Do Shareholder Activism Effect Corporate Governance and Related Party Transactions: Evidences from India?

Abstract

The study investigates the relationship between corporate governance performance, related party transactions and shareholder activism among listed firms in India. The study provides valuable insights into the impact of shareholder activism on corporate governance performance (CGP) and the occurrence of related party transactions (RPTs). Results infer a significant difference in overall CGP between the firms subjected to shareholder activism and firms not subjected to shareholder activism. The study proposes significant evidence on the close monitoring of the governance practices of the firm by activists’ investor and they respond immediately to any evidence of poor governance practice of the firm. A significant difference was found in the amount of sales to RP prior to the incidence of SA than the post incidence of SA for the firms subjected to SA. However, no such difference was found with respect to other major components of RP.

Keywords

Shareholder activism corporate governance related party transactions independent directors

Introduction

Shareholder activism (SA from here on) commonly defined as ‘corporate governance responsibility procedure’ that includes all the engagements comprising of actions initiated by shareholders in response to the differences they encounter with the owners of the public companies (Schacht, 1995, pp. 8–12). It can be also be explained as ‘all the activities in which shareholders are engaged due to their differences in corporate decision making with the managers of the firm in which they have invested with the prime motive of influencing company’s policy decisions’ (Goranova & Ryan, 2014). SA has positioned itself as an effective tool for minority shareholders to influence corporate decisions (David et al., 2001). The investors who feel that their interest is compromised can show their resentment towards the corporate governance underperformance (Gillan & Starks, 2007) through the use of corporate ownership (Sjostrom, 2008) by providing shareholders with the ability to execute and impose their rights to amplify the shareholder’s value in long term (Renneboog and Szilagyi, 2011).

The beginning of shareholder capitalism (Useem, 2003) has been established by enhanced SA (Greenwood & Schor, 2009; Renneboog & Szilagyi, 2011) including investors arbitration with managers to post their dissatisfaction (David et al., 2001) and formal involvements to alter corporate strategy and performance (Song & Szewczyk, 2003). Over the last decade due to effective policy reforms and rigorous efforts by corporates and policymakers several important areas of SA have been addressed including (a) the manner of voting, (b) higher participating in shareholders meetings and (c) understanding and exercising the rights and duties of shareholders.

Corporate Governance, on the other hand, is a mechanism by which the suppliers of finance to corporations assure themselves of getting a return on their investment (Shleifer & Vishny, 1997) thus by acting as a tool to enhance the corporate transparency and performance (John & Klien, 1995). Corporate governance procedures and policies regarding the active participation of minority shareholders have evolved enormously in the last decade particularly due to the various scams and frauds including Satyam, Enron, and others. Existing evidence suggests that poor corporate governance practices significantly increases the threat of SA (Del Guercio & Hawkins, 1999; Smith, 1996). Specifically, lack of transparency in the functioning of boards, disproportionate executive compensation, lack of credibility of independent directors, lack of transparency in the appointment and compensation of auditors, suspicious related party transactions (RPTs) are among the factors that have been found to trigger activists to act and protect their wealth. Further, empirical evidence suggests that poor corporate governance practices exploit the interest of minority shareholders (Stathopoulos & Voulgaris, 2016). Investigations into the consequences of SA on corporate governance practices suggests that SA leads to improvement in the CGP of the firms (Bebchuk et al., 2017). Mostly, the studies investigating the relationship between CGP and SA has focussed on specific aspects of CGP while investigating the impact of SA on CGP.

Majority of the companies in case of developing countries have concentrated ownership (Shleifer & Vishny, 1998) and majority shareholders utilise their position in the firm to influence the while dealing with RPT (Claessens & Fan 2002; Shleifer & Vishny, 2003) to exploit the minority shareholders wealth by the process of tunnelling using RPT (Bae et al., 2002). The exploitation has been mostly done through the transactions including sales to RP, purchases from RP and loans and guarantees to RP (Becht et al., 2009; Claessens & Fan, 2002; Shleifer & Vishny, 2003). Hence, a strong shareholder monitoring and participation are important to safeguard the interest of minority shareholders in the firm; thus, augmenting the need for increased shareholder participation in corporate decision making related to RPTs (Gordon et al., 2004).

Although the existing empirical studies have investigated various aspects of corporate governance, related party transactions and its relationship with shareholder activism. However, there is a dearth of studies investigating the impact of shareholder activism on corporate governance performance (CGP) and the occurrence of related party transactions. This study is an effort to investigate the impact of shareholder activism by investigating pre- and post-SA corporate governance performance and the occurrence of related party transactions. This study will lead to the existing literature by providing valuable insights about the impact of shareholder activism on the overall corporate governance performance and occurrence of related party transactions in case of developing countries like India where SA is still in the emerging stage but is gaining pace.

Literature Review

SA has not been extensively investigated in the existing literature and very recently focus has been shifted towards its importance and impact. But in reality, it is not a very recent phenomenon. Proxy fights have been used by shareholders as a tool to express their resistance towards corporate decisions, which they felt are against their interests from the early 20th century. Existing empirical evidences suggest that in the early part of 20th century some investors started to become very active in corporate governance decisions, however, the laws were altered in such a way that their participation has been blocked or made limited (Roe, 1993). SA finds its root in the United States where through multiple revision and amendments in the relevant acts during the 1940s, shareholders were first allowed to submit proposals in the general meeting and hence opened the avenue for the active participation of shareholders in the governance of the firms’. SA has progressed exponentially over the last few decades and hence led to higher shareholder participation in corporate decision making and also posting their dissent for the decisions which they think will harm their interests (Gillan and Starks, 2007).

