Board structure and firm performance : evidence from India's top companies

Manuscript Type: Empirical

Research Question/Issue: This paper investigates the relationship between internal governance structures and financial performance of Indian companies. The effectiveness of boards of directors, including board composition, board size, and aspects of board leadership including duality and board busyness are addressed in the Indian context using two theories of corporate governance: agency theory and resource dependency theory.

Research Findings/Insights: The study used a sample of top Indian companies taking into account the endogeneity of the relationships among corporate governance, corporate performance, and corporate capital structure. The study provides some support for aspects of agency theory as a greater proportion of outside directors on boards were associated with improved firm performance. The notion of separating leadership roles in a manner consistent with agency theory was not supported. For instance, the notion that powerful CEOs (duality role, CEO being the promoter, and CEO being the only board manager) have a detrimental effect on performance was not supported. There was some support for resource dependency theory. The findings suggest that larger board size has a positive impact on performance thus supporting the view that greater exposure to the external environment improves access to various resources and thus positively impacts on performance. The study however failed to support the resource dependency theory in terms of the association between frequency of board meetings and performance. Similarly the results showed that outside directors with multiple appointments appeared to have a negative effect on performance, suggesting that "busyness" did not add value in terms of networks and enhancement of resource accessibility.

Theoretical/Academic Implications: The two theories of corporate governance, namely agency and resource dependence theory, were each only partially supported, by the findings of this study. The findings add further to the view that no single theory explains the nexus between corporate governance and performance.

Practitioner/Policy Implications: This study demonstrates that corporate governance measures utilized in developed economies related to boards of directors have some synergies and relevance to emerging economies, such as India. However, the nature of business structures in India, for example the large number of family businesses, may limit the generalizability of the findings and signals the need for further investigation of these businesses. The evidence related to multiple appointments of directors suggests that there may be support for restricting the number of directorships held by any one individual in emerging economies, given that the "busyness" of directors was negatively associated with firm performance.

Trophic responses to nutrient enrichment in a temperate seagrass food chain

Simple ecological models that predict trophic responses to bottom-up forcing are valuable tools for ecosystem managers. Traditionally, theoretical ecologists have used resource-dependent functional responses to explain the modification of food chains exposed to bottom-up perturbations. These models predict alternating positive, negative and zero responses at each trophic level. More recently, ratio-dependent functional response models that predict proportional increases at each level have challenged this paradigm. The present study tested the predictions of the 2 hypotheses empirically by comparing the relative biomasses of 4 trophic levels of an estuarine seagrass food chain in relatively undisturbed, low-nutrient catchments and ‘developed’ catchments subjected to a prolonged period of nutrient enrichment. We found that nutrient-enriched sites had significantly greater biomass of both epiphytic algae and grazing invertebrates; however, the bottom-up forcing of nutrients was attenuated at higher trophic levels (occupied by juvenile and piscivorous fish), with no significant effect of catchment development. This disconnect in the upward cascade of energy may be due to a number of possible reasons including high levels of diversity and omnivory, trophic subsidy within the system or the strength or nature of perturbations. Although the predictions of both hypotheses failed to hold across all trophic groups, ratio dependence was prevalent at the lower levels of the food chain, which has implications for catchment management.

Ratio-dependent response of a temperate Australian estuarine system to sustained nitrogen loading

Classical resource- and the less studied ratio-dependent models of predator–prey relationships provide divergent predictions as to the sustained ecological effects of bottom-up forcing. While resource-dependent models, which consider only instantaneous prey density in modelling predator responses, predict community responses that are dependent on the number of trophic levels in a system, ratio-dependent models, which consider the number of prey per consumer, predict proportional increase in each level irrespective of chain length. The two models are only subtly different for systems with two or three trophic levels but in the case of four trophic levels, predict opposite effects of enrichment on primary producers. Despite the poor discriminatory power of tests of the models in systems with two or three trophic levels, field tests in estuarine and marine systems with four trophic levels have been notably absent. Sampling of phytoplankton, macroinvertebrates, invertebrate-feeding fishes, piscivorous fishes in Kooloonbung Creek, Hastings River estuary, eastern Australia, subject to over 20 years of sewage discharge, revealed increased abundances in all four trophic levels at the disturbed location relative to control sites. Increased abundance of phytoplankton at the disturbed site was counter to the predictions of resource-dependent models, which posit a reduction in the first trophic level in response to enrichment. By contrast, the increase in abundance of this first trophic level and the proportionality of increases in abundances of each of the four trophic groups to nitrogen loading provided strong support for ratio dependency. This first evidence of ratio dependence in an estuarine system with four trophic levels not only demonstrates the applicability of ecological theory which seeks to simplify the complexity of systems, but has implications for management. Although large nutrient inputs frequently induce mortality of invertebrates and fish, we have shown that smaller inputs may in fact enhance biomass of all trophic levels.

