Ownership Characteristics,Corporate Social Responsibility,Resource Productivity And Firm Performance: An Empirical Study

Abstract

Corporate governance continues to be at the forefront as evinced by some of the recent incidents at organisations such as Tata Sons, Yes Bank and ICICI bank. Traditionally, ownership characteristics have been considered as close substitutes representing corporate governance, considering that board processes and activity do not yield themselves to much scrutiny beyond a few media reports and analysis. The research article undertakes a study of ownership, corporate social responsibility(CSR) and resource productivity in the Indian context. Using a sample of 900 firms from the non-financial domain, the study uses multivariate regression to identify the effect on market based measure of firm performance. Results indicate that all the ownership variables have a positive and significant influence on market based metrics of organisations. However, the CSR orientation or intent does not indicate any impact on organisation’s market based metric. The resource productivity, on the hand is strongly positive, indicating that markets recognise, intuitively the impact of competencies and capabilities of people. For practitioners, the implications are the quest to identify further levers of strategic and competitive advantage since the governance indicators have merely explained a small part of firm performance.

Keywords

Corporate governance corporate social responsibility resource productivity India firm performance

Introduction

Firms worldwide are quickly unscrambling and re-assembling their resource bases and competencies in their quest to sustain business ventures in the face of the global health hazards posed by viruses of Chinese origin. Amidst all this frantic corporate scurrying, fresh controversies and scandals have emerged in the recent decade such as the questionable governance practices at WeWork (Peregrine, 2019) and the undignified ouster of the previous Chairman of Tata Sons, Cyrus Mistry (Jain, 2018); the Indian banking system is going through a dramatic reform phase—unfortunately due to non-conformance to corporate governance standards as evinced in the case of Yes bank (Gopakumar, 2020). Considering several incidents and observations from industry practices, corporate governance continues to be a key point of concern not only for practitioners and C-suite executives, but also serves as an area of research interest among the academic fraternity.

The 20th century, from the context of corporate malpractices, threw up various conflicts, controversies and corporate chieftains, who were unable to rein in their greed leading to the downfall of once reputed firms such as Enron, Tyco, WorldCom, among others. The concerns arising due to corporate governance practices in the developed world are very different from those of the third world countries. Firms such as 3G, the Brazilian private equity managed conglomerate have shown tremendous ambition (Fontanella-Khan & Massoudi, 2017), backed it up with resources and competencies, while they managed to showcase tremendous growth in shorter time spans. Fouad and Gouvea (2018) studied the global expansion strategies of 3G Capital, while highlighting their unique synergies. Yet, media and industry have noted that in the recent few years it ran short of new targets to acquire, thereby going through a slow growth phase. Hence, for the investors, the fundamental questions always hark back to those that seek to unlock firm value—'for instance, what factors drive firm value?’

Once corporate entities grow, establish scale, explore and conquer new markets, the questions from the stakeholders now take a new turn—for instance, ‘are corporates contributing to society?’ To partly answer the large community of stakeholders, firms are now mandated to spend 2% of their profits after tax in social initiatives. However, practitioners find less evidence that markets value firms’ commitment and actual spends on such activities. Earlier we had scholars like Elkington (1998) who espoused the ideal, hallowed corporate-plus-environment-plus-human resource trinity of people, planet and profits under the triple bottom line umbrella. Moving ahead, research from the strategy domain has often given credibility to the idiosyncratic mix of resource-based competencies that go beyond merely documented or codified practices of firms (Colbert, 2004; Fahy & Smithee, 1999; Henderson & Cockburn, 1994); such competencies that are based on innately honed skills resident in the minds of individuals. Therefore, markets tend to place value on such firms, wherein the employees contribute to enhanced business performance, not just from the point of view of an accountant’s profitability metrics, but from market based measures of financial performance as well.

