Sunday, October 2, 2011

Papers on Corporate Governance in India


The following recent papers contribute to the empirical literature on corporate governance in India, and deal with issues that have hitherto received less attention.
1. Executive Compensation in India by Rajesh Chakrabarti, Krishnamurthy Subramanian, Pradeep K. Yadav & Yesha Yadav. The abstract is as follows:
We present an introductory regulatory and empirical analysis of executive compensation in listed companies in India.Our descriptive overview of levels and trends leads to several interesting conclusions. First, executive pay in the echelon representing the largest firms is several times greater than in smaller firms. It also includes a much greater component of variable pay, is much more sensitive to stock market movements, and exhibits much greater dispersion both across time and across firms. For this echelon of the largest firms, the features of executive pay are not qualitatively different from those documented for the US by Frydman and Saks (2010). However, for even upto the 75th percentile firm by size, there is little variable component in executive pay. CEO pay is considerably greater than the pay other executive directors (i.e., CXOs), and the ratio of CEO to CXO pay also displays high dispersion both across time and across firms. CXO pay displays a much lower variable component and much lower sensitivity to stock market movements, and hence a much lower variation across time. The real values of both CEO and CXO compensation have been following a sharply increasing trend in recent years in India.
Second, CEO and CXO pay is considerably higher (about 30% for both CEOs and CXOs) for firms that are part of business groups, and increase significantly with the proportion of promoters’ equity. These results are qualitatively similar to the inferences that currently exist in the literature for the impact of vertical agency costs on executive pay.Questions must now be asked to better assure that international standards implemented in India are tailored and fit for the specific risks generated, such that disclosure, corporate oversight, and say-on-pay, are meaningful and fulfill the intended regulatory rationales.
2. Coping with Corporate Cholesterol: Board Interlocks and Their Impact on Corporate Governance - the Indian Experience by Bala N. Balasubramanian, Samir Barua, Suresh Bhagavatula & Rejie George. The abstract is as follows:
Board interlocks occur when a director of one organization sits on the board of directors of another organization. The causes and consequences of these interlocks have been much debated in the western literature but comparatively little is known about interlocks in Indian corporate boards. Board interlocks are essentially analogous to cholesterol. Both are facts of life. Like good cholesterol, there are aspects of interlocking directorates that are beneficial and there are others that are detrimental to the corporation and its stakeholders and their respective interests.
In this study, we find that board interlocks are quite widespread in India. Taking a (numerically) small but nevertheless (in terms of market capitalization) an important slice of available corporate data, we observed that in 2010, ‘highly boarded’ directors (defined as those on the board of 5 or more listed NSE companies) who constitute just 6 percent of the overall pool of directors among NSE100 companies are associated with 486 NSE listed companies which account for a whopping 66 percent of the total market capitalization of all NSE listed companies. Interestingly, there appears to be a marked increase in market capitalization of these ‘highly boarded’ companies, which these ‘highly boarded’ directors are linked to over the last several years. For instance, for the 3 years from 2001 to 2003, the market capitalization of ‘highly boarded’ companies ranged between 33 percent to 43 percent; it moved up to peak of 70 percent in 2007 and was at 66 percent in 2010 (the latest year in the study period). The substantive rise in market capitalization of these ‘highly boarded’ companies has coincided with only a marginal increase (from 5% to 6%) in the proportion of ‘highly boarded’ directorships.
These trends suggest that despite the well-intentioned regulatory reforms the extent of over-boarding/interlocking among directors has not come down (there is actually a marginal increase) and there appears to be increasing concentration of power among key individuals. Given the general view that concentration of power in a few individuals or entities is not desirable in the larger interests of society, it would appear that the observed trends in the concentration of power among a handful of the country’s corporate elite is a matter for substantive public policy concern. Finally, the regression analysis indicates a positive impact on Return on Assets (ROA) for ‘highly boarded’ directors signifying a negation of the agency centric conceptualization on the role of multiple directors. Instead, connectedness variables (Eigen vector) which proxy for the Resource dependency hypothesis are quite strongly supported. In a nutshell, from public policy perspective, the analysis potentially reflects the ‘bad cholesterol’ elements of multiple directorships in terms of a tiny segment of ‘highly boarded’ directors controlling a significant portion of the country’s economic prowess, whereas the positive influences on company performance provide some evidence of the ‘good cholesterol’.

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