Firms which implement sound CG systems provide more useful information to investors and its other stakeholders to reduce information asymmetry as well as to help the company improve its operations (Hsiang-tsai Chiang et al. 2005). CG is concerned with holding the balance between economic and social goals and between individual and communal goals. Dahya et al. (1996) defined CG as "the manner in which companies are controlled and in which those responsible for the direction of the company are accountable to the stakeholders of the company" (p.74). In the wake of accounting, leadership and governance scandals at large companies, CG has succeeded to attract a lot of attention. The reason behind this is that it does not lay emphasis only on the long term relationship, such as communication between management and investors, but also transactional relationship, which has to deal with disclosure and authority. In this respect the structure of corporate governance plays a significant role in successful businesses. Some examples of the elements of corporate governance structure are as follows:
Board of Directors
The board of directors has its key role in corporate governance; their main responsibility is to approve the organisation's strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its shareholders, authorities and other stakeholders. They have to ensure the proper functioning of a business by monitoring and supervising the companies' resource and operation. Therefore, the board is collectively seen as a team of individuals with fiduciary responsibilities of leading and directing a firm, with the primary objective of protecting the firm's shareholders' interests (Shamsul Nahar Abdullah 2004). However, the separation between ownership and control mechanism in today's modern organization has resulted in a potential conflict of interest situation (Berle and Means 1932).
Independent Directors
The role of independent directors on the board of directors is to effectively monitor and control firm activities in reducing opportunistic managerial behaviors and expropriation of firm resources (Fama and Jensen 1983a, b, Brickley et al. 1994). There is evidence to show that independent directors are valued for their ability to advise, to solidify business and personal relationships, and to send a signal that the company is doing well rather than for their ability to monitor (Mace 1986, Herman 1981). However, independent directors face difficulties in discharging their duties as they are not directly affiliated with the management (Weisbach 1988).
CEO Duality (CEO Is Chairman of Board Of Directors)
There are two types of leadership structure, that is, combined leadership structure and separated structure (Coles et al 2001). A firm may adopt the combined leadership structure in which the CEO is also acting as chairman of the board whilst the separated structure clearly divides the positions of CEO from chairmanship. The role of CEO and Chairman should be distinct and separated to ensure the balance of power of the two designations as well as to avoid conflict of interest. It is also to avoid a single person in the board to dominant the others in decision making process so to promote fair judgment and reasonable concern. If there is a duality it is recommended that strong independent element should be included and such information be disclosed to the public for transparency purpose. Many studies have been done to identify the implications of CEO duality. There is a claim that the operating performance may be improved as a result of less conflict between the CEO and chairman and/or other directors (Anderson and Anthony 1996).
Some other elements of the corporate governance structures are the audit committee, major shareholders of the company amongst others. The most important part in corporate governance is to see whether the management has been able to develop a model which is in line with the standards of the corporate participants. In addition to this they must evaluate this model from time to time to ensure that it is effective. Hence the management should do their wok honestly and ethically, particularly concerning conflicts of interest and disclosure in financial reports.
CG and CSR Disclosure
Following recent accounting and ethical scandals in firms such as Enron, WorldCom and Parmalat, corporate governance is being regarded as an important issue in the business world due to the fact that rules and regulations have become stricter with regard to societal expectations. In this respect the concept of corporate governance has start to cover some part of CSR. Previous researches has tended to study CG and CSR issues separately and not as combined manifestation in the fast developing business world where CG issues may also have impact on CSR disclosure and firms performance. Examples of studies that have directly or indirectly link CSR and CG are those that talk about the influence of CG reforms on business ethics most often in a particular region( mainly Rossouw 2005; Kimber and Lipton,2005; Ryan 2005); the role of socially responsible investors and shareholder activism (Aguilera et al., 2006; McLaren, 2004; Monks et al., 2004; Guay et al., 2004; Sjöström, 2008) and of employee relations (Deakin and Whittaker, 2007; Jones et al., 2007); and, perhaps most remotely, those that critically examine the stakeholder approach, frequently referring to an agency perspective (Hill and Jones, 1992; Jensen, 2001; Sternberg, 1997; cf. Kolk and Pinkse, 2006).
There is several corporate governance practice which helps to find out whether corporate social responsibility should be disclosed or not, for example the Global Reporting Initiative (GRI) comes across several indicators such as independence and expertise of directors which help to identify economic, environmental and social risks and opportunities and find out whether the financial and non financial goal have been achieved and hence based on this firms will decide whether CSR should be disclosed or not.
Corporate governance and corporate social responsibility is therefore expected to be more integrated in the field of business disclosure practices. Nowadays companies are required to disclose other types of information, like what the business has done for the welfare of the society, and not only financial information. For this reason the number of firms which publish voluntary reports has increased. According to the triple bottom line, a business reports strategy and operational performance within three primary dimensions and these are financial, stakeholder and environmental performance. Thus these reports shows that there is proper planning in the business as the latter selects the most important issues to be included in the triple bottom line plan and report. This report is usually included in the annual report which shows that the corporate governance structure does indeed have an impact on CSR disclosure.
