.0646)	6.479*(3.850)	2.305(1.769)	5.079(4.225)
Firm age	−0.00133***(0.000222)	0.00209(0.00499)	−0.00144***(0.000270)	0.00213(0.00803)	0.280**(0.125)	−0.00191(0.00679)
Growth	0.00262***(0.000934)	−0.00360**(0.00146)	0.00170(0.00105)	0.365***(0.0497)	0.112**(0.0493)	0.319***(0.0687)
Firm size	−0.0116(0.00912)	−0.0411(0.0440)	−0.0118(0.0104)	−0.760*(0.438)	0.415(0.851)	−0.747(0.552)
Board size	0.000608***(0.000118)	0.000344**(0.000151)	0.000579***(0.000128)	0.0208***(0.00625)	0.0207**(0.00749)	0.0238**(0.0110)
Board independence	−0.000812(0.000648)	−0.000134(0.000543)	−0.000877(0.000611)	−0.00372(0.0204)	0.0321(0.0190)	0.00261(0.0282)
CEO duality	−0.0191(0.0191)	−0.0119(0.0167)	−0.0150(0.0182)	−0.545(0.429)	0.304(0.307)	−0.480(0.426)
Board meetings	−0.000358(0.000303)	0.000713(0.000431)	−0.000200(0.000346)	−0.00144(0.00907)	0.00502(0.00370)	−6.52e−05(0.00378)
Constant	0.309***(0.0997)	0.442(0.320)	0.328***(0.111)	5.468(4.292)	−21.27**(6.938)	5.319(5.534)
Observations	55	55	55	55	55	55
R-Squared	0.189	0.415		0.892	0.698
Number of panels		11	11		11	11
Hausman test		33.96(0.000)			107.04(0.000)

Source: The authors.

Note: Standard errors in parenthesis; ***P < 0.01, **P < 0.05, *P < 0.1.

On the other hand, board independence means that the board should constitute maximum number of outside non-executive directors to ensure transparency and fairness for efficient and smooth running of business. Our results from the model suggest a ‘negative relationship between board independence and firm performance’ which implies more the independent directors on the board, more will decline the profitability of a business. Our results are in line with the study of Syriopoulos and Tsatsaronis (2011) and argues that no relationship exists between board independence and firm performance.

Consistent with the prior literature (Jensen, 1993; Palaniappan, 2017), the present study also report that board meetings do not have a significant relationship with the ROAs and Tobin’s Q. This suggest that more meetings of the board do not contribute to the profitability of a firm which is lesser valued in the market.

Similarly, CEO duality does not have a significant relationship with ROA and Tobin’s Q which implies that the concentration of power in the board does not signify positive influence on the performance of the firms in our study. This is conjecture with study of Boyd (1995) who argues that boards are a mechanism to manage external dependencies but can have a positive effect while studying at certain industry level. The study therefore supports the agency theory for having separate roles for CEOs due to the property of enhancing transparency and fairness of responsibilities held upon them. Hence, the possible explanation for insignificant relationship may be due to costs associated with non-duality.

However, control variable growth provides mixed results as growth has a significant but negative association with ROA whereas, it has positive association with Tobin’s Q.

Discussion and Conclusion

In the present context, the ‘impact of corporate governance on firm performance’ has been explored using performance as a function of governance. However, prior studies do not extensively study the textile sector as an individual sector. This study, therefore, examines the relationship between ‘corporate governance and firm performance’ using panel data analysis from 2014 to 2018. However, our results do not document strong relationship between ‘corporate governance and firm performance’. The results in our study found contradictory results that there is an absence of independent directors having supervisory position which may be due to limited availability of suitable people on the board who possess such qualities. Board size signifies statistically positive and significant impact on performance which indicates that larger boards tend to increase financial performance. On the other side, board meetings and CEO duality are both negatively related with the performance of firms as measured by both performance measures after controlling features of a firm such as, size, leverage growth and age of a firm. The results of the study indicate absence of vibrant corporate governance policies in the textile companies. Therefore, companies can prosper to achieve the excellence in adhering to best governance practices.

The relationship between corporate governance in Indian textile sector has huge policy implications for policymakers. In the current economic scenario, corporate governance has become one of the strategic tools to bring efficiency and competitive advantage to the firms. Although corporate governance has achieved a milestone over the last decade to bring vibrant governance system in India, but the textile sector is yet to achieve ascendency in these reforms. From this point of view, the government has an obligatory part to play the role to specify sectors based on the regulatory framework to improve standards of governance in textile sector. When corporate governance standards are in line with the developed economies and are ethically followed, the economic sentiments would improve the firm performance of the textile companies in India.

Hence, this study faces some limitations which are not covered and can be used as direction for future research. This study is based on secondary data. So, it can be extended to primary data with a large sample size. Further this study measures two performance variables. More variables can be included in the data which can add more insight to the further study. However, there are a lot of variables which are not taken as determinants of corporate governance which can have ramifications on the findings of the study related to this area, so the variables left out and could be considered for the future analysis.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

ORCID iD

Ishfaq Gulzar

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