According to OECD CG is the system by which business corporations are directed and controlled. The CG structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance." This definition outlines the sets of procedures and policies that need to be followed by stakeholders and management to assist the organization in achieving its goals. These sets of procedures and policies promote accountability and transparency which in turn helps to reduce the temptation for opportunism as management including employees of an organization are exposed to the consequences of failing to adhere to the policies and procedures of the organization.
Therefore, the main impetus towards better CG practices began with a number of high profile corporate scandals worldwide (Becht et al. 2002; Coyle 2007) which occurred mainly due to failure by senior managers to apply good CG practices. These failures started in the U.K in the 1980's and 1990's with the unexpected collapse of firms such as Polly peck International, the Bank of Credit and Commerce International, the Mirror Group News International and Barings bank. More recently, a number of high profile corporate failures also occurred involving some big firms which damaged investor's confidence and have raised questions over a firm's governance and internal control system. These are listed below:
Table 1- Corporate failures
Company
Country
Year
Reasons
Enron
USA
2001
Inflated earnings
Tyco
USA
2002
Improper share deals, Falsifying business records
WorldCom
USA
2002
Expenses booked as capital expenditure
Ahold
Netherlands
2003
Earnings overstated
Livedoor
Japan
2006
Securities fraud and share-price manipulation
Satyam Computer Services
India
2009
Accounts falsified
As a result of these failures, stakeholders began to work towards the common goal of fighting corruption and demanding transparency and accountability in management of their organizations (Naidoo 2002).Thus, we can note that in each case lack of CG mechanisms was the main cause of these corporate failures and thereby the need for proper CG framework became increasingly important. As such in his book, The Corporate Citizen, King (2006) affirms that "the key challenge facing the global economy today is to ensure that of quality governance are applied by the local boards of its many subsidiaries. The principles are those of fairness, accountability, responsibility and transparency, based on the foundation of intellectual honesty".
Moreover, much has been done to improve the level of CG compliance in the business world. Thus, Table 2 below describes the evolution of important CG guidelines.
Table 2- Recent Evolution of CG
EVOLUTIONS
BRIEF DESCRIPTION
Cadbury Report, United
Kingdom 1995
The objective of the Cadbury committee was to investigate how large public companies should adopt CG guidelines with a focus on the procedures of financial report production and the role of the accounting profession. Issues included the role of the board of directors, standards of financial reporting, accountability of the auditors and directors pay.
Greenbury Report, United
Kingdom, 1995
The report dealt with the remuneration of executives and non-executives board members and recommended the setting up of a remuneration committee in each public company to determine remuneration packages for the board members. It also provided suggestions on the disclosure of remuneration and the setting up of remuneration policy and service contracts and compensation
Hampel Report, United
Kingdom, 1998
Four major issues were discussed with practical guidelines offered; (a) the role of directors (b) directors compensation (c) the role of shareholders (d) accountability and audit
Sarbanes-Oxley Act, 2002
A major initiative of corporate compliance, the SOX, is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 include main features such as ;
establishment of the Public Company Accounting Oversight Board (PCAOB), auditors independence, corporate
responsibility, enhanced financial disclosures, analyst conflict of interest, commission resources and authority, corporate and criminal fraud accountability, white collar crime penalty enhancement, corporate tax returns and corporate fraud accountability
Higgs Report, 2003
On non-executive directors.
Smith Report, 2003
On Audit Committees
OECD Principles,2004
The OECD Principles cover five aspects of governance (a) the rights of shareholders (b) the equitable treatment of shareholders (c) the role of stakeholders (d) disclosure and transparency (e) the responsibilities of the board.
2.2: Theoretical view
Generally, CG refers to the set of customs, processes, policies and laws by which a company is run. It provides guidelines as to how a company can be directed and controlled to achieve its objectives in such a way that adds value to the company and is beneficial to all stakeholders in the long term. In this perspective, Professor Bob Tricker (1994) stated "If management is about running business, governance is about seeing that it is run properly and that all companies need governing as well as managing."
In addition, CG varies widely across firms and across countries. As such, Consolandi et al. (2006) stated that a system of CG "is a more or less country specific framework of legal, institutional and cultural factors…" Also, Sheridan and Kendall (1992) stated that "different countries have different ideas as to what constitute good CG." Thus, through time each country has developed a wide variety of CG mechanisms. Furthermore, the most famous and widely discussed theories of CG are the Stakeholder theory (Kiel and Nicholson, 2003; Freeman et al, 2004), the Agency theory (Berle and Means 1932; Jensen and Meckling, 1976), the Stewardship theory (Donaldson, 1990) and the Resource depending theory (Rulgrok et al, 2006).