Theoretical Background and Hypotheses

Early researchers noted the conflict of interests between the owners and the agents (Jensen & Meckling, 1970), while a subsequent body of research expanded upon the significant themes. Prominent among them are Ang et al., (2000), Kim and Sorenson (1986), and several others who identified applicability of agency theories to different issues of corporate governance across organisations worldwide. Significant points of concern across corporates varied—firms expressed interest in terms of how corporate governance impacted firm value (Baek et al., 2004; Chhaochharia & Grinstein, 2007; Jo & Harjoto, 2011), firms also observed the influence of disclosures on performance (Akhtaruddin et al., 2009; Donnelly & Mulcahy, 2008; Ghazali & Weetman, 2006) in countries across the globe. Country and political contexts also dictated how studies in corporate governance were carried out. The developed world was more concerned about rationalising corporate spends and curtailing excesses (Humphery, 2010), while countries from the Asian economy still grappled with founder-owners and their unique mind sets dominating leadership of publicly listed entities (Chen et al., 2005; Kumar & Singh, 2013; Yu, 2013).

A 19th century frame of reference at best helps visualise craftsmen and small firms which worked independently. However, subsequently, the rise of structured organisations and industries implied the need for governance and systems that could provide checks and balances; for firms this meant the need to comply or conform to laws laid down by regulators or government bodies. Yet, owners and founders of firms continued to dominate decision making (Humphreys et al., 1993); however, post the world wars, the western world moved to a domain wherein the owners diluted their stakes, lent more power to individual shareholders. This in turn led to rise of shareholder activism, the desire to control larger firms through the levers of activism. On the other side of the globe, Asian countries continue to work with owners and founders retaining more than 50% stakes in their corporations. From the perspective of research, this gives rise to questions that attempt to study a fundamental point—does ownership influence firm performance? Similar lines of questioning, from the investors and stakeholders’ standpoint are mostly about ‘whether ownership influences the market based metrics of performance’ since stakeholders are mostly concerned about potential returns to them.

A large body of research has studied the influence of ownership stakes on firm performance. The study parameters are usually promoter stakes and institutional investor stakes. However, evidence has been inconclusive suggesting the subtle play of the political and economic regimes which are country specific. In this section, we develop hypothesis based on established research; moreover, we propose to test the influence of few other factors such as resource productivity which have not been studied elsewhere.

The Indian context is dominated by promoter driven firms with the average promoter stake hovering around 50% for a sample of 1000 firms listed on the Bombay Stock Exchange (BSE). Kumar and Singh (2013) note that promoter stake has a positive and significant influence on firm performance. Research into board ownership on firm performance has noticed a significant, positive influence (Mishra & Mohanty, 2014; Pant & Pattanayak, 2007). Further Mishra and Mohanty (2014) developed a corporate governance indicator comprising of legal, board and proactive measures within the context of board processes, composition and actions. The Indian context is unique due to issues of dominant shareholders who may hold higher stakes (Varma, 1997). The public often holds up promoters to high standards since they seem to have an aura around them; yet this comes with high level of responsibility and accountability. Tam and Tan (2007) found significant relationship between the dominant owners’ characteristics and firm performance, also noting the effect being restricted to Asian countries. In a slightly differing research wherein the impact of ownership characteristics on firm’s technological innovation performance was studied, Choi et al. (2012) found that ownership concentration does not significantly impact this measure, while they noted that institutional ownership does influence firms’ technological performance. While studying Korean firms’ performance, Cho and Kim (2007) found weakly positive links between ownership shareholding and firm performance. At an overall level, considering India-specific context, we observe the influence of promoters on various strategic decisions. Hence we frame our first hypothesis thus,

H_1a: Domestic promoter ownership has a significant influence on firm’s market based measure of performance

With the advent of liberalisation in the year 1991, the Indian economy gradually opened the gates to foreign investment which materialised in the form of assets, plant, machinery, human talent as well as capital. However, considerable time period lapsed and it took more than a decade for the investments to fructify and generate yields to the shareholders. During this time frame, a host of organisations had foreign promoters even though their shareholding ranged from 0 to 74%, the mean stakes were closer to 3%. Foreign promoter ownership has been found to positively impact firm performance (Sridharan & Joshi, 2018), while Gu et al. (2019) find the evidence to be unclear, especially considering the lack of the underlying rationale. From the developed world, Driffield et al. (2018) found the evidence to be inconclusive, hinting at presence of secondary considerations that could effectively link foreign ownership and firm performance. Foreign promoters are expected to bring greater transparency (Halter et al., 2009) resulting in more qualitative information (Sriram, 2018) flowing through to stakeholders; this can be seen in the greater content of voluntary disclosures that accompany mandated ones; mandatory reports include the annual reports and its various constituents, whereas the voluntary disclosures include qualitative information in the form of letters to shareholders and press releases conveying strategic intent of the firms. Consequently, it acts a strong positive signal to the markets, resulting in better market based measures of performance, leading to the framing of the hypothesis thus,

