Determinants of Corporate Governance Disclosures: Evidence from the Companies in Northern India Dr. Anurag Pahuja E-mail:
[email protected] Faculty-Finance, Apeejay Institute of Management,Rama Mandi-Hoshiarpur Road, Jalandhar, Punjab (India) Associate Editor, Apeejay Journal of Management & Technology Dr. B.S. Bhatia E-mail:
[email protected] Director- General, RIMT-IMCT, Mandi Gobindgarh, , Punjab (India)
Electronic copy available at: http://ssrn.com/abstract=1656262
Determinants of Corporate Governance Disclosures: Evidence from the Companies in Northern India Abstract In India, it is mandatory for all the listed companies to comply with the revised Clause 49 of listing agreement, which came in operation on January 01, 2006 and intends to protect the interests of investors through enhanced governance practices. This study seeks to determine the extent to which Indian listed companies are disclosing their corporate governance practices by examining the annual reports of fifty listed companies. Also, the determinants of disclosures have been looked into. The paper concludes that there is a substantial scope for improvement in disclosure of corporate governance practices and size of the company is a significant determinant of disclosures.
Keywords: Corporate Governance, Corporate Governance Disclosures, Listed Company, Clause 49, India INTRODUCTION Corporate governance is not a new phenomenon. It has remained an issue since people began to organize themselves. The common theme had been to harness the power of organization for an agreed purpose rather than being diverted to some other purpose. The principal characteristics of effective corporate governance include transparency i.e. disclosure of relevant financial and operational information and internal processes of management oversight and control; protection and enforceability of the rights and prerogatives of all shareholders; and, directors capable of independently approving the corporation‟s strategy and major business plans and decisions, and of independently hiring management, monitoring management‟s performance and integrity, and replacing management when necessary (Gregory, 2000). All these characteristics contribute towards the attainment of objective of good corporate governance i.e. maximization of shareholder value. Disclosures play an important role in ensuring transparency. Transparency means adequate and timely dissemination of information by a company of its operations to its stakeholders. These disclosures need not necessarily be governed by the rules and regulations imposed by a security market regulator. The company on its own has to come out with adequate and timely disclosures of honest anticipation or actual happening of material events affecting the value of the company. Keeping this in mind, this paper tends to examine the disclosure practices as regards mandatory as well non-mandatory requirements and also, what contributes towards corporate governance disclosures. REVIEW OF LITERATURE With the increasing recognition to good corporate governance for its economic impact, a large number of theoretical and empirical researches on corporate governance disclosures/reporting have been undertaken throughout the world and annual reports have been used as a main source of information {Ramsay & Hoad, 1997 (Australia); Gupta, Nair & Gogula et al., 2003 (India); Bhuiyan & Biswas, 2007 (Bangladesh); Webb, Cohen, Nath & Wood, 2007 (US)}. The main focus of these studies had been on the disclosure practices found in the annual reports by determining the extent of corporate governance disclosures in the annual reports of the companies. Karim (1996) argued that annual reports of the companies should be considered as the most important source of information about a company. Based on a content analysis study, Ramsay and Hoad (1997) determined the extent to which Australian listed companies are
Electronic copy available at: http://ssrn.com/abstract=1656262
disclosing their corporate governance practices by examining the latest available annual reports of 268 listed companies. They found that the extent and quality of disclosure is typically better for larger companies than for smaller companies. Gupta et al. (2003) examined corporate governance reporting practices of 30 Indian companies, which form the BSE Sensex, extracting corporate governance reporting section from the annual reports. The findings indicated that though the firms are providing information related to all the dimensions, yet there is a considerable variance in the extent and quality of disclosures made by the companies in the annual report. Using least squares regression method, the significant determinants of corporate governance disclosures are size of the company, number of independent directors and overseas listing status. Brown and Caylor (2006) tended to relate corporate governance to firm valuation using 1,868 firms based on 51 internal and external corporate governance factors provided by Institutional Investor Services. The 51 governance provisions were classified in eight categories: audit, board of directors, charter/bylaws, director education, executive and director compensation, ownership, progressive practices, and state of incorporation. They created a broad summary measure of corporate governance, Gov-Score, which sums these 51 binary factors where each is coded 1 (0) if it does (not) represent minimally acceptable governance. Gov-Score was found to be significantly and positively associated with Tobin‟s Q. Durnev and Kim (2005) provided empirical and theoretical evidence that companies with greater growth