In addition it is widely believed that good CG improves the performance of a company (Chun et al, 2003; Hossain et al, 2000). However, in order to maximize shareholders' wealth and to benefit the society as whole CG mechanisms must integrate fundamental values such as integrity, transparency and accountability. Thus, based on the argument that better corporate disclosure and transparency leads to better performance, Loh (2002) drafted a list of possible benefits coming from higher level of transparency, that is, CG not only leads to better corporate performance but also increases management trustworthiness, expands investor's base and improves access to capital. Also, there is evidence around the world that firms with better governance enjoy lower cost of capital (Ashbaugh-Skaife et al, 2005; La Porta et al, 1997), lower risks ( Brown and Caylor, 2006) and lower credit rate (Yu, 2005). Therefore, with better governance firms will have access to better capital markets.
2.3: Corporate Governance - Towards a definition
CG has been defined by scholars and various reports as per the perspective with which they were analyzing the subject. Thus, according to Turnbull (1997) CG influences all the activities of a firm that produce goods or provide services. On the other hand, Colley et al. (2004) states that CG is the act or process of governing while Cadbury (2000) defines CG in terms of the systems by which firms are directed and controlled. The presence of different definitions indicates that each author formulates a definition that spins around his theme (Demb & Neubauer, 1992). In fact, Wallace and Zinkin (2005) point out that the term good CG is easy to phrase but difficult to understand and appreciate.
Further, Cadbury (1992) stated that "CG is concerned with holding the balance between economic and social goals and between individual and communal goal. The CG framework is there to encourage the efficient use of resources. The aim is to align as nearly as possible the interests of individuals, corporations and society." Thus, this definition describes the objectives to be attained by applying good CG practices. The objectives of a company include the procedures and policies which ensure that the directors and management maximize shareholder value, minimize risk of self-opportunism by individual employees by putting a strong internal control system in place and minimize the damages to the environment in which the company operates.
From an academic point of view based on extensive surveys and studies, Sheilfer and Vishny (1997) defined CG in terms of the methods by which investors in a firm assure a good return to their investment. This definition is one-dimensional in that it emphasises the suppliers of finance while not recognising the relationships between a firm's stakeholders and managers. Each firm has numerous stakeholders whose different interest must be taken care of. This is why CG has also been referred to as a collective group of people united as one body with the power and authority to direct, control and rule an organisation (Ruin, 2001).
Moreover, CG is referred to as a whole system of controls, financial and otherwise, which ensure that a firm is directed in the right way and towards the right direction (Cadbury 1992). This definition focuses on the ways in which companies are controlled and managed in order to achieve their main objectives. Also the aim of CG is to align as nearly as possible the interests of individuals, corporations and society (Cadbury, 2000). This definition is distinctive as it asserts the multi-faced role of businesses. It implies that businesses should not just be seen as vehicle for the achievement of the shareholders' wealth maximisation objectives, but rather businesses should be seen as an integral part of the community with its own share of societal duties and responsibilities. Therefore, managements have a duty of care to society as well as to their shareholders.
In addition, Monks and Minow (1995) defined CG in terms of "interactions between various players in the corporate environment and the processes used in achieving consensus in the allocation of corporate resources and in the determination of corporate direction to ensure improved performance. Since organisations resources are limited and have alternative uses, their allocation deserves considerable attention in order to optimise returns from such usage". This definition can be said to link CG with the strategic position of organisations and perhaps sees CG as the preserve of strategic level management. It defines CG in the light of the firm alone rather than in terms of the various stakeholders and definitely not in the realisation of the interdependence between the firm and its environment especially the society in which it operates.
As such, Yadong (2004) addressed CG "as the relationship between the corporation and the stakeholders that determines and controls the strategic direction and performance of the corporation. It is the system by which corporations are directed and controlled". Thus, this definition addressed the concerns of stakeholders. He further suggested that "this structure specifies the distribution of rights and responsibilities among various corporate participants including board members, executives, shareholders and other stakeholders; it spells out the rules and procedures for making decisions on corporate affairs" Yadong (2004). It "...also provides the structure through which the company sets objectives, the strategy for attaining those objectives and the guidelines for monitoring performance." This comprehensive definition has important implications not just for the nature of interaction between corporate structures but also for interactions between the individuals within the structures. In other words, what sort of relationships exist between the board and the shareholders on one hand, but also how the relationship between individual members of the management is regulated and how this impacts upon their interactions with members of other structures. What rules, rights and obligations each structure has to grapple with and what affects each individual member in the structure all seem to have become the subject of CG.
2.4: The corporate governance system in Mauritius
Mauritius is considered as an economic success story. The Mauritian economy has witnessed remarkable transformation ever since it gained independence, moving from a poor mono-crop economy into a well diversified economy in only a few decades. This remarkable transformation is due to a combination of political stability, strong institutional framework, low level of corruption and favourable regulatory environment. Thus, transformation was only possible due to a paradigm shift in the economic policies, resisting to the various shocks that the world is facing (Ali Zafar, 2011).