H_1b: Foreign promoter ownership has a significant influence on firm’s market based measure of performance

Institutional ownership may refer to domestic as well as foreign investors. On the domestic front, mutual funds and larger corporate entities could hold stakes in firms. Research has observed the influence of foreign institutional investor stakes on firm performance to be a mixed bag: conclusive evidence is elusive. Foreign institutional investors are not subject to managerial pressures (Almazan et al., 2005), while Cornett et al. (2007) note a significant and positive link between institutional ownership and firm performance. Moreover, foreign and independent institutional investors tend to bring in a monitoring role, albeit being passive investors in firms (Ferreira & Matos, 2008). Douma et al. (2006) find a strong and positive relationship between foreign institutional holding and firm performance; however, they also find the relationship to be strong in situations where the foreign entities have a long term strategic commitment to investment in firms. A study from Chinese context notes the enhanced effect of qualified foreign institutional investor holding on stock liquidity (Ding et al., 2017). Research as well as practice indicates that foreign institutional participation is a signalling mechanism by firms; this is accompanied by significantly superior firm performance in some markets as observed. Moreover, research indicates that in an emerging market with institutional voids, foreign institutional holdings communicate a subtle strategic orientation; this in turn leads us to frame the next hypothesis thus,

H_1c: Foreign institutional investor ownership has a significant influence on firm’s market based measure of performance.

Society and stakeholders who can contribute to its betterment have been in existence since time immemorial. With the coming of age of conglomerates, regulators and governments across the globe felt that established listed entities could contribute in a formal manner as well. Thus the term corporate social responsibility (CSR) became ubiquitous especially in the business press as well as annual reports of companies. Simultaneously, several reputed Indian business houses such as the Tatas have built entire townships such as Tatanagar (in Jamshedpur, India) as a part of their core steel industry during the early part of the 20th century. As regulators in India sought to include firms in the development of welfare schemes benefiting women, rural growth and society as a whole, CSR got woven into the corporate fabric as a way of life. In turn this paved the way for stakeholders testing whether it conveyed sufficient signals to the marketplace—for instance, did it influence firm’s market based measures of performance? (Cochran & Wood, 1984; McWilliams & Siegel, 2000; Pava & Krausz, 1996). Academicians have sought to provide more clarity, studying the impact of firms’ investing their time, resources and efforts on their perception of performance in the marketplace.

CSR was initially a discretionary activity for firms. Larger organisations, over a period of time made concerted efforts to spend their resources for the betterment of society. However, CSR spends became mandatory with the Indian government insisting on 2% of post-tax profits to be directed towards such activities. For firms that had made it their routine, it was a relief—their efforts could now get formal recognition as well. On the other hand, it was imperative for newer firms to allocate resources—people and funds—towards CSR. Research finds linkage of CSR activity and firm performance to be mixed. Favourable CSR practices were found to have a positive impact on both financial and non-financial measures of performance in the Indian context (Mishra & Suar, 2010), while among Brazilian firms, a negative relationship was found between CSR and firm value (Crisóstomo et al., 2011). From a Chinese study, Qu (2009) found that the impact of market orientation on firm performance was mediated by CSR. Other scholars looked at linkages between CSR and corporate communication (Lattermann et al., 2009); they found that large Indian firms disseminated more information about CSR mainly because of the mandatory requirement, unlike those of Chinese firms whose information was of a lower intensity. Representation of more women on boards strongly related to CSR performance of firms especially in the developed markets (Byron & Post, 2016), while Ntim and Soobaroyen (2013) note that better governed firms tend to pursue a more socially oriented agenda through a wide range of CSR initiatives. Hence, research that attempts to understand the finer nuances of CSR often looks at not just firm performance, but a wide variety of firm specific characteristics within the larger umbrella of country level constructs. Indian firm’s commitment to CSR, however has been seen to indicate intent, partly on account of the rule based nature of this activity. Therefore, this leads us to frame the next hypothesis,

H₂: CSR intent has a positive and significant influence on firm performance.

