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The Field Of Corporate Governance In Mauritius

Recently, there has been a noticeable advance in the field of corporate governance in many countries. Mauritius, as well, has shown its concern for good governance through the introduction of its own code of corporate governance in 2004.

During the last decade, the financial services sector started to become one of the major pillars of the economy. The nature and complexity of this particular sector has needed the set up of the Financial Services Commission, as a regulator, and new enactments and amendments in laws governing financial operations.

The Collective Investment Industry has also experienced major changes. Previously, Collective Investment Schemes (CIS) were managed by Asset Managers and were fairly regulated. With the growing interest of investors in collective funds, it became necessary to regulate asset management firms as they involved large amount of funds under their management. The securities act was amended and other regulations were introduced to regulate the industry. However, though being a highly regulated industry in many countries, a series of corporate scandals and malpractices have still been witnessed in fund management.

1.2 Motivation of study

In Mauritius, evidences in many corporate governance studies and dissertations have shown that firms in various sectors as well as in the financial services sector do not maintain a robust corporate governance structure. Moreover, there has been a widely held perception that in recent years many boards have not managed the risks associated with their businesses. The Board of Directors is usually the one who is responsible for good governance practices and to implement efficient risk management procedures in an organisation. Risk mitigation and good governance practices are an important concern in CIS. However, there are little research in the field of risk management and corporate governance in the management of collective investment schemes.

The aim of this study is to examine risk management practices by CIS Managers and their compliance to the rules ascertaining good governance. Analyses are performed at board level to determine the effectiveness of board and board committees in the management of collective investment. The research also identifies the different risks and risk management techniques involved while managing the funds and how good governance practice aid in mitigating those risks.

1.3 Outline

Chapter 1:Introduction

This chapter gives an overview of the dissertation.

Chapter 2: Literature Review

It provides a study of corporate governance and good governance practices and requirements for good risk management process through board structures.

Chapter 3: Background

The purpose of this chapter is to outline the CIS industry in Mauritius and provide an overview of CIS Management companies.

Chapter 4: Research Methodology

Chapter 4 describes the means and ways adopted to carry out the research for this dissertation. A description of the types of methods used will also be given, followed by an explanation of the problems faced while collecting the data.

Chapter 5: Analysis & Findings

This part of the dissertation displays an overview and a general indication of the findings from the survey carried on corporate governance and risk management in CIS Managers.

Chapter 2.

Literature Review

“Reading maketh a full man; conference, a ready man; and writing, an exact man.”

~ Francis Bacon ~

2.0 Literature Review

2.1 Corporate Governance

2.1.1 History

Corporate Governance has been practised ever since the existence of corporate entities. Yet, the study of the subject is as old as about half a century only. The UK Cadbury Report in the 1990’s considerably influenced thinking about good governance practices in many countries. Soon later, many of them founded their own reports on corporate governance; for instance, the Viénot Report (1995) in France, the King Report (1995) in South Africa, the Report on corporate governance in Hong Kong (from the Hong Kong society of Accountants in 1996), the Netherlands Report (1997), amongst others. Corporate Governance is now viewed as the practise to which an organisation is run; laying emphasis on accountability, integrity and risk management.

2.1.2 Definition

Although being an extensively researched subject, researchers and academics have, till now, not yet arrived to a common and widely accepted definition to corporate governance. Shleifer and Vishny, (1997) put it as “dealing with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” Other explanations were provided by Monks and Minow (1995) [i] , the Cadbury report (1992) [ii] , the World Bank report (1999) [iii] , Mathiesen (2002) [iv] , amongst others. However, a proper and elaborated definition seems to be that of the OECD (2004), stating that: “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which a company’s objectives are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently. Good corporate governance is only part of the larger economic context in which firms operate that includes, for example, macroeconomic policies and the degree of competition in product and factor markets. The corporate governance framework also depends on the legal, regulatory, and institutional environment”. The Executive summary of the King Report on Corporate Governance (2002) draws attention to the subject by listing out 7 characteristics indispensable for good corporate governance; which are: Discipline, Transparency, Independence, Fairness, Accountability, Responsibility and Social Responsibility. [v] 

2.1.4 Organisational Structure.

In an organisation, each individual has his own duties and status within the firm. Corporate governance identifies some interest groups that have a distinct role in the governance of the company (OECD, 2004).

