The influence of board characteristics on corporate illegality
| Date | 08 May 2017 |
| Pages | 133-148 |
| DOI | https://doi.org/10.1108/JFRC-05-2016-0045 |
| Published date | 08 May 2017 |
| Author | Gundeep Kaur Virk |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
The inuence of board
characteristics on
corporate illegality
Gundeep Kaur Virk
Faculty of Business Management and Commerce, Panjab University,
Chandigarh, India
Abstract
Purpose –In light of frequent corporate scams and frauds, this paper aims to investigate the relationship of
corporate illegality with the board of directors’ characteristics in Indian manufacturing companies.
Design/methodology/approach –The board of director characteristics of sample companies charged
with violation of the Securities Exchange Board of India (SEBI) regulations from 2008 to 2013 are matched
to an equivalent-sized control data set. A cross-sectional logistic regression model is applied to test the
hypothesized association.
Findings –The ndings suggest that the SEBI violations are less likely to occur when a large fraction of the
board of directors consists of independent directors and when the individual directors have multiple
appointments on the boards of other companies. However, it is observed that the size of the board and its
meetings have no observable association with violation of the SEBI regulations.
Research limitations/implications –This work is likely to aid future research in exploring the impact
of governance mechanisms on the occurrence of illegality. In future, studies may be conducted to investigate
the probability of illegal corporate events using a larger sample size and corporate governance variables
which have not been examined in the present study.
Practical implications –The analysis provides corporate policy makers and investors an insight to
evaluate the vulnerability of a company being engaged in illegality based on its board features.
Originality/value –The present study is distinct from previous reports as it makes a novel attempt to
gauge the relationship between the board of directors’ characteristics and the occurrence of illegality in the
Indian corporate section.
Keywords Corporate governance, Logistic regression, Board independence, Corporate compliance,
Corporate illegality, SEBI regulations
Paper type Research paper
1. Introduction
Fraudulent activities, ethical breaches and performance lapses in companies such as
WorldCom, Enron, Adelphia Communications Corp., Lehman Brothers, Tyco Ltd., etc. have
given a severe blow to the integrity of corporate governance systems (Hwang and Blair
Staley, 2005;Hope and Player, 2012). In the Indian capital market as well, a series of corporate
frauds, business scams and white collar crimes have drawn the attention of the investors
worldwide. Incidents such as the Ketan Parekh scam (2001), Home Trade scam (2002),
Satyam Computers scam (2009), Sahara Housing Bonds scam (2010), Speak Asia scam (2011)
and Saradha Chit Fund scam (2013) are glaring examples of regulatory loopholes. They raise
serious concern about the corporate governance practices and credibility of nancial
reporting in Indian companies.
An effective governance framework is an essential tool for achieving a high level of
performance in the rm. The agency theory asserts that the opportunistic behavior of the
directors and managers must be curbed to maximize shareholders’ value (Fama and Jensen,
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Corporate
illegality
133
Journalof Financial Regulation
andCompliance
Vol.25 No. 2, 2017
pp.133-148
©Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-05-2016-0045
1983). For this reason, immense importance is given to board composition and leadership, as it is
the directors who strategize and take chief decisions regarding the functioning of a company. The
board is also held responsible for monitoring, managing and evaluating the operations of the
company and its top executives to ensure effective progression. This requires the board to comply
diligently with the regulations established by the statutory bodies (Baysinger and Butler, 1985).
Non-conformity with laws gives way to corporate illegality, thereby leading to loss of
stakeholders’ condence in the company.
Pressures from the external environment, motivation to engage in wrongdoing,
availability of opportunity and the exercise of choice by management to exploit such
opportunities are key factors leading to corporate illegality. Dunn (2004) suggests that
corporate illegality is an outcome of the decisions taken by the managers. According to
Baucus (1994), corporate activities, intentional or unintentional, explicitly declared by laws
to be unethical, unacceptable and impermissible fall in the class of corporate illegality. They
encompass both corporate crime and illegal corporate behavior. Corporate crime consists of
actions that violate criminal laws. On the other hand, violation of civil and administrative
laws entailing nes, attachment of property, consent decrees and judgments by government
agencies against the rm fall in the domain of illegal corporate behavior. Such events can be
accredited to the weak governance structure of the company and delegation of much board
power in the hands of inside directors who have connections with the company. The outsider
dominance perspective advocates that a higher proportion of independent directors on the
board disconnects it from the insider relations. At the same time, it strengthens the board’s
scope of power and extent of knowledge.
The Securities Exchange Board of India (SEBI) is a statutory body acting as a supervisor,
regulator and controller for securities market in India. Signicant corporate governance
reforms relating to board structure and composition, ownership structures and audit
committee functioning have been introduced in the Indian corporate sector through its
policies, recommendations and amendments in the Clause 49 of the Listing Agreement.
This empirical study is based on the contraventions of the SEBI regulations by Indian
manufacturing companies from the nancial year 2008-09 to nancial year 2012-13. For the
purpose of this study, corporate illegality includes any act of violating the SEBI Act of 1992 and
other statutory regulations prescribed by the SEBI for companies listed and trading in stock
markets. The sample comprises 30 companies from the manufacturing industry that violated the
SEBI regulations during the study period, and these were matched to 30 control companies with
no violations. The primary objective of this paper is to test the relationship between corporate
illegality and board characteristics that has been previously established in Australia (Sharma,
2004), Canada (Park and Shin, 2004), China (Chen et al., 2006), Malaysia (Abdullah, 2006;Salleh
and Othman, 2016;Shan et al., 2013) and the USA (Beasley, 1996;Dunn, 2004;Kesner et al., 1986;
McKendall and Wagner, 1997;McKendall et al., 1999;Uzun et al., 2004). The research will
contribute to the existing literature, as this association has not yet been extensively explored in
the Indian context. Thus, this paper is a leap towards establishing the relationship between
corporate governance characteristics and corporate illegality in the Indian background. The
results posited by the study will draw the attention of policy makers toward focal points of board
composition which may act as a check on illegality. Further, the stakeholders can appraise
companies based on their board characteristics, and researchers, in future, can investigate critical
governance aspects contributing to corporate wrongdoing.
The forthcoming section of this paper deals with the review of relevant literature and
hypotheses development, followed by Section 3 which describes the research methodology.
Section 4 states the empirical results, and Section 5 presents the summary and discussion on
the prospects for research.
JFRC
25,2
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