Resources, both tangible and intangible are fundamental levers in the growth and sustenance of firms. Various theories from the strategy domain have explored how resources contribute to the long term performance of firms. Prominent among them are the resource based view (Hart 1995; Wernerfelt, 1984), dynamic capabilities (Eisenhardt & Martin, 2000; Teece & Pisano, 1994) and frameworks such as the VRIO (Barney, 2002). While the previous century saw the dominance of firms which had physical assets, the recent two decades have seen the emergence of firms which wield soft power—for instance the firms belonging to the FANG group (Facebook, Amazon, Netflix and Google). Within the context of resources, recent research has stressed the importance of tacit knowledge as being an important lever to firms’ overall knowledge development and subsequent competitiveness. Hence, our article observes that tacit knowledge calls for the role of people in different roles and their efforts, contributions and imperceptible understanding of the business function nuances assist firms in their quest to sustain their competitive advantage. Hence, our article advances the resource productivity as being an important determinant of firm performance.

Resource productivity can be seen through the lens of assets—physical as well as intangible. Our research article looks at the inclusion of people as key assets. Firms measuring intangibles often assign monetary values to goodwill, brands or reputation. Research in this domain links impact of action across disciplines such as manufacturing and human resources: for instance, Youndt et al. (1996) found that a human resource (HR) system that leveraged the enhancement of people potential delivered on several operational metrics, yet the enabler was found to be a robust manufacturing strategy. A people focused strategy is linked with organisational effectiveness, considering that configuration of several activities are involved (Dyer & Reeves, 1995); supporting systems such as enterprise resource planning enable the conversion of human resource efforts into firm performance (Beheshti & Beheshti, 2010), while Huselid et al. found that effective HR management contributed to several performance metrics such as productivity, cash flows and market based financial performance of firms. Hence, we find that most research leans towards fairly robust linkages between the human resource productivity and firm performance, thereby leading us to frame our hypothesis thus,

H₃: Resource productivity, considering people as fundamental intangible value generators has an impact on firm performance.

Methods

Data and Sample

The hypotheses are tested against a large sample of firms in India. The CMIE (Centre for Monitoring the Indian Economy) is a database wherein companies’ financial information is stored. The database PROWESS serves as the master (Balasubramanian et al., 2010; Dwivedi & Jain, 2005; Ghosh, 2006)—here we extract the list of non-financial companies. From this list, we reduce the firms that are less than 1000 million in sales turnover for the year 2019. The reduced list is further subjected to data cleaning: we look for missing data, we look at firms that have price to book value data available. Also all firms that do not mention the number of employees is removed. Final tally yielded is of 900 firms that forms our sample.

The current sample of non-financial (mainly manufacturing) companies is suited for our analysis since it is representative of the overall population. Besides, since it covers more than 15 different industries ranging from chemicals to consumer goods, possible biases are removed. We also find the sample to be representative in terms of reaching out to every geographical region within India: this is possible on account of the firms having their registered addresses in different states and also managing manufacturing facilities across different states. A mixture of consumer facing and business facing firms are present in this sample. The reason for choosing manufacturing firms and excluding financial service firms is this: these firms are more likely to engage a certain amount of resources in a dedicated manner towards CSR activities. Moreover, the manufacturing based sample is better positioned to represent the larger base of firms who have been in existence for at least 20 to 30 years before the turn of the century. Hence legacy based factors can be considered.

Measures

Dependent Variable: Market Performance of Firms

We use the price to book value as a proxy to indicate the market performance of firms. This measure is determined by market forces, where investors, shareholders—both retail as well as institutional, as well as other stakeholders play a key role; hence it is significantly different from the accountant’s computation of firms’ performance, where measures such as ratio of profit after tax to company’s sales revenue may be taken. This measure is obtained from PROWESS for the closing of the financial year 2018–2019—the date taken is 31 March 2019.

Independent Variables

The ownership characteristics for the study include three—(a) the Promoter stake which is represented as the percentage stake held by the promoter(s) at the end of fiscal year 2019; (b) the foreign promoter stake; and (c) the foreign institutional investor stake—all these variables have measures taken at the end of the financial year 2019.