In India, the evolution of SA is a recent phenomenon. Post-independence, the capital markets in India was very small and the participation of retail investor was very thin (Armour and Lele, 2010). Further, higher institutional ownership and emergence of public sector units (PSU) (Sarkar & Sarkar, 2000) created a bond between government and industries that ensured the absence of threat from institutional shareholders (Goswami, 2000). The above situation continued even after the liberalisation of the economy in the year 1991. Due to this, continuous deterioration of rights of minority shareholders at the hands of majority shareholders, the concept of shareholder activism erupted and gained momentum in India. Shareholder activism in the Indian context gained pace through various reforms and rule changes, ranging from enriched capital market rules and changes in the Company’s Act 2013. These changes provided minority shareholders with the power to make their opinions public.

Earlier investigations propose that good corporate governance practices have a significant negative impact on the occurrence of SA (Goswami, 2000). Good corporate governance practices are characterised by the maintenance of the highest standards of ethical and responsible conduct of business to create value for all stakeholders (ITC Annual Report, 2019). The regulatory requirements with respect to the various aspects of corporate governance practices and its disclosures are primarily the basis of the empirical evidence of the effectiveness of corporate governance practices. Specifically, empirical studies on the board size (Chin et al., 2006), the role of outside/independent director (Beasley, 1996; Fama & Jensen, 1983), frequency of the meeting of BoD (Moore, 2002; Ward, 1991), active participation of independent directors in the affairs of the firm (Chou et al., 2013; Gao & Kling, 2008), presence of women directors in the board (Goodstein et al., 1994), executive remuneration (Holmstrom & Hart, 1987) has significantly contributed the regulatory interventions with respect to corporate governance across the globe.

Investigations into the corporate governance performance of the firm suggest that CGP (corporate governance performance) index is an effective tool to measure the corporate governance performance of the firm by including significant contributors to the overall corporate governance performance. For example, Black et al. (2010) while developing the CGP index in the Brazilian context, utilised 42 variables, consistent with the Croatian Corporate Governance Index (CCGI). Brav et al. (2006) in their study also used various elements to develop a corporate governance index for Korean listed firms. Kajola (2008) in his study to investigate corporate governance performance used board composition, the board size, and nature of director as components of corporate governance index.

Existing empirical investigations into corporate governance performance of India reveals that various measures have been utilised to effectively measure the overall corporate governance performance. Samontaray (2010) in his study on the sample of National Stock exchange listed firms utilised the extent of financial disclosure and reporting, board composition, corporate social responsibility, and risk management as major components to develop the corporate governance performance index. Similarly, Sarkar and Sarkar (2012) measured CGP by using various aspects of CG including, board governance, ownership structure, audit quality, and compensation. These CGP measures are adequate and offer insights into the CGP of the firms based on the CG related disclosures in their annual reports, the above CGP indexes were developed prior to the Companies Act, 2013 and did not incorporate the progressive changes made in the Companies Act 2013 to enable firm and board maintain the highest standards of ethical and responsible conduct of business to create value for all stakeholders. These changes have been directed (a) to make the board more inclusive (by making mandatory to include women director on the board), (b) bring transparency in the composition, appointment, tenure, remuneration and functioning of independent directors in the board, (c) making independent directors accountable for their decisions, (d) making approval of minority shareholders mandatory for engagement in related party transactions, (e) nomination of a director by minority shareholders and (f) transparency and disclosure of the tenure and engagement of auditors among others.

Studies investigating the consequences of SA on corporate governance performance suggests that SA leads to improvement in the CGP of the firms (Bebchuk et al., 2017). Literature investigating the relationship between CGP and SA has mainly focussed on individual aspects of CGP while investigating the impact of SA on CGP. However, there are not many studies investigating the impact of SA on overall CGP particularly in the Indian context. Similarly, amendments have been made in the Companies Act (Companies Act, 2013) and listing requirements for public companies to bring a higher level of transparency in RPTs. Specifically, minority shareholders have been empowered to submit their reservations through a vote and/or through nominated director with respect to the RPTs of the firm. Further, the publicly listed firms are mandatorily required to disclose the specifics of RPTs in their annual report. Investigations into the impact of SA on the occurrence of RPTs suggest that SA reduces the frequency and amount of RPTs (Gong, 2013). Further, the RPTs have been perceived as a tool to channel funds into towards majority shareholders, SA has been utilised as an effective tool to keep a check on such type of transactions (Gong, 2013). Globally, investigations into SA has been mainly funded and performed in developed countries like the United States, Japan, Germany and others; however, there are very few studies investigating SA in developing markets particularly in India. SA is going to play an important role in India due to its concentrated ownership of public companies (Sarkar & Sarkar, 2000) and ongoing regulatory reforms in the financial market directed towards protecting minority shareholders rights and bringing transparency in the governance of publicly listed companies.

The objective of this study is twofold. In the first part, the study assesses how the incidence of SA influences the overall CGP of the sample firms in India. First, the CGP index was developed based on the listing norms and Companies Act 2013 that makes it mandatory for the listed firms to disclose their corporate governance practices through an annual report. Further, the impact of SA on the overall corporate governance performance has been investigated over the sample period. The study develops a broad-based CGP index and utilises the index to assess the performance of the firms subjected to SA when compared to self (pre- and post-analysis) and peers (i.e., similar firms not subjected to SA).

