Do Board Quality and Promoters’ Holdings Affect Firm Performance? Evidence from Small and Medium-sized Enterprises

Abstract

Unlike large businesses, small and medium-sized enterprises (SMEs), being a key growth driver in accomplishing immeasurable socio-economic objectives, possess different governance structures and face unique governance issues. Through the agency perspective, this research endeavours to pore over how the quality of their board affects the performance of SMEs in India. A regression model was run applying heteroscedasticity robust standard errors (RSE) on a sample of 68 BSE-listed SMEs for the period from 2013–2014 to 2017–2018. The results of the regression of the performance of the SMEs against their board attributes showed the prominent contribution of high promoters’ shareholding, signifying that SMEs with a highly concentrated ownership structure demonstrate better performance. Firm leverage and firm performance were shown to have a positive and significant relationship with each other, suggesting that levered firms display substantially better performance. On the other hand, it was found that increasing the number of independent directors and female directors does not necessarily result in improved firm performance. This finding suggests that tokenism, that is, appointing independent directors and female directors merely to comply with norms but not in true spirit, can reduce a firm’s performance. This research effort contributes to the literature constructively through explaining the linkage between board quality and the performance of SMEs, particularly in the Indian context, and has implications for the escalation of governance standards through bringing more clarity to and streamline policy and disclosure.

Keywords

Corporate governance SMEs board quality ownership structure firm performance

Introduction

The extensive body of scientific research endeavours and anecdotal shreds of evidence show that well-governed and well-managed enterprises exhibit substantially healthier long-term financial conditions and that they are nurtured quicker, with more sustainability. On the other hand, lower governance standards lead to financial irregularities and other malpractices, resulting in catastrophic failure. Adopting and implementing good governance is a long excursion that requires persistent efforts, and the faster enterprises espouse good practices, the more benefits they can generate. In practical terms, governance provides a key set of standards that firms can practise for their competitive survival and progression. However, most of the theoretical and empirical research works on governance issues deal with the context of large enterprises (Gabrielsson & Huse, 2004). In fact, healthy governance practices also succour small and medium-sized enterprises (SMEs) to get funding from investors (Abor & Adjasi, 2007). For an emerging and transactional economy like India to grow and sustain the growth at an accelerated, or even the same, pace in a volatile environment where a lot of structural changes take place, SMEs hold the added allure of being a key growth driver. Being nimble and agile, they are more willing to innovate than their larger and better-established peers. Over a number of years, SMEs have played a substantial role in India’s growth saga through their contribution in the attainment of innumerable socio-economic goals, such as employment generation, higher growth of output, exports promotion, enabling of entrepreneurial spirit and fostering of innovation. Over 51 million SMEs have contributed immensely towards industrial growth, providing employment and entrepreneurial opportunities in both urban and rural areas.¹ Per a 2016 report by the Ministry of Micro, Small and Medium Enterprises, India, SMEs provided employment to over 80 million people, contributed up to 8% of the GDP, 45% of manufacturing output and contributed to above 40% of the exports through their 6,000-plus products.

In the face of the opportunity available, there are quite a few critical issues that draw our attention. Governing firms based on a certain set of doctrines and standard procedures, for example, even internal controls mechanism, when appropriately planned and framed, aids preventing fraud and provides for more precise and truthful financial reporting and planning. Transparency in their systems and processes can be used by SMEs as a core value proposition in inviting various investors, such as private equity and venture capital firms, ensuring them more risk coverage and better yield on investment.

Corporate governance refers to the management and control of officials. In this context, the agency theory views the board of directors as critical to monitoring to ensure that issues that may arise on account of principal–agent relationships are lessened. Various researches attribute good governance to different factors such as board independence, board leadership structure, gender diversity and ownership pattern (Bonn, 2004; Daily & Dalton, 1992; Dalton et al., 1999; Scholtz & Kieviet, 2018) in a firm. However, several unique characteristics of SMEs distinguish them from firms and lead to distinctive governance issues. While these literatures provided valuable insights into diverse governance arrangements and systems, it cannot be generalized for SMEs as many of these businesses are not widely held by the promoters and governance matters are quite entangled than in large firms (Cowling, 2003). In SMEs, the shareholding pattern is in such a way that the members of the board and those at the higher management level often overlap with each other.

