Impact of Corporate Governance On Corporate Sustainable Growth

Tutun Mukherjee, Som Sankar Sen / Impact of Corporate Governance on Corporate Sustainable Growth / 167 - 184
ISSN: 2089-6271 | e-ISSN: 2338-4565 | https://doi.org/10.21632/irjbs
Vol. 12 | No. 2
Impact of Corporate Governance on

Corporate Sustainable Growth
Tutun Mukherjee*, Som Sankar Sen**
* Department of Commerce, The University of Burdwan, West Bengal, and St. Xavier’s University, Kolkata, India
**Department of Commerce, The University of Burdwan, West Bengal, India.
ARTICLE INFO ABSTRACT
JEL: G3, G30, G32, G34, G38 It is believed that good corporate governance practices assist
Keywords:
significantly in uplifting corporate performance, and brings in business
corporate sustainable growth, success and sustainability. This study aims to shed light on the impact
corporate governance, of corporate governance practices on corporate sustainable growth in
longitudinal data analysis,
control variable, India
India. A sample size of leading 139 non-financial companies listed in
NSE for five years has been used in this study. Using longitudinal data
Kata Kunci: analysis, the findings of the study suggest that Board Size (BS) and the
pertumbuhan berkelanjutan
perusahaan,
Board Independence (B-IND) exercise strong influence in explaining
tata kelola perusahaan, the Corporate Sustainable Growth in India after controlling the effect
analisis data longitudinal, of Leverage (LEV).
variabel kontrol,
India
SARI PATI
Diyakini bahwa praktik tata kelola perusahaan yang baik sangat

membantu dalam meningkatkan kinerja perusahaan, dan membawa
keberhasilan dan keberlanjutan bisnis. Penelitian ini bertujuan
untuk menjelaskan dampak praktik tata kelola perusahaan pada
pertumbuhan berkelanjutan perusahaan di India. Sebanyak 139
sampel perusahaan non-keuangan terkemuka yang terdaftar
selama lima tahun di NSE telah digunakan dalam penelitian ini.
Menggunakan analisis data longitudinal, temuan penelitian ini
menunjukkan bahwa Ukuran Dewan atau jumlah Dewan Direksi (BS)
dan Dewan Independen (B-IND) memiliki pengaruh yang kuat dalam
menjelaskan Pertumbuhan Berkelanjutan Perusahaan di India setelah
mengendalikan efek Leverage (LEV).
© 2019 IRJBS, All rights reserved.
Corresponding author:
[email protected]
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International Research Journal of Business Studies | vol. XII no. 02 (August - November 2019)
INTRODUCTION system is the pre-requisite to enable sustainable

