Fuzzy bundling of corporate governance practices and performance of Indian firms

• DOI: https://doi.org/10.1108/CG-12-2020-0546
• Published date: 13 September 2021
• Date: 13 September 2021
• Pages: 257-277
• Subject Matter: Strategy,Corporate governance
• Author: Pankaj Kumar Gupta,Prabhat Mittal

Fuzzy bundling of corporate governance

practices and performance of Indian firms

Pankaj Kumar Gupta and Prabhat Mittal

Abstract

Purpose –This paper aims to develop a frameworkthat aids in achieving the desired state of financial

performance for corporate enterprises based on distinct configurations of corporate governance (CG)

practices.

Design/methodology/approach –This study uses a fuzzy-based system to arrive at a definitive

configurationof CG practices that lead to a specificlevel of firm’s performance.

Findings –This analysis of the panel dataof 92 National Stock Exchange–listed companies conducted

for RONW on selected CG variables shows that eight fuzzy configurations lead to a particular state of

RONW. Theauthors compare the results with theconventional regression-basedscoring models.

Originality/value –Corporate enterprises can use the derived bundles of CG practices leading to a

specific set of financial performance (RONW) to aid the decision-making process in defining and

implementingtheir governance structures. The regulatorscan modify or customize the law-mandated CG

practicesto reduce redundancies and promote the nationalagenda of economic efficiency.

Keywords Corporate governance(CG), Fuzzy sets, Firm performance, RONW, CG variables, Fuzzysets

Paper type Research paper

Introduction

Quality of corporate governance (CG) is vital for every economy because it directly or

indirectly impacts various stakeholders, policymakers and society. CG structures are

developing gradually in the emerging economies, including India, but it is still inefficient. In

CG, it is believed that adopting best CG practices can foster economic growth and build

market confidence. CG in the literature use transparency, accountability and fairness as the

quality characteristics of firms. CG has been linked to the national policy framework

(Fernando, 2012) and stakeholders’ relationships (Hussain et al.,2018). Various authors

have argued in favour of CG as the system of control and coordination that defined

standards of relationships and solutions to agency problems (Arslan and Alqatan, 2020;

Cris

ostomo et al.,2020;Veres, 2019). CG creates trust among stakeholders (Arslan and

Alqatan, 2020;Gangi et al.,2019) and acts as a balancing apparatus (Veres, 2019).

It is derived from several studies that CG structurehas a bearing on organizations’strategic

and operational perspectives (Arslan and Alqatan, 2020;Mardnly et al.,2018). CG

practices show the impact of senior management decisions on various classes of

stakeholders (Khan and Rehman, 2020). In the contemporary scenario, the CG structures

are complex, complicated and implicate indefinite relationships between the internal and

external stakeholders (Gupta and Mittal, 2020). In various countries, the listing agreements

with stock exchanges deal with the issue of CG by way of agreements. Such endeavours

include transparency in board practices, risk disclosures and ensuring operational that

serves the best interest of economy and society. Of these, firm performance, an essential

objective for various concerned parties, is prominent and has attracted researchers

worldwide.

Pankaj Kumar Gupta is

based at the Department of

Management, Jamia Millia

Islamia Central University,

New Delhi, India.

Prabhat Mittal is based at

Satyawati College

(Evening), University of

Delhi, New Delhi, India.

JEL classification –G34, C02,

O16

Received 10 December 2020

Revised 17 March 2021

9 June 2021

2 July 2021

11 July 2021

Accepted 15 August 2021

DOI 10.1108/CG-12-2020-0546 VOL. 22 NO. 2 2022, pp. 257-277, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 257

CG standard affects the capital markets especially the stock markets that may also affect

business investment environment(Cohen et al.,2017)and may affect the pace of economic

growth directly (S

ˇkare and Hasi

c, 2016). In a survey of KPMG, the problem of continued

persistence of corporate frauds has been highlighted across various business structures of

corporate organizations, including credit-granting institutions. In India, though the evolution

of legislation is a dynamic process, corporate frauds are still growing. In such a scenario,

the continuous need to evolvethe best CG practices is an area of concern that can inter-alia

ensure firm performance and valuation. It is observed that the behaviour of the organization

son various CG parameters is changing dynamically. The industry-wide disparity among

these parameters makes it difficult to evolve a standard model of CG that can optimize the

firm performance. Park et al. (2020) argue that companies in emerging countries innovate

their governance practices by combining different external and internal governance

systems using local embeddednessand global agency.

We highlight the role of regulatory practices on CG, which have a bearing on selecting

CG practices for this paper. La Porta et al. (2000) have examined the laws in various

countries, their differences and the enforcement agencies’ success in its implementation

and enforcement and suggest that the most effective way for CG implementation is by

providing legal protection of investors. Lefort and Walker (2011) study a company’s

performance after CG norms implementation in a country and its effect on the valuations.

The study indicates a higher level of CG standards such as better transparency and

information disclosure norms vis-a-vis other different developing economies. Kiesewetter

and Manthey’s (2017) study suggests that value creation and the effective tax rate for

firms with low social and environmental characteristics are positively related. Conversely,

stronger CG is allied with a lower effective tax rate in coordinated and liberal market

economies.

In many studies, regressions in various forms have been used to derive the relationship

between CG and firm performance. The impact of CG variables in predicting companies’

distress has been studied by Polsiri and Sookhanaphibarn (2009) using ANN and logit

models. In a study, Chiou and Sen-Wei (2010)attempts to find the relation between CG and

the pricing of the initial public offerings by using the ANN as a learning method. Studies on

the stock market and CG practices have been carried out by Soni (2012) using ANN. Chen

et al. (2014) has used data mining methods that include neural networks to detect

fraudulent financial statement in light of CG variables. Fern

andez-G

amez et al. (2016) have

used neural networks to combine the financial and CG variables and find a higher level of

prediction ability.

Almost without exception, the relationship between CG variables and the performance

levels have used regression as the analytical technique. We instead use fuzzy-set

qualitative comparative analysis (fuzzy-set QCA). The approach is better-suited than

regression in cases where variables impact only in combinationwith a high or low degree of

one or more other factors. In addition,a factor that has an impact in a subset of cases tends

to become obscured and results in deflated coefficients and inflated variance with the use

of regression analysis techniques. In contrast, the fuzzy-set analysis approach allows us to

examine relatively large data sets and can reveal causal patterns that differ across subsets

of cases.

Fuzzy logic has emerged as an ideal tool for modelling complex situations because it

allows decision-making in a dynamic complex system where the attributes are

qualitative (Mancilla-Rend

on et al., 2021). Fuzzy logic application is best suited for

situations where the assessment of attributes is subjective by the decision-maker.

Fuzzy logic is appropriate for situations of intuition-based rules that are difficult to be

expressed on mathematical forms and linguistic expressions matching with human

thinking.

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