Corporate governance, being an emergent area of investigation, is mostly discussed in the context of large enterprises and extended to scholarly work with regard to SMEs. However, very few scholarly works with respect to SMEs have been undertaken in the context of emerging countries Eisenberg et al., 1998). Hence, in this article, an attempt is made to carefully examine the attributes of corporate governance, such as ownership pattern, board size and independence, board leadership structure, gender diversity and board meetings, that affect performance in the case of listed SMEs, particularly in the context of India, one of the emerging economies. A robust standard errors (RES) regression analysis is carried out for the chosen sample of 68 listed SMEs for the period from 2013–2014 to 2017–2018.

This article is structured as follows. The second section reviews the existing literature and frames the hypotheses. The third section discusses the data collection process and the methodology used. The fourth section deals with the empirical results and entails a discussion. The last section concludes the article and states the implications of the study.

Literature Review and Hypotheses

There are ample studies related to corporate governance and firm performance. However, most of these studies were done in the context of large listed firms (Anderson & Reeb, 2003; Dalton et al., 1999). Moreover, there is no conclusive information in the results of the empirical works on the connection between corporate governance and enterprise performance (Kumar, 2004; Pintea & Fulop, 2015). Corporate governance refers to the means of governing the relations between the owners and managers of an enterprise, and entrepreneurship can be defined as ‘entrepreneurial behavior and the pursuit of entrepreneurial opportunities by existing firms’ (Rigolini, 2007). Though SMEs are likely to have limited resources and strategic options relative to well-established firms, good governance practices enhance entrepreneurial actions and thus their performance (Tan & Tan, 2004). Given the aforesaid statements, the existing literature related to board attributes and firm performance is reviewed below.

Promoters’ Ownership

Shareholders’ ownership is an internal-governance mechanism, and it has an impact on the governance structure of any enterprise (Lins, 2003). The role of ownership is important as a mitigating instrument to solve agency issues (Fama & Jensen, 1983). Several costs and benefits ascend from the ownership structure that a firm has. Agency issues arise even when there is an incongruity between ownership and control. Berle and Means (1932) argued that the segregation of ownership and control can result in owners–managers conflict. Particularly, widely held companies where board members may be unable or unwilling to monitor the management ultimately show poor performance. The shareholders, being the owners of the company, supply funds and want the maximum value for their funds from the managers (the agents) to generate the maximum returns. An agency issue arises due to a clash of interests either between the management and the shareholders or between the two categories of principals—the controlling shareholders (the principal blockholders and the dispersed minority shareholders). When the promoters’ shareholding is larger, chances of divergence of funds through pyramid structures or tunnelling of profits are more, as the promoters may take advantage of the difference in the cash flow and control rights. They misuse their power and resources and expropriate corporate opportunities for personal ends at the cost of minority shareholders. Interestingly, in Asian countries, including India, a concentrated ownership structure is a quite common phenomenon, and it is the rule, rather than the exception. A group of authors conducted a study and applied the ownership trace model propounded by La Porta et al. (2000) to explore the ownership pattern of East Asian enterprises and revealed that over two-thirds of the listed companies in Asian countries except Japan are controlled and managed mostly by a sole shareholder, or by controlling shareholders. Moreover, there is another opinion that concentrated ownership can raise risk aversion and lack of motivation for change at the strategic level, such as diversification or entry into new global marketplaces (George et al., 2005; Hoskisson et al., 2000). On the flip side, however, controlling shareholders may have long-term commitment, efficiency and strong incentives to engage in the maximization of the firm’s earnings. Even family-owned SMEs which are not widely held have an unswerving and complete understanding of the internal matters (Cowling, 2003). Their holding of substantial stocks may incentivize them to oversee the top management and thereby promote the better performance of the enterprise. Thus, taken together, concentrated shareholding has both benefits and costs. Several scholars have scrutinized the linkage between ownership structure, especially block ownership, and firm performance, but only in the setting of large businesses. However, past studies have revealed that SMEs are family-owned and managed by their owners. Given this, it would be interesting to examine the influence of promoters’ holdings on the value of SMEs. Accordingly, in this study, large promoter shareholdings are hypothesized to significantly affect the performance of SMEs.