In the second objective, the study assesses how the incidence of SA influences the extent of RPT by a sample of listed firms in India. This is due to the fact that the proportion of ownership of promoters is significant, who also acts as managers of the firms (Khanna and Palepu, 1997; La Porta et al., 1998; OECD, 2012) leading to a high degree of ownership and control (Firdous and Mishra, 2010). Hence, it is likely that majority shareholders, who also act as managers for the majority of these firms, may assign higher priority to self-interest rather than the interest of all shareholders. Hence, it is likely that RPTs will be subjected to scrutiny by minority shareholders and opposition if there is a felt understanding that RPT is not driven by economic motives. The study assesses the RPTs of the firms subjected to SA when compared to self (pre- and post-analysis) and peers (i.e., similar firms not subjected to SA to investigate the impact of SA on the occurrence of RPTs.

Relationship Between Corporate Governance Performance and Shareholder Activism

As discussed earlier that a significant relationship is occurring between the corporate governance performance of the firms and its probability of being targeted by activist shareholders, empirical evidence suggests that incidence of SA disciplines companies by (a) bringing transparency in the functioning of board and management (Ciccotello & Grant, 1999), (b) improving the audit quality of the firm (Dao et al., 2011; Horkisson et al., 2002; Jenkins & Velury, 2008) and (c) rationalising directors compensation (Cai & Ralph, 2011; Ertimur et al., 2011; Ferri & Sandino, 2009). Thus, indicating that poor corporate governance practice is likely to trigger SA among the firms. Hence, it is likely that the firm subjected to SA (SSA) are likely to have poor CGP in comparison to firms not subject to SA (NSSA) prior to the incidence of SA where t₀ indicates the year of incidence of SA, t₋₁ indicate one year preceding to the year of SA, and t₋₂ indicate two years preceding to the year of SA. Based on the above, the following hypothesis is proposed:

H₁: There is a significant difference in the CGP score of SSA and NSSA in Year (t₀).

H₂: There is a significant difference in the CGP score of SSA and NSSA in year (t₋₁).

H₃: There is a significant difference in the CGP score of SSA and NSSA in year (t₋₂).

H₄: There is a significant difference in the Pre-SA CGP score from Post-SA CGP score for SSA.

Related party transactions (RPT) are defined by the US Generally Accepted Accounting Principles (GAAP) as ‘transactions occurring between the firm and its subsidiaries, principal owners, affiliates or any of the entities controlled and owned by its management or their family members’. Investigations into RPT suggest that it is a widespread phenomenon (Srinivasan, 2013), which is influenced by economic as well as non-economic motives (Cheung et al., 2006). There have been regulatory concerns on the potential non-economic motives influencing RPT, which has inter-alia attracted regulatory interventions from time to time (Kohlbeck & Mayhew, 2010). There are two perspectives of RPT, which are conflict of interest transactions and efficient transactions (Gordon et al., 2004). The conflict of interest transactions may be termed as abusive which as proposed by Jensen and Mecking (1976). The conflict of interest transactions is potentially very harmful to the interest of minority shareholders (Cheung et al., 2006; Gordon et al., 2004). A different perspective, which is efficient transactions proposes that shareholders will benefit from the RPT as proposed by Williamson (1975).

Security Exchange Board of India (SEBI) amended the Equity Listing Agreement in October 2014 and empowered minority shareholders to participate in the decisions involving RPT. SEBI (2014) amendments include (a) increasing the responsibility and accountability for the board of directors, key management personnel (KMP) to put a system and process in place for compliance on a continuous basis (Delloitte, 2014), (b) necessitating consent of board/audit committee/shareholders in specific cases for related party transactions (Delloitte, 2014) and (c) empowerment of minority shareholders to protect their interest from promoters and other majority shareholder group (Varottil, 2012). These regulatory interventions have offered the necessary impetus on minority shareholders to actively participate in the decision related to RPTs of listed firms.

Relationship Between Shareholder Activism and Related Party Transactions

Existing literature on the relationship between SA and RPT suggests that RPT acts as one of the major motivations for the incidence of SA (Chen & Yuan, 2004; Ming & Wong, 2010). Claessens and Fan (2002) in their study while investigating the shareholder activism suggested that firms with a higher amount and frequency of RPT are more likely to be targeted by activist shareholders. Investigating the voting pattern of minority shareholders with respect to RPT, Gong (2013) found that most of the proposals related to RPTs are voted against by minority shareholders as they believed that RPT is a value-destroying activity rather than value-creating activity. Further, studies have also suggested that SA inhibits RPT (Chen et al., 2009).

Even though RPTs encompasses a large number of transactions between the firm and its related party, majority of the transactions be related to sales to a related party (hereon RP), purchases from RP, guarantees to RP, and loans and mortgages to RP (Claessens & Fan, 2002)

Based on the above discussion, it is proposed that there is likely to be a significant difference in the RPT between the firms subjected to SA (SSA) and firms not subjected to SA (NSSA). Further, the incidence of SA is likely to reduce the level of RPT among listed firms.

Hypotheses Related to Loans and Guarantees to RP

H_5a: There is a significant difference in the RPT (measured through loans and guarantee) of SSA and NSSA in Year t₀.