‘Corporate governance’ has turned out to be growth of the firms. Pintea & Fulop (2014) support
one of the buzzwords in the language of global the view and claimed good corporate governance
business. The global financial catastrophe that practices play a crucial role to assure corporate
swept the financial markets and economies around sustainable growth, in the present context of
the world, causing bankruptcies and resulting globalization. Empirical shreds of evidence as
economic recession has pushed the concept of well, suggests that corporate governance practices
corporate governance into the limelight (Pintea & exercise strong influence in explaining the corporate
Fulop, 2014). The concept of corporate governance sustainable growth (Li et al. 2015).
“encompasses policies, processes, and people,
designed to govern the companies towards In this comprehensive framework, this study aims
sustainable value generation.” It is believed that to shed light on the impact of corporate governance
corporate governance in its practical application is practices on corporate sustainable growth in India.
an important key that unlocks the true value of a In doing so, this study adds several novelties to the
business regardless of the firm size (Bates, 2013). existing literature. First, this study provides evidence
The practice of good governance in a company of the impact of corporate governance practices on
mitigates risk, improves performance, opens the corporate sustainable growth in India for the first
way to efficient financial markets, and establishes an time. Second, the present study considers a sample
attractive investment climate, showing transparency of top 139 NSE listed non-financial companies with
and social responsibility (Pintea & Fulop, 2014). the intent to capture the comprehensive view of
best blue-chip companies along with the mid-cap
On the other hand, sustainable growth is becoming companies in India. Third, instead of focusing on
more and more important for all the companies, a single metric framework (i.e., an index) with the
across the globe. Strategically, ‘value-creation’ is intent to capture the impact of the different facets
the ultimate mission of all what we do. However, of corporate governance practices on corporate
in today’s global competitive battles, a mere sustainable growth more precisely, the present
maximizing growth may assist the company to study utilizes a range of corporate governance
accomplish its short-term goals but not the long- measures (including Board Size, Proportion of
run objective what they seek to i.e., the ‘value- Women Directors on the Board, CEO’s Duality,
creation’ (Ramezani et al., 2001). Empirical shreds Boards Education, Board Independence, and
of evidence too, suggests that value creation Presence of Family Affiliation on the Board). Fourth,
maximizes around sustainable growth rate of an the present study can help the policymakers in
organization and decreases sharply, once actual framing effective governance policies for the
growth exceeds sustainable growth rate (Ataünal Indian companies in light of corporate sustainable
et al., 2016). Thus, realizing the empirical fact, growth. Lastly, in today’s global competitive battles
many companies have been pushing hard for managing, corporate growth is a big confrontation
attaining sustainable growth and integrating the for corporate managers. To such a degree, this study
same into their long-term strategic plan. Despite can help corporate managers in managing the firm’s
the emerging orientation of corporate growth, the growth and its policies effectively.
legitimate question of how to achieve sustainable
growth remains a profound mystery for corporate In accordance with the core objective, the rest of
managers. this paper is organized as follows: Second section
deals with Literature Review and Hypothesis
Sakai & Asaoka (2003) believe establishing an development. The subsequent section delineates the
adequate and effective corporate governance Research Methods. Then, Results and Discussions,
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and Managerial Implications are presented, and the particular task to the agents (Eisenhardt, 1989; Ross,
last section concludes the paper. 1973) and given the chance, agents in most of the
cases behave in a self-interested manner, behaviour
LITERATURE REVIEW AND HYPOTHESIS that may conflict with the principal’s interest
DEVELOPMENT (Eisenhardt, 1989; Jensen & Meckling, 1976). As
Corporate Governance and its theoretical such, principals enact structural mechanisms that
perspective keep an eye on the agent to curb opportunistic
It is difficult to point out one universal definition behaviour and better align the parties’ interest
of corporate governance, as it is a complex, multi- (Madison, 2014; Eisenhardt, 1989; Fama & Jensen,
paradigmatic and highly interdisciplinary subject 1983).
(Klepczarek, 2017). However, in common jargon,
“corporate governance represents the system by In sum, this theory specifies mechanisms which
which corporations are managed and controlled” reduces agency loss (Eisenhardt, 1989) and suggests
(Van Horne & Wachowicz, 2015, pp. 8). It defines that agency problems are created, and agency costs
the roles of the board of directors in managing the are incurred to alleviate these problems (Jensen &
company and maintaining the relationship with the Meckling, 1976).
company’s shareholders (Pass, 2004). According to
Shleifer & Vishny (1997), “corporate governance Stewardship Theory
is the process through which suppliers of finance The stewardship theory presents a divergent
to corporations gain assurance of return on their perspective than the agency theory, especially
investment.” While Blair (1995) defines corporate in terms of motivation and control issues of
governance as “a whole set of legal, cultural and businesses. The key tenet of this theory is trust
institutional arrangements that determine what (Keay, 2017; Kluvers & Tippet, 2011; Hernandez,
public corporations can do, who controls them, 2007). Stewardship theory views manager as
how this control is exercised and how the risks stewards (Pandey, 2015, pp. 849) and presumes
and return from the activities they undertake are that they will behave as trustworthy stewards of the
allocated.” organization and focus on the collective well-being
of the constituents in the firm regardless of the
Regarding the theoretical perspective of corporate managers’ self-interests (Wesley, 2010; Donaldson
governance, several theories have been used over & Davis, 1991).
time to explore the relationship between corporate
governance practices and firms performance. Putting things together, this theory emphasizes on
Amongst them, the four widely used theories viz. cooperation and collaboration, and assumes that
Agency theory, Stewardship theory, Stakeholders the manager will act for the collective interest to
theory, and Resource Dependence theory are maximize the value of the firm.
discussed as under:
Stakeholder Theory
Agency Theory The stakeholder theory is merely an extension of the
Agency theory is considered as one of the dominant agency view (Amer, 2016). This theory assumes that
theoretical perspectives in the literature on the “companies and society are independent and
corporate governance (Daily et al., 2003). The key therefore the corporation serves a broader social
tenet of this theory is the separation of ownership purpose than its responsibilities to shareholders”
and control (Pandey, 2015, pp. 849). Agency theory (Keil & Nicholson, 2003a). To be more specific,
discusses situations, in which principals delegate the stakeholder theory is principally based on the
their authority of control and decision-making for premises that a firm’s board of directors should be
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working in the best interests of all its stakeholders, Corporate Sustainable Growth
rather than only the shareholders. “Stakeholder The words “Sustainable Growth” do not have a rigid
represents any group or individual who can affect or definition. It holds different meanings to different
is affected by the achievement of the organization’s people and groups. However, from a financial
objectives” (Freeman, 1984). This group includes perspective, sustainable growth implies “an
- investors, managers, employees, customers, affordable growth that can be sustained profitably
business partners, local communities, civil society for future benefits.” The concept of corporate
and the natural environment (Wheeler & Sillanpaa, sustainable growth became popularized by Higgins
1997). Freeman et al., (2004) suggest that corporate in the year 1977, where he first proposed the use
managers should try to create as much as value of sustainable growth rate model in explaining
for stakeholders as possible by resolving existing the practical limit for growing firms. The model of
conflicts among them so that the stakeholders do sustainable growth rate explicates “whether or not
not exit the deal. the firm’s proposed growth plan can be funded
within its existing financial parameters” (Firer,
In sum, this theory aims to ensure that the interests 1995). More specifically, sustainable growth rate
of the stakeholders are aligned with that of seeks to explain “the utmost annualized growths
shareholders (Pandey, 2015, pp. 850). in the percentage of sales a firm can afford without
issuing any further (i.e. new) equity or, altering its
Resource Dependence Theory financial policies.”
The ‘Resource Dependence Theory’ is developed by