CSR is measured through a proxy which indicates the amount spent during the financial year. Hence the variable CSR intent indicates the firms’ commitment in terms of funds directed towards and spent on these activities. Ratio of CSR spent to the profit after tax determines the variable, CSR_INTENT.

The resource productivity dimension considers people as a key resource. Hence the employee productivity per capita is measured as the sales per employee. This is also measured for the financial year 2019.

Control Variables

The variables considered here are age and size of firms. An appropriate proxy for size is taken as the sale of goods, of the sample firms, corresponding to the year 2018–2019. Table 1 provides the list of variables and their description for the study.

Table 1.

Description of Variables.

Variable Nomenclature	Description
Type: Dependent Variable
PRICETO_BOOKVALUE	Measures the market based performance of firms
Type: Independent Variables
PROM_STAKE	Promoter Stake indicating the % stakes held by the promoter(s)
FOREIGN_PROMSTAKE	Foreign promoter stake in %
FII_STAKE	Foreign Institutional Investor stake in %
CSR_INTENT	Measured as the ratio of amount spent on CSR activities to the profit after tax
EMPPRODUCTIVITY_PERCAPITA	Measured as the ratio of sale of goods.to the number of employees.
SIZE	Measured as the sale of goods in INR million

Source: The author.

Analysis

The key dependent variable price to book value is regressed against the independent variables belonging to the themes of ownership, CSR and resource productivity. Linear multivariate regression is used to determine the strength of the relationship. Descriptive statistics relevant to the research is presented in Table 2. Table 3 indicates the correlations observed between the dependent variables. Regression results are tabulated in Table 4.

Table 2.

Descriptive Statistics: Variables Under Study.

VARIABLE NAME	MEAN	STD ERROR	STD DEVIATION	RANGE	N
CSR_INTENT	0.02	0.00	0.14	3.92	900
AGE	40.71	0.70	21.06	154.00	900
PROM_STAKE	0.55	0.01	0.16	0.91	900
FOREIGN_PROMSTAKE	0.03	0.00	0.11	0.74	900
FII_STAKE	0.04	0.00	0.07	0.43	900
SIZE	36918.14	8952.02	268560.46	5964306.20	900
EMPPRODUCTIVITY_PERCAPITA	14.58	1.77	53.11	1043.16	900
PRICETO_BOOKVALUE	2.63	0.12	3.72	48.06	900

Source: The author.

Correlation between the independent variables would indicate a relationship between the variables without indicating the direction of the relationship. Hence the table indicating the correlation between the variables is presented (Table 3).

Table 3.

Correlations.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)
(1) CSR_INTENT	1.00	0.00	0.02	0.01	–0.02	0.00	–0.02
(2) AGE		1.00	–0.06	0.03	0.05	0.07	–0.08
(3) PROM_STAKE			1.00	–0.54**	–0.26**	–0.04	0.02
(4) FOREIGN_PROMSTAKE				1.00	0.02	–0.01	–0.02
(5) FII_STAKE					1.00	0.18	0.03
(6) SIZE						1.00	0.12
(7) EMPPRODUCTIVITY_PERCAPITA							1.00

Source: The author.

Note: ** Correlation is significant at the 0.01 level (2-tailed).

Explanatory power metric, R² is 9.9% and the adjusted R² is 9.2% indicating that just about 10% of the market based performance measure is explained due to the variables under study. Since our independent variables include ownership characteristics, age, size of firms, CSR intent and resource productivity, the inference is that several other firm specific characteristics and inherent idiosyncrasies may lead to an explanation of price to book value. The ANOVA (Analysis of Variance) results are along expected lines: the F statistic has a value of 14.04 and is significant at the 1% level. The regression table with the coefficients, t-value and the corresponding p-values for the study variables is outlined in Table 4.

Table 4.

Results of Multivariate Regression.

Variables	Coefficients	Standard Error	t-Stat	P-value
Intercept	–0.351	0.610	–0.575	0.565
CSR_INTENT	–0.203	0.841	–0.241	0.809
AGE	0.012	0.006	2.075**	0.038
PROM_STAKE	3.004	0.905	3.321***	0.001
FOREIGN_PROMSTAKE	7.937	1.320	6.014***	0.000
FII_STAKE	13.759	1.819	7.565***	0.000
SIZE	0.000	0.000	–1.570	0.117
EMPPRODUCTIVITY_PERCAPITA	0.006	0.002	2.822**	0.005

Source: The author.