H_5b: There is a significant difference in the RPT (measured through loans and guarantee) of SSA and NSSA in Year t₋₁.

H_5c: There is a significant difference in the RPT (measured through loans and guarantee to RP) of SSA and NSSA in Year t₋₂,

Hypotheses Related to Remuneration to RP

H_6a: There is a significant difference in the RPT (measured through remuneration to RP) of SSA and NSSA in Year t₀.

H_6b: There is a significant difference in the RPT (measured through remuneration to RP) of SSA and NSSA in Year t₋₁.

H_6c: There is a significant difference in the RPT (measured through remuneration to RP) of SSA and NSSA in Year t₋₂.

Hypothesis Related to the Sale to RP

H_7a: There is a significant difference in the RPT (measured through sale to RP) of SSA and NSSA in Year t₀.

H_7b: There is a significant difference in the RPT (measured through sale to RP) of SSA and NSSA in Year t₋₁.

H_7c: There is a significant difference in the RPT (measured through sale to RP) of SSA and NSSA in Year t₋₂.

Hypothesis Related to Purchase from RP

H_8a: There is a significant difference in the RPT (measured through purchase from RP) of SSA and NSSA in Year t₀.

H_8b: There is a significant difference in the RPT (measured through purchase from RP) of SSA and NSSA in Year t₋₁.

H_8c: There is a significant difference in the RPT (measured through purchase from RP) of SSA and NSSA in Year t₋₂.

Hypothesis Related to a Difference in the RPT Prior to the Incidence of RPT and Post-incidence of RPT

H_9a: There is a significant difference in the amount of loans and guarantee offered to RP by firms subjected to SA before and after the incidence of SA.

H_9b: There is a significant difference in the amount of remuneration to RP by firms subjected to SA before and after the incidence of SA.

H_9c: There is a significant difference in the amount of sales to RP by firms subjected to SA before and after the incidence of SA.

H_9d: There is a significant difference in the amount of purchase from RP by firms subjected to SA before and after the incidence of SA.

Research Methodology

Data Source and Sample Size

The sample for the study included firms which are subjected to SA. All major search engines were utilised to search various combination of words including shareholder(s)/investor(s) activism, activist shareholder(s)/investor(s), shareholder(s)/investor(s) revolt, rebel shareholder(s)/investor(s), antecedents/causes to shareholder(s)/investor(s) activism, shareholder(s)/investor(s) activism in India, types of shareholder(s)/investor(s) activism, consequences of shareholder(s)/investor(s) activism and impact of shareholder(s)/investor(s) activism etc. in different search engines including Google and Yahoo. The period included was for 7 years (FY 2008–2009 to FY 2014–2015). A total of 41 incidents affecting 32 companies were explored. These 32 companies were included in the chapter as experiment group. A comparable firm (i.e., firm with the same NIC code and comparable size measured through total assets) for each of these 32 companies were included in the chapter (Brav et al., 2008). These 64 companies form the basis of an investigation in this chapter. The data related to each variable were collected from the annual report of the respective companies for the year in which SA took place (t₀) and the two-precedence year (i.e., t₋₁, t₋₂). Further, the data for validation of SAPM has been collected for three more years using a similar mechanism from FY 2013–2014 to FY 2015–2016.

The data related to RPTs has been collected from the annual reports of the various companies. The data has been collected for sales, purchases, loans and guarantee and remuneration. The loans and guarantee have been used as a single head as adopted by previous literature (Shleifer & Vishny, 2003) and to counter the data inadequacy because most of the companies have listed loans and guarantee as single head while furnishing data.

Table 1 lists the sample companies (experiment group and control group). It includes the companies, which are subjected to shareholder activism (experiment group) and companies which are not subjected to SA (control group).

Table 1.

List of the Sample and Compare Group of the Companies

S. No.	Experiment Group	Control Group
1	Satyam Computer Services Limited	Man Infra-Construction Limited
2	Siemens Technology and Services Private Limited	BHEL
3	ARSS Infrastructure Projects Limited	Tantia Constructions Limited
4	Crompton Greaves Consumer Electricals Limited	Schneider Electric Infrastructure Ltd.
5	DLF Limited	Oberoi Realty Ltd.
6	Hindalco Industries Limited	Hindustan Copper Ltd.
7	Reliance Industries Limited	Indian Oil Corporation Ltd.
8	Seamec Limited	Essar Shipping
9	Azko Nobel India Limited	Kansai Nerolac Paints Ltd.
10	Coal India Limited	L and T Finance Holdings Ltd.
11	Halonix Limited	Jai Bharat Murat
12	Infosys Limited	Wipro Ltd.
13	Reliance Communications Limited	Bharti Airtel Ltd.
14	Sesa Sterlite Limited	Cimmco Limited
15	Vedanta Limited	NMDC Ltd.
16	Ambuja Cements Limited	ACC Ltd.
17	GMR Infra Limited	IRB Infrastructure Developers Ltd.
18	Havells India Limited	Techno Electric and Engineering Company
19	Tata Motors Limited	Ashoka Leyland
20	GAIL (India) Limited	3M India Ltd.
21	Alstom India limited	Oil India Ltd.
22	Cairn India Limited	Mangalore Refinery and Petrochemicals Ltd.
23	Essar Oil Limited	Petronet LNG Ltd.
24	HCL Technologies Limited	Tata Consultancy Services
25	Indus-India Bank Limited	Bank of Baroda
26	Jindal Steel and Power Limited	Tube Investments of India Ltd.
27	JSW Energy Limited	S J V N Ltd.
28	Maruti Suzuki Limited	Mahindra and Mahindra
29	Panacea Biotech Limited	Neuland Laboratories
30	PTL Enterprises Limited	Elgi Rubber
31	Sun Pharmaceuticals Industries Limited	Dr Reddy’s Laboratories Ltd.
32	United Spirits Limited	United Breweries Ltd.