The principles (e.g. shareholders)

The principle is the one who has permitted or instructed another person (an agent) to act on his behalf and according to his instructions. They are the ultimate proprietors of corporate information and they have the prerogative to use them or not, so as to exert control and demand accountability.

Agents (e.g. executive managers)

The agent is someone delegated to act on behalf of the principle. They are the ones who control the information flow because all information is forwarded to them and is then disseminated to the Board of directors, and stakeholders.

Board of directors (BOD)

The Board of directors (BOD) is composed of shareholders, including executives and non-executives and is the main mechanism responsible for dealing with problems of goal incongruence between agents and principals. The company’s board has the role to set up management compensation and monitor senior management as well (Main & Johnston, 1993; Tosi et al., 1997). However, Lorsch and Maclver (1989) explain that many of the critical processes and decisions of boards of directors do not derive from the board-at-large, but rather in subcommittees such as for e.g., audit committees, compensation committees, and nominating committees (Bilimoria and Piderit, 1994; Daily, 1994, 1996). Sub committees enable directors to cope with the limited time they have available, and the complexity of the information with which they must deal (Dalton et al, 1998). Moreover, these committees are seen to specifically enhance the accountability of the board as they provide independent oversight of various board activities (Harrison, 1987).

2.1.5 Agency [vi] problems and Sub-Committees.

The separation of ownership and control constitutes agency problems between managers and the suppliers of capital (Berle and Means, 1932). Agency problems are multiple. Executive directors and managers have the power to control the amount and quality of the information that are transmitted to the owners and stakeholders, which can lead to a phenomenon of arrogance and power exploitation for their own interests, against the interests of the owners (Fama, 1980). It is known that managers are usually the ones who are more exposed to the necessary information and knowledge to estimate risks and opportunities rather than the board. In fact, prior to market surveys, nine-tenths of directors are not properly informed or aware about their duties and obligations as board members (Fremond and Capaul, 2002). This may result in improper monitoring of the board, as according to Jensen (1993), its role is to represent the shareholders and serve as their first line of defence against a self-serving management team. Therefore delegating authority to board committees to assist the board will help deal with complex issues which the board may not be having time to ponder on and hence provide detailed attention to specific areas of their duties. Nomination Committee

In order to manage the company properly, a sufficient number of board members is recommended to favour appropriate supervision of the agents. However, researchers argue that that a large board size may result in less effective monitoring. Lipton and Lorsch declare that "the norms of behaviour in most boards are dysfunctional" (1992); where numbers [of Directors] increase, so do the problems associated with these norms of behaviour. Companies that have introduced a nominations committee to select and recruit directors are considered to have a more effective board control. Remuneration Committee

Main and Johnston (1993) stated that: "There are strong theoretical reasons for expecting a Board sub-committee such as the remuneration committee to exert an influence on top executive pay. And that influence should be in the interests of the owners, i.e. the shareholders," The importance of a remuneration committee is evident; in its absence, senior executives may desire to award themselves pay raises that are not an advantage to shareholders’ interests. In their study, Conyon and Peck, (1998) point out that the constitution of both a company's main board and its compensation committee are essential in the closer alignment of management pay and corporate performance. Audit Committee

Audit committees are board mechanisms that enhance accountability around the financial reporting and accounting functions. In an organisation, the audit committee guarantees the quality and reliability of financial reporting and corporate accountability (Carcello and Neal, 2000), and acts as an important governance mechanism. Krishnan (2005) presents evidence that internal control problems are less likely to occur when audit committees are well versed with financial elements. Financial expertise of audit committee members has been shown to be important for dealing with the complexities of financial reporting (Kalbers and Fogarty, 1993), detect material misstatements (Scarbrough et al., 1998; Raghunandan et al., 2001) and thus reduce the occurrence of financial restatements (Abbott et al., 2004). Therefore, the importance of an audit committee is considerable. They have the responsibility to ensure a reliable financial reporting (Blue Ribbon Committee 1999; Johnstone et al. 2001; Abbott et al. 2002). Companies without audit committees are more likely to have fraudulent financial reporting (Dechow et al. 1996) and earnings overstatements as revealed by prior period adjustments (DeFond and Jiambalvo 1991).