the American theorists, Jeffrey Pferrer and Gerald Board Size and Corporate Sustainable Growth
Salancik, in the year 1978, in which the board of Board size reflects the number of directors
directors is considered as a resource that can, not representing the board. It is considered to be one
only supplant its need for other resources, but also of the crucial factors to decide the efficiency and
influence the environment in its favour, and thereby decision-making process of a firm (Nazar and
improve firm performance (Bathula, 2008). The Rahim, 2015). However, identifying an appropriate
underlying proposition of this theory represents board size has remained a matter of continuing
the need for environmental linkages between the debates (Hermalin & Weisbach, 2003; Yermack,
firm and outside directors (Yusoff & Alhaji, 2012). 1996; Jensen, 1993). Jensen (1993) believes as
Accordingly, the board of directors is considered boards become larger, they become less effective
as a link between the firm and the key resources and are easier for the CEO to exert his or her control.
(i.e., information, skills, access to constituents, In addition, over-crowded boards are less cohesive
and legitimacy) that a firm needs from the external (Lipton and Lorsch, 1992), and more difficult to
environment for better performance and growth. coordinate (Forbes and Milliken, 1999), which
possibly can deteriorate the firm’s performance.
Putting things together, this theory perceives “the A numerous number of prior studies (Orozco et
board members, with their knowledge, skills, al., 2018; Zabri et al., 2016; Ali, 2016; Azeez, 2015;
talents, and professional experience, may be Nazar and Rahim, 2015; Canh et al., 2014; Arosa et
helpful in providing advice and counselling to al., 2013; Jensen, 2012; Gill & Mathur, 2011; Guest,
management in case of limited or lack of inside 2009; Mashayekhi & Bazaz, 2008; Singh & Davidson,
knowledge. In addition, they could also provide the 2003; Hermalin & Weisbach, 2003; Vafeas, 1999;
firm with access to scarce resources by providing Eisenberg et al., 1998; Yermack, 1996; Jensen, 1993;
the firm with access to their networks” (Sarens & Lipton & Lorsch, 1992) offers evidence that smaller
Merendino, 2016). and the limited size boards are more efficient and
delivers a superior corporate performance.
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There are, however, strong contradicting views performance gets better with an increase in the
in the literature, regarding this. The contrary proportion of women directors on corporate boards.
school of thought believes larger boards are more Thus, we hypothesize:
efficient and tends to deliver superior corporate
performance. It is believed that larger boards have H2: Proportion of Women Directors on the Board
directors from diverse backgrounds possessing (BS) have a positive impact on attaining
different sets of talent, skill, and professional corporate sustainable growth.
experience, which improves boards planning and
decision-making practice and thereby enhance CEO’s Duality and Corporate Sustainable Growth
firms’ performance. Prior researches by Herdjiono CEO’s duality is considered to be an important
& Sari (2017), Arora & Sharma (2016), Kalsie & mechanism of board control structure (Bathula,
Shrivastav (2016), Oludele et al. (2016), Fauzi & 2008). It is argued when a single individual plays the
Locke (2012), Coles et al. (2008), Pearce & Zahra role of a chairman and the CEO simultaneously, a
(1992) offers evidence that there exists a significant conflict of interest and higher agency costs arises
positive relationship between board size and the (Ehikioya, 2009). In addition, such a centralized
corporate performance. Thus, we hypothesize: leadership authority may lead to management’s
domination of the board, which results in poor
H1: Board Size (BS) have a positive impact on performance (Jensen & Meckling, 1976; Fama
attaining corporate sustainable growth. & Jensen, 1983). The prior empirical evidences
(Wanjiru, 2013; Azeez, 2015) also support the
Proportion of Women Directors on the Board same and confirms that a separation of the
and Corporate Sustainable Growth aforementioned two positions proves beneficial
The presence of women director on the corporate in uplifting a firm’s performance. Thus, we
boards has been increasingly recognized as an hypothesize:
obligatory element of good corporate governance
practices. It is asserted that women directors are H3: CEO’s Duality (DUALITY) have a negative impact
more diligent as compared to the male ones in on attaining corporate sustainable growth.
terms of attending the board meeting, monitoring
performance, and others (Appiadjei et al., 2017; Board’s Education and Corporate Sustainable
Khan et al., 2017; Erhardt et al., 2003; Carter et al., Growth
2003). In addition, women’s are more cautious,
less overconfident, and are innately more risk- “Education is the most powerful weapon
averse than men’s. These traits intensify the which you can use to change the world”
board’s decision-making process, the monitoring – Nelson Mandela
practice, and the performance. On the other hand,
Daunfeldt & Rudholm (2012) believes that firms Business organizations formed and managed
with a diverse board likely to incur higher costs as a by educated managers tend to perform better
result of collective decision-making and thereby can than those managed by uneducated managers
deteriorate the firm’s performance. Nevertheless, (Akpan and Amran, 2014). The presence of more
a numerous number of prior studies (Carter et al., qualified directors on the board enriches board’s
2003; Erhardt et al., 2003; Campbell and Minguez- knowledge base, the skill and, the technical base.
Vera, 2007; Srinidhi et al., 2011; Mahadeo et al., 2012; These enrichments enrich board’s decision-making
Fan, 2012; Johl, Kaur, and Cooper, 2015; Christiansen process, and finally, the firm’s performance. The
et al., 2016; Lee-Kuen et al., 2017; Appiadjei et al., studies of Bathula (2008); Ujunwa (2012); and Ali
2017; Sánchez, 2017) have confirmed that the firm’s (2016) have confirmed that the firms equipped
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with highly qualified directors on the board tend account of nepotism (Lansberg et al., 1988; Burkart
to perform better. Ljungquist (2007) believes et al., 2003; Pérez-González, 2006) and asymmetric
that board members with higher qualifications altruism (Schulze et al., 2001). In addition, large
likely to benefit the firms through a mix of family shareholders may use their controlling
competencies and capabilities, which helps in position in the firm to extract private benefits at
creating diverse perspectives to decision-making. the expense of the small shareholders which may
Thus, we hypothesize: have an adverse effect on the firm’s performance
(Villalonga and Amit, 2006). Thus, we hypothesize:
H4: Boards Education have a positive impact on
attaining corporate sustainable growth. H6: Presence of Family Affiliation on the Board
(P-FAMA) have a negative impact on attaining
Board Independence and Corporate Sustainable corporate sustainable growth.
Growth
Independent directors are entrusted with the METHODS
responsibility of protecting shareholders interest Database
through impartial decision-making and vigilant Primarily, a sample of top 200 NSE listed companies
monitoring of the governance process. They bring has been drawn out of the target population based on
in more skills and knowledge to the company their market capitalization. The above selection has
(Kamardin, 2011), and their presence on the board been considered in an anticipation of capturing the
gives greater weight to board`s deliberations comprehensive view of best blue-chip companies
and judgment (Heravia et al., 2011). It is widely along with the mid-cap companies in India. Of the
acknowledged that the ideal board should have a selected sample, 139 non-financial companies
large proportion of outside directors as they bring have been considered as an ultimate sample size
in a balance of power into the ‘upper echelons’ of on the basis of purposive sampling. Banks and
organizations (Hambrick and Mason, 1984). Prior other financial companies, due to their divergent
empirical evidence (Laing and Li, 1999; Bebchuk nature of the operation and capital structure,
and Weisbach, 2010; Rouf, 2012; Khan and Awan, have been left out of the ultimate sample size.
2012; Chen, 2015; Liu et al., 2015; Sarpong-Danquah Additionally, a few non-financial companies, due to
et al., 2018) suggests that the firm’s having higher unavailability of data or of different financial years,
board independence likely to perform better. In failed to be the part of the ultimate sample size. The
sum, independent directors play an imperative required financial and corporate governance data
role in protecting the shareholder interest (Byrd & of the selected companies have been collected
Hickman, 1992). Their effective monitoring reduces exclusively from Capitaline Database over a time
agency costs and boosts company performance period of five years, i.e., from 2011-12 to 2015-16.
(Fama, 1980). Thus, we hypothesize: The selection of the time period as stated has been
considered with an intent to evade the effects of
H5: Board Independence (B-IND) have a positive 2008-09 global financial crisis. The present study has
impact on attaining corporate sustainable been conducted based on the consistently arranged
growth. data as per financial years.
Presence of Family Affiliation on the Board and Research Variables