Source: www.bse.com

Statistical Methods and Tools Used

To test the proposed hypothesis, the study utilised independent sample t-test and paired sample t-test. Statistical Package for Social Sciences, version 20 (SPSS 20) was used as statistical software.

Development of Corporate Governance Performance (CGP) Index

CGP index developed in this study captures good corporate governance practices by including the various aspects of governance as per the regulatory requirement for the listed firms in India. The proposed CGP index incorporates for the disclosure requirements as per the Companies Act 2013 and clause 49 of the listing agreement for the firm in India and is an unweighted index (i.e., each variable equally contributes to the CGP score of the firm). The process adopted is similar to Sarkar and Sarkar (2012). The list of variables included in the CGP index, description of the variables, measurements and their contribution to CGP index is discussed in Table 2.

Table 2.

List of Variables Included in CGP Index

Variables	Description	Measures	Contribution to CGP Index	Reference
BrdSze	Board size (relative to other firms in the sample)	Numbers	Negative	Uzun et al. (2004)
OutDir	Percentage of outside directors (relative to other firms in the sample)	Percentage	Positive	Beasley (1996)
InDir	Percentage of independent directors (relative to other firms in the sample)	Percentage	Positive	Baysinger and Butler (1985)
DirSpH	Number of directorships held by independent directors (relative to other firms in the sample)	Numbers	Negative	Lipton and Lorsch (1992)
BrdMtng	Number of board meetings held (relative to other firms in the sample)	Numbers	Negative	Chen et al. (2006)
DirMt	Average percentage of meetings attended by directors (relative to other firms in the sample)	Percentage	Positive	Chou et al. (2013)
InDiMt	Average percentage of meetings attended by independent directors (relative to other firms in the sample)	Percentage	Positive	Chou et al. (2013)
InDirAGM	Average percentage of independent directors attended AGM/EAGM	Percentage	Positive	Chou et al. (2013)
NumDir	Is the number of independent directors on the board less than regulatory norms?	Indicate 1 if yes, else 0	Negative	Chou et al. (2013)
DirNumCom	Does any of the directors hold directorship in more than 20 companies/10 public companies?	Indicate 1 if yes, else 0	Negative	Xie et al. (2003)
DirWm	Whether the board contains any woman director?	Indicate 1 if yes, else 0	Positive	Goodstein et al. (1994)
ComDir	Average annual remuneration of executive directors as % of operating profit margin	Percentage	Negative	Muller et al. (2014)
Audfee	Percentage of non-audit fee to total fee to auditors	Percentage	Negative	Simunic (1984) and Parkash and Venable (1993)
AudBig4	Whether auditor is from big four firms?	Indicate 1 if yes, else 0	Positive	Jaggi and Leung (2007)
AudChG	Whether there is a change in the auditor from the last year?	Indicate 1 if yes, else 0	Positive	Lyuder (2010)
AudCHm	Whether chairman of the audit committee is an independent director?	Indicate 1 if yes, else 0	Positive	Agarwal and Chadha (2005) and Ashbaugh et al. (2003)
PerPR	Percentage of promoters’ ownership	Negative	Positive	Yeo et al. (2002)
PerFII	Percentage of FII	Percentage	Positive	Rajgopal et al. (2002)
PerDow	Percentage of domestic institutional ownership	Percentage	Positive	Rajgopal et al. (2002)
PerNPNI	Percentage of non-promoter	Percentage	Negative	Berglöf and von
	Non-institutional			Thadden (1999)
	Ownership
ApRPT	Whether approval of minority shareholders has been sought for a related party transaction	Indicate 1 if yes, else 0	Positive	Chou et al. (2012)
NomDir	Is there any director nominated by minority shareholders	Indicate 1 if yes, else 0	Positive	Chou et al. (2012)

Source: Islam, A. U. (2016).

The performance of the sample firms has been measured with respect to each variable. The performance of the firm is compared with the regulatory requirements and is scored on the 5-point scale wherein the performance of each firm on each variable is considered to develop the boundaries for the score (i.e., from zero to five). For example, among the sample firms, maximum and minimum board size was considered as boundary performance. According to Table 1, board size negatively contributes to CGP score and hence, maximum board size was assigned zero score and minimum board size was assigned 5 scores. The score attained by all other firms’ lies on the scale of zero to five. A similar process was adopted by Sarkar and Sarkar (2012). The aggregate score based on the score attained by each firm on each variable were added to estimate the CGP index score of the firm.

Results and Discussions

While analysing the data we found an overall CGP mean score of 3.04, range of 0–5 and a variance of 1.46 that means the performance of board governance is above the average of 2.50. The overall performance can be judged as above average (i.e., good) but not of very high performing.

Table 3.

