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Corporate governance and sustainable value creation in business: a study of select Indian firms

Student Name: Ms Shinu Vig
Guide: Prof. Manipadma Datta
Year of completion: 2021

Abstract:

This study has attempted to examine whether the quality of corporate governance has a significant impact on a company’s ability to create value. This study had three objectives. The first objective was to test whether corporate governance has an effect on sustainable value creation of companies as measured by Sustainable Value Added (SVA) and how far corporate governance leads to value creation to business. Sustainable Value added (Hahn, Figge & Barkemeyer, 2007) is a pioneering value-based approach that measures performance in terms of an integration of economic, social and environmental performance. The second objective was to make a comprehensive and comparative analysis of the impact of corporate governance quality on SVA and EVA (Economic Value Added). This study had investigated the value-creation role of corporate governance mechanisms using two value-based measures of corporate performance – SVA and EVA, in contrast to the traditional measures used in previous studies in this field. The third objective was to identify the parameters of corporate governance in India that have a significant impact on value creation by the companies and to make suggestions for improving the same.

The study investigated the impact of quality of corporate governance on sustainable value creation of some selected companies (BSE Carbonex companies) during the period of 2015 to 2019. The quality of corporate governance has been assessed by constructing a corporate governance index (CGI) based on five important corporate governance parameters namely, the Board effectiveness, transparency & disclosure, audit quality, ownership concentration and non-mandatory & voluntary measures. The corporate governance index presents the overall state of corporate governance at the sample companies. The data set used for the study was extracted from the annual reports and sustainability reports of the sample companies and CMIE Prowess data base. The final sample for the study comprised 44 companies in the BSE Carbonex. The main tool used for analysis was panel data regression analysis.

The empirical analysis showed that there is positive association between CGI and EVA, which is evident through results of correlation analysis. Regression analysis further indicated that there is significant impact of CGI on EVA, which means that improvement in CGI can lead to more wealth creation in the form of EVA. Data analysis further revealed that although there is no impact of CGI on SVA but there exists a positive though weak correlation between the two. The impact may increase in the future when awareness about SVA increases. The insignificant impact of corporate governance quality on Sustainable value added (SVA) can be attributed to the fact that companies in India are not reporting the information on their environmental and social performance. The study provides a new agenda for corporate governance research in India and draws attention to the need to develop sustainability based measures of firm performance.