Impact of Board Composition on Firm Performance: A Study

This report, prepared for a Master's of Professional Accounting program, investigates the influence of board composition and corporate governance structures on the financial performance of firms in both Australian and Indian markets. The study begins by defining key concepts such as financial performance and corporate governance, followed by a review of existing literature that explores the relationship between board characteristics (including diversity and independence), corporate governance mechanisms, and firm outcomes. The research employs a positivism philosophy and a deductive research approach, utilizing secondary data from various sources including journal articles, corporate websites, and financial statements. The analysis focuses on qualitative methods to identify trends and opinions, and quantitative analysis using financial ratios to evaluate the impact of different variables. The report examines the impact of board composition on firm performance, considering the roles of outside directors, CEO duality, and female directors. Several articles are critically evaluated to determine how board structure and corporate governance influence a firm's performance. The findings suggest that board composition and corporate governance are critical factors that influence the performance of a firm.

Running head: MASTERS OF PROFESSIONAL ACCOUNTING
Masters of Professional Accounting
University Name
Student Name
Authors’ Note

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Project Title: Impact of composition of board and corporate governance on
performance of firms: Australian as well as Indian Evidence
1.0 Introduction
1.1 Definitions and key concepts
Financial performance: The financial performances of business concerns can be considered to
be of utmost significance to firm’s stakeholders. On one hand, financial performance of firms
is an important source for financing present economic activities of the firm, thus can help in
maintaining a going concern and increase the value of the business. On the other hand,
financial performance can be considered as the basis for allotting dividends that subsequently
might lure investors as well as their funds. Therefore, identifying as well as evaluating
diverse facets that exert impact on financial performance of business concerns is of great
significance both to practice along with academia. Whilst it is reasonable to suppose that the
managerial capabilities of board members would have considerable influence on the financial
performance of the entity (Hermalin & Weisbach, 1991). However, it is not clear whether the
composition of the board would considerably influence the performance of the business
concern.
1.2 Brief Background
Several prior studies have examined the influence of diverse corporate governance features
on performance of business concerns. However, the current issue is analysing outcomes of
prior researches along with the conclusions that are mixed. The role of professional
accountant in a specific business is necessarily application of an inquisitive mind founded on
the awareness as regards financials of the corporation. This profession involves using skills
along with in depth understanding of firms along with the environment in which the business
functions (Daily & Dalton, 1994). Thus, professional training in accountancy specifically can

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assist me in taking on a pragmatic and at the same time objective approach to resolve diverse
matters. Being a future accounting professional, I will be able to help the company in
developing corporate strategy, delivering advice and assisting business in reducing the cost,
enhancing the top line and alleviating the risk.
1.3 Literature Review
Board composition has several issues associated to the independence rate of different board
of directors, diversity subsisting amongst different members of the board together with the
duality of CEO. In this case, the directors are also categorized in three different broad classes
that include inside directors, affiliated outside directors as well as outside directors (Kiel and
Nicholson, 2003).
Corporate governance can be referred to as a system designed by a corporation that comprises
of certain set of rules as well as regulations for the effectual management of the corporation
(Kang et al., 2007). Fundamentally, it majorly focuses on shielding the interests of the
financiers taking into account interests of the management as well as other parties related to
the business (Bernardi et al., 2002).
Majority of the research carried out considers two extensively accepted theories of corporate
governance that includes agency theories as well as the resource dependency themes. Sarkar
& Sarkar (2009) study indicates sample of certain top Indian corporations and observes
situations as well as several aspects of corporate governance as Indian market is considered
as a developing market. Again, it also declares that research undertaken in this area is more
focussed on the nations that are comparatively developed and hence there remains a variance
in the issues when it comes to the nations that are in the developing stage (Dwivedi & Jain,
2005).