Descriptive Statistics of Mean Governance for Sample and Control Group

	Activism	N	Mean	Standard Deviation	Standard Error of Mean
Year (t₀)	1	32	2.3861	0.35362	0.06251
Year (t₀)	0	32	2.6384	0.32833	0.05804
Year (t₋₁)	1	32	2.5610	0.32407	0.05729
Year (t₋₁)	0	32	2.6532	0.37418	0.06615
Year (t₋₂)	1	32	2.4532	0.35532	0.06281
Year (t₋₂)	0	32	2.6033	0.30046	0.05311

Source: Table is self made so only transcript is given above and no direct source has been utilized.

The study presents the results in two sub-sections which includes an assessment of the difference in CGP of firms subjected to SA (SSA) and firms not subjected to SA (NSSA) and followed by the results of the assessment of the difference in the occurrence of RPT of firms subjected to SA (SSA) and firms not subjected to SA (NSSA).

Assessment of the Difference in the CGP of Firms Subjected to SA (SSA) and Firms not Subjected to SA (NSSA)

Table 3 summarises the descriptive statistics of the overall CGP for the sample group (1) and the control group (0) to presents the absolute difference in mean of the two groups. As we can see that for all the years the sample group has a lower overall CGP score than the control group. As in year t₀, t₁ and t₂ the sample group has an overall CGP score of 2.38, 2.56 and 2.45 while as control group has a score of 2.63, 2.65 and 2.60 showing there is a difference between the mean CGP score of the groups.

To investigate whether the difference in the overall mean CGP score of two groups is significant or not an independent sample t-test has been carried and the results of independent sample t-test are presented in Table 4.

Findings of the independent sample t-test suggest that a significant difference in the CGP of firms subjected to SA (sample group) from the firms not subjected to SA (control group) for the year of incidence (accepted H₁: there is a significant difference in the CGP score of SSA and NSSA in Year (t₀)). However, based on the test statistics, there was no significant difference in the CGP score of these two categories of the firm in the preceding years 1 and 2 (rejected hypothesis H₂: there is a significant difference in the CGP score of SSA and NSSA in year (t_–1) and H₃: there is a significant difference in the CGP score of SSA and NSSA in year (t_–2)) possibly leading to a conclusion that activists closely monitor the governance practices of the firm and responds immediately to any evidence of poor governance practice of the firm. Hence a decline in CGP is going to enhance the probability of firm to get targeted by activist shareholders as a decline in corporate governance performance is perceived as a measure for financial underperformance (Ertimur et al., 2011)

Table 4.

Independent Samples Test for the Mean Difference Between Sample and Control Group

F		Levene’s Test for Equality of Variances		t-Test for Equality of Means
		Sig.	t	df	Sig. (Two-tailed)	Mean Difference	Standard Error Difference	95% Confidence Interval of the Difference
		Sig.	t	df	Sig. (Two-tailed)	Mean Difference	Standard Error Difference	Lower	Upper
Year (t₀)	Equal variances assumed	0.03	0.86	−2.95	62	0.004	−0.25	0.085	−0.42	−0.08
Year (t₋₁)	Equal variances assumed	0.37	0.54	−1.05	62	0.291	−0.09	0.087	−0.26	0.08
Year (t₋₂)	Equal variances assumed	0.63	0.43	−1.824	62	0.072	−0.15	0.082	−0.31	0.014

Source: Table is self made so only transcript is given above and no direct source has been utilized.

Test the Difference Between the Mean CGP Score of SSA Firm Subjected to SA in the Preceding Year from the Succeeding Year

A paired sample t-test was used to investigate the difference in the CGP score of firms prior to the incidence of SA and CGP score after the firm is subjected to SA. Tables 5 and 6 summarise the findings.

The results of the paired sample t-test suggest a significant difference in the CGP index score of the firm subjected to SA in the preceding year (t_–1) from the succeeding year (t₊₁). The CGP score of the firm was found to improve significantly post-SA (accepted H₄: there is a significant difference in the Pre-SA CGP score from Post-SA CGP score for SSA). The findings are consistent with existing literature (Arora & Bhandari, 2017; Brav et al., 2008), predominantly the incidents and programs related to governance after a firm is targeted by activist shareholders (Del Guercio & Hawkins, 1998).

Assessment of the Difference in the RPT of Firms Subjected to SA (SSA) and Firms not Subjected to SA (NSSA)

The RPT of the firms has been categorised into four main categories including the loans and guarantees, remuneration, sales and purchases. Table 7 presents the descriptive statistics related to components of RPT for various periods (in ₹ millions).

Table 5.

Paired Samples Statistics

		Mean	N	Standard Deviation	Standard Error of Mean
Pair 1	Pre-ACT	2.4	32	0.35	0.06251
Pair 1	Post-ACT	2.5	32	0.28	0.04892

Source: Table is self made so only transcript is given above and no direct source has been utilized.

Table 6.

Paired Samples Test for Pre- and Post-SA

Mean		Paired Differences					t	df	Sig. (Two-tailed)
		Standard Deviation	Standard Error of Mean	95% Confidence Interval of the Difference
		Standard Deviation	Standard Error of Mean	Lower	Upper
Pair 1	Pre-ACT-Post-ACT	−0.08069	0.21776	0.03849	−0.15920	−0.00218	−2.096	31	0.044

Source: Table is self made so only transcript is given above and no direct source has been utilized.

Table 7.