Corporate Sustainable Growth 1. Dependent Variable – Corporate Sustainable
Strong family involvement on the board may blur Growth is the dependent variable in the present
the dissection between a family perspective and its study. There are number of ways through which
responsibility to other shareholders produced on one can quantify corporate sustainable growth.
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However, amongst those, Sustainable Growth considered as independent variables instead

Rate (SGR) models of Van Horne and Higgins of focusing on a single metric framework (i.e.,
are universally accepted and used in the prior an index). To be more specific, a catalogue of
studies (Mukherjee & Sen, 2018; Xu & Wang, six variables has been taken into consideration,
2018; Pandit & Tejani, 2011). In this study, Van where each of them represents a separate facet
Horne’s SGR model has been used as there is of corporate governance practices. First, Board
no significant difference between these two Size (BS), as measured by taking a natural log of
models (Fonseka, Ramos, and Tian, 2012). total number of directors on the board at period
t; Second, Proportion of Women Directors on
the Board (P-WOM), as measured by number of
Sustainable Growth Rate (SGR) =
women directors on the board at period t to Total
Np number of directors on the board at period t;
( Eq )
b
Third, CEO’s Duality (DUALITY), as measured by
[Van Horne & Wachowicz, 2015, pp.192]
using dummy ‘0’ and ‘1’ i.e., Coded ‘1’, if Board’s
Np
1 - [b
( Eq ) ] Chairman acting as a CEO/Managing Director
simultaneously and Coded ‘0’, otherwise;
or, Fourth, Boards Education (B-EDU), as measured

by using dummy ‘0’ and ‘1’ i.e., Coded ‘1’, if
ROE x b majority (i.e. more than 50%) of the directors