Notes: *** Significant at 1% level, ** Significant at 5% level.

The regression results indicate support for all the hypotheses under ownership characteristics. Hence, hypotheses H_1a, H_1b and H_1c are supported. The sign is along expected lines. Similarly, we notice that the resource productivity also strongly influences the firm performance as indicated by the results. The control variable age indicates an effect on the firms’ performance while size shows no impact. The legacy factors or the set of favourable characteristics and competencies intrinsic to the firms, developed over the years may be captured in the rather oversimplified proxy, age of the firm. Strategy scholars used VRIO frameworks, where the letter ‘O’ indicates organisation (or) organised to capture value: this reinforces the capability of firms to deliver market linked perceptions of performance based on value gained over several years of existence and actively competing in the marketplace.

Conclusions, Implications for Practice

The West frowns upon larger stakes held by promoters. However, our study restricted to the Indian firms shows that larger share of ownership held by the founders/promoters has been accepted as well as appreciated by the markets. This implies that legacy firms from business houses such as Tata, Birla and the Reliance group of companies may continue to perform and exceed expectations of stakeholders. The logic holds true for other, not so well known firms as well. Similarly, foreign ownership has also met with appreciation from the markets as seen by the statistically significant results; this indicates that investors reward firms that have a foreign hand in the business. Investors possibly equate foreign ownership with better governance characteristics internally; additionally, foreign ownership has been shown to result in higher level of transparency as well as voluntary disclosures leading to a virtuous cycle; in turn better market based measures of performance can be seen. For practitioners, it implies that firms do not need to follow the western model of ownership. Western firms rely more on impartial, neutral stance to leadership, where owners or founders of firms have little say. In fact, recent trends indicate that some of the founders are forced to exit, case in point being that of Travis Kalanick of Uber. This is relevant considering that western firms depend on upholding the highest levels of corporate governance.

Surprisingly, initiatives from CSR have not been recognised in the form of firms’ performance in the markets. Stakeholders seem to observe that firms do engage and actively participate in social and community development activities since they are documented formally in the annual reports of firms besides being discussed in the business press. Our sample indicates the absence of a significant influence on firm performance. Possible reason could be that CSR is undertaken largely to satisfy the regulator which has imposed a minimum of 2% of after-tax profit to be spent on such activities. Yet, in the real world, firms need to undertake socially rewarding and concomitant activities in addition to their laser-sharp focus on business performance and sustenance. Another reason is that most of the newer firms tend to utilise the services of not-for-profit organisations or non-governmental organisations which would channel the funds as well as direct the efforts in community and social development activities. Markets are aware of this mechanism and they may not be fully in agreement with the processual aspect, leading them to discredit the efforts of firms.

The contribution of people to business results is quite complex. People contribute by way of routinely assigned tasks, they contribute creatively whenever firms pursue new products and engage in innovative activities. For a large set of mature industries, the contribution of people is mostly through routine sets of activities. In that sense, the significant influence of resource productivity on firms’ market performance is quite serendipitous. Our metric of revenue per employee indicates simple computation; however, the marketplace seems to also intuitively perceive the revenue generated per employee. Therefore, every unit of resource is recognised by the stakeholders. Hence, the people dimension and its significance assumes considerable import as we view the results of the research. Does it indicate that people and their tasks are equally important along with the innate skills and unique set of competencies that they bring to the workplace? This may call for more longitudinal studies covering longer time spans and more industries as well.

At a broader level, we observe that governance indicators of ownership continue to hold sway for investors. This means that shareholders and investors are looking at annual reports, deciphering directly available data points pertaining to promoters, their controlling stakes as well as the influence of overseas institutional investors. For practitioners, it implies moving beyond ownership, resource productivity and understanding how other strategic, organisational levers can be understood with a view to enhancing market performance; this is also buttressed by our explanatory metric R², which merely indicated 1/10th of the overall performance metric that could be influenced by the variables under study. Hence, for academicians and practitioners, further fine-grained studies may need to be taken up for such a better understanding of performance can be obtained.

Footnotes

Declaration of Conflicting Interests

Funding

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

ORCID iD

John Ben Prince

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