2.1.6 Elements of control, transparency and disclosure

Researchers, in the field of accounting (e.g. Cohen et al., 2004), suggest that it is import to align the interests of shareholders and management with mechanisms of accountability such as audit committees, internal audit and risk management to guarantee the quality in financial reporting Mechanisms of transparency, in the form of accounting, financial reporting and voluntary disclosures have also taken their place in corporate governance research. To further ensure transparency in the organisation, a system of monitoring is put in place by the principle to govern the agent. Again, traditionally, researches, from an agency theory perspective, have demonstrated that transparency, in the form of disclosures to shareholders, is an important mechanism for aligning shareholder and management interests (Healy et al., 1999; Healy and Palepu, 2001). There are various ways to disclose company information such as company reports, daily newspapers, etc. Besides, the internet has recently proven to be a highly effective information channel as well as.

2.2 Risk Management

2.2.1 Introduction

Risk management is defined by the King report (2002) as “the identification and evaluation of actual and potential areas of risk as they pertain to a company, followed by a procedure of termination, transfer, acceptance (tolerance) or mitigation of each risk. Risk management is therefore a process that utilises internal controls as a measure to mitigate and control risk.”

In an article by Sophia Grene (Jan. 2010), it was reported that “many financial models failed in the past two years as markets demonstrated they did not behave according to conventional assumptions” and that “the main challenge for asset managers in the coming decade is understanding, managing and communicating risk.”

Risk management is often a difficult task as risks can emerge when sometimes least expected. If risks are ignored or let to get out of control, it will cause damage to the business as well as its clients, causing the survival of the business less probable in the long run.

Unlike most other institutions that need only to think about managing the risk of their own business, management companies of collective investment schemes must think about risk at two levels. On one level is the CIS manager’s fiduciary responsibility to protect the clients of the firm and on the other is the need to protect the CIS management firm itself. According to Andre Morony (1999), “There are many overlaps between these two aspects of funds management risk; for example, if a funds management firm damages client portfolios by poor investment decisions, the firm will also sooner or later damage its own business.”

2.2.2 Types of risks

Firm risk is inherent in every decision that is taken and every procedure that is executed. It also tends to be more general across industries compared to fiduciary risks. Initially, firms risk will tend to affect the clients, but it will eventually have an impact on the asset managing company itself (Morony, 1999). Hence, management of firm risk involves not just the protection of the firm’s clients but the protection of the firm itself as well.

The Ernst & Young Survey on Risk Management for Asset Management (2010), identifies 12 main risks which are faced by firms in the fund management industry; which are the:

Market risk

Credit risk

Operational risk

Investment risk

Legal risk

Country risk

Settlement risk

Liquidity risk

Fiduciary risk

Regulatory risk


Reputational risk

2.2.3 Risk Management Framework

Risk management includes the examination of risks concerning the improvement of performance measures, critical success factors, and well-organized systems based on corporate strategy and corporate goals to influence decision making and managerial action plans. The Institute of Chartered Accounts in England and Wales (ICAEW) (2002) recommends a few steps, to ensure that the company has a proper continuous risk management process, which are:

identifying, classifying and sourcing the risks inherent in the company’s strategy;

selecting the correct risk management approaches and transferring or preventing those risks that the business is not competent or ready to manage;

applying control strategies to manage the remaining risks;

monitoring the efficiency of risk management methods and controls;

Learning from experience and making improvements.

The ICAEW (2002) insists that it is mandatory to follow all these steps to make sure that the process is coordinated and that management is fully informed. Making appropriate information available for internal purposes will mean that no additional systems are required to support external reporting.

2.2.4. Risk Identification techniques

To carry out the risk management process, the different risks affecting the enterprise should be identified first. Identifying an issue that is facing the organization and discussing it in advance can potentially lead to the risk being reduced. The Institute of Management Accountants (2007) proposes some techniques for identifying risks, namely:


Event inventories and loss event data

Interviews and self-assessment

Facilitated workshops

SWOT analysis

Risk questionnaires and risk surveys

Scenario analysis

Using technology

Other techniques (e.g. value chain analysis, Audits or physical inspection, etc)

Risks faced by the organisation can be minimised once they have been identified and located. The implementation of a risk monitoring system is then required to control the risks.

