The Mimetic Behavior of Firms in Choosing Board Structure and the Evolution of Corporate Governance in India

Abstract

Increasingly more and more emerging economies have been reforming their corporate governance structure to bring more independence and accountability to the board of directors and better disclosure norms to safe guard the interests of the investors. In Indian context, the corporate governance reforms were pushed by big corporate houses. The Securities Exchange Board of India, the primary regulator of the capital market in India, implemented the corporate governance reform with the inclusion of Clause 49 in the listing agreement of the companies in the stock market. The enforcement of the Clause 49 by SEBI has been weak. In our sample of 651 firm that were included in the list of BSE500 index between the years 2005-2012 accounting to 4050 firm-year data we found that the firms are increasingly adapting independent board structure with larger representation of independent directors. Drawing upon the new institutional theory, we explain the increase in board's independence is due to firms' action to seek legitimacy in the market. However, this increase in the demand of ID has made the resourceful independent directors to be more selective in joining the board of firms with high performance. Thus, there is an endogeneity problem in determining the effect of board's resources in firm performance. To address the endogeneity problem we estimated a dynamic panel Generalized Methods of Moment estimator and found that board resources have no significant effect on firm performance. The result highlights the concern of how commonly used estimator that ignore the dynamic relationship can bias the result and raises that question about the efficacy of governance reforms in the emerging economies.

Keywords: Corporate Governance, Institutional theory, Resource dependence theory, Generalized Methods of Moments

JEL Classification: G38, P48, C23