Board, Ownership Structure & Pay and Firm Performance: A Literature Review

IntroductionCorporate governance as a topic has gained global upsurge both in academia as well as in the corporate level. The separation of ownership and control is what creates the need for corporate governance, which includes mechanisms to ensure prudent decision making and profit maximization. Factors like liberalization and globalization have also accentuated the importance of the concept globally. Globalization has a twofold impact on the economy: it increases the accessibility of world market to the Indian corporate sector; and intensifies the competition in the home market (with multinational firms). This scenario increases the importance of good governance as a factor for survival and competitive advantage and acts as a deciding factor for the creditworthiness of a company (Dwivedi and Jain, 2005). Logically, there is a great difference in the corporate governance structures and systems of different industries and different countries. Authors like Maher and Andersson (1999) classify corporate governance systems, on the basis of degree of ownership and control and on the basis of controlling shareholders, into the outsider systems and the insider systems. The authors further emphasize that governance policies should be product- and market-specific.Shleifer and Vishny (1997) state that corporate governance is a means to make sure that managers' activities concentrate on value maximization of the firm. There are several mechanisms like management ownership, corporate control activities, shareholder activism and trading activities which ensure the same. Dwivedi and Jain (2005) opine: Governance parameters include board size, director's shareholding, institutional and foreign shareholding, while the fragmentation in shareholding is captured by public shareholding. Dwivedi and Jain (2005) believe that corporate governance structures and systems vary across countries and industries. However, the authors also state that corporate governance and firm profitability tend to vary for different countries but predictably, depending on the national system of corporate governance.Research works indicate that there exists a correlation between corporate governance and firm profitability; however, it varies across countries based on the national system of corporate governance. A study done by Gedajlovic and Shapiro (1998) found statistically significant differences in the relationship between ownership concentration and firm performance in the context of Canada, France, Germany, the UK, and the US. Thomsen and Pedersen (2000) also found similar results in their study where they took into consideration 12 European countries.The Indian corporate governance system is a hybrid of the Anglo-Saxon governance system prevalent in the US and the UK and the bank-dominated systems prevalent in Germany and Japan (Dwivedi and Jain, 2005). Indian companies rely on external sources of financing like banks and financial institutions. Such institutions are both lenders as well as shareholders in Indian companies. Significant amount of research on corporate governance, focusing on financial performance of firms, has been done in the Indian context also. Factors like ownership structure, board characteristics (size, structure, control type and processes), investment opportunities, corporate governance ratings, pay performance and accounting control have been linked to financial performance. Corporate governance research in India is still in doldrums due to the stringent disclosure practices followed by the Indian corporate sector (Goswami, 2000).In this paper, we review selective literature on relationship between the three aspects of corporate governance and firm performance. The three selected corporate governance parameters are board characteristics, ownership structure and executive pay.The BoardThe board constitutes a very essential part in the functioning of corporate control. Over the last one decade, lots of studies have reported the existence of relationship between the board's composition and firm's level of performance. …

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