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International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264)

Vol. 3, No. 2, April 2015


Available at www.ijrmst.org

The Impact of Corporate Governance on the


Profitability: An Empirical Study of Indian
Textile Industry
Karam Pal Narwal*, Sonia Jindal**
*Professor, Haryana School of Business, Guru Jambheshwar University of Science &Technology, Hisar,
Haryana, India.
** Corresponding Author, Junior Research Fellow, Haryana School of Business, Guru Jambheshwar University
of Science &Technology, Hisar, Haryana, India
karampalhsb@gmail.com*
soniajindalbpc@gmail.com**

Abstract-- In the globalization of business economics, the principle, accountability principle, responsibility
principle of good corporate governance is necessary. The principle, independence principle and fairness
study examined the impact of corporate governance on principle which have direct effect on corporate
the profitability of Indian textile sectors. The data has performance (Nur’ainy et al, 2013). Good corporate
been collected from annual reports of textiles companies
governance does not only enhance the profitability but
for the period of five year ranging of 2009-10 to 2013-14.
The profitability has been taken as dependent variable also increases firm performance.
and board size, audit committee members, board By enhancing the overall performance of
meetings, non executive directors, directors companies and increasing their access to outside
remunerations as independent variables. For analyzing capital,good corporate governance contributes toward
the data, correlation and OLS regression model has been economic stability that reduces the vulnerability of the
used in this study. A strong positive association is financial crises. It reduces cost of capital and
observed between director’s remuneration and transaction cost. Corporate governance concerns with
profitability. The Audit Committee members is observed the relationship among management, board of
negative associated with the profitability. The study
directors, controlling shareholders, monitoring
concluded that board size, board meeting and non
executive directors do not significant association with shareholders and other stakeholders (Latif el al,
the profitability. 2013).
Poor corporate structure results indiscipline, both
on the part of management and workers. Poorly
Keywords-- Corporate governance, profitability, firm governed corporations not only pose a risk to
themselves, but they also cause barrier to others and
performance, board size, board meeting could indeed pull down capital market. For instance,
the poor governance of a systematically important
I. INTRODUCTION firm would pose a threat to the economy. Irrespective
of how sound macroeconomic policies are, if entities
Corporate governance is a system of structuring, are not well governed, the macro-economic objectives
operating, and controlling a company with a view to may not be attained (Ganiyu and Abiodun, 2012).
achieve long-term strategic goals to satisfy its Thus, corporate governance is important for all types
shareholders, creditors, employees, customers and of business entities.
suppliers (Das, 2009). Corporate governance plays an II. LITERATURE REVIEW
important role for improvement of profitability. The
improvement of firms profit is essential to attain Properly applied corporate governance principles
overall corporate objectives (Gill and Mathur, 2011). in the organization may increase the profitability and
Strong corporate governance is necessary for the returns, improve its competitiveness, credibility and
all the business organizations because it plays an improve relations with key stakeholders such as
important role in the management of organizations in investors, business partners, employees, customers,
both developed and developing countries. etc.(Todorovic, 2013) Kumar and Nihalani (2014)
Developed countries differ from developing investigated the effect of corporate governance on the
countries in many ways (Achchuthan and performance of Indian Banks and found that board of
Kajananthan, 2013). For developing countries like the directors has play significant role in firm
India, good corporate governance is an essential tool performance but the board meetings negatively impact
for globalization of business organizations. Good on the financial performance. Latif et al. (2013) found
corporate governance consists of transparency that board size and CEO duality had significant

2321-3264/Copyright©2015, IJRMST, April 2015 81


International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264)
Vol. 3, No. 2, April 2015
Available at www.ijrmst.org