= [Ross et al., 2012, pp.104-106] on the board possessed Master Degree or any
1 - (ROE x b) Professional Degree, or, any other equivalent
degree and Coded ‘0’, otherwise; Fifth, Board
Independence (B-IND), as measured by Number
of independent directors on the board at period
Where, t to Total number of directors on the board at
ROE (Return on Equity) = period t; Lastly, Presence of Family Affiliation
on the Board (P-FAMA), as measured by using
Net Profit dummy ‘0’ and ‘1’ i.e., Coded ‘1’, if more than
Total Equity one family member on the Board during period
t and Coded ‘0’, otherwise.
b (Retention Ratio) =
3. Control Variable – In the present study, Leverage
PAT - Current Year Dividend (LEV), as measured by debt to equity ratio, is
PAT considered as control variable. The selection
of the said control variable is in line with the
previous studies conducted by Mukherjee &
2. Independent Variables – Corporate governance Sen, (2018), Xu & Wang (2018).
represents a multi-dimensional concept.
Finance literature reveals that there different Research Method
ways through which one can enumerate the Two regression models have been used in the
corporate governance practices. In the present present study. Model 1 represents the fundamental
study, with the intent to capture the impact of model, which examines the impact of corporate
corporate governance practices on corporate governance practices viz. Board Size (BS), Proportion
sustainable growth more precisely, a range of Women Directors on the Board (P-WOM), CEO’s
of corporate governance measures has been Duality (DUALITY), Boards Education (B-EDU),
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Table 1. Summary of the Research Variables and their Proxies
Variables Proxy
1. Dependent Variable:
Np
a) Corporate
b
( Eq )
Sustainable Growth CSG = [Van Horne & Wachowicz, 2015, pp.192)]
Np
(CSG) 1 - [b
( Eq ) ]
Or,
ROE x b
= [Ross et al., 2012, pp.104-106]
1 - (ROE x b)
Net Profit
Where, ROE (Return on Equity) =
Total Equity
PAT - Current Year Dividend

b (Retention Ratio) =
PAT
2. Independent Variables:
a) Board Size (BS) BS = Natural log of total number of directors on the board at period t
[Azeez, 2015; Che and Langli, 2015; Arosa et al., 2013; Jackling & Johl, 2009;
De Andrés et al., 2005; Anderson & Reeb, 2003]
b) Proportion of
Number of woman directors on the board period t
Women Directors on P-WOM =
the Board (P-WOM) Total number of directors on the board at period t
[Akpan & Arman, 2014; Ahern and Dittmar, 2012; Yasser, 2012;
Nielsen & Huse, 2010; Adams and Ferreira, 2009]
c) CEO’s Duality DUALITY = Coded ‘1’, if Board’s Chairman acting as a CEO/Managing Director
(DUALITY) simultaneously and Coded ‘0’, otherwise
[Berardino, 2016; Cabrera-Suárez & Martín-Santana, 2015;
Liu et al., 2015; Azeez, 2015; Arosa et al., 2013]
d) Boards Education B-EDU = Coded ‘1’, if majority (i.e. more than 50%) of the directors on the board
(B-EDU) possessed Master Degree or any Professional Degree or any other equivalent
degree and Coded ‘0’, otherwise
e) Board Independence
Number of independent directors on the board during period t
(B-IND) B-IND =
Total number of directors on the board during period t
[Liu et al., 2015; Akpan & Arman, 2014]
f) Presence of Family P-FAMA = Coded ‘1’, if two or more family members on the Board during
Affiliation on the period t with same last name and Coded ‘0’, otherwise
Board (P-FAMA) [Rutherford et al., 2006; Schulze et al., 2001]
3. Control Variable:
a) Leverage (LEV) Long t erm debt
LEV =
Total Equity
[Mukherjee & Sen, 2018;]
Source: Author’s own tabulation