According to Tricker (1984), CSR disclosure can be viewed as a strategy which leads to towards closing a perceived legitimacy gap between management and shareholders, especially foreign shareholders. Non executive directors are seem as a mechanism which not only acts in the best interest of the owner but also in the interest of other stakeholders and they advise about the presentation of the the companies' activities. Zahra and Stanton(1988) said that members in the corporate governance team are more likely to concers about honour and obligations and they would make disclosures which would improve their social prestige and honour.
One important element of corporate governance mechanism is the board of directors as they see whether the business is properly managed by their agents. Previous studies have proposed that bigger board size can increase communication and coordination problem and decrease the ability of the board to control management and on the other hand small board can decrease agency conflicts between managers and shareholders (Lipton and Lorsh, 1992; Eisenberg et al., 1998; Raheja, 2003). Jensen (1993) found that large board size result in less effective coordination, communication and decision making is more likely to be controlled by the CEO. Thus it can be forecasted that ineffective coordination in communication and decision making will result in low quality financial disclosure due to the fact that managers have not been able to perform their roles efficiently.
Previous empirical governance literature that board independence will foster board effectiveness. The difference between socially responsible firms' and non socially responsible firms' board structures was studied by Webb (2004) and she found that socially responsible firms had more independent directors than non socially responsible firms. Independent directors has the objective to safeguard shareholders interest and they also play an important role in enhancing the corporate image. They are seen as an important tool to keep an eye on management behavior (Rosenstein and Wyatt, 1990) and hence this results in more voluntary disclosure. Forker (1992) found out that the higher number of independent directors supervise the quality of financial disclosure.
When a person hold the position of CEO and boar chairman, CEO duality occurs (Rechner and Dalton, 1989). This combination reflects leadership and corporate governance issues. However vesting these two powers in only one person gives that latter a strong base which can erode the board's ability to exercise effective control (Tsui and Gul, 2000). Therefore, companies with the CEO duality offer greater power to a person, which enable him to make decisions that do not maximize the shareholders wealth and will help improved monitoring quality and reduce benefits from withholding information that may consequently result in enhancing quality of reporting.
Prior researches have proven that audit committee plays an effective role in enhancing the corporate governance standards. Wright (1996) found that audit committee composition is strongly related to financial reporting. McMullen and Raghunandan (1996) provide support for the association between the presence of an audit and more reliable financial reporting.
The existence of an audit committee was significantly and positively related to the extent of voluntary disclosure (Ho and Wong, 2001; Bliss and Balachandran, 2003).
Audit committee roles is providing a mean for review of the company's processes for producing financial data and its internal control, thus its existence is in producing high quality financial reporting. According to Mauritian Code of Corporate Governance (First Edition,Revise April 2004), the board should establish an audit committee with majority of independent directors. The existence of audit committee with a higher proportion of independent directors should reduce the agency cost and improve the internal control that will lead to greater quality of disclosures (Forker, 1992).
The agency theory predicts that the principal-agent problem between managers and shareholders arises when managers hold little equity in the corporation. This will lead to managers to engage in an opportunistic behavior (Jensen and Meckling, 1976). Past studies had showed that an increase in management ownership will reduce the agency problems and improved managers' incentive to provide more disclosure. Mohd Nasir and Abdullah (2004) investigated the influence of ownership structure in explaining the level of voluntary disclosures among the financially distressed firms and found that management shareholding levels have a significant and positive association with the level of voluntary disclosures. Coffey and Wang (1998) found that managerial control (percentage of stock owned by insiders) is positively related to charitable giving.
The above findings were in contrast to Guan Yeik (2006) and Eng and Mak (2003). In his study, he examined the relationship between managerial ownership and corporate social responsibility and he found that managerial ownership was significantly negatively related to corporate social disclosure. In his study, he found that managerial ownership level of 45 percent above will influence the corporate to have lower social disclosure. Eng and Mak (2003) found that lower managerial ownership is associated with increased voluntary disclosures.
Ramasamy and Ting (2004) examined a comparative analysis of corporate social responsibility awareness by using levels of corporate social disclosure as a measurement of corporate social responsibility (CSR) awareness. In their study, they used employee perception towards CSR awareness. The respondents were questioned on their management of CSR within the company, such as awareness of corporate social responsibility, attitudes to CSR in the company, the types of CSR activity and the respondent involvement in CSR. The results show a low level of awareness in both countries, although companies tend to exhibit a relatively higher level of awareness.
Chambers et al. (2003) investigated CSR reporting in seven countries through analysis of websites of the top 50 companies in Asia. This study investigated the penetration of CSR reporting within countries; the extent of CSR reporting within companies and the waves of CSR engaged in. The findings in Chambers et al. (2003) showed that, there are fewer CSR companies in the seven selected Asian countries compared with UK and Japan companies.
The mean for the seven countries studied, show a score of 41 percent which is under half the score for the UK (98 percent) and Japan companies (96 percent). Thus by involvement of foreign shareholders in Mauritian Listed companies will enhance the extent of corporate social disclosure in Mauritius.
Haniffa and Cooke (2005) found a significant relationship between corporate social disclosure and foreign shareholders indicated that companies use corporate social disclosure as a proactive legitimating strategy to obtain continued inflows of capital and to please ethical investors. Foreign shareholdings in Mauritian listed companies have considerably increased.