impact on firm performance while board composition Abdullah (2006) studied the relationship among
had insignificant impact on performance. directors’ remuneration, firm performance and
Todorovic (2013) found that if the company rigidly corporate governance in the Malaysian firms and the
follows principles of corporate governance then it study showed that directors remuneration was not
results in higher net profit margin and earnings per associated with the profitability while the board
share. Vo and Phan (2013) examined elements of independence and the extent of non executive
corporate governance such as CEO duality, presence interests negatively influence the directors
of female board members, the working experience of remuneration and also strong negative relationship
the board members and compensation of board was found between the return on assets and the
members and found that all the elements had positive directors remuneration.
impact on the firm performance but board size had Stephen and Olatunji (2011) studied the role of non
negative impact on the firm performance. Sheikh et al executive directors in the profitability and the study
(2013) studied the impact of internal attributes of revealed that the non executive directors and return on
corporate governance on firm performance. equity are negatively associated with each other. The
findings show that more numbers of outside directors
in board adversely impact the financial performance.
The study found that board size, CEO duality, and
ownership concentration were positively related to the
firm performance but outside directors and managerial
ownership are negatively related to the return on III. RESEARCH GAP
assets and earning per share. Nyamonogo and
Corporate governance is the important factor in
Temesgen (2013) analyzed the impact of corporate
economic development. For business globalization
governance on firm performance and found that board
economics, implementation of good corporate
size negatively impacts firm performance while
governance principle is necessary. Many of studies
independent board directors tend to enhance the firm
are being conducted in the context of corporate
performance. Danoshana and Ravivathani (2013)
governance but no study was found to analyze
found that board size and audit committee size exert
corporate governance impact on the profitability in
positive influence on the firm performance while
context of Indian textile firms. On the basis of review
board meeting frequency has negative impact on the
of available literature in various national and
firm performance.
international journals, a small number of study is
Mathur and Gill (2011) investigated impact of
found that focused over corporate governance
board size, CEO duality and corporate liquidity on the
components like audit committee members, non
profitability. The study found CEO duality and
executive directors and board meetings.
corporate liquidity to be positively related to the
profitability but the board size had negative impact on
the profitability. Coleman and Biekpe (2006) studied IV. RESEARCH OBJECTIVE AND HYPOTHESIS
the interrelationship between corporate governance
and financial performance in Ghana and found that The main objective of this study is to examine the
board size and CEO duality had no significant relation impact of corporate governance on the profitability on
the India textile industries. Further, study also attempt
with performance while board composition had
to describe the corporate governance and relationship
positive impact on the performance.
of corporate governance with the profitability. For
Herdan and Szczepanska (2011) did a comparative
achieving the research objective, following hypothesis
analysis between director’s remuneration and
company’s performance of listed companies in Poland has been testing.
and UK and the study showed positive relationship
between the director’s payments and the companies’
size. The study also found that directors H1: There is significantly positive association between
remunerations and return on capital were positive board size and profitability.
associated.
Emmanuel and Hodo (2012) examined corporate H2: There is significantly positive association between
governance impact on the bank performance by taking audit committee members and profitability.
the sample of the Nigerian bank and found that the
size of the board of directors and the number of the H3: There is significantly positive association between
shareholders had positive impact on the return on director’s remuneration and profitability.
equity and return on the assets. The study also showed
that the quality of the assets, equity providers and H4: There is significantly positive association between
managers also exert an influence on bank board meetings and profitability.
performance.
H5: There is significantly positive association between
non executive directors and profitability.

2321-3264/Copyright©2015, IJRMST, April 2015 82


International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264)
Vol. 3, No. 2, April 2015
Available at www.ijrmst.org

PAT: Profitability
Theoretical Model
V. RESEARCH METHODOLOGY
To achieve research objective, a
There are number of variables which are used to
theoretical model (inspired from
analyze the impact of corporate governance on
Achchhuthan and Kajananthan, 2013) profitability. Table 1 describes the different dependent
and independent variables, used to analyze impact of
has been constructed which highlights
corporate governance over profitability, and their
the various corporate governance measurement. Independent variables are the BS,
NED, DR, BM and ACM which are measure the
variables impacting profitability.
corporate governance. Dependent variable is the PAT
Corporate Governance which is measure the profitability.
SAMPLE SELECTION, DATA COLLECTION AND
NED ANALYSIS
DR
Kothari (2004) stated that empirical study takes
BM PAT place when some variables affect another variable one
ACM way or another. In this study, efforts have been made
to explain the impact corporate governance on the
Where, profitability of textiles firms in India. Therefore, this
study is empirical in nature. Secondary data has been
BS: Board size used for the research purpose. Data has been collected
from annual reports of the textiles industries. Forty
NED: Non executive directors in the board Textile companies which are listed in both Bombay
Stock Exchange and National Stock Exchange have
DR: Directors remuneration been selected as sample size. The data has been
collected from annual report of five years ranging
BM: Board meetings from 2009-2010 to 2013-2014.