opportunities, greater needs for external financing, and more concentrated cash flow rights practice higher quality governance and disclose more and the strength of their influence depends, in part, on the country‟s legal environment. Arcot and Bruno (2006) examined the effectiveness of the "comply or explain" approach to corporate governance in the UK. Using a unique database of 245 non-financial companies for the period 1998-2004, they performed a detailed analysis of both the degree of compliance with the provisions of the corporate governance code of best practices i.e. combined code, and the explanations given in case of non- compliance. They ranked the quality of explanations based on their information content. They found an increasing trend of compliance with the provisions of the combined code, but also a frequent use of standard and uninformative explanations when departing from best practices, which highlights a common conformity with the letter but not the spirit of the code. In their study, Bhuiyan and Biswas (2007) tried to examine the actual corporate governance practices in the listed public limited companies by considering 45 disclosure items. A random sample of 155 listed Public Limited Companies was taken for this purpose. To facilitate the analysis, they computed a Corporate Governance Disclosure Index (CGDI) and a number of hypotheses were tested. They found that significant difference among the CGDI of various sectors. Financial sector has been found to make more intensive corporate governance disclosures than the non-financial sector. In general, companies have been found to be more active in making financial disclosures rather than non-financial disclosures. According to multiple regression results, corporate governance disclosure index is significantly influenced by local ownership, the Securities Exchange Commision (SEC) notification, and the size of the company. Belonging to financial or non-financial institution, age, multinational company, and size of the board of directors were not found to have any significant impact on corporate governance disclosures. Webb et al. (2007) examined a sample of 50 US firms and their public disclosure packages from 2004. They found a high degree of variability in the presentation of and reporting
format choices for many elements of the governance structure. This variability included several items for which disclosure is mandated by regulators or legislative action. In particular, smaller firms offer fewer disclosures pertaining to independence, board selection procedures, and oversight of management. Also, the boards that are less independent offer fewer disclosures of independence and management oversight matters. Moreover, large firms provide more disclosures of independence standards, board selection procedures, audit committee matters, management control systems, other committee matters, and whistle-blowing procedures, still there information environment was not found better than smaller firms. Javed and Iqbal (2007) investigated whether differences in quality of firm-level corporate governance can explain the firm-level performance in a cross-section of companies listed at Karachi Stock Exchange. Therefore, relationship between firm-level value as measured by Tobin‟s Q and total Corporate Governance Index (CGI) and three sub-indices: Board, Shareholdings and Ownership, and Disclosures and Transparency for a sample of 50 firms was examined. The results indicated that corporate governance does matter in Pakistan. However, not all elements of governance are important. The board composition and ownership and shareholdings were found to enhance firm performance, whereas disclosure and transparency had no significant effect on firm performance. It was also concluded that those adequate firm-level governance standards can not replace the solidity of the firm. The perusal of the review of literature reveals that though adequate attention has been paid to the concept of corporate governance throughout the world, relatively little attention has been given to the concept in India in recent past. This created the need of the study as it was to be analyzed whether the listed companies comply with the mandatory and non-mandatory disclosure requirements during the period when these guidelines were made effective. OBJECTIVES AND HYPOTHESIS The study has following two specific objectives. The first objective of the study is to find out the existing corporate governance disclosure practices of the companies. The second objective of the study is to examine the determinants of disclosures. In the context of the above mentioned objectives and keeping in view the findings of earlier studies, the following hypothesis were framed and tested: The size of the companies surveyed had been a major variable in most of the studies examining variability in disclosures (Singhvi & Desai, 1971; Firth, 1980; Lang & Lundholm, 1993; Bhuiyan & Biswas, 2007) and larger companies have been found to have better disclosures. We expect the following relationship to hold true. Hypothesis1: Size of the company is positively associated with extent of corporate governance disclosures by the company. High earnings motivate managers to comply with the rules and disclose detailed information whereas the managers of low earnings firms may not comply fully with the accounting rules so as to conceal declining profits (Singhvi & Desai, 1971). We assume that when the profitability is high, managers would be more willing to disclose it to the public. Hypothesis 2: Better profitability of the company results in better disclosures on corporate governance.