Board Independence (B-IND), and Presence of Family Affiliation on the Board (P-FAMA) on
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corporate sustainable growth after controlling (i) Pooled OLS model; (ii) The fixed effects least
the profound effect of Leverage (LEV). Model 2 squares dummy variable (LSDV) model; (iii) The
represents the model for robustness test, which random effects model (REM).
examines the impact of corporate governance
practices viz. Board Size (BS), Proportion of Women Now, to select the appropriate model from the
Directors on the Board (P-WOM), CEO’s Duality above, the following steps have been considered:
(DUALITY), Boards Education (B-EDU), Board
Independence (B-IND), and Presence of Family Step 1: Selection between Model (i) and Model (iii):
Affiliation on the Board (P-FAMA) on DEVIATION Breusch Pagan Test LM Test
after controlling the profound effect of Leverage The null hypothesis in the Breusch Pagan Test
(LEV). LM Test represents, the variance across entities
is Zero. This highlights that there are no random/
To check the robustness of the basic results, we panel effects. Now, if the computed value of LM
legitimately consider Deviation (DEV), as measured is insignificant, then H0 will be accepted, and the
by corporate actual growth rate minus corporate pooled OLS regression model should be applied.
sustainable growth rate, to represent the alternative But if the computed value of LM is significant,
measure of corporate sustainable growth and the then H0 will be rejected, and there will be random
underlying model as developed is re-estimated. The effects.
selection of this alternative measure of corporate
sustainable growth is in line with the previous Step 2: Selection of fixed effects or random effects:
researches conducted by Mukherjee & Sen (2018), Hausman Test
Li et al. (2015), and Amouzesh et al. (2011). The To decide between fixed or random effects, we
Deviation (DEV) indicates how close or far the firm have to run a Hausman Test, where, as the null
is to attain sustainable growth. To be more specific, hypothesis represents, there are no fixed effects.
the lesser the deviation, the closer the firm is to Now, if the H statistics is significant, then H0 is
attain sustainable growth and vice-versa. rejected, and fixed effect model is retained and
vice-versa.
The models are represented as follows:
RESULTS AND DISCUSSION
CSGit=β1 + β2 BSit + β3PWOMit + Table 2 presents descriptive statistics of the selected
β4DUALITYit + β5BEDUit +β6 BINDit + variables employed in this study. The mean value
β7PFAMAit +β8LEVit +μit ...................................................................... (1) of CSG is 0.096, which suggests that on an average,
the Indian companies have a low sustainable
DEVit=β1 + β2 BSit + β3PWOMit + growth capability. The Board Size (BS) ranges
β4DUALITYit + β5BEDUit +β6 BINDit + from a minimum of 1.386 to a maximum of 3.045
β7PFAMAit +β8LEVit +μit ...................................................................... (2) with a mean value of 2.289, which signifies that on
an average, the Indian companies uphold a larger
Where i (i.e. company) = 1, 2, 3, 4, 5…...139 and t board size. The statistics for P-WOM indicates that
(i.e. time) = 1, 2, 3, 4, 5. within the Indian corporate boards approximately
one-tenth represents the women directors.
This study consists of 139 companies, and the period Regarding the CEO’s Duality, the statistics suggest
is 5 years. Since this study has the characteristic of that approximately 37% of the leading companies
both cross-sectional and time-series, longitudinal in India display an incidence of CEO’s duality on
/ panel data analysis has to be employed. For the the board. The statistics for B-EDU indicates that
empirical analysis, three options are available: approximately 86% of Indian companies consist
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Tabel 2. Descriptive Statistics
Variable Observations Minimum Maximum Mean Std. Dev.

CSG 695 -12.852 2.269 0.096 0.574
BS 695 1.386 3.045 2.289 0.299
P-WOM 695 0.000 0.375 0.105 0.078
DUALITY 695 0.000 1.000 0.374 0.484
B-EDU 695 0.000 1.000 0.859 0.348
B-IND 695 0.000 1.000 0.569 0.252
P-FAMA 695 0.000 1.000 0.540 0.499
LEV 695 -24.318 79.973 0.515 3.393
Source: Author’s own tabulation using XL STAT software
of well-educated boards. As regards Presence amongst all the explanatory variables is minimal
of Family Affiliation on the Board (P-FAMA), the i.e. below 0.80. This offer evidence that no multi-co
statistics suggests that approximately 54% of the linearity problem exists amongst the explanatory
leading companies in India demonstrate a presence variables employed in the present study.
of family affiliation on the board. While the statistics
for LEV (i.e. mean value of 0.515) indicates that the Table 4 presents the results of Breusch and
Indian companies upholds a low-geared capital Pagan Lagrangian multiplier test (BP test) for the
structure. underlying model (i.e., for Model 1). This test assists
researchers to determine which model amongst
Table 3 presents Pearson’s correlation analysis, the Pooled OLS and REM represents the best-fitted
which highlights the relationship between the model for the models as developed in the study.
dependent variable and explanatory variables The result shows that the LM statistic is 2.55 and is
employed in this study. The correlation shows that significant at 5 % level. Accordingly, H0 is rejected,
CSG is positively correlated with BS and P-WOM. and the result of REM (as shown in Table 6) could
However, CSG is negatively associated with CEO’S be accepted for the underlying model as developed.
DUALITY, B-EDU, B-IND, P-FAMA, and LEV. Addi- However, there is a need to run FEM and conduct
tionally, the result demonstrates that the correlation supplementary tests.
Tabel 3. Pearson Correlation Matrix
BS P-WOM DUALITY B-EDU B-IND FAM-A LEV CSG

BS 1
P-WOM -0.005 1
DUALITY 0.071 -0.047 1
B-EDU 0.146 0.021 0.117 1
B-IND -0.062 0.131 -0.356 0.041 1
P-FAMA 0.157 0.080 0.016 -0.175 0.221 1
LEV 0.028 0.092 0.076 0.024 0.010 0.088 1
CSG 0.105 0.040 -0.041 -0.008 -0.047 0.079 -0.027 1
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Tabel 4. Breusch and Pagan Lagrangian multiplier test for random effects (for Model 1)
Var sd = sqrt(Var)
CSG 0.330 0.574
e 0.309 0.556
u 0.017 0.132
chibar2(01) 2.55**

