ESSAYS ON CORPORATE GOVERNANCE IN EMERGING ECONOMY FIRMS DEEKSHA SINGH (B. Tech. (Institute of Engineering and Technology, Lucknow, India)) A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY DEPARTMENT OF STRATEGY AND POLICY NATIONAL UNIVERSITY OF SINGAPORE 2011 ACKNOWLEDGEMENTS I needed a great deal of encouragement and support to embark on my journey to obtain a PhD. As this journey comes to an end, I would like to acknowledge the great support I have received from several people, without which this journey would not have been started, much less completed. First, and foremost, my sincere thanks go to my thesis committee chair, Andrew Delios, for his encouragement, support, guidance, and training. Andrew has been a wonderful advisor and mentor, who always amazed me with his compassion, enthusiasm, energy, accessibility, promptness, and above all, his patience. He has been exceptionally generous with his time and effort. To me he is not only a great academic and a model of excellence in scholarship, but also a wonderful person. I also received invaluable guidance and support from my thesis committee members, Sea-Jin Chang and Young-Choon Kim at various stages of the development of my thesis. Several other professors helped me in many ways. an inspiration and role model as an academic and a person. Jane Lu has been Jayanth Narayanan, Daniel McAllister, and Sai Yayavaram were always there to listen to my problems and calm me when I had frustrations. I will remain indebted to them, and many other professors, for their guidance and support. The PhD program staff – Woo Kim, Wendy, Jenny, and Hamidah – made it so easy for me to handle administrative issues. received from them. I gratefully acknowledge the support I I must also acknowledge the help and support I received from friends in the PhD program. Special mention must go to Sankalp, Tanmay, Mayuri, and Gu Qian. I would also like to thank my parents for their encouragement and faith in me. They have been a source of strength and inspiration. Finally, no words can express my thanks to my lovely daughter Dishita, and my very supporting husband Ajai. Even with the pressures of his own academic job, he always had time to listen to my ideas, read my works, and provide critical, yet encouraging comments. Thank you all! ii TABLE OF CONTENTS ACKNOWLEDGEMENTS . ii LIST OF TABLES v LIST OF FIGURES vi SUMMARY . vii CHAPTER ONE INTRODUCTION . OVERVIEW OF THE RESEARCH QUESTIONS . Essay 1: Ownership Structure, Group Affiliation and Board Composition Essay 2: Corporate Governance, Board Networks and Growth Strategies . Essay 3: Corporate Governance, Board Networks and Firm Performance . EMPIRICAL CONTEXT CONTRIBUTIONS . 10 Theoretical Contributions . 10 Empirical Contributions . 11 STRUCTURE OF THE DISSERTATION 12 CHAPTER TWO 13 THEORETICAL CONSTRUCTS AND EMPIRICAL CONTEXT 13 THEORETICAL FOUNDATIONS 13 CORPORATE GOVERNANCE IN INDIA 20 Indian Economy . 20 The Governance Model 21 Corporate Governance Prior to Liberalization (1991) . 22 Corporate Governance Post Liberalization (1991) 25 BOARD OF DIRECTORS 31 Different Roles of a Board . 31 Governance Context and the Relative Importance of Board Roles 34 Board Antecedents . 37 Board Members and Network Relationships . 39 OWNERSHIP STRUCTURE . 40 Family Ownership . 41 Business Group Affiliation . 45 SUMMARY 46 CHAPTER THREE . 49 OWNERSHIP STRUCTURE, GROUP AFFILIATION AND BOARD COMPOSITION 49 THEORY AND HYPOTHESES . 52 Background . 52 Family Ownership and Board Composition 54 Business Group Affiliation and Board Composition . 57 The Joint Effect of Family Ownership and Group Affiliation . 59 iii DATA AND METHODS . 61 Sample . 61 Variables . 62 Analytic Procedure 63 RESULTS 64 DISCUSSION AND CONCLUSION . 69 CHAPTER FOUR . 73 CORPORATE GOVERNANCE, BOARD NETWORKS AND GROWTH STRATEGIES 73 THEORY AND HYPOTHESES . 75 Background . 75 Board Structure and Growth Straetgies 77 Network Effects and Growth Strategies 81 Family Ownership and Growth Strategies 83 The Contingent Value of Board Structure 87 DATA AND METHODS . 93 Sample . 93 Variables . 93 Analytic Procedure 96 RESULTS 97 Growth in the Domestic Market . 97 Growth in the Foreign Markets 101 DISCUSSION AND CONCLUSION . 105 CHAPTER FIVE 109 CORPORATE GOVERNANCE, BOARD NETWORKS AND FIRM PERFORMANCE 109 THEORY AND HYPOTHESES . 112 Board Structure and Firm Performance 112 Family Ownership and Firm Performance 115 Network Effects and Firm Performance . 117 The Contingent Value of Board Structure 119 DATA AND METHODS . 124 Sample . 124 Variables . 124 Analytic Procedure 125 RESULTS 126 DISCUSSION AND CONCLUSION . 131 CHAPTER SIX 137 DISCUSSION AND CONCLUSION . 137 SUMMARY FINDINGS 137 CONTRIBUTIONS . 139 FUTURE DIRECTIONS 143 BIBLIOGRAPHY . 145 iv LIST OF TABLES Table 2.1: Review of Governance Studies in Finance Literature 15 Table 2.2: Institutional and Governance Reforms in India 30 Table 3.1: Descriptive Statistics and Correlations (Chapter 3) 65 Table 3.2: Results of Random Effects GLS Estimation on Board Independence . 66 Table 3.3: Results of Panel Data Logit Estimation on CEO Duality . 67 Table 3.4: Summary of Hypotheses and Results . 68 Table 4.1: Descriptive Statistics and Correlations (Chapter 4) 98 Table 4.2: Results of Panel Data Negative Binomial Estimation on New Domestic Projects (I) 99 Table 4.3: Results of Panel Data Negative Binomial Estimation on New Domestic Projects (II) 100 Table 4.4: Results of Random Effects GLS Estimation on Foreign Investments (I) . 102 Table 4.5: Results of Random Effects GLS Estimation on Foreign Investments (II) . 103 Table 4.6: Summary of Hypotheses and Results . 106 Table 5.1: Descriptive Statistics and Correlations (Chapter 5) 127 Table 5.2: Results of Random Effects GLS Estimation on Firm Performance (I) 128 Table 5.3: Results of Random Effects GLS Estimation on Firm Performance (II) 129 Table 5.4: Summary of Hypotheses and Results . 