We expect a positive relationship between market performance of the firm and corporate governance disclosures as many researchers have advocated a positive relationship between corporate governance and firm performance (Bai, Liu, Lu, Song & Zhang, 2003; Black et al., 2006; Beiner et al, 2004) Hypothesis 3: Market performance of the firm has a significant positive relationship with corporate governance disclosures. DATA AND METHODOLOGY As the SEBI regulations relating to corporate governance are applicable to listed companies in the form of Clause 49 of listed agreement, a total of fifty companies were chosen for the study. Any listed company with its registered office in Northern India constituted the sampling unit. For the purpose of the study, Northern India includes Punjab, Haryana, Himachal Pradesh, Delhi, Chandigarh and Uttar Pradesh. In all, the findings of the study are based on the information derived from annual reports of randomly selected fifty listed companies. Like other studies (Ramsay & Hoad, 1997; Gupta et al., 2003; Bhuiyan & Biswas, 2007), corporate governance disclosure practices in this study too were examined from the annual reports of the companies selected in the sample. For this, a list of 67 parameters based on the suggested list of items (as suggested by SEBI in Clause 49 of the listing agreement) and a few non-mandatory items to be disclosed in the corporate governance section or anywhere else in the annual report was prepared the contents of the annual reports were analyzed using content analysis technique. Content analysis is a research technique widely used in social sciences, which objectively and quantitatively examines written or oral communication in order to make inferences about values, meanings or understandings being conveyed (Riffe, Lacy & Fico, 1998; Rosengrew, 1981; Holst, 1981). The content analysis has been widely used in the literature examining non-financial disclosure behavior (Campbell, 2000; Deegan & Gordon, 1996; Deegan & Rankin, 1996; Gray, Kouhy & Lavers, 1995; Milne & Adler, 1999 etc.). So content analysis deemed to be the most appropriate technique for analysis of disclosures of various items in the annual reports. Annual reports of selected companies were analyzed for the presence of nine broad dimensions as suggested by SEBI. Further to this, in order to understand the substance of reporting, sixty seven statements (Appendix A) related to each of these dimensions, Management Discussion and Analysis (MDA) and miscellaneous category were drawn as a framework to calculate disclosure score in order to understand the disclosures of these dimensions in the annual report. A dichotomous procedure was followed to score each of the disclosure items. Each company was awarded a score of „1‟ if the company appears to have disclosed the concerned issue and „0‟ otherwise. The net score of each company was found out by adding all the individual scores on various sub-dimensions. The maximum score obtainable by a company could be sixty seven if all the items were disclosed. Every item was given equal weight because each item was considered equally important. The sixty seven statements included both mandatory and non-mandatory stipulations of the regulation. Total indicates the extent of information disclosed in annual reports. A Corporate Governance Disclosure Index (CGDI) was then computed by using the following formula as used by Bhuiyan & Biswas, 2007. CGDI =
Total Score of the Individual Company X Maximum Possible Score Obtainable by the Company
100
The value of Corporate Governance Disclosure Index (CGDI) ranges between 0-100, with 0 reflecting the worst disclosure practices and 100 representing the best disclosure practices. It is to be kept into consideration that CGDI indicates only the disclosure/presence of information regarding a particular item in the annual report. It does not indicate anything about the quality/extent of disclosure of a particular item. Variables Used To examine the possible relationships with disclosures, the study identifies few variables to be tested. Correlation analysis and multiple regression techniques have been used as the analytical techniques for the purpose. Table 4 explains the operational meaning of these variables. TABLE 1 Operational Meaning of the Variables Variables
Acronym
Description
Dependent Variables Corporate Governance CGDI Disclosure Index
Corporate governance disclosure index calculated as total score obtained by the company (out of 67 disclosure items) divided by maximum possible score obtainable by the company multiplied by 100
Independent Variables Size Book Value of Assets
LnBVA
Natural log of book value of assets in Lacs. (proxy for firm size).
Market Capitalization
LnMC
Natural log of market value of common stock in Lacs, measured as on march 31, 2006.