Notes: p < 0.05**, p < 0.01*
Table 5 presents the result of Hausman Test for is consistent with the resource dependence theory
the underlying model (i.e., for Model 1). This test and findings of Herdjiono & Sari (2017), Arora &
assists researchers to determine whether to keep Sharma (2016), Kalsie & Shrivastav (2016), Oludele
FEM or REM as a preferred model for the models et al. (2016), Fauzi & Locke (2012), Coles et al.
as developed in the study. The result demonstrates (2008), and Pearce & Zahra (1992) yet contradicts
chi2(4) is 2.78 and is insignificant. Accordingly, we the research by Li et al. (2015) that observed a
failed to reject H0, and the result of the Random significant negative association between board
Effect Model (as shown in Table 6) is to be size and corporate sustainable growth. The logical
considered a good fit for the underlying model as reasoning behind this phenomenon is that larger
developed. board size brings a comprehensive range of
expertise, knowledge, and experience in diverse
Table 6 presents the regression results for the fields, thereby, provides an improved corporate
underlying model (i.e., for Model 1). The first governance framework through sound planning;
explanatory variable, Board Size (BS), demonstrates productive decision-making; and superior board
a significant positive influence on corporate monitoring. On the other hand, Proportion of
sustainable growth (b = 0.179; z = 2.222). It implies Women Directors on the board (P-WOM) proven
that the firms having a larger board size are more not to be significantly influential over corporate
competent to attain sustainable growth. This result sustainable growth. This result indicates that
Tabel 5. Hausman Test (for Model 1)
(b) (B) (b-B) sqrt(diag(V_b-V_B))

fe re Difference S.E
BS 0.293 0.179 0.114 0.162
P-WOM 0.472 0.352 0.120 0.268
DUALITY 0.019 -0.089 0.108 0.134
B-EDU 0.031 0.010 0.021 0.111
B-IND -0.249 -0.215 -0.034 0.145
P-FAMA -0.138 0.097 -0.235 0.189
LEV -0.007 -0.006 -0.001 0.004
chi2(4) 2.78
Source: Author’s own tabulation using STATA software
Notes: p < 0.05**, p < 0.01*
- 177 -
board gender diversity provides no linkage with board independence tends to decelerate the
the corporate sustainable growth; accordingly, board’s functioning and efficiency produced as
we failed to accept our hypothesis H2 . Consistent a result of frequent interference; consequently,
with the findings of Li et al. (2015), our results also a firm squanders its potential opportunities. In
demonstrates an insignificant association between contrast, Presence of Family Affiliation on the Board
CEO’s duality (DUALITY) and corporate sustainable (P-FAMA) is found to demonstrate a significant
growth, indicating that there is no linkage between positive association with the corporate sustainable
CEO’s duality and corporate sustainable growth; to growth. It implies that the firms having a higher
such a degree, we failed to accept our hypothesis presence of family affiliation on the board are
H3 . Likewise, the result for the Board’s Education more competent to attain sustainable growth.
(B-EDU), also exhibits no notable relationship with This result also supports the stewardship theory
corporate sustainable growth; consequently, we and researches by Che and Langli (2015) however
reject our hypothesis H4. Surprisingly, the result for contradicts our hypothesis H6 . The logical reasoning
Board Independence (B-IND), exhibits a significant behind this phenomenon is that family affiliated
negative association with corporate sustainable director’s treat the firm as if it is their own child,
growth, indicating that higher board independence and takes, decisions judiciously. In addition, it is
(i.e., higher proportion of independent directors on likely that communication is more efficient when
the board) may adversely affect a firm’s potentiality more family affiliated directors are present on the
to attain sustainable growth. This result is in line board instead of outsiders (Che and Langli, 2015;
with the stewardship theory and researches by Jaskiewicz & Klein, 2007).
Arora & Sharma (2016), Vrenken (2014), Arosa et
al. (2013), Bhagat & Bolton (2008), Dalton et al. Regarding the control variable, the study has failed
(1998) yet contradicts our hypothesis H5 and the to observe any significant association of leverage
research by Li et al. (2015) that noted a significant (LEV) with corporate sustainable growth.
positive association between board independence
and corporate sustainable growth. The logical In sum, the findings of Model 1 suggest that the
reasoning behind this phenomenon is that higher Board Size (BS), Boards Independence (B-IND),
Tabel 6. Random-effect GLS Regression Results (for Model 1)
CSG Coef. Std. Err. z