2.2.5 Risk Control

The principal goal of a control system is to maximize safeguarding of assets and capital by minimizing the exposures that can exhaust them. An effective internal control system is based upon a thorough and regular evaluation of the nature and extent of the risks faced by the enterprise. The level of risk undertaken by a company is under the responsibility of the governing body and it is the one accountable for it. The Turnbull’s report (1999) has identified 3 steps on how risk control should be established in the business processes:

The board or relevant board committee members should identify the key risks and assess how they have been evaluated and managed.

The board has to assess the efficiency of the internal control system in place, laying particular focus on the weak spots and trouble spots, identified previously.

The board must make certain that company reports cover all features of the internal control system, its procedures and its effectiveness.

Risk management activities are usually performed by a management team, external auditors, consultants, or internal auditors. The audit committee is then, the one which is at the head of the risk management process. However, the expanding roles and responsibilities of audit committees raise various criticisms and doubts as to their ability to function effectively (Alles et al., 2005; Harrison, 1987). For example, audit committees are commonly delegated with the responsibility of both financial reporting and risk management control by the board. As a result, such committees may become less effective due to the increased workload pressure. According to Alles et al. (2005, p. 22) audit committee members “however well qualified, often have full-time, high-level responsibilities elsewhere which inhibit their desire and ability to get more involved with the firm”. Moreover, managing risks generally requires a considerable understanding of evolving organisation structures and their related risks. Hence, it is evident that the setting up of a separate risk management committee is expected to be more efficient than the audit committee. In fact, risk management committees are gaining popularity as an important oversight board committee (Fields and Keys, 2003). The broad areas the risk management committee have as responsibilities commonly include:

determining the organisational risk management strategies;

evaluating the organisational risk management operations;

assessing financial reporting in the organisational; and

ensuring the organisation is in compliance with the laws and regulations (COSO, 2004; Sallivan, 2001; Soltani, 2005).

The committee members are expected to discuss with senior management the state of the organisation’s risk management, review the adequacy and management of the risk procedures, and report to the board on its findings.

2.3 Corporate Governance and Risk Management

2.3.1 Risk Management as a part of Corporate Governance.

Risk management is one of the main areas in corporate governance that has recently been much talked of; from the Cadbury Report of the early 1990s to the more recent Financial Reporting Council (FRC)’s Review of the UK’s Combined Code published in December 2009. The latter implements that there is “the need for boards to take responsibility for assessing the major risks facing the company, agreeing the company’s risk profile and tolerance of risk, and oversee the risk management systems.” Systems of risk management and internal control not only aid the prevention of governance breakdowns, but can also assist in creating an environment where innovation and continuous improvement can thrive (Australia / New Zealand Risk Management Standard, 1999). The IMA (2006) lists different reasons for which risk management is closely integrated in corporate governance; for instance, it:

Improves the flow of information between the company and the board regarding risks;

Enhances discussions of strategy and the related risks between executives and the board;

Monitors key risks by accountants and management with reports to the board;

Identifies acceptable levels of risks in the firm;

Focuses management on the risks identified;

Improves disclosures to stakeholders about risks taken and risks yet to be managed;

Reassures the board that management no longer manages risk in silos; and

Knows which of the organization’s objectives is at greatest risk. ”

2.3.2 Corporate governance and Risk Management in CIS

It is important that in the CIS industry and individual CIS ensure that robust governance structures are constructed and maintained to safeguard the interests of investors and maintain their confidence. Collective funds are used by small investors as well as sophisticated individual investors and institutional investors. However, owing to their critical role as an investment instrument for smaller savers and to their widespread applicability in providing for their future needs (e.g. retirement income), a system of good governance and risk management is important to protect the interests of the CIS investors.

The International Organization of Securities Commissions (IOSCO) (2005) describes CIS governance as "a framework for the organization and operation of CIS that seeks to ensure that CIS are organized and operated efficiently and exclusively in the interests of CIS investors (both actual and potential investors, and not in the interests of CIS insiders." The robust CIS governance framework should:

Seek to protect the CIS assets from loss due to malfeasance or negligence on the part of those that organize or operate the CIS.

Ensure that investors are adequately informed of the risks involved in their investment and the rewards they may obtain.