Performance Market to Book Value
MBV
Market value of common stock divided by book value of common stock
Tobin‟s Q
Tobin‟s Q
Tobin‟s Q is computed as (MV of common stock+ BV of preference stock+ BV of borrowings + BV of CL)/ BV of total assets as denoted by FA + INV + CA) with all values computed at the end of year.
Profitability Return on Equity
ROE
Computed as profit after taxes divided by net worth (shareholder equity).
Return on Assets
ROA
Computed as profit after taxes divided by
total assets. Control Variables Debt-Equity Ratio
DE
Computed as total debt divided by net worth (shareholder equity).
Proportion of PI Independent nonexecutive directors
Percentage of independent directors on the board.
Index Dummy
1 if the firm form a part of BSE/NSE index i.e. Sensex/ Nifty; 0 otherwise.
INDUM
Disclosures: As already explained, Corporate Governance Disclosure Index (CGDI) has been calculated. Size: Natural log of book value of assets has been used as the proxy for the size of the company. Alternatively, this proxy of size has been replaced by log of market value of common stock. Profitability: Ratio of Return on Equity (ROE) and Return on Assets (ROA) has been used as alternative measures of profitability in this study Market Performance: Market-to-Book Value ratio has been calculated to judge market performance of the firms. Market-to-Book Value ratio is defined as the ratio of market value of equity to book value of equity (Sarkar & Sarkar, 2000). Tobin‟Q has also been used as a proxy for performance. Leverage Financial leverage is the ratio of long term debt to total equity plus retained earnings. It is expected that the providers of debt may expect better transparency of operations and hence their disclosures. Proportion of Independent Directors (PI): A greater proportion of independent directors brings about more financial disclosures (Chen & Jaggi, 2000). It is expected that with the increase in number of independent directors, the amount of disclosures with respect to corporate governance increases. Index Dummy (INDUM): It is a dichotomous variable which has a value of 1 if the firm is included in BSE/NSE index and 0 otherwise. It is suggested that a company which forms part of any security index would be disclosing more on corporate governance. To provide evidence of the impact of these attributes on the corporate governance disclosures of different companies, the regression equation estimated is CGDI = C + β1LNBVA+ β2ROE+ β3MBV + β4PI + β5INDUM+ et Limitations of the Study The methodology used in measuring and analyzing the disclosure practices of the companies with regard to corporate governance does not offer limitation less explanation. The following limitations characterize the methodology. If there was an evidence of information being disclosed by the company, regardless of whether the company follows it or not, a score of „1‟ was awarded. For example, whether the company has adopted the practice of giving their employees the stock options or not, if it has been disclosed in the annual report, a score of „1‟ was given. No attempt has been made to take into account the length of each disclosure, whether
the company follows the best practices or to differentiate reports on the basis of the „quality‟ of disclosures practices. This means the quality as expressed by quantum or extent of disclosures has not been considered. This is the first limitation of the study. The relative importance of disclosure variables has not been taken into account. All the variables may not be equally important but they have been treated equally and this constitutes the second limitation. The use of content analysis too raises methodological limitation to the analysis and the third limitation is related to questions of internal validity and reliability of the study‟s measurement model. In this case, validity is achieved through the use of a classification scheme from the SEBI guidelines. As regards reliability, the allocation of the contents of reports into categories based on their major theme is a subjective process. To minimize subjectivity, a predetermined classification scheme as indicated by SEBI has been used. The fourth and last limitation is related to the generalizability of the study i.e. the extent to which the results can be generalized to the entire corporate sector. As the sample size for this study is fifty companies, the results may not be true for whole corporate sector. RESSULTS AND DISCUSSION The companies included in the sample belong to various sectors, industry groups, and ownerships. The detailed description of the sample characteristics is discussed in Table 2 which indicates that majority of the companies (43) i.e. 86% belong to manufacturing sector and 11 companies (22%) belong to Textile industry. Six and four companies are owned by Government and foreign firms (wholly or partially). Largest shareholder has substantial voting right i.e. over 30-40 percent and effectively controls the firm in 35 companies (70%). TABLE 2 Profile of Sampled Companies Basis of Classification Sector Manufacturing Service Others Industry Textiles Automobiles/ Automotive Parts and Equipments Food Products/Edible oil/Sugar /Rice Chemicals, Fertilizers & Bulk Drugs Power, Energy & Natural Gas Leather/ Footwear Paper/ Starch Lighting Equipments Services Others Whole or part ownership by Government