_CONS_ -0.253 0.197 -1.290
BS 0.179** 0.081 2.220
P-WOM 0.353 0.289 1.220
DUALITY -0.090 0.053 -1.710
B-EDU 0.010 0.070 0.150
B-IND -0.215** 0.102 -2.100
P-FAMA 0.097** 0.051 1.890
LEV -0.006 0.007 -0.950
R 2
0.027
WALD CHI2 16.56**
N 695
Notes: p < 0.05**, p < 0.01*
- 178 -
and the Presence of Family Affiliation on the Board to exhibit any notable association with Deviation
(FAM-A) exercise profound influence in explaining (DEV). This contradicts the basic result where a
the Corporate Sustainable Growth in India. significant linkage between the Presence of Family
Affiliation on the Board (FAM-A) and corporate
Table 7 presents the regression results for Model sustainable growth was obtained. As regards other
2 (i.e., of robustness check). Using Pooled OLS explanatory variables, the result of the robustness
regression model (as suggested by the Breusch test is consistent with the basic results.
and Pagan Lagrangian multiplier test for random
effects), the results for robustness test suggest that Thus, the results for Model 2 (i.e., of the robustness
board size (BS) demonstrates a significant negative test) offers evidence that almost all the findings of
association with the dependent variable – Deviation this study are robust.
(DEV), which indicates that the firms having a larger
board size tends to reduce the deviation, and turn MANAGERIAL IMPLICATIONS
out to be more competent to attain sustainable This study contributes constructively to the extant
growth. This result is consistent with the basic result literature on corporate governance and corporate
as obtained. The result for Board Independence sustainable growth by revealing the profound
(B-IND), exhibits a significant positive association impact of corporate governance practices on
with the dependent variable – Deviation (DEV), corporate sustainable growth in India. The above
indicating that higher board independence (i.e., a shreds of empirical evidence exhibit the most
higher proportion of independent directors on the suitable board size in order to attain corporate
board) is likely to enlarge the deviation and reduce sustainable growth. Besides, the findings show the
the firms’ capability to attain sustainable growth. adversity of the excessive board independence on
This result as well in line with the basic result, as the attainment to corporate sustainable growth.
obtained. However, the result for the Presence Thus, this study would be valuable for the Indian
of Family Affiliation on the Board (FAM-A) failed Government and other policymakers too, in
Tabel 7. Pooled OLS Regression Results (for Model 2)
DEV Coef. Std. Err. t
_CONS_ 2.236 0.914 2.450

BS -1.085** 0.375 -2.890
P-WOM -2.249 1.397 -1.610
DUALITY 0.041 0.244 0.170
B-EDU 0.181 0.326 0.550
B-IND 1.057** 0.483 2.190
P-FAMA -0.239 0.234 -1.020
LEV 0.029 0.322 0.910
R 2
0.027
Adj. R2 0.017
F 2.72*
N 695
Notes: p < 0.05**, p < 0.01*
- 179 -
framing effective governance policies for the Indian (P-FAMA) and Corporate Sustainable Growth (CSG).
companies in light of corporate sustainable growth.
Additionally, in today’s vibrant and competitive The research findings offer evidence that in the
business world, managing corporate growth is Indian context, larger boards (i.e., a larger board
undoubtedly a big confrontation for corporate size) and lesser board independence (i.e., a
managers. As demonstrated, this study provides limited proportion of independent directors on the
corporate managers with a mantra that if good board) are the key contributors to the corporate
governance practices are employed, the firm’s sustainable growth. In sum, it can be asserted that
growth and its policies can be managed effectively good corporate governance practice not only brings
for future benefits. in superior management and business performance
but also, enables a firm to attain affordable heights.
CONCLUSION
The present study aimed to investigate the impact This study presents ample scope of future research
of corporate governance practices on corporate for the academicians, economists, corporate
sustainable growth in India. The ultimate findings managers, and scholars as well. The present study
of this study bring to light that out of the selected can be further extended by taking into consideration
corporate governance measures, Board Size (BS) the other corporate governance determinants like
and the Board Independence (B-IND) exercise a Audit Committee, Remuneration Committee, Board
profound influence in explaining the Corporate Meetings, and others or by expanding the sample
Sustainable Growth (CSG). However, no significant size, the period of the study, and the control
linkage could be established between the other variables. Additionally, further studies can be carried
selected explanatory variables viz. CEO’s Duality out to explore the effect of Board Gender Diversity
(DUALITY), Proportion of Women Directors on or Boards Ownership Structure on Corporate
Board (P-WOM), Boards Education (B-EDU), Sustainable Growth.
Presence of Family Affiliation on the Board
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Impact of Corporate Governance On Corporate Sustainable Growth

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Tutun Mukherjee, Som Sankar Sen / Impact of Corporate Governance on Corporate Sustainable Growth / 167 - 184

ISSN: 2089-6271 | e-ISSN: 2338-4565 | https://doi.org/10.21632/irjbs

Impact of Corporate Governance on

ARTICLE INFO ABSTRACT

Diyakini bahwa praktik tata kelola perusahaan yang baik sangat

© 2019 IRJBS, All rights reserved.

INTRODUCTION system is the pre-requisite to enable sustainable

Presence of Family Affiliation on the Board and Research Variables

However, amongst those, Sustainable Growth considered as independent variables instead

or, Fourth, Boards Education (B-EDU), as measured

ROE x b majority (i.e. more than 50%) of the directors

Table 1. Summary of the Research Variables and their Proxies

PAT - Current Year Dividend

Source: Author’s own tabulation

Tabel 2. Descriptive Statistics

Variable Observations Minimum Maximum Mean Std. Dev.

Tabel 3. Pearson Correlation Matrix

BS P-WOM DUALITY B-EDU B-IND FAM-A LEV CSG

Source: Author’s own tabulation using XL STAT software

Tabel 5. Hausman Test (for Model 1)

(b) (B) (b-B) sqrt(diag(V_b-V_B))

Tabel 6. Random-effect GLS Regression Results (for Model 1)

CSG Coef. Std. Err. z

Tabel 7. Pooled OLS Regression Results (for Model 2)

DEV Coef. Std. Err. t

_CONS_ 2.236 0.914 2.450

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