ACM: Audit committee members

TABLE NO.2: DESCRIPTIVE STATISTICS OF THE STUDY

PAT BS ACM DR NED BM


Mean 215.787 8.8 3.641 3.974 5.528 5.656
Median 48.78 9 3 2.320 5 5
Maximum 3880.4 14 6 25.225 11 24
Minimum -1637.61 5 3 0.015 1 4
Std. Dev. 690.146 2.306 0.789 4.675 2.150 2.951
Observations 195 195 195 195 195 195
Table 2 shows that total observations are 195. size is 8.8 and the average of the non executive
Presence of more than three members is essential to directors is 5.528 it means non-executive directors in
build a qualified and independent audit committee board is more than 50 percent. The average of
(Khan& Jain, 2011). Present study found that the director’s remuneration (DR) is Rs. 3.97crore and
presence of at least three members in audit committee director’s remuneration is Rs. 25.225crore to
in companies under sample. Whereas the board of maximum extent. The minimum of the director’s
directors meets at least four times in the year while the remuneration is the Rs. 1.45lakh. The maximum profit
mean of the board directors meet more than five times. is Rs. 3880.4crore and minimum amount of profit
The part of non executive directors in the board shows negative representing loss amounts to Rs.
should be at least 50 percent (Khan& Jain, 1637.61crore.
2011).According to this sample the average of board
TABLE 3: CORRELATION MATRIX FOR ALL VARIABLES

PAT BS ACM DR NED BM


PAT 1
BS 0.182** 1
ACM -0.081 0.317* 1

2321-3264/Copyright©2015, IJRMST, April 2015 83


International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264)
Vol. 3, No. 2, April 2015
Available at www.ijrmst.org

DR 0.511* 0.520* 0.247* 1


NED 0.002 0.582* 0.282* 0.116 1
BM -0.057 -0.189* 0.122*** 0.188* 0.142** 1
Note: *, ** and *** shows that the levels of significance 1%, 5% and 10% respectively.
Table 3 displays the correlation matrix between the negative associated with the board meetings and audit
dependent and independent variables. Accordingly, committee members.
the table 3 shows that board size plays important role
OLS REGRESSION MODEL
in the profitability because the board size positively
associated with the profitability(at 5% significance) its
Since the data is of panel in nature consisting of both
means that if the increasing the numbers of directors
then increasing the profitability. Directors time series and cross sectional data, so that the
remuneration is also positively associated with the
ordinary least square panel regression is used for the
Profitability (at 1% significance).Means that directors
remunerations is also playing an important role in the purpose of analysis. The following regression
profitability. If increasing the director’s remuneration
equation is estimation:
then also enhanced the profitability. Director’s
remuneration is also positive associated with the board
PATit = αit+β1BSit+β2ACMit+ β3DRit+ β4NEDit+
size. Means that if the increasing the numbers of
directors in the board than the increasing the directors β5BMit+µit
remuneration. If board size increasing than the audit
committee members is also increasing because board In the above regression equation, PAT it represents
the profitability of firm i at time t. BSit, ACMit, DRit,
size and audit committee members is positive
NEDit and BMit represents corporate governance
associated .but the board size has negative associated
variables of firm i at time t . αit and µit stand for the
with the board meetings. Audit committee members
intercept and error term respectively. β1 to β5 are the
and non executive directors do not play any role for
enhanced the profitability because the profitability is slope of the coefficients which influence the
dependent and independent variables.
Table 4: Ordinary least square regression result

Variables Coefficient Standardized t-Statistic


Coefficient
C 667.390 2.560072
BS -27.834 -0.092986 -1.032104
ACM -186.837 -0.213689 -3.292531*
DR 0.900 0.610139 8.170755*
NED 15.962 0.049723 0.635205
BM 4.842 0.020709 0.333666

N 195

Adjusted R-squared 0.292827

F-statistic 17.06637

Prob(F – statistic) 0

Table 4 represents the result of ordinary least square remuneration of directors positive impact on the
model .The adjusted R2 0.293 for the model implies profitability at 0.610139 that is why hypothesis(H3) is
that more than 29 percent of the variance in accepted But Abdullah (2006) revealed that directors
profitability can be explained by the variances of remuneration were not positive associated with
independent variables. It is observed that the model is profitability. Whereas audit committee members
good fit because the prob (F -statistic) is less than 0.05 (ACM) has significantly negative impact on the
.The study found that director’s remuneration (DR) profitability so that the hypothesis (H2) is not
has significant positive impact on the profitability of accepted. Board size has also insignificant negative
the companies. In the light of above result, It implies impact the profitability so that hypothesis (H1) is not

2321-3264/Copyright©2015, IJRMST, April 2015 84


International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264)
Vol. 3, No. 2, April 2015
Available at www.ijrmst.org

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