Corporate governance and value creation index

Abstract

This study aims to create a methodology to measure good governance and value creation with the help of an index composed of two sub-indices which corresponds to corporate governance and value creation (CGVC). The proposed index measures corporate governance quality that collapse into one number (a governance rating or index) and helps in analysing the effectiveness of corporate governance index in predicting value creation. We believe there is no one “best” measure of corporate governance, however, the most effective governance system depends on context and firm related circumstances. Thus, it is generally difficult for an index, or any one variable, to capture such nuances which may be critical for making informed decisions. Having said that, the index beautifully helps in giving a fair idea about governance practices followed by companies’ in India. The CGVC index is constituted after investigating governance practices in BSE 100 companies which accounts for nearly 66% of the market capitalisation (as of March 2014). The study investigates corporate governance practices followed by the company in terms of 11 parameters identified (based on various recommendations given by the several committees) coupled with value created for different stakeholders. The period under study (2006-07 to 2013-14) is known for several volatilities and has remained one of the key themes in the global business environment. Economic uncertainties and changing business landscape left investors unnerved. While growth in largest economies declined, it had ripple effect on emerging economies. We have followed a two-step methodology where equal weightage is assigned to both the sub-indices. For sub-indices we have followed survey methodology where we interviewed personnel including board members, entry and mid-level employees of companies, regulatory participants, and stock brokers. Lastly, the paper aims to fill the gaps and conduct a thorough review of corporate governance and its relationship with value creation for one of the fastest growing emerging markets i.e., Indian economy.