131 v LIST OF FIGURES Figure 1.1: Research Framework . Figure 3.1: Interaction between Family Ownership and Group Affiliation 69 Figure 4.1: Growth through New Domestic Ventures . 91 Figure 4.2: Growth through Foreign Investments . 92 Figure 5.1: Theoretical Model (Chapter 5) . 123 Figure 5.2: Interaction between Board Independence and Family Ownership . 133 Figure 5.3: Interaction between Board Independence and Network Centrality 133 vi SUMMARY I link agency theory and resource dependence theory with an institutional theory perspective to identify the antecedents of board structure, and the strategic and performance consequences of board structure. I focus on family ownership and business group affiliation as determinants of board structure, which I measure by the presence of independent directors and CEO duality. With respect to growth strategies, I focus on growth through new domestic ventures and growth through new foreign investments. The dissertation has three essays. Essay one examines the effect of family ownership and business group affiliation on board composition. the first one to investigate the growth strategies of firms. Essay two builds on I examine the individual and joint effects of board structure, network centrality through board interlocks and ownership structure on firm‘s growth strategies. In Essay three, I examine the performance consequences of board structure, network centrality and ownership structure. I also investigate the contingency conditions which make board independence less or more valuable for emerging economy firms. The empirical analysis is based on a longitudinal sample of 2,689 publicly listed Indian firms over a nine year period from 2001-2009. The sample includes all the publicly listed firms that have filed the board information with the leading stock exchange in India. The board level data comprises longitudinal board membership information involving more than 20,000 unique directors over nine years (2001-2009). I obtain data from three sources – Bombay Stock Exchange (Directors Database), Prowess, and Capex to create a longitudinal profile of firms in my sample. The empirical analyses largely support my arguments. With respect to the board composition, I find family ownership to be positively related to the presence of vii independent directors and CEO duality. Firms affiliated to a business group have more independent board members and are less likely to have CEO duality. Group affiliation also interacts with family ownership such that a high family ownership in group affiliated firms leads to a reduced incidence of having independent board members and an increased incidence of having CEO duality. Regarding the growth strategies, I find that boards that are structured keeping in view the resource dependence role are more helpful in pursuing growth strategies. I find that firms having more independent board members and CEO duality are more likely to pursue growth through new domestic ventures or new foreign investments. Moreover, firms that are more central in the network of other firms, based on director interlocks, are more likely to pursue growth in domestic as well as international markets. I also find that firms with higher family ownership are more likely to pursue growth through international expansion and less likely to pursue growth through new domestic ventures. Further, I find that board independence interacts with network centrality and family ownership in affecting a firm‘s growth strategies. With respect to the performance consequences of firm level governance, I find that family ownership, presence of independent directors and separation of the role of CEO from board chair are positively related to firm performance. Additionally, directors also help firms become central in the network of other firms, and firms that are more central in a network outperform those that are less central. Board independence also interacts with family ownership and network centrality in affecting firm performance. viii CHAPTER ONE INTRODUCTION For long, the scholarly research on corporate governance (CG) has attempted to prescribe a ―one size fits all‖ model (Coles, Daniel & Naveen, 2008; Judge, 2009). Yet, as is evident from several meta-analytic studies, there is no consensus about the efficacy of various governance practices for different types of firms (Dalton & Dalton, 2011). With its focus on establishing universal links between different governance mechanisms and firm performance, the extant literature mostly ignores how organizations interact with their environment, which might lead to variations in the effectiveness of different governance mechanisms in different contexts (Aguilera, Filatotchev, Gospel, & Jackson, 2008; Hambrick, Werder, & Zajac, 2008). Most of the empirical research on corporate governance is limited to applying agency theory (Judge, 2009). With a few exceptions (Choi, Park & Yu, 2007; Dahya, Dimitrov & McConnell, 2008), extant literature fails to utilize the richness that a multi-theoretic approach and contextual variation can bring to the study of firm governance. The importance of context in shaping a firm‘s structure, strategy and performance is well established in strategy research (Hambrick et al., 2008). In particular, research in emerging markets suggests that the theoretical lenses and approaches that have been used to analyze firms based in developed markets may have to be qualified with contextual contingencies when analyzing emerging market firms (Wright, Filatotchev, Hoskisson, & Peng, 2005). Consistent with this, several scholars have found that emerging market firms experience different types of governance problems than developed market firms (Dharwadkar, George, & Brandes; 2000; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). As a result, it is often argued that agency theory is not the most suitable lens to analyze governance issues in all types of firms, and in all contexts. However, even in the case of research in emerging market firms, the focus continues to be on agency problems (Singh & Gaur, 2009). An important question that is unanswered in the extant governance literature is, ―How firms choose different corporate governance mechanisms, and how different governance mechanisms interact with each other and the external environment in affecting a firm‘s strategic choices and performance?