Descriptive Statistics of Various Components of RPT

	SA		N	Mean	Standard Deviation	Standard Error of Mean
Year (t₀)	Loan and guarantee	SSA	32	11347.8	49480.1	8746.92
	Loan and guarantee	NSSA	32	1151.31	2407.11	425.52
	Remuneration	SSA	32	187.1	213.54	37.75
	Remuneration	NSSA	32	78.3	136.64	24.15
	Sales	SSA	32	27,458	47676.5	8428.1
	Sales	NSSA	32	4305.44	12604.4	2228.17
	Purchases	SSA	32	30358.8	138280	24444.7
	Purchases	NSSA	32	3071.73	13048.1	2306.6
Year (t₋₁)	Loan and guarantee	SSA	32	23892.7	84065.3	14860.8
	Loan and guarantee	NSSA	32	805.11	1846.02	326.33
	Remuneration	SSA	32	145.41	151.24	26.74
	Remuneration	NSSA	32	127.41	439.84	77.75
	Sales	SSA	32	22108.7	41,530	7341.54
	Sales	NSSA	32	4192.75	12471.6	2204.69
	Purchases	SSA	32	26530.6	138,410	24467.8
	Purchases	NSSA	32	3193.66	9759.9	1725.32
Year (t₋₂)	Loan and guarantee	SSA	32	3519.1	14,382	2542.4
	Loan and guarantee	NSSA	32	1387.4	3863.34	682.95
	Remuneration	SSA	32	265.9	535.12	94.6
	Remuneration	NSSA	32	149.8	419.95	74.24
	Sales	SSA	32	6114.13	12630.1	2232.7
	Sales	NSSA	32	5022.96	9544.64	1687.27
	Purchases	SSA	32	9492.75	23671.9	4184.64
	Purchases	NSSA	32	1377.25	2995.82	529.59

Source: Table is self made so only transcript is given above and no direct source has been utilized.

The descriptive statistics of the various components of RPT for firms subjected to SA (SSA) and firms not subjected to SA (NSSA) infers that there is a difference between the amounts of transactions. To investigate whether the difference is significant or not an independent sample t-test has been utilised. The test result of independent sample t-test is discussed in Table 8.

Table 8.

Independent Samples Test Results

			Levene’s Test for Equality of Variances		t-Test for Equality of Means
Years	Components of RPT		F	Sig.	t	df	Sig. (Two-tailed)	Mean Difference	Standard Error Difference
Year (t₀)	Loan and guarantee	Equal variances assumed	4.1	0.1	1.2	62.0	0.2	10196.4	8757.2
	Remuneration	Equal variances assumed	3.8	0.1	2.4	62.0	0.0	108.8	44.8
	Sales	Equal variances not assumed	18.6	0.0	2.7	35.3	0.0	23152.5	8717.6
	Purchases	Equal variances assumed	3.8	0.1	1.1	62.0	0.3	27287.0	24553.3
Year (t_-1)	Loan and guarantee	Equal variances assumed	8.5	0.0	1.6	62.0	0.1	23087.5	14864.3
	Remuneration	Equal variances assumed	0.9	0.4	0.2	62.0	0.8	18.0	82.2
	Sales	Equal variances not assumed	17.8	0.0	2.3	36.5	0.0	17915.9	7665.4
	Purchases	Equal variances assumed	3.4	0.1	1.0	62.0	0.3	23336.9	24528.5
Year (t_-2)	Loan and guarantee	Equal variances assumed	1.6	0.2	0.8	62.0	0.4	2131.7	2632.5
	Remuneration	Equal variances assumed	0.8	0.4	1.0	62.0	0.3	116.1	120.2
	Sales	Equal variances assumed	0.7	0.4	0.4	62.0	0.7	1091.1	2798.5
	Purchases	Equal variances not assumed	16.0	0.0	1.9	32.0	0.1	8115.5	4218.0

Source: Table is self made so only transcript is given above and no direct source has been utilized.

The findings suggest that for the year of incidence of SA (t₀) significant difference exist in the remuneration (p ≤ 0.05) and sales (p ≤ 0.05) of the firms subject to SA (SSA) from the firms not subjected to SA (NSSA). However, no significant difference was found with respect to purchase from RP and loan and guarantee to RP, hence accepting hypothesis H_6a (there is a significant difference in the RPT (measured through remuneration to RP) of SSA and NSSA in Year t₀) and H_7a (there is a significant difference in the RPT (measured through sale to RP) of SSA and NSSA in Year t₀) and rejecting H_5a (there is a significant difference in the RPT (measured through loans and guarantee) of SSA and NSSA in Year t₀) and H_8a (there is a significant difference in the RPT (measured through purchase from RP) of SSA and NSSA in Year t₀).

Further, for the year (t_-1) sales to RP (p ≤ 0.025) was only found to be significantly different among the firms subjected to SA from firms not subjected to SA and for all other components no significant difference was found to be existing. Hence accepting hypothesis H_7b (there is a significant difference in the RPT (measured through sale to RP) of SSA and NSSA in Year t_–1) and rejecting H_5b (there is a significant difference in the RPT (measured through loans and guarantee) of SSA and NSSA in Year t_–1), H_6b (there is a significant difference in the RPT (measured through remuneration to RP) of SSA and NSSA in Year t_–1) and H_8b (there is a significant difference in the RPT (measured through purchase from RP) of SSA and NSSA in Year t_–1)_.

