Business Group Affiliation and Board Independence in India: The Effects of Structural and Situated Attention

Abstract

Research Question/Issue

This study examines how business group affiliation shapes firm attention and consequently influences firms' compliance with board independence requirements.

Research Findings/Insights

Using a longitudinal sample of Indian listed firms, we find that group-affiliated firms are more likely to comply with board independence requirements than nongroup firms, especially when the affiliated firm is larger or when a greater proportion of firms in the business group has adopted an independent board structure. However, the likelihood of compliance in group-affiliated firms is subject less to the influence of the industry compliance norm. We also document that group-affiliated firms are less sensitive to the influence of the industry task environment than stand-alone firms. Other things being equal, the influences of industry complexity, munificence, and dynamism on compliance are smaller in group affiliates.

Theoretical/Academic Implications

Our study contributes to the attention-based view by extending the structural attention argument from organizational structures within firm boundaries to organizational forms across firm boundaries. We argue that the network structure of business groups shapes affiliated firms' attention focus and consequently affects their compliance patterns. We also highlight the joint effects of structural and situated attention on shaping organizational decisions. We reveal that the interplays of business groups' organizational form and industry contexts give rise to distinct compliance patterns between affiliated and unaffiliated firms and among different types of group-affiliated firms. As such, we supplement prior corporate governance literature by stressing the influences of inter-organization networks and industry task environment on board structure.

Practitioner/Policy Implications

Our study indicates that inter-organizational networks affect compliance with corporate governance regulations. Thus, the government could utilize inter-organizational relationships and peer influence to encourage compliance. Our study also highlights the impact of industry environments and business group structure on board composition and managers' cognitive limitations that prevent them from attending to all situational cues. Thus, it is essential for managers to allocate their scarce attention to scanning various domains of their firms' external environments and internal circumstances when making strategic and corporate governance decisions.