Impact of Corporate Governance on Financial Performance of Firms In India

Abstract

Corporate Governance refers to the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a companys relationship with all its stakeholders. Failure of corporates like Enron or Satyam is the prime argument for better corporate governance. In the light of major corporate debacles, efforts have been made for putting into operation better corporate governance. The question then arises, does governance indeed affect the financial performance of a firm? The present study aims to examine and determine the impact of corporate governance on financial performance of firms in India. The study was conducted on a sample consisting of 30 companies of the BSE Sensex for a period of five financial years from 2011-12 to 2015-16. It was concluded that board and audit committee independence significantly have a bearing on performance measures of a company. The performance measures of older companies were significantly higher than younger companies which indicate that the governance of companies with higher age tends to be better. Audit committee independence, audit committee size and age have a significant correlation with performance measures, though the correlations are weak yet positive. Board size (6 to 18 in the sample) is negatively associated with performance measures indicating that large boards have an adverse impact on financial performance of firms.

Keywords: Corporate Governance, Return on Assets, Return on Equity

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