Furthermore, in contrast with other countries including developed countries, the stability of the Mauritian economy can be attributed to good governance. The democratic process, freedom of the press, an independent judiciary, the separation of powers between the executive and the legislative, all constitute the governance framework that has served to create the stable and enabling environment that made Mauritius one of the best places in the world to do business. As a result Mauritius has been ranked first out of 53 countries in Africa for three consecutive years by governance indices like the Mo Ibrahim Index (2008, 2009 and 2010). Also, Mauritius has emerged as a regional entrepot and tourism destination as the top ranked African country and 20th out of 183 countries in the World Bank Doing Business (2009) as well as being ranked first in Africa on the Fraser Institute's Economic Freedom. Thus, Mauritius has been consistently re-inventing itself and for this reason Mauritius has achieved so much in a relatively short period of time.
CG has been a topic of great concern around the world including Mauritius for many years mainly as a result of financial scandals worldwide. CG, which refers to the manner in which an organisation is managed and controlled, is dependent on the efficacy of governance at institutional and state levels. The aim is to align as nearly as possible the interests of individuals, corporations and the society. More precisely, the interests of different stakeholders, employees, customers, suppliers and the society in general and Mauritius have been one of the rare countries which have succeeded in maintaining the delicate balance between sustained economic growth and social welfare.
In Mauritius, it is the Inclusive Approach of CG that has been adopted. This approach requires that when developing the strategy of the company the key stakeholders such as the business environment in which the company operates, its employees, its customers and its suppliers should be taken into consideration. The inclusive approach also necessitates that the purpose of the company should be defined, and the values by which the company will carry out its daily activities should be identified and communicated to all stakeholders. Thus, all these factors should be combined in developing the strategies to attain the company's goal and the relationship between the company and its stakeholders should be mutually beneficial. In addition, a number of evidence has established that this inclusive approach is the way to create sustained business success and long term growth in shareholder value.
Mauritius' path towards improved governance started in the year 2001whereby to provide Mauritius with a well organised and efficient system of governance, the then minister, the Honourable Sushil Khushiram came forward with a number of initiatives that have largely contributed to a significant transformation in the regulatory and governance landscape in which Mauritian companies operate. Thus in 2001, a number of proposals were put into place with the aim to bring into line the practices of corporate Mauritius with world-wide best practice. As a result, a new Companies Act was voted for and IASs were introduced; the new listing rules for the companies listed on the SEM were put forward and a committee on CG was set up. In addition, the Securities Act, the Insolvency Act, the Financial Reporting Act and the Insurance act were approved. Also, in 2001 the Financial Services Commission was put in place as well as the Mauritius Institute of Directors which was launched in 2009.
The committee for CG had as part of its charge to reflect on the introduction of a Code of Best Practice in Mauritius. Thereby, the committee for CG for Mauritius prepared the CCG for Mauritius which was launched in 2003. In short, the CCG requires that each board should consist of a proper balance of executive, non-executive and independent directors and the role of the chairman and the Chief Executive Officer (CEO) should also be different and separate so as to delegate powers and authority at different levels. Furthermore, the board which is responsible for the performance and affairs of the company should have at a minimum, an audit committee and CG committee. The audit committee which should consist of at least three non-executive directors is responsible for matters such as the functioning of the internal control system, the company's compliance with legal and regulatory requirements with regard to financial matters and financial information to be published by the board. On the other hand, the responsibilities of the CG Committee which should also be composed of a majority of non-executive directors include remuneration and nomination matters.
The Code which puts greater importance on disclosure and communication requires a separate CG section in the AR and also the AR should be presented in such a that all stakeholders can obtain a true and fair view of the company's performance. In addition, the Code requires that every company should adopt a Code of Ethics which should consider the principles, norms and standards that the company wants to promote.
Moreover, in 2009 the NCCG conducted a survey on the state of compliance with the CCG in Mauritius. The key findings of the survey indicated the compliance with the CCG is still not a norm in Mauritius and it indicated higher compliance among listed companies (83%) and lower compliance among State Owned Enterprises (44%). The survey also found that companies who are compliant with the CCG have an audit committee and a CG committee in place and the levels of disclosure of financial information and disclosure regarding conflicts of interest are higher among these companies. The survey also indicated that 72% of the companies consider that good governance has positively improved the performance and status of the respective companies.
However, the research also highlighted the need to reconsider the approach to CG adopted by the companies in Mauritius. It stated that the Board of Directors should focus more on strategy, risk management, performance and sustainability which are important to the CG process and also the need for more training of directors to improve their competence level. The survey also requires that effective Board Committees should be set up and strengthened as much effort is needed to improve the risk identification process and board committees to spend more time overseeing risk management. In addition, the survey also requires the setting up of an effective Nomination Committee and ensures that a proper assessment of the appointment of board members has been carried out with a view of improving the competence and diligence of board members.