Board structure and firm performance : evidence from an emerging economy

We investigate the relationship between corporate board structure and firm performance of Bangladeshi companies. Using a sample of 654 firm- year observations for the period 2005-2009, the results show some support for aspects of agency theory as a greater proportion of independent directors on boards is related to better firm performance. Supporting resource dependence theory our result also suggest that larger boards provide valuable business experience, expertise, skill and social and professional networks which might add substantial business resources to the firms and thus positively impact on performance. We also find that female and foreign directors in Bangladesh provide more monitoring which leads to better firm performance. Our study contributes to extant research on board structure–performance relationship by providing evidence from an emerging economy context which is characterised by ownership concentration, family dominance and poor regulatory oversight.

The provision of business advice to SMEs by external accountants

Purpose – Business advisory services are an emerging service category for external accountants in the small and medium-sized enterprise (SME) environment. The purpose of this study is to investigate determinants of SME demand for business advice, drawing on the agency theory, relational marketing and resource-based literatures.

Design/methodology/approach – The study empirically tested theoretical predictions based on an Australia-wide survey of SMEs, in which 485 firms responded to a questionnaire.

Findings – The results show that the purchase of business advice is significantly and positively associated with the perceived competence of the external accountant, but significantly and negatively associated with length of the relationship. However, the authors observe a significant positive interaction between tenure of the relationship and competence. A unique contribution of this study is the development of the understanding of the combined role of the external accountant’s competence and the tenure of the relationship. The findings indicate that SMEs require time to verify whether accountants have the competence to provide business advice, suggesting that information asymmetry and uncertainty is minimised only after SMEs have nurtured relationships with their external accountants, and after they have developed some confidence in the competence of their external accountants. At the same time, the negative association with tenure suggests that when accountants are not perceived as competent advisors, SMEs purchase less advice over time.

Research limitations/implications – The paper has important theoretical implications by augmenting agency theory, the relational marketing and the resource-based literature, and it clarifies which antecedent factors are important in explaining demand for business advisory services provided by accountants to their SME clients. In particular, the paper highlights the importance of the combined roles that the external accountant’s competence and tenure play in the SME–accountant relationship, highlighting how these two factors can overcome credence issues and ex ante information problems.

Practical implications – The findings have practical implications for government initiatives targeting support to SMEs, as the findings identify small firms and firms planning to grow as likely to gain the greatest benefit from external advice and support.

Originality/value – This study adds to the limited literature and scant theoretical discussions on the emergence of business advisory services that accountants provide to their SME clients by drawing on several theories to explain the determinants of business advice.

Stress, resource allocation and mortality

We model the optimal allocation of limited resources of an animal during a transient stressful event such as a cold spell or the presence of a predator. The animal allocates resources between the competing demands of combating the stressor and bodily maintenance. Increased allocation to combating the stressor decreases the mortality rate from the stressor, but if too few resources are allocated to maintenance, damage builds up. A second source of mortality is associated with high levels of damage. Thus, the animal faces a trade-off between the immediate risk of mortality from the stressor and the risk of delayed mortality due to the build up of damage. We analyze how the optimal allocation of the animal depends on the mean and predictability of the length of the stressful period, the level of danger of the stressor for a given level of allocation, and the mortality consequences of damage. We also analyze the resultant levels of mortality from the stressor, from damage during the stressful event, and from damage during recovery after the stressful event ceases. Our results highlight circumstances in which most mortality occurs after the removal of the stressor. The results also highlight the importance of the predictability of the duration of the stressor and the potential importance of small detrimental drops in condition. Surprisingly, making the consequences of damage accumulation less dangerous can lead to a reallocation that allows damage to build up by so much that the level of mortality caused by damage build up is increased. Similarly, because of the dependence of allocation on the dangerousness of the stressor, making the stressor more dangerous for a given level of allocation can decrease the proportion of mortality that it causes, while the proportion of mortality caused by damage to condition increases. These results are discussed in relation to biological phenomena.

Resource heterogeneity for stream detritivores

Invertebrate animals in headwater streams depend upon leaves, wood and bark for both food and living space. This project demonstrated the strength of that dependence where the patchiness in habitat is influenced at the smallest spatial scales by the movement of sediments, and at the largest by agricultural clearing.