Ascertain that the scheme is operated in the investors' best interests at all times. Internal Control

Independently of the form or model under which a CIS is organized, CIS Managers should always be subject to the fiduciary duty of acting for CIS investors in the best possible way. CIS often entail a separation of the ownership of the scheme from its management, which may incite the CIS Manager’s fiduciary duty to diverge; as stipulated by the IOSCO (2005). The IOSCO, sets forth that CIS Managers could rid themselves of unattractive securities that they own by dumping them into the collective fund. CIS Managers can also interfere in NAV calculations and overestimate the value of their assets in order to avoid showing poor performances or inadequately managed risks or to increase the size of fund by selling additional units or shares of the schemes.

Therefore, it is important to maintain appropriate controls and implement an internal structure of compliance responsible for monitoring compliance with their contractual obligations and the rules that are applicable to the CIS management activity. Many CIS Operators employ a compliance officer to help assure compliance with the rules and allow proper information to be passed to the entity responsible for enforcing fiduciary duties. Conflict of interest and Agency abuse

The investment manger’s objective is to maximise assets under management while the investor’s objective is to maximise return in asset class. By attracting as many investors into the fund, the manager has the possibility to obtain higher fees for his service. But in so doing, the fund may become too large to be managed efficiently (OECD). In practice, potential conflicts are even greater. Collective schemes are legally a separate legal entity, such as a corporation or a trust, whereas all facilities provided to manage the fund belong to the asset management company and all managers of the fund are employed and compensated by the management company. However, most fund managers are affiliated with other financial institutions. It is feared that the fund managers use the fund to support issues of securities underwritten by the parent organisation (OECD, 2001). In extreme cases these funds can be used to purchase assets from the affiliates which could not be placed in a public offering. The fund managers could also direct securities trades to affiliated market intermediaries, rather than seeking best execution of orders. There is also the risk that the company will trade excessively in order to increase the commission income of affiliated market intermediaries. Failure to withhold information about possible trades from affiliated intermediaries can allow these intermediaries to “front run”. In all of these cases, the operator could trade at prices or commissions that are inappropriate from the point of view of investors while allowing the operator or the affiliated intermediary to earn profits from an inside relationship.

2.3.3 Corporate failures and fraudulent activities.

The focus on issues of business ethics, better corporate governance and risk management are usually directly linked to scandals and disasters. The crumbling of a large number of high-profile firms such as Enron (2001), WorldCom (2002), AIG (2004), and Satyam (2009), amongst others, in those past years have stained corporate governance reputation and questioned the effectiveness of its current structure. In their article, “Corporate Governance: A Mandate for Risk Management?” (2001), Dr Drennan and Professor Beck, report that “the current system of largely voluntary governance codes is unlikely to prevent the occurrence of future scandals, because of its inability to ‘frighten’ governance under-performers into action.” The fund industry, has also experienced such incidents such as, for instance, the world’s largest fraud ever; Bernard Madoff’s Ponzi Scheme, of at least $50 billion (Dec 2008) and other fund scandals like that of Charles Ponzi [1] (1920), Jerome Kerviel (2009), Ralph Cioffi and Matthew Tannin (2008), Edward Strafaci (2002), Kazutsugi Nami (2009).

Fraudulent activities occur when the company cheats on implicit or explicit contracts with creditors, employees, franchisees, or clients or when agents of the company misrepresent the company's financial condition. It is observed that fraud is more likely to happen among companies having fewer independent members on the BOD and the audit committee (Dechow et al. 1996; Abbott et al. 2000; Beasley et al. 2000). These studies imply that when this key element of oversight is missing, there are likely to be consequences in terms of financial reporting quality.

In certain countries, legislation has been passed in order to encourage whistleblowing and protect the rights of whistleblowers in order to encourage the exposure of illegal activities and fraudulent businesses. In fact whistleblowing has been the subject of several recent ethics studies on corporate governance (e.g. Cohan, 2002; Vandekerckhove and Commers, 2004). Cohan (2002, p. 275) which call for solutions to improve whistleblower communications in corporations, such as

encouraging employees to expose wrongdoing without fear of retribution;

devising communication systems that enable important information to move upward to the proper decision-maker without distortion;

adequate training to new directors; and

expanding the number of independent directors.

Chapter 3.