As result of this survey, the NCCG decided that the code should be revised so as to increase awareness of CG in Mauritius (Taylor 2011).
2.5: Brief overview of corporate governance in the hotel and leisure sector
CG is also particularly relevant for the hotel industry worldwide. As a result of globalisation many hotels are adopting good governance practices to maintain the best practice around the world. The hotel industry around the world including in Mauritius, is facing a challenge in sustaining growth and managing their operations and therefore governance standards is vital to the hotel industry.
Moreover, the last few years have not been an easy year for hotel companies. The hotel industry in Mauritius saw revenue falling and major currency fluctuations added to the complexity of the problem. In this perspective, the CEO's and board of directors of the hotel companies are playing a vital role in sustaining the growth of these companies. As such the HVS Executive Search (2010) indicated: "In 2009, the hotel industry saw operators slashing room's rates and desperately trying to replace the sudden absence of corporate demand with leisure guests. Thus, being able to steer a company through an ever-changing business environment with certainty and confidence is a vital key to success, and it is the board of director's responsibility to oversee the strategies which provide the direction for the company. Sound CG is, now more than ever, of utmost importance."Therefore, for the hotel companies to achieve sustainable growth, management must act responsible and morally by setting up vital strategies and structures to improve the governance of the company. This could be achieved by launching an excellent system of communication so that employees at all levels are aware of the company's code of ethics, giving greater powers to the audit committee.
Due to the ongoing globalization process more and more Mauritian hotels are adopting good CG practices to maintain the best global standards. The Mauritian hotel operations are becoming an integral part of the global supply chain with increased contribution to the growth of the Mauritian economy. The hotel industry is growing manifold with the advent of foreign hotel companies like Starwood, Four Seasons, Hilton hotels, Intercontinental hotels, Club Med Resorts and many more international hotel brands are opening multiple operations in Mauritius. Thus, the industry is facing a great challenge in managing its business and sustaining their growth.
Therefore, improved governance standards are not only important for the hotel and leisure sector but also for other sectors of the Mauritian economy. As a result, by adopting good governance principles the hotel companies would become more transparent, disclose transactions to all stakeholders, protect shareholder interests and ensure that the company is driven by values like integrity, transparency, objectivity and meritocracy.
2.6: Brief overview of corporate governance in the banking and insurance sector
One of the most important pillars of the Mauritian economy is its financial sector which comprises of the banking and insurance sector. An effective system of CG in banks and insurance companies will impose appropriate standards of conduct on managers and control and monitoring procedures on banks in order to maximize opportunities for legitimate profits subject to the best interests of depositors and shareholders. Good CG regulates the relationships between banks' stakeholders, their Boards and their management. It prevents the abuse of power and self-serving conduct, as well as imprudent and high risk behaviour by bank managers, and resolves conflicts of interests between managers and board members on the one hand and shareholders and depositors on the other. Indeed, the current state of the world economy is in some measure attributed to the fact that boards (and their risk management committees) have not properly discharged their duties in exercising oversight on managers engaging in high risk activities. The CG of the financial sector, therefore, has important implications for the stability of the whole economy in Mauritius.
As such, CG for banking and insurance sector is of great importance in the Mauritian economy due to their vital financial intermediation role in the country's economy, their high level of sensitivity to problems arising from ineffective CG practices and the need to protect depositors' funds. Thus, in order to help the banking supervisors to promote the adoption sound CG practices by banking organisations in their countries, the Basel Committee on Banking Supervision in 1999 published guidance based on the principles of the OECD. The purpose of this guidance was to help governments in their efforts to assess and improve their CG practices and provide assistance for financial market regulators and participants.
Effective CG practices are essential to achieving and maintaining public trust and confidence in the banking system, which are critical to the proper functioning of the banking sector and economy as a whole. Poor CG may contribute to bank failures, which can pose significant public costs and consequences due to their potential impact on any applicable deposit insurance systems and the possibility of broader macroeconomic implications, such as contagion risk and impact on payment systems. In addition, poor CG can lead markets to lose confidence in the ability of a bank to properly manage its assets and liabilities, including deposits, which could in turn trigger a bank run or liquidity crisis. Indeed, in addition to their responsibilities to shareholders, banks also have a responsibility to their depositors.
From a banking industry perspective, CG involves the manner in which the business and affairs of banks are governed by their boards of directors and senior management, which affects how, they:
Set corporate objectives;
Operate the business on a day-to-day basis;
Meet the obligation of accountability to their shareholders and take into account the interests of other recognised stakeholders;
Align corporate activities and behaviour with the expectation that banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations; and
Protect the interests of depositors.