Number of Firms
Percentage of Firms
43 4 3
86.0 8.0 6.0
11
22.0
4
8.0
6 6 3 2 3 2 4 9
12.0 12.0 6.0 4.0 6.0 4.0 8.0 18.0
Yes No Foreign Firms Yes No Control Structure A B C D E
6 44
12.0 88.0
4 46
8.0 92.0
35 2 6 7 0
70.0 4.0 12.0 14.0 0.0
A. B. C. D.
Largest shareholder has substantial voting right i.e. over 30-40 percent and effectively controls the firm. Largest shareholder effectively controls even though voting right is far less than 30-40 percent. Two or more large shareholders collectively control the firm. Ownership is fairly diffused with no controlling shareholder, and the management is not directly controlled by shareholders. E. Others.
Disclosure Practices of the Companies It has been observed after analysis that even if there is an increasing tendency to disclose different aspects of corporate governance, the disclosure practices and the content, quality and extent of disclosures among the selected companies varied greatly. As is evident from the Table 3, there is a significant range in the disclosure index among the selected companies, which ranges between the minimum score of 43 and maximum score of 96 with a mean of 77.2 and standard deviation of 12.21. It is clearly indicated that 75% of the companies are scoring 85 (eighty five) or lower meaning thereby that the extent of disclosure on corporate governance practices among Indian listed companies is fairly good though quality may remain an issue. TABLE 3 Descriptive Statistics of CGDI Minimum
Maximum
Mean
Mode
Median
43.00
96.00
77.2
82
81
Standard Deviation 12.21
1st Quartile 70
3rd Quartile 85
Skewness
Kurtosis
-.924
.619
Source: Compiled and computed on the basis of information given in the annual reports of the sampled companies
Figure 1 shows the histogram of the overall corporate governance disclosure index CGDI. A normal distribution curve is superimposed. By comparing the histogram and the normal distribution curve, one can easily see that the distribution of corporate governance index is slightly skewed to the left (long tails to the left). That is, many companies are concentrated above the mean and few companies are located at low scores. The skewness of the distribution for the index is -.924 and kurtosis of the distribution is .619 (Table 2). Both skewness and kurtosis are falling within the acceptable range of -1.0 and +1.0 and satisfy the criteria for a normal distribution. FIGURE 1
Distribution of Corporate Governance Disclosure Index (CGDI)
CGDI 14 12 10 8 6
Frequency
4 Std. Dev = 12.22
2
Mean = 77.2 N = 50.00
0 45.0
55.0 50.0
65.0 60.0
75.0 70.0
85.0 80.0
95.0 90.0
CGDI It is clear from Table 4, five companies received a score above 90%. Twenty one (42%) companies have a score in the range of 80%-90%. Eleven companies have a value between 70%80%. Ten companies fall in the range of 51%-70%. At the lower end, three companies (6%) received a score below 50%. It can be easily inferred from the above analysis that disclosure practices in the sampled companies are reasonable with only few of the companies having lower values. TABLE 4 Frequency Distribution of CGDI
Total Score Above 90% 81-90 71-80 61-70 51-60 Below 50% Total
Frequency (N) 5 21 11 8 2 3 50
Cumulative N 5 26 37 45 47 50
Percent (%) 10.0 42.0 22.0 16.0 4.0 6.0 100
Cumulative % 10.0 52.0 74.0 90.0 94.0 100.0
Source: Compiled and computed on the basis of information given in the annual reports of the sampled companies
Item-wise Disclosures of Corporate Governance Recommendations by SEBI require that there should be a separate section on corporate governance in the annual reports of companies. One hundred per cent i.e. all of the sampled companies did have a separate section, usually titled “Corporate Governance Report”. The detailed item- wise disclosures (Appendix A) reveals that not only non-mandatory requirements but also all the mandatory requirements have not been disclosed by all the