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As mentioned in the introduction, there are several academic research papers that examined
the nature of association between characteristics of corporate governance and overall
business performance. Ghosh (2006) study in their often cited research paper the overall
influence of corporate governance on performance of corporation during the period 1990’s.
Utilizing 24 governance regulations, the writers construct a governance index in order to
proxy for the level of rights of shareholders (Barnhart et al., 1994). Again, the outcomes of
the study reflect that business concerns with greater shareholder rights had superior value of
the firm, higher level of performance and higher growth in sales than corporations with
weaker rights of shareholders. Again et al., (2015) showed that in the first decade of this
current century, corporations with strong rights of shareholders do not outperform
corporations with weaker rights of shareholders. Again, another seminal research paper
regarding association between corporate governance and business performance, based on a
previous European study declared substantiation of a negative association between these two
constructs (Baysinger & Butler). Again, taking into account the endogeneity of the
association between firm’s governance, performance of the group, corporate structure and
ownership framework, the writers discovered that better corporate governance is considerably
positively correlated with both superior contemporaneous and subsequent operating
performance of a corporation (Welch, 2003). Pertinent to this current study is also the study
conducted by Jackling & Johl (2009) who scrutinizes the overall influence of the size of the
board on performance of corporations for a large number of corporations.
1.4 Research Aim and Objectives
The current research study intends to develop an understanding the way variances in board
composition and structures of governance exerts impact on the performance of companies
operating in both Australian as well as Indian market. The composition of the board
comprises of outside directors, directors having duality in the profile, female directors. On the

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other hand, corporate governance concentrates on enhanced and stringent rules as well as
regulations that mainly concentrate on protection of interests of shareholders.
1.5 Research Questions
The research question framed for the study is:
- Is there any association between board composition and performance of a
firm? If yes, then what kind of correlation do they have?
2.0 Methods
2.1 General Approach
The current research proposes to use the positivism philosophy since this assists in the
process of substantiation. The selection of the research philosophy of positivism is justified as
this philosophy declares that authentic knowledge accepts that only effectual knowledge is
scientific and it originates from derived knowledge. In addition to this, the learner intends to
employ the deductive research approach for the present study. Furthermore, the learner also
proposes descriptive research design for the current study as this helps in observing and at the
same time illustrating behaviour of different subjects without affecting it in any way (Hillman
& Dalziel, 2003).
2.2 Analytical Approach
The learner intends to utilize secondary data collected from journal articles, books, official
websites of corporations, news papers and many others. The proposed interpretation approach
for evaluation of this study includes qualitative method. Qualitative methods of analysis that
can be taken into consideration include uncovering particular trends in thoughts as well as
opinions, and delving deeper into the problems. The learner intends to gain comprehensive
understanding different facets that contribute towards changes in profitability of corporation.
In addition to this, the researcher also intends to analyse impacts of diverse theories of

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corporate governance utilized in corporations operating in both Indian as well as Australian
markets. Moreover, the learner also proposes to utilize secondary data obtained from the
financial assertions of business corporations and put emphasis on values of key financial ratio
such as profitability ration as well as solvency ratio. Essentially, these ratios can be utilized
as performance indicators in the process of determination of diverse impacts of variables
(Schultz, 2003).
2.3 Results
Analysis of the article “Corporate Governance and Board Composition: diversity and
independence of Australian boards” penned by Helen Kang, Mandy Cheng and Sidney J.
Gray reveals that board diversity and independence can be considered to be crucial corporate
governance matters that the business concerns face (Kang et al., 2007). Again, critical
evaluation of the research study “Impact of Firm Performance on Board Characteristics:
Empirical Evidence from India” by Akshita Arora and Chandan Sharma reflects the fact that
the outcomes of the research study reflect that performance of business entity has a negative
influence on characteristics of the board. Furthermore, findings of the study also shows that
larger size of the board, outside membership along with more number of meetings can be
regarded as pricey affairs in the business concern (Arora & Sharma, 2015). Again, from the
review of the article “Corporate Governance and Performance of Indian Firms: The Effect of
Board Size and Ownership” penned by Neeraj Dwivedi and Arun Kumar Jain, it is apparent
that larger boards can enhance firms’ governance contributing towards lower costs of agency
and can have a positive relationship with value of the corporation in the Indian perspective.
Nevertheless, the association is observed to be weak (Dwivedi & Jain, 2005). Evaluation of
the article “The Relationship between Ownership Structure and Performance in Listed
Australian Companies” reflect that there exists a limited evidence of a non-linear association
between managerial share ownership and performance of corporations. Thus, it can be said

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that endogeneity problem recognized in the American perspective is also existent in
Australia, in which ordinary least-squares testing suggests that performance of firm is
statistically reliant on managerial ownership (Welch, 2003). Nevertheless, at the time when
endogeneity is considered, performances demonstrate no statistical reliance on ownership
dimensions. Thus, based on the results of the prior study, it can be said that firm’s
performance is said to be influenced by the board structure and corporate governance.

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References
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