Ha1: Promoter ownership interacts positively with the performance of SMEs.

Board Quality

Another important criterion for raising the governance standards is the quality of the board. Investors have no choice but to rely on the board for the strategic decisions and actions it takes for the accomplishment of a firm’s objectives, as they cannot see through the boardroom veil. A large stream of researchers have argued that the quality of the board determines its effectiveness in performing its functions smoothly. An effective board can make maximum contributions through providing insights and foresight to the management. It is also the responsibility of the board to oversee the management and mitigate agency issues (Shleifer & Vishny, 1997). The performance of a board primarily depends upon its structure (Dalton & Dalton, 2011; Škare & Hasić, 2016). The quality of a board is determined by its independence, in the true sense, its deliberate composition, in terms of diversity, and the alignment of its competencies with and support for the company’s forward-looking strategies resulting in long-term value creation. A reasonably active and engaged board can create and deliver maximum value to its shareholders (Das & Dey, 2016).

The problem in India and in much of the world is that most companies engage in symbolic governance, whereby they adopt practices either in response to external demands or to comply with legal requirements but not in true spirit, resulting in their having an inept board. In an era where environmental, social and governmental changes are taking place, primacy of the shareholders is the ultimate goal, irrespective of the firm’s size. With the recent regulatory reforms in India, many companies have been triggered to engage in an assessment of their board structure and composition. The major governance issue triggering all kinds of structural and regulatory changes around the globe is the safeguard of the interests of minority shareholders, especially when firms are more exposed to the environmental, social and governance risks. Such risks are more prevalent when a firm spreads its wings beyond its territory and seeks global investments. The issues related to governance are very much prevalent in the context of small and medium firms. In fact, owners of small and medium firms may be more concerned about the survival and growth of their enterprises. Past studies pertaining to the various board attributes are discussed below.

Board Size

A huge amount of research works have been undertaken to study the linkage between the board quality and the performance of large listed companies in various countries (Dalton & Dalton, 2011; Das & Dey, 2016; Mehrotra, 2016; Mehrotra & Mohanty, 2018). The size of a firm’s board as an important attribute determining its effectiveness (Raheja, 2005) has its limit in contributing to the performance of the firm, as a large board size may obstruct the group dynamics and discourage board performance (Eisenberg et al., 1998; Lipton & Lorsch, 1992), whereas a small board size can lead to another set of problems. Sometimes, large boards may encounter the problem of coordination and long board processes and may be less efficient in resolving agency issues. Thus, the effect of board size on firm value is a trade-off between costs and benefits. Given this, it would be interesting to examine the effect of board size on the performance of SMEs.

Ha2: Board size significantly affects the performance of SMEs.

Independent Directors

Another debatable and widely analysed attribute defining the board quality is the independence of the board (Bonn, 2004). Though the agency theory favours the idea of an outsider-dominated board for the sake of independence, some firms prefer majorly having insiders on the board (Agrawal & Knoeber, 1996; Bhagat & Black, 2002). However, one stream of researchers found no linkage between the board arrangement and the firm performance (Chiang, 2005; Hermalin & Weisbach, 1991; Lappalainen & Niskanen, 2009). Underlining the agency theory’s view that independent directors constitute a more influential and competitive board, it is expected that the potential paybacks of an outsider-dominant board are more than the potential costs. A small-sized firm may have a relatively small board size, with less outside directors. In most cases, they rely on limited internal resources, with limited in-house knowledge. However, the presence of outside directors in a small-sized firm’s board may bring more resources and provide more insights, knowledge and strategic networks to the firm. Thus, it can be proposed that the presence of a higher proportion of independent directors in a firm’s board has a positive influence on the performance of the enterprise, forming the following hypothesis.

