Impact of Corporate Governance and Financial Parameters on Profitability of the BSE 100 Companies

What the paper says

IntroductionA company, although is a legal entity, it is an artificial person which cannot act on its own. Shareholders elect a group of individuals to act as their representatives, termed as board of directors, who govern the company on their behalf. The governance of a company devolves into a field which is filled with challenges arising primarily on account of separation of ownership and control in companies. It gained momentum in developed countries in the early 1990s, and later in the developing economies. The whole gamut of governance of corporate entities by then has been framed as Corporate Governance (CG) which encompasses not just the board but also other mechanisms like external markets to monitor poor performing managers, regulatory agencies, institutional investors, block holders of shares and the framework under which power is exercised over corporate entities.The past two decades, observed a series of large-scale corporate scandals and frauds across the globe like Enron and WorldCom in the US, Parmalat in Italy, Sanlu in China, and Satyam Computers in India. These corporate scandals and failures caused significant losses to shareholders of these companies. To prevent such scandals in future, developed countries like the US took effective measures to improve their standards of CG. However, developing countries like India, are still improving their standards to avoid such corporate failures (Prasad, 2014).CG is an act or manner of governing a company. The Cadbury Committee of UK defines CG as the system by which companies are directed and controlled. It aims at promoting fairness, transparency and accountability of an entity. Good CG is essential for the integrity of corporations, financial institutions and markets. It ensures the health of our economies and their stability.In India, good CG practices were seen as a subject of random documentation efforts since last two decades. The issue of CG goes well beyond the law and the domain of legislative or regulatory framework. Ministry of Corporate Affairs of India undertook a number of initiatives to ensure good CG practices, which lead to the inclusive growth of the corporate. It was considered necessary that voluntary guidelines on CG were prepared and disseminated for consideration and adoption by the corporate sector. These guidelines did not substitute any existing law or regulation but were essentially for voluntary adoption by the corporates. While it was expected that more and more corporates made sincere efforts to consider adoption of these guidelines, there might have been genuine reasons for some companies for not being able to adopt them completely. In such a case, it was expected that such companies should have informed their shareholders about the guidelines which the companies have not been able to comply either fully or partially.On April 17, 2014, Securities and Exchange Board of India (SEBI) amended the CG norms for listed companies in India which were effective from October 1, 2014. Ensuring better governance practices in listed companies, stringent conditions were imposed to the listed companies through listing agreement. The CG norms were brought on line with Companies Act, 2013. Voluntary guidelines were amended and were made compulsory for all the listed companies to comply with. It is hoped that by following good governance practices, the Indian corporate sector would be in a better position to enhance not only the economic value of enterprise but also the value for every stakeholder who has contributed in the success of the enterprise, and while doing so, it would be setting the global benchmarks for good CG.This paper attempts to study the extent to which the BSE 100 listed firms are following the CG guidelines that are mandatory for a firm to adopt, and the impact of this on the financial performance of the company. The paper also attempts to study the impact of financial variables on the company's profitability. …