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Corporate Governance and its Impact in Times of Crisis

The governance crises in corporations over the past two decades or so, transformed corporate governance from a set of self-imposed ethical restraints into a structured corporate code with statutory enforceability. Even today it usually comes into focus for investors and policy makers only as a consequence of crises resulting from corporate mis-management. Stock market crashes, a manifestation of such crises, act as a wake-up call to investors and shareholders, reminding them why corporate governance should always remain at the core of business operations and practises.

This article focuses on why corporate governance matters for investors and shareholders of emerging markets like India, both during prosperous and challenging times.

Governance Risk and Access to Capital

One of the key benchmarks for investment decisions among institutional investors in emerging markets, is the quality of the corporate governance.

  • In a 2010 survey for IFC, 1 all respondents said that in emerging markets, governance was part of their pre-investment due diligence (with characteristics like better disclosures, related party transactions, etc., identified as very important) on a target firm. Investors are unwilling to invest in poorly governed firms.

  • Firm level corporate governance is also closely linked with credit risk ratings (CRR), which aligns with the extent of financial exposure investors are willing to take, and the safeguards available to protect their interests. In a 2018 IFC study, 2 for its investments in companies of emerging economies, the companies in the top quartile of corporate governance performance had a significantly lower CRR (4.62) compared to those in the bottom quartile (6.08), suggesting that strong governance leads to better risk management.

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Better Operational Efficiency and Market Premium

A widely accepted research by La Porta et. al. (2002)3 highlights that overall, companies in emerging economies are under-valued relative to their counterparts in wealthy nations, due to inadequate corporate governance. There are two ways in which companies in emerging markets
garner better market valuations through strong corporate governance practices. 4 First, through a decrease in the cost of capital, which is utilised for discounting anticipated future cash flows, and second, because stronger governance procedures are anticipated to increase the efficiency with which firms’ investment decisions are made.

  • Corporate governance exerts a markedly adverse influence on the cost of equity capital in 17 emerging nations and the effect is particularly significant in nations that offer comparatively inadequate legal protection.5 In the Indian context, research suggests that by lowering the cost of capital, sound corporate governance procedures improve company performance and safeguard the rights of shareholders.6

  • Strong corporate governance is associated with higher profitability and financial performance. In IFC’s 2018 research, 7 among its investments in emerging economies, companies in the top corporate governance quartile had an average return on equity (ROE) of 13.05%, about 20% higher than companies in the bottom quartile with ROE of 10.96%. More focused and important corporate governance indicators have a more pronounced effect on financial performance.

Do companies in emerging economies with good corporate governance practises reap premium valuations? The answer is Yes!

Investors in an emerging market firm were willing to pay a minimum of 10% (maximum up to 40%) higher premium for better corporate governance, than the premium they might pay for a firm with better governance in developed markets (IFC 2010).8

In an empirical research study of CNX 500 companies listed in India also, it emerges that companies with good corporate governance get a premium. 9 The study highlights that the impact of good corporate governance is more pronounced in capital markets valuation indicator, Tobin’s Q, compared to financial performance measured through return on assets and ROE.

Market Volatility and Crises

The quality of corporate governance affects firm behaviours in times of economic shocks and contributes to financial distress. 10 The absence of good governance mechanisms thus assumes significance in the backdrop of large corporate failures as it may lead to bankruptcy or liquidation. Well-governed firms on the other hand are more resilient during crises and periods of capital market volatility.

Companies with weak corporate governance practises are susceptible to the risk of heightened stock price crashes, particularly during periods of crisis. A study of over 800 firms during the 1997 East Asian financial crisis, revealed that companies with deficient corporate governance, where minority shareholders faced expropriation, underperformed by 9% relative to other firms during the crisis period.11

The Indian stock market recently saw significant volatility and a meltdown. Both the Nifty and Sensex reached their peak on September 28, 2024, subsequently experiencing troughs on March 1, 2025, accompanied by persistent decreases and volatility. In the period since, the Nifty has fallen by 15.5%, the BSE Sensex recorded a 14.5% decline, while the broader CNX 500 index had a more substantial decline of 18.8%.

TARI undertook an analysis of the performance of stock prices of 834 companies during this period of market volatility, using CRISIL’s corporate governance assessment score from its ESG ratings of companies in 2022 and 2023. The ratings categorise companies based on governance scores as follows: adequate (0-60), strong (61-70) and leadership (71-100).

The key findings of this analysis include:

Companies by Market Capitalisation Leadership
(169 companies)		 Strong
(571 companies)		 Adequate
(94 companies)		 All Companies
Large-cap -15.2% -24.2% -29.2% -21.8%
Mid-cap -17.1% -20.8% -22.4% -20.1%
Small-cap -23.5% -25.9% -26.4% -25.5%
All Companies -20.8% -25.1% -26.1% -24.3%
  • Among all 834 companies analysed, a significant reduction of 24.3% was observed in average stock prices, indicating that the downturn was pervasive, with smaller companies being primarily affected.
  • Companies with CRISIL’s Leadership score (large, mid cap and small cap) witnessed an average decline of only 20.8 % in their share prices, compared to companies rated Strong and Adequate
  • The impact of strong corporate governance is more prominent among large-cap companies compared with others.

Effective corporate governance fosters trust, enhances performance and mitigates risks that could harm companies and their stakeholders. Empirical evidence in emerging markets and in India suggests that well-governed companies demand a premium from investors, while poorly governed ones can destroy shareholder wealth. The recent Indian stock market turmoil from September 2024 to March 2025 reinforces the belief that corporate governance should be a top priority for investors and shareholders at all times and not just in times of crisis. Investment decisions based on the corporate governance yardstick can thus serve as a risk mitigation strategy for investors, minimising vulnerabilities and reducing exposure to potential losses.

  1. Khanna, V., & Zyla, R. (2012). Survey says… corporate governance matters to investors in emerging market companies. International Finance Corporation
  2. IFC (2018). Governance and performance in emerging markets: Empirical study on the link between performance and corporate
    governance of IFC investment clients. International Finance Corporation
  3. La Porta, R., Lopez-de-Silanes, F., and Shleifer, A., & Vishny, R. (2002). Investor protection and corporate valuation. The Journal of Finance, 57(3), 1147-1170.
  4. Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging markets review, 15, 1-33
  5. Chen, E. T., & Nowland, J. (2010). Optimal board monitoring in family‐owned companies: Evidence from Asia. Corporate Governance: An International Review, 18(1), 3-17.
  6. Reddy, K., Locke, S., & Scrimgeour, F. (2010). The efficacy of principle‐based corporate governance practices and firm financ ial performance: An empirical investigation. International Journal of Managerial Finance, 6(3), 190-219.
  7. IFC (2018). Governance and performance in emerging markets: Empirical study on the link between performance and corporate
    governance of IFC investment clients. International Finance Corporation
  8. Khanna, V., & Zyla, R. (2012). Survey says… corporate governance matters to investors in emerging market companies.
    International Finance Corporation
  9. Kapil, S., & Mishra, R. (2019). Corporate governance and firm performance in emerging markets: Evidence from India. Theoretical
    Economics Letters, 9(6), 2033-2069.
  10. Claessens, S. (2006). Corporate governance and development. The World Bank Research Observer, 21(1), 91-122.
  11. Lemmon, M. L., & Lins, K. V. (2003). Ownership structure, corporate governance, and firm value: Evidence from the East Asian
    financial crisis. The Journal of Finance, 58(4), 1445–1468.