Ha3: The presence of a high proportion of independent directors improves the performance of SMEs.

Gender Diversity

Diversity in the board, especially gender diversity, is an important factor in strengthening the governance of an enterprise. It is argued that a diversified board can offer both challenges and opportunities. Significant research has shown that leaders with diverse backgrounds and experiences bring different perspectives and cultivate more innovative ideas. A diverse board may also signal a competitive management and raise the confidence of the investors. However, a few researchers have also raised the issue that bringing gender diversity into recruitment practices should not be a number game of token representation or an obligation. A diversified board may encourage dialogue and the exchange of ideas (Watson et al., 1993), resulting in the better performance of a firm (Rose, 2007; Scholtz & Kieviet, 2018). However, some studies have shown that the presence of female directors is adversely linked with the performance of an enterprise (Low et al., 2015; Shehata et al., 2017).

Ha4: Female directors improve the performance of SMEs.

Board Leadership Structure

Another significant governance measure defining the quality of a board is its leadership structure. It is highly recommended by most committees and disclosure rules across the globe, including India, that the role of the chief executive officer (CEO) or managing director and chair be detached and not be held by the same board member. The separation of these roles decreases agency issues and enhances firm performance (Berle & Means, 1932; Lew et al., 2018). It brings about a new strategic outlook and boosts the overall independence of the board. However, a few studies show that the majority of the US public-traded companies maintaining a combined board leadership structure display high firm performance (Mehrotra, 2015).

SMEs vary in different ways from large listed companies and contain a more concentrated ownership structure, resulting in CEO duality being a very common and prevailing practice among them. A centralized leadership structure may lead to power imbalance and ultimately may bring down the performance of a firm. Given this, it is proposed that separating the roles of CEO and chairperson enhances the performance of SMEs.

Ha5: Separating the roles of CEO and chairperson positively affects the performance of SMEs.

Board Meetings

Another board attribute is how active a board is in terms of meetings held in a financial year, a factor that possibly carries implications for governance, as it is cheaper to fine-tune the meetings’ frequency to accomplish good governance than to alter the configuration of the board or the shareholding structure. Though conducting meetings incurred costs, including managerial time for directors to deliberate, establish strategies and monitor officials, travel expenses, sitting fees and other administrative expenses, the frequency of the meetings of a board can help to easily assess whether the board is active. However, it is also argued by the researchers that high frequency of meetings were valued less (Vafeas, 1999), in case if the firm performs poorly, the board members are likely to be vigorously inspected by shareholders and may meet quite ofter to cope with the deteriorating firm value. An alternative viewpoint is that a higher meeting frequency is crucial to enhancing operations and earnings, which is consistent with the agency theory. Hence, the frequency of board meetings is a vital factor affecting firm value. Thus, we hypothesize that it has a significant effect on SMEs’ performance. Despite huge empirical consideration, there is very little literature examined the performance of small and medium enterprises with respect to the board quality.

Ha6: A high frequency of board meetings negatively affects the performance of SMEs.

Research Methodology

Data

The sample for this study initially comprised 151 enterprises listed on the BSE as on 14 September 2016. Data were gathered for the period from 2013–2014 to 2017–2018. Out of the 151 SMEs, 18 companies migrated to the main board, so we were left with 133 companies. The most of the SMEs are listed on BSE only in the year 2013, so the firms which do not have complete data have been excluded for the purpose of analysis. The banking and financial units were excluded for the purpose of the analysis, as the firms follow distinctive accounting procedures and practices, to ensure consistency and standardization in the collection and measurement of the variables. The final sample consisted of 68 listed SMEs. We retrieved governance-related data and accounting information from the annual reports of the SMEs available on their websites.