“Judge a man by his questions rather than by his answers”


3.0 Background

3.1 Background – The CIS Industry

In the capital market, various investment opportunities are available, but most individuals do not possess the necessary investment skills and can hardly afford sufficiently, diversified portfolios, or execute large trades. That is why many small investors pool their savings collectively in a large fund often called as a Collective Investment Scheme (CIS). In fact, CIS have been one of the most significant developments in financial intermediation during the past few decades. CIS are important vehicles through which investors across the world save and invest as they allow investors with relatively small savings to get better returns by pooling their money and benefit from the expertise of a professional investment manager who invest the pooled fund in a diversified portfolio of securities. In many countries Collective Investment Schemes are the main source of savings and capital for investments. A well developed Collective Investment Schemes industry helps to create jobs and mobilize savings to productive sectors.

3.2 CIS in Mauritius

In Mauritius, Collective Investment Schemes have been very popular in mopping up liquidity and for promoting savings. As at 31 December 2009, the global business sector had more than 455 CIS’s (with total assets of US$50.1 billion under administration) used by institutional and professional investors to channel their investments in different markets. [2] 

Until 2005, the domestic Collective Investment Schemes were structured through a company (mutual funds and investment trusts) or through a trust (unit trusts) vehicle. Apart from the Unit Trusts Act 1989 and the limited provisions of Clause 35 in the Companies Act 1984 (saved under the Companies Act 2001) there existed, in Mauritius, no comprehensive legislation for the regulation and supervision of Collective Investment Schemes.

During that time, it was the FSC who had adopted best market practices to regulate and supervise Collective Investment Schemes. Best practices offered a lot of flexibility but the absence of written rules had proved to be a major obstacle for investors, for operators of CIS and for the Regulator alike. The past legal framework did not provide for adequate means to identify and manage the investment, institution and compliance risks mentioned.

It is only after 2005 that the securities act was amended to govern the operation of Collective Investment Schemes. According to the act, a collective investment scheme is the collective investment of funds in a portfolio of financial or non-financial assets which operates on the principle of risk diversification. The funds are redeemed at Net Asset Value (NAV).

CIS are usually identified as open ended funds. In an open-ended fund, money is raised by selling shares of the fund to the public and there is no restriction on the amount of shares the fund will issue. Investors are allowed to redeem their shares at NAV at pre-determined times in accordance with the articles of association. The legal form under which a CIS may be constituted is as a company limited by shares, a trust or in any other form approved by the Financial Services Commission. Legally, there are 4 types of CIS:

Fully regulated CIS (meant for Public Funds)

Professional CIS (open to only sophisticated investors or as private placements)

Specialised CIS (investing in real estate, commodities and derivatives and other structured products)

Expert Fund (investment in the scheme is only available to expert investors)

3.3 The FSC as a regulatory body

The regulatory body for CIS in Mauritius is the Financial Services Commission (FSC). When setting up a fund, the FSC needs to be satisfied of certain requirements. The promoters need to provide their track record and profile, and information concerning the objectives and structure of the fund. The promoters should specify the type of investors being targeted and in which category of assets the fund will be invested in. Details about the investment manager, the custodian, and the administrator should also be provided. In case the fund is being invested overseas, the laws applicable in the foreign countries should be complied with.


The FSC plays an important role as a regulatory body as it implements a risk-assessment approach to the regulation of the collective funds by identifying and focussing regulatory attention on those institutions and their activities. It thus aims at avoiding a downturn to market confidence, which may lead to spill-over effects, in the event of a failure or a collapse of any of the firm.

3.4 Legal framework governing CIS in Mauritius

A CIS Manager regulated in Mauritius or any other equivalent jurisdiction is required to manage a fund set up under the supervision of the FSC. In Mauritius, funds are governed by the following acts:

The Companies Act 2001 - for the incorporation of the collective investment scheme

Financial Services Act 2007 (as amended) - for the process of setting up the collective investment vehicle and its licensing, once having satisfied the necessary criteria.

The Securities Act 2005; from which the following rules are derived:

The Securities (Licensing) Rules 2007

The Securities (Acquisition of Shares of Dissenting Shareholders during Takeovers) Regulations 2010

The Securities (Collective Investment Schemes and Closed-End Funds) Regulations 2008

Other regulations.