‖ Even though board structure and its impact on firm level outcomes have received a great deal of attention in the governance literature, there is relatively little empirical research on the antecedents of board structure (Linck, Netter, & Yang, 2008). Likewise, there is a lack of systematic evidence on the consequences of board structure for firm strategy and performance in the context of emerging economies in general, and Indian firms in particular. In this dissertation I address this issue in the form of three essays using a multi-theoretic framework, integrating agency theory and resource dependence theory with institutional theory. 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Journal of Business Venturing, 18: 495-512. 162 [...]... external environmental factors My focus on governance in group affiliated firms would provide fresh insights into the functioning and logic of business groups in emerging economies Empirical Contributions This dissertation is situated in the context of an important emerging economy – India Indian context provides a useful laboratory setting to test several theoretical concepts advanced in recent studies... level information and information on growth initiatives Firm level information comes from Prowess database of the Center for Monitoring the Indian Economy (CMIE), which has information on about 20,000 Indian firms I obtained information on new domestic ventures from Capex database (CMIE), which has information on more than 50,000 new capital projects started by Indian firms STRUCTURE OF THE DISSERTATION... empirical context of this dissertation First I elaborate on the nature of Indian economy and the governance model adopted by Indian firms This is followed by a discussion of the evolution of governance standards in India in two distinct time periods – from independence (1947) till 1991, and from 1991 onwards Indian Economy India experienced a robust economic growth after it initiated market liberalization... dissertation investigate the following three questions: 1 What are the antecedents of board structure in an emerging economy context? 2 How does firm governance affect firms growth strategies in an emerging economy? 3 What is the relationship between firm governance and firm performance in an emerging economy? Figure 1.1 presents the broad overview of the above research questions Following the figure, I give... privatization programs in 1991 India is the 4th largest economy in terms of purchasing 20 power parity and 11th largest economy in terms of gross domestic product (GDP), with a GDP of US$ 1.3 trillion in 2009-10 investment after China and US It is the third most favorite destination for foreign According to the Indian Commerce Ministry, inward foreign direct investments have increased from US $3.6 billion in. .. regulations is A case in point is Satyam Corporation, which was one of the top three information technology companies in India in 2008 Satyam won the Golden Peacock Award for the best governed company in the world in 2008 Within a month of winning this award, it was discovered that Satyam was involved in one of the biggest scandals in the corporate history of India (Gaur & Kohli, 2011) Widespread corruption... (2001-2009), making India a suitable empirical setting Last, in recent years, firms from advanced economies have shown a great deal of interest in the Indian market and Indian firms Indian firms have also (Knowledge@Wharton, 2011) become quite active in the global market Analyzing the growth strategies of Indian firms, in the domestic as well as international markets is important for strategy and international... examine growth through investments in new capital projects With respect to international growth strategies, I examine growth through new foreign investments Emerging market firms have traditionally operated in international markets primarily through exports A shift from an international operating strategy based on exports to that based on a combination of FDI and exports is a major change in the international... helped in improving the functioning of Indian stock markets Following economic liberalization, it became imperative to initialize stock market reforms to enable Indian markets to attract investments from foreign institutional investors The first initiative to improve CG practices was undertaken by Confederation of Indian Industry (CII) which is an association of major Indian firms A committee comprising... for 90% of the market capitalization of BSE, nearly 60% belong to business groups The ownership in Indian firms is concentrated and the finance needed for business activities is mostly provided by the financial institutions According to Topalova (2004), in 2002 the controlling families held as high as 48.1% shareholdings in all Indian companies Indian corporate environment is also characterized by pyramidal . and logic of business groups in emerging economies. Empirical Contributions This dissertation is situated in the context of an important emerging economy – India. Indian context provides a. Monitoring the Indian Economy (CMIE), which has information on about 20,000 Indian firms. I obtained information on new domestic ventures from Capex database (CMIE), which has information on. performance in the context of emerging economies in general, and Indian firms in particular. In this dissertation I address this issue in the form of three essays using a multi-theoretic framework, integrating