Selection and Description of Variables

For measuring the financial performance of the SMEs, ROA (return on assets) is used as a proxy. It is calculated as the net return yield by an enterprise on the assets it has invested in. This helps gauge how profitable a firm is in relation to its total assets and has been widely used in several studies (Ararat et al., 2010; Bhagat & Black, 1999; Jackling & Johl, 2009; Sarkar & Sarkar, 2009). In India, it is required for all listed businesses to comply with SEBI’s (Securities and Exchange Board of India) LODR (Listing Obligations and Disclosure Agreement) Regulations, 2015, in order to incorporate corporate governance practices. We used the debt-to-equity ratio and total assets value as control variables to capture the size effect and the industry effect, respectively. The debt-to-equity ratio reflects long-term solvency and explains the effects of financial leverage on performance. Storey suggests that firm-specific characteristics, such as firm size, age, etc., contribute to the progress of SMEs. They are measured by dividing the total debt by the equity shares (Sarkar & Sarkar, 2000). The natural log value of the total assets is used to evaluate the size of an enterprise (Anderson & Reeb, 2003; Wang, 2006).

Descriptive statistics, correlations and finally regression model was run. The following is the regression model:

\begin{array}{l} Y (R O A) = α + β_{1} P O + β_{2} B S + β_{3} I D + β_{4} F D + \\ \begin{matrix} \begin{array}{l} β_{5} M E E T + β_{6} C D + β_{5} F S I Z E + \\ β_{7} L E V + ε i t \end{array} \end{matrix} \end{array}

where:

ROA = return on assets;

PO = promoters’ ownership;

BS = board size;

ID = independent directors on the board;

FD = female directors on the board;

MEET = board meetings;

CD = CEO duality;

FSIZE = firm size; and

LEV = firm leverage.

Empirical Results and Discussion

Table 2 presents the results of the descriptive statistics of the selected variables used in this study. For all the variables, the minimum, maximum, mean, median and standard deviation values are computed.

Table 1.

List of Variables

Dependent variables
1. ROA	Net income/total assets
Independent variables
1. Promoters’ ownership	Percentage of shares held by promoters
Corporate governance
1. Board size	Total number of directors on the board
2. Independent directors	Proportion of independent directors on the board
3. Gender diversity	Total number of female directors
4. Board leadership structure (CEO duality)	If the positions of CEO and chairman of the board is held by the same person, then 1, if not, then 0
5. Board meetings	Total number of board meetings
Control variables
1. Firm size	Natural logarithm of total assets
2. Firm leverage	Debt–equity ratio

Source: The authors.

The minimum and maximum numbers of board members are 3 and 9 respectively. The average board size is 5.89, with an average of 3.45 independent directors on the board, indicating that outside directors constitute more than 50% of the SMEs’ boards. The minimum number of board meetings in a financial year is four, showing that all SMEs comply with the rule related to the frequency of board meetings. Moreover, all SMEs have a minimum of one female director on the board, as revealed by the minimum value. As far as promoters’ ownership is concerned, the minimum percentage is 15, and the highest percentage is 81, which is quite high. It is notable that, there is a concentrated ownership structure in SMEs, as indicated by the mean value (55.10%). Table 2 also shows that the minimum ROA is negative, showing that a few SMEs have destroyed their shareholder value.

Table 2.

Descriptive Statistics

Variables	Minimum	Maximum	Mean	Median	Std. Deviation
BS	3	9	5.89	6.00	1.59
ID	2	8	3.45	3.00	3.04
MEET	4	49	11.6	9.67	9.22
FD	1	3	1.13	1.00	0.38
PO	15	81	55.1	60.29	21.17
FSIZE	2	5	3.29	3.35	0.92
LEV	0	3.17	1.05	0.79	0.95
ROA	−4.99	18.89	4.79	3.22	5.23

Source: The authors.

Table 3 exhibits the correlation results among the variables tested in the study. It may be noticed from the results of the correlation analysis that the size of the board is significantly associated with the proportions of independent directors and female directors on the board, the frequency of board meetings and promoters’ ownership, and with all the control variables. However, the presence of independent directors on the board is adversely correlated with ROA. Another variable that is significantly correlated with ROA is the board leadership structure.

