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Examination of prior research has provided important insights into the relationship between leadership structure and performance. As suggested by the agency theory, the conceptual framework considers the importance of separating the roles of chairman and CEO in affecting FP. To test the above argument in relation to the Mauritian context, the following hypotheses are suggested:
H0a: Separate leadership structure is not associated with Firm Performance.
H1a: Separate leadership structure is positively associated with Firm Performance.
3.4.2 Composition of the board and Firm Performance
Another important mechanism of CG is the composition of the board, which refers to executive and non-executive directors. Both agency theory and stewardship theory apply to board composition. Boards dominated by NEDs are largely grounded in agency theory.
According to the agency theory point of view, outside directors (non-executive) on boards help in monitoring the conflicts of interests between shareholders and managers due to their independence from firm management (Jensen and Meckling 1976; Fama & Jensen 1983 and Shleifer & Vishny 1997). In contrast, a majority inside (executive) director representation on the board is grounded in stewardship theory, which argues that managers are good stewards of the organization and work to attain higher profits and shareholder returns (Donaldson & Davis 1994).
Baysinger and Butler (1985) observed that companies with more outside directors performed better. Rosentein and Wyatt (1990) found that the appointment of an outside director was associated with significant positive excess returns. Lee, Rosenstein, Rangan, and Davidson (1992) found that boards with majority outside directors performed better than those which were dominated by inside directors. While analyzing the link between board composition and FP, Jackling and Johl (2009) found evidence of a positive and significant relationship between outside directors and Tobin's Q (TQ).
On the other hand, Dalton, Daily, Ellstrand and Johnson (1998) did not find significant link between board composition and firm's performance. Reddy, Locke & Scrimgeour (2010) found no significant effect of outside directors and FP. Hermalin & Weibach (1991) and Bhagat & Black (2002) found no significant relationship between board composition and performance. Yermack (1996) also showed that the percentage of outside directors does not significantly affect FP. Agarwal & Knoeber (1996) suggest that boards expanded for political reasons often result in too many outsiders on the board, which does not help performance.
Even though, empirical evidence on the role of outside directors on FP is mixed, the agency theory perspective has been adopted to evaluate the impact of board composition on FP. It is theorised that greater proportion of outside directors will monitor the actions of managers, bring in a wide breath of knowledge, expertise and contacts which eventually would have a positive impact on the FP.
The relationship between board composition and FP has been reported in prior research. According to the arguments put forward by agency theory, non-executive directors are an important component of the board structure that affects FP. The conceptual framework considers the importance of non-executive directors in increasing FP. To test the above arguments the following hypotheses are suggested:
3.4.3 Board committees and Firm Performance
The existence of board committees is considered by investors in their investment decisions. The setting up of sub-committees was emphasised by the Cadbury Committee (1992) for specific areas of governance that have been identified as a problem. The areas which were considered important were the quality of financial reporting, director remuneration and appointment of directors (Spira & Bender 2004).
Therefore, the Cadbury Committee (1992) recommended establishing oversight committees for remuneration of executive directors, the auditing of financial statements and appointment of directors, which was supported by agency theory.
Cadbury (1992) stated that these committees should be staffed by non-executive directors, because of their independent view on important decisions. Therefore, board committees consisting of audit, remuneration and nomination committees must be composed of outside directors as outside directors are believed to ensure decisions made by the executive directors are in the best interest of the shareholders (Weir & Laing, David 2001).
The importance of board committees has heightened as a result of corporate collapses around the world. Board committees are appointed to function as independent monitors. The establishment of board committees is expected to have a positive influence on the motivation of the directors and provide confidence in the financial reports of the firm.
Laing and Weir (1999) also reported that the companies which introduced board committees to the board structure performed better than those without them and thus showed a significant improvement in FP by firms which have introduced audit and remuneration committees. In contrast, there is also evidence to support