3.5 CIS Manager

The FSC requires the appointment of a CIS manager for most collective funds. A CIS manager is a company incorporated in Mauritius which holds a licence issued by the FSC. The CIS manager may also hold a Category 1 Global Business License (GBL1) which enables it to carry business with people in foreign countries. Business then is conducted in a currency other than the Mauritian Rupee. However, for the purpose of this research only CIS Managers which do not hold a GBL1 have been taken.

The CIS manager carries out activities related to the management of a Collective Investment Scheme such as:

the administrative services required by the scheme

provision of registrar and transfer facilities

distribution of the securities of the scheme

maintaining accounting records of the scheme

giving investment advice in relation to the scheme

maintaining the portfolio of the scheme

Chapter 4.

Research Methodology

“The next best thing to knowing something is in knowing where to find it.”

~ Samuel Johnson ~

4.0 Research Methodology

4.1 Research Methodology explained

The procedure in carrying out the research is based on the steps provided by C. R. Kothari in his book ‘Research Methodology: Methods and Techniques’ which are:

Formulating the research problem

Extensive literature review

Preparing the research design

Determining the sample design

Collecting the data

Execution of the project

Analysis of data

Preparation of report

4.2 Formulating the research problem

A good methodology is one whose research problems have been clearly stated. The research objectives to be accomplished are mainly:

To analyse corporate governance level and adherence to good governance practices by CIS Managers in Mauritius and the implementation of board mechanisms to ensure proper fund management.

To investigate the process for evaluating the main risks to which CIS Managers are exposed to and hence identify the risk management practices; to study the extent to which risks are successfully managed; and to find the importance given to an effective risk management of risks in the CIS industry.

To seek the importance of attributing effective risks management to good governance practices.

To put forth recommendations and suggest measures to:

improve good governance practices when managing collective investment funds;

improve firm risk management;

laying emphasis on key problems areas and hence find the ideal corporate structure in establishing good corporate governance and effective risk management,

and to avoid potential cases of frauds and dishonest activities;

4.3 Extensive literature review

Extensive literature review was carried out to

Understand the concepts of corporate governance and the implication of good governance practices.

Find out about the risk management process by Managers of CIS.

Sustain the opinions and suggestions to be put forth in the next chapter.

4.4 Preparing the research design

For the purpose of this research, the research design to be used will be the exploratory and descriptive studies.

An exploratory study will be necessary as a first research process. Exploratory research is aimed at exploring a new area of research about which little is known. This will thus aid in understanding the subject being discussed before the analysis. The descriptive research is most certainly the most common research type. It includes surveys and fact findings analysis of different kinds.

4.5 Determining the sample design

The target population consist of CIS Managers operating in the Mauritian jurisdiction. The official list of the licensed CIS Managers was obtained at the Financial Services Commission (see Appendix 2). Given that the population being researched is restrained to a size of only 17 companies, the entire population was solicited for the survey.

4.6 Collecting the data

The main data collection technique used for this dissertation was, initially, a survey through interview questionnaire only. Later, due to time constraints and also to the fact that a few of the interviewee were unable to give an appointment before the set dates, some questionnaires had to filled via telephonic contacts, while the others were sent to the respondent’s e-mail addresses. (See Appendix 1. for complete questionnaire)

Other techniques used to collect data were from secondary sources. Information was taken from annual reports, company documents and financial statements available at the Companies Division (Research Section). Additional information was taken from Company Websites, the code of corporate governance, from publications by the Financial Services Commission and from company reports and manuals handed by the companies’ staffs, at request. Questionnaire Design and Structure

When designing the interview questionnaire, it was anticipated that certain companies would prefer the questionnaire to be sent to them by mail rather than accepting to conduct an interview. Therefore, the interview questionnaire was designed to enable the user to answer it by himself, without any problems.

The questionnaires were carefully prepared so as to encourage respondents to answer all questions. The temptation to ask too many questions in the questionnaire, in the hope of obtaining large amount of information, was avoided; for, the respondents may become bored and thus pay less interest when answering the remaining questions. Consequently, the layout of the questionnaire is set to appear not too long with a rather attractive and professional look. Personal and confidential questions such as age of respondent, income level of employees were avoided. This may place our respondent in an uneasy position or become doubtful of the nature of the research. When designing the questionnaire, the questions were put and categorised in such a way to make sure that the question follow each other in logical sequence starting with more general questions to dealing with questions more relevant to the title of the dissertation.