companies. A close look at the disclosure of individual items by the companies reveals that though majority of the items are mandatory in terms of the requirements to adopt them, only six items are disclosed by 100% of the companies. Twenty four items are being disclosed by more than 90% of the companies. Nine items are disclosed by above 80% of the companies. There are twelve items which are being disclosed by less than 50% of the companies out of which two items i.e. whistle blower policy mechanism and well defined independent directors are being disclosed by merely 18% of the companies. Determinants of Disclosures It has been observed after the analysis that the extent of disclosures vary among the companies. Past studies have indicated that the amount of disclosure on corporate governance, as calculated in terms of corporate governance disclosure index, is influenced to an extent by various factors. Papas (2002) found financial disclosures to be significantly associated with their listing status and state of international affiliations. Singhvi and Desai (1971) found financial disclosures to be strongly related to size, listing status and earnings margin. Similarly, Lang and Lundholm (1993) found size of the company to be the determinant of financial and non-financial disclosures. As regards corporate governance disclosures, Bhuiyan and Biswas (2007) found size of the company, local ownership and the SEC (Securities and Exchange Commision) notification to be significant determinants of corporate governance disclosures. The study by Gupta et al. (2003) came out with three determinants of corporate governance disclosures namely size of the company, number of independent directors and overseas listing status. Correlation Results The results of the correlation analysis are provided in the Table 5 which provides the Pearson (below diagonal) and Spearman (above diagonal) correlations of CGDI and the explanatory variables. The correlation matrix indicates that there exist a positive and significant (at 1 percent significance level) correlation between CGDI with log of assets (Size), the coefficients being .479 (Pearson) and .417 (Spearman). Also, Pearson and Spearman correlation between CGDI and return on equity (profitability), come out to be .314 and .377 respectively and both are significant at 5 percent significance level. The other significant positive correlation is of index dummy with size of the firm and profitability. This relation is as expected because the firms forming a part of Sensex/ Nifty would be large in size and profitable too. All other correlations are not significant even at 5 percent level of significance. TABLE 5 Correlations Matrix for CGDI and Other Variables *, **, and *** respectively indicate significance levels at 10%, 5%, and 1% levels. Statistically significant correlations (at 5% level or better) are shown in boldface.
Variables CGDI LNBVA ROE 1.000 CGDI .417*** .377*** 1.000 .235* LNBVA .479*** .221 1.000 ROE .314** .232 MBV .357** .532*** .007 -.158 .031 PI .047 .143 -.046 DE .212 .156 INDUM .720***
MBV .443*** .244* .646*** 1.000 -.036 .085 .230
PI .071 .005 .071 -.068 1.000 .346** -.272
DE -.088 .004 .072 .032 .442*** 1.000 .235
INDUM .225 .412*** .289** .289** -.250* -.096 1.000
Regression Results The results of correlation analysis indicate that there is a positive and significant relationship between CGDI and LnBVA and ROE. To further analyze these relationships multiple regression analysis was employed. Table 6 reports the results of regression analysis. TABLE 6 Regression of CGDI on Other Variables This table reports the regression model using CGDI as the dependent variable and other variables as the independent variables. T-statistics are reported in parentheses. *, **, and *** respectively indicate significance levels at 10%, 5%, and 1% levels. Statistically significant results (at 5% level or better) are shown in boldface, except for the intercept term.