However, in the second preceding year (t_–2), the difference was found to be insignificant for all the four components of RPT. Hence, rejecting all the hypothesis H_5c (there is a significant difference in the RPT (measured through loans and guarantee to RP) of SSA and NSSA in Year t_–2), H_6c (there is a significant difference in the RPT (measured through remuneration to RP) of SSA and NSSA in Year t_–2), H_7c (there is a significant difference in the RPT (measured through sale to RP) of SSA and NSSA in Year t_–2) and H_8c (there is a significant difference in the RPT (measured through purchase from RP) of SSA and NSSA in Year t_–2). ^^

The findings suggest that sales to RP are significantly high for the firms subjected to SA when compared with firms not subjected to SA in the year of incidence an indication of a red flag for the minority shareholders. This difference is coupled with the difference in the management compensation between these two groups of firms, indicating an incentive system build around overestimation of sales through transactions with RP. However, the findings are preliminary in nature and need further testing for robustness. In the immediately preceding year, only sales to RP is significant, which further became insignificant in the next preceding year t_–2.

To Test the Difference in RPT Pre-SA and Post-SA for SSA

To investigate the difference in various aspects of RPT pre- and post-SA a paired sample t-test has been utilised. Table 9 presents the results of a paired sample t-tests.

Table 9.

Paired Samples Test for Pre- and Post-SA

Mean Standard Deviation			Paired Differences				t	df	Sig. (Two-tailed)
			Standard Error of Mean
			Standard Error of Mean	Upper
Pair 1	Pre-SA loan guarantee—Post-SA loan and guarantee	23635.92		84047.9	14,857	53938.4	1.59	31	0.122
Pair 2	Pre-SA remuneration—Post-SA remuneration	21.12		164.86	29.14	80.56	0.72	31	0.474
Pair 3	Pre-SA sales—PostSA sales	21889.12		41593.5	7,352	36885.2	2.98	31	0.006***
Pair 4	Pre-SA purchases—Post-SA purchases	25307.03		138,690	24,517	75310.1	1.03	31	0.31

Source: Table is self made so only transcript is given above and no direct source has been utilized.

Note: *** represents highly significant with 1% level of significance.

The finding of paired sample t-test to investigate the difference in the amount of RPTs pre- and post-SA incidents is consistent with the findings of an independent sample t-test suggesting a significant decrease in the sales to RP for the firms subjected to SA (p ≤ 0.05). However, there is no significant decrease in loans and guarantee, purchases and remuneration have shown no significant decrease. Hence, accepting Hypothesis H_9c (there is a significant difference in the amount of sales to RP by firms subjected to SA before and after the incidence of SA) and rejecting hypothesis H_9a (there is a significant difference in the amount of loans and guarantee offered to RP by firms subjected to SA before and after the incidence of SA), H_9b (there is a significant difference in the amount of remuneration to RP by firms subjected to SA before and after the incidence of SA) and H_9d (there is a significant difference in the amount of purchase from RP by firms subjected to SA before and after the incidence of SA). Hence, advocating the fact that sales to RP is the most affected component of related party transactions, which is showing a significant decrease after the firm is subjected to SA.

Conclusions and Future Scope of the Study

This study focused on investigating the relationship between SA, CGP and RPTs of Indian listed firms using two different sample sets (sample group and control group). First, the overall corporate governance performance of both the groups was investigated by CGP index which was developed based on the listing norms and Companies Act 2013 that makes it mandatory for the listed firms to disclose their corporate governance practices through an annual report. The methodology adopted was similar to Sarkar and Sarkar (2012) and included variables related to various aspects of CG including the recent amendments in Companies Act 2013.

The overall CGP was found to be lesser for companies where SA has taken place and vice versa. Results of the independent sample t-test suggested that a significant difference in the CGP index score of firms subjected to SA from the firms not subjected to SA for the year of incidence. However, it was found to be insignificant for the preceding years. Further, pre- and post-SA analysis of overall CGP also revealed significant improvement in the CGP of the company subjected to SA post-SA.

Further, the study also focused on investigating the relationship between SA and RPTs. Specifically, the difference in the RPTs among the firms subjected to SA and firm not subjected to SA with respect to sales to RP, purchase from RP, loans and guarantee to RP and remuneration to RP and found that significant difference occurs with respect to the sales to RP and compensation to RP in the year of incidence. Findings suggest a significant difference in the compensation to management and sale to related party during the event year. However, for the immediately preceding year, only the sale to RPT of the firm subjected to SA was significantly different from other comparable companies. Further, pre- and post-SA analysis of the amount of RPTs found significant difference only in the sale to a related party and no significant difference was found with respect to guarantees to related parties, compensation to management and purchase from related parties.

The study provides valuable insights into the impact of SA on the overall corporate governance performance and how SA can act as a tool to streamline the corporate governance performance of the firm. Further, the study also provides valuable insights about the impact of SA on the occurrence of various components of RPTs and how SA contributes to significantly declining the sales to related parties.

The study may be further elaborated by investigating the impact of SA on the financial performance of the firm and also an investigation into the effect of financial underperformance on the occurrence of shareholder activism can be accessed. The study has used various search engines to collect information regarding the various incidents of SA, there are chances that some of the incidents may have excluded from our study.

Footnotes

Declaration of Conflicting Interests

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

Funding

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

ORCID iD

Ajaz Ul Islam

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