Bourque and Clark (1994) point out that researchers may, when designing individual questions:

adopt questions used in other questionnaires;

adapt questions used in other questionnaires; and

develop their own questions;

In this survey, all of these approaches have been used while making up the research questions. Hence, questions were taken and constructed as from the literature review, from codes and reports on corporate governance and risk management, from acts and regulations governing the CIS industry and from other dissertations and surveys relevant to the topic.

The questions were categorised in 2 parts; namely Section A and Section B; and each parts, into sub-parts. Section A deals with question related to corporate governance and section B consists of questions linked to the management of risks. The last questions are related to both topics. The types of question used for the research are: Dichotomous Questions

Questions require a simple YES or NO answer; Likert response scale questions

These are scale questions, whereby the respondents are asked how strongly they agree/disagree to certain questions through a bipolar scale or selecting a numerical rating scale to the question. Filter or Contingency Questions

A contingency question is one where a question is a subsequent to another question. Questions are used in order to determine if the responder is qualified or experienced enough to answer the next question subsequent to it. Cumulative or Guttmann scale

These questions give the possibility to select more than one answer.

For some questions, the respondent may add/suggest additional answer(s), which he deems appropriate.

Besides, it is important to note that the questionnaires were accompanied by a covering letter, which gave details of the survey carried out; its purpose and which assured the respondent that the information provided will be dealt with complete confidentiality. There in, contact details were provided for any assistance to the respondent in case questionnaire was sent by mail.

An attached memo gave instructions about filling the questionnaire and provided other information such as the deadline for getting back questionnaire. Moreover, technical terms used in the questionnaire were explained in an annex to it. Pilot Testing

Before delivering the questionnaire, a pilot test was required:

To verify that instructions are comprehensible

To test how long it takes to fill the questionnaire

To detect any ambiguous questions

To eliminate those questions which are not significant for the research.

The pilot test was done with 2 companies, after which, a few adjustments on the questionnaire structure and layout were made. Certain wordings, grammatical errors and question sequence were corrected before administering the final questionnaires.

4.7 Execution of the project

Before conducting the interview or sending any questionnaire, it seemed appropriate that the addressee were to be contacted and informed beforehand. The interviewee was selected and contacted after consultation with the Human Resource Department of each company. The interviewee had to be a senior manager or executive who was well versed with company issues. Respondents which denied the interview were asked to fill an e-mailed version of the questionnaire. The respondent was then recommended to fill the questionnaire with the assistance of a qualified employee where applicable. This was to ensure that the information gathered were reliable. Besides, follow-ups were done regularly to encourage maximum response. When necessary, telephonic contacts, visits to the companies and meetings with the respondents were carried out to gather additional information.

4.8 Analysis of data

After having gathered the data, they were analysed and gone through a number of operations such as coding and classification in tabular form, as a first step. The information obtained have been analysed and interpreted through the use of comparative figures, means, percentages, charts and tables. To process data, the use of statistical package, SPSS 17.0, was used. SPSS was preferred over Microsoft Office Excel as:

Statistical analyses are easier and faster in SPSS.

A full set of statistical tests are available.

SPSS provides accurate results in case some question are left unanswered in the questionnaire (e.g. valid percent, etc).

Labels can be used in the analysis chapter of the dissertation instead of codes. SPSS allows the values to be kept intact.

However, charts and tables were created in Microsoft Office Excel 2007 as they can then be easily edited, rearranged or modified if the need arise.

4.9 Preparation of report

Finally, the research problem, the data collected and the findings is illustrated into a written report.

4.10 Constraints faced

It was a difficult task to convince the respondents in answering the questionnaires. The reasons put forward to avoid the survey were:

Questions asked related to confidential issues.

Inaccessibility of the respondents

Company’s policy does not favour the response to research works.

Too much time-consuming exercise.

Therefore, to gain maximum response, certain questions which attained to company’s confidentiality or were too lengthy had to be removed from the survey. The limitation to the study is that not all companies surveyed had reverted back. Hence, the data obtained is less precise than would otherwise be the case, and hence it may not reveal the actual state of corporate governance and risk management by CIS Managers.

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