CGDI Intercept LnBVA
(1) 34.686*** (3.060) 9.216*** (3.785)
MBV ROE PI DE INDUM R2 Adjusted R2 F-Stat Durbin-Watson VIF
. 230 .214 14.328*** ----1.000
(2) 36.881*** (3.346) 8.058*** (3.326) 1.297** (2.061) .120 (.824) .085 (.682) -.036 (-.290) -.315 (-1.816) .294 .264 9.774*** 2.102 1.057
Table 6 presents the regression results when CGDI is taken as the dependent variable and the first stepwise regression is run. It can be seen that in model 1, LnBVA is the first variable to enter the equation and explains 23 percent variance in CGDI as shown by R2. This is increased to 29.4 percent when MBV enters the equation in model 2 (i.e. there is a 6.4 percent increase and is statistically significant). Adjusted R2 for model 1 is .214 and model 2 is .264. For the initial model 1, F-ratio is 14.328 and is highly significant at less than 1% level of significance and it becomes 9.774 but remains significant at less than 1% level of significance. The Durbin-Watson statistic, which is used to test for the presence of serial correlation among the residuals, for this problem is 2.102, which falls within the acceptable range from 1.50 to 2.50 and satisfies the assumption of independence of errors. The Variance Inflation Factor (VIF) is used to assess multi-collinearity. The VIF scores ranged between 1.0 and 1.057. Threshold values of tolerance
(not shown in the table) above .10 and VIF scores of less than 10 suggest minimal multicollinearity and stability of the parameter estimates. Analysis of the regression coefficients in Table 6 indicates that LnBVA (b = 8.058, t statistic = 3.326 and p< .01) is positively contributing towards disclosures. Out of all other variables, the only significant control variable is MBV (b= 1.297, t statistic =2.601 and p< .05). All other control variables have been excluded in stepwise regression results as these don‟t have a significant positive or negative coefficient, implying that these variables don‟t influence our dependent variable, CGDI, to a significant extent endogenously but their exogenous effects can not be ruled out. Most surprising results include the negative coefficients for DE and PI. To check the robustness of results, alternative proxies of size, performance and profitability areused. LnBVA is replaced by LnMC, MBV is replaced by Tobin‟s Q and ROE is replaced by ROA as the independent variable. All the results remain exactly the same when ROA is used instead of ROE (Table 7). Both size (LnBVA) and performance (MBV) explain the variation in CGDI. TABLE 7 Regression of CGDI on Other Variables This table reports the regression model using CGDI as the dependent variable and other variables as the independent variables. T-statistics are reported in parentheses. *, **, and *** respectively indicate significance levels at 10%, 5%, and 1% levels. Statistically significant results (at 5% level or better) are shown in boldface, except for the intercept term.
CGDI Intercept LnBVA
(1) 34.686*** (3.060) 9.216*** (3.785)
MBV ROA PI DE INDUM R2 Adjusted R2 F-Stat Durbin-Watson VIF
. 230 .214 14.328*** ----1.000
(2) 36.881*** (3.346) 8.058*** (3.326) 1.297** (2.061) -.181 (-.525) .085 (.682) -.036 (-.290) -.315 (-1.816) .294 .264 9.774*** 2.102 1.057
In the second step, when LnMC replaces LnBVA, only significant variable that explains the variation in CGDI is Size i.e. LnMC. When Tobin‟s Q replaces MBV in another step, once again, only significant variable that explains the variation in CGDI is Size i.e. LnMC and
LnBVA respectively. Though the firm performance comes out to be a positive predictor of disclosures, it does not sustain the robustness checks. The results of regression analysis clearly indicate that size of the company is positively and significantly related to disclosure of corporate governance practices. This result is consistent with the findings of earlier studies (Ramsay & Hoad, 1997, Gupta et al., 2003; Webb et al., 2007) which have found a positive relationship between size and corporate governance disclosures. Firm performance too, to an extent, has been found to be positively related to disclosures. But the results are not robust to change in the measure of size from LnBVA to LnMC and MBV to Tobin‟s Q. Profitability, as unexpected, is not significantly related to disclosure even when ROE or ROA is used. Hence Hypothesis 1 is accepted, whereas Hypothesis 2 and 3 are rejected. CONCLUSIONS As listing requirements under revised Clause 49 had been in operation for a relatively short period of time at the time of study, the annual reports for one year only could be analyzed for this study. However, following are the conclusions based on the study. First, not only the non-mandatory requirements, but also all the mandatory requirements have not been disclosed by all the companies. One explanation which can be given for this result is that the listed companies were to comply with revised Clause 49 from January 1, 2006 and this information has been collected from the annual reports for the year ended March 31, 2006. Three months time period may be considered very less for adopting all the recommendations and it is expected that over a period of time, the companies might start following all the good practices of corporate governance. Secondly, the analysis reveals that there is a considerable gap in the sphere of extent, quantum and quality of disclosures made by the companies in the annual report. Many companies are now disclosing information about a range of corporate governance practices, still there are many which do not provide it in details. The disclosure by few of the companies is merely a ritual, that too with regard to mandatory requirements. Thirdly, the extent and amount of disclosures has been found better in larger companies. Large firms are established to have richer information environments; they are also exposed to more political costs with respect to their activities, and thus may require more impression management among stakeholders and regulators (Webb et al., 2007). Also, one can argue that large firms have more resources to undertake additional corporate governance initiatives because large firms receive a lot of attention from the investing public so they have to disclose more information (Cheung et al. 2007). Fourth, there is a substantial scope for improvement in disclosure of corporate governance practices. A number of important issues were not discussed by many companies. Consistent with the SEBI observations based on the consolidated compliance report by BSE and NSE, the compliance level with respect to the requirements related to remuneration committee and board procedures is not satisfactory. However, the compliance level related to board of directors, audit committee and shareholders‟ grievance committee is high (SEBI, 2003). Finally, it can be concluded that though there have been concerted efforts by SEBI to strengthen corporate governance practices in India, yet the efforts to disclose world-class information on the part of companies are required so that they can participate in the global economy.
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Appendix A Detailed Item –wise Disclosure Sr. No. 1 2
Main Dimension
Sub-dimensions
Statement on philosophy Board of Directors (BoD)
Statement on Company‟s philosophy on code of governance
3
Audit Committee
4
Remuneration Committee
5 6
Shareholders Committee General Meetings
Body
Number of Firms 50
Percentage of Firms 100
Clear distinction between promoter director, executive director and non executive director Independent directors well defined Attendance of each director at the Board meetings Attendance of each director at the last AGM Details of membership in other companies/ committees Adherence to maximum number of directorship positions a director can hold Information on nominee directors Declaration of compliance with the code of conduct signed by the CEO Minimum three members on audit committee Details of financial expert as a member Chairman of committee- independent director Chairman present at AGM Company secretary- audit committee Well defined powers and functions Details of audit committee meetings Information on external auditors and their presence in meetings
41 9 49 47 49 40 23 39 50 22 47 42 35 33 44 13
82 18 98 94 98 80 46 78 100 44 94 84 70 66 88 26
Details on company‟s remuneration policy Whether all members of remuneration committee are non executive directors (NED) Chairman- independent director Compulsory attendance of remuneration committee Compulsory attendance of chairman at AGM Remuneration of non executive directors - board of directors to decide Breakup of remuneration - all elements of salary, benefits, bonus, pension Details of fixed component and performance linked incentive along with performance criteria Service contracts, notice period and severance fees Stock option details Name of NED heading the shareholder/ investor grievance committee Number of shareholders complaints received and resolved during the year Details of last three AGMs - date, time and place Special resolutions passed in the previous 3 AGM
37 32 34 24 24 14 39 15
74 64 68 48 48 28 78 30
18 19 47 46 49 33
36 38 94 92 98 66
7
8 9
10
11
Disclosures
Means of Communication General Shareholder information
MDA
Miscellaneous
Special Resolutions put through postal Ballot in the last financial year Material and financial transactions by management where they have personal that may have potential conflict with the interest of the company. Non compliance by company or penalties imposed or/and strictures passed on company by the stock exchange/SEBI/statutory authorities on any matter Whistle blower policy Means of communication adopted by the company Whether the company maintains website to keep the shareholders informed Date, time and venue of AGM Financial year Date of book closure Dividend payment date Listing on stock exchange Stock code Market price data for each month of last financial year Performance in comparison to broad based indices
interest
41 49
82 98
the
49
98
09 49 35 49 49 49 39 50 48 46 29
18 98 70 98 98 98 78 100 96 92 58
48 45 45 48 40 36 36 48 50 42 37 41 47
96 90 90 96 80 72 72 96 100 84 74 82 94
46 41 49 32 50 20 31
92 82 98 64 100 40 62
Registrar and Transfer Agent (RTA) Share transfer system Dematerialization and liquidity Distribution of shareholding Categories of shareholding as per the format prescribed in clause 35 of listing agreement Outstanding GDRs/ADRs/warrants Convertibles, conversion date and likely impact on equity Plant location Address for correspondence Industry structure and developments Opportunities and threats Outlook Material developments in human resources /Industrial Relations front, including number of people employed Internal control systems and their adequacies Risks and concerns Discussion on financial performance with respect to operational performance Product wise/ segment-wise information-financial as well as operating details Certificate of compliance by the auditors Name and address of compliance officer CEO/ CFO Certificate