The presence of female directors on the board is considerably associated with the number of board meetings, as well as with the firm size and leverage. Since there is a significant difference between the mean and median of the data of the variables selected for the study (refer to Table 2), it is desirable to conduct a test for heteroscedasticity.

Table 4 provides the results for the White and Breusch–Pagan tests, which again confirm the presence of heteroscedasticity. Hence, the regression model was run applying heteroscedasticity RES, and the statistical outcomes are presented in Table 5. The model is robust and significant at the 5% level.

Table 3.

Correlation Analysis

Variables		BS	IDs	MEET	FD	CD	PO	FSIZE	LEV	ROA
BS	Pearson correlation	1	0.214*	0.339**	0.248**	−0.004	0.518**	0.460**	0.528**	−0.017
	Sig. (two-tailed)		0.016	0.000	0.005	0.961	0.000	0.000	0.000	0.852
ID	Pearson correlation	0.214*	1	−.114	−0.034	−0.224*	0.308**	0.053	0.300**	−0.363**
	Sig. (two-tailed)	0.016		0.203	0.704	0.011	0.000	0.557	0.001	0.000
MEET	Pearson correlation	0.339**	−0.114	1	0.489**	0.133	0.044	−0.025	0.045	0.015
	Sig. (two-tailed)	0.000	0.203		0.000	0.136	0.624	0.784	0.613	0.866
FD	Pearson correlation	0.248**	−0.034	0.489**	1	0.129	0.305**	0.056	0.304**	−0.058
	Sig. (two-tailed)	0.005	0.704	0.000		0.148	0.000	0.535	0.001	0.518
CD	Pearson correlation	−0.004	−0.224*	0.133	0.129	1	0.029	−0.137	0.046	0.252**
	Sig. (two-tailed)	0.961	0.011	0.136	0.148		0.743	0.125	0.606	0.004
PO	Pearson correlation	0.518**	0.308**	0.044	0.305**	0.029	1	0.389**	0.849**	0.054
	Sig. (two-tailed)	0.000	0.000	0.624	0.000	0.743		0.000	0.000	0.548
	Sig. (two-tailed)	0.000	0.557	0.784	0.535	0.125	0.000		0.000	0.043
FSIZE	Pearson correlation	0.528**	0.300**	0.045	0.304**	0.046	0.849**	0.421**	1	0.051
	Sig. (two-tailed)	0.000	0.001	0.613	0.001	0.606	0.000	0.000		0.568
LEV	Pearson correlation	−0.017	−0.363**	0.015	−0.058	0.252**	0.054	−0.180*	0.051	1
	Sig. (two-tailed)	0.852	0.000	0.866	0.518	0.004	0.548	0.043	0.568

Source: The authors.

Note: *Significant at the 0.05 level (two-tailed). **Significant at the 0.01 level (two-tailed).

Table 4.

Test for Heteroscedasticity

Test	F-statistic	p-Value
Breusch–Pagan test	4.590	0.032
White test	5.294	0.002

Source: The authors.

Table 5.

Regression Results with Heteroscedasticity Robust Standard Error

Variables	Regression Model
Variables	Coefficient	p-Value
Intercept	8.972	0.000
BS	0.113	0.296
IDs	−0.444	0.000*
MEET	−0.023	0.818
FD	−0.182	0.060**
CD	0.123	0.141
PO	0.371	0.004*
FSIZE	−0.311	0.001*
LEV	0.306	0.004*

Source: The authors.

Note: R² = 0.522, Adj. R² = 0.371, and F-statistic = 5.032* at p-value 0.001

*Significant at 5%; **Significant at 10%.

The RES regression model confirms that the promoters’ shareholding pattern and leverage positively influence the operating income measured as the ROA of the SMEs. This is in conformity with the findings of of a positive association between promoters’ holdings and firms’ financial performance. They showed that a firm with a highly concentrated ownership structure shows superior performance. However, firm size is found to have a negative effect on the SMEs’ performance, which is in line with the study. Firm leverage and firm performance were found to have a significant positive relationship with each other, suggesting that levered firms perform relatively better. It is interesting to note that the presence of independent directors on the board is shown to negatively affect the firm performance, which is in line with a few previous research articles (Agrawal & Knoeber, 1996; Yermack, 1996); thus, some businesses may prefer insider-oriented boards. The reasons put forward to explain the negative affect of outside directors on a firm’s value may vary. Insider dominated board may make it easier for other directors to view them as potential executives and may assess their skills and knowledge at ease, as insiders may have greater knowledge and information than outside directors (Raheja, 2005). Interestingly, the presence of female directors on the board was also shown to have a negative relationship with the firm performance, which is in conformity with previous studies, like Low et al. (2015). This possibly is due to tokenism, and the finding advocates that the imposition of female-director positions or gender quotas can shrink performance. There could be other possible reasons for the relationship, as mentioned by different researches in their studies related to gender diversity. Wang and Clift (2009) found no strong connection between gender diversity and firm performance, and they stated that due to the very few number of female directors, the results are not conclusive. The another reason, as argued by Matsa and Miller (2011) may be that women director may have certain set of skills which may be suitable in some work environment. As mentioned earlier while discussing the descriptive statistics for gender diversity, most of the companies have only one female director on the board, and the benefits of the presence of female directors cannot be realized if the female representation on the board is negligible (Kramer et al., 2008). Though the high frequency of meetings and CEO duality results in the poor performance of the firms as we hypothesized, it is not statistically proved. Moreover, the board size has no significant effect on firm performance.

Conclusion

This research effort scrutinizes how the quality of the board affects the performance of SMEs in India. Notably, the enormous research literature in this area offers a critical examination of the linkage between firm performance and board quality, but mostly only for large listed firms. Thus, there is an opportunity for strenuous empirical research based on a sample of SMEs, in the Indian context, to narrow down the gap in order to bring more clarity in terms of understanding the linkage between board quality and firm performance. Interestingly, the presence of promoters as principal blockholders on the board of listed SMEs is very much prevalent. Most of the SMEs are family-owned and closely held, where proprietors may often be the managers as well. The empirical results show that high promoters’ shareholding significantly affects the performance of SMEs, signifying that SMEs with a highly concentrated ownership structure demonstrate better performance, as the owners might have long-term commitment, efficiency and incentives to be involved in the maximization of the firm’s value. However, it is found that the presence of outside directors and female directors does not necessarily result in improved firm performance. It might be the case that independent directors and female directors are appointed only to comply with the norms and that the promoters hold the lead positions on the board. Levered firms are shown to perform better, which may be because they are less risky. However, the negative effect of firm size on the performance of the firms indicating ineffective and underutilizations of firms’ assets lead to reduced performance.

Implications of the Study

This research provides insights pertaining to SMEs, especially those in emerging economies, on how to raise governance standards while deciding the board structure, and to regulators and policymakers on the formation of rules and regulations that would result in better performance in the SMEs sector. This study provides empirical and meaningful results on which of the governance indicators pertaining to the structure of the board of SMEs are the most crucial for raising their governance standards. Interestingly, the dominance of promoters adds more value to firms, and outsider directors do not contribute much in enhancing a firm’s performance, which is contradictory to the views of previous studies that included large listed firms in their sample. This indicates that SMEs’ boards are unique in their own ways and that the results found for large listed firms cannot be generalized for SMEs. It further implies that there is a need to mull over the different facets associated with the presence of independent directors on the board of SMEs to ensure the survival of the SMEs. This work solely discusses the effects of governance issues on firm performance in the context of SMEs, based on the accounting measures of performance only. It offers the scope for further academic research endeavours with an increased sample size and more governance variables as well as market-based performance variables to get more accurate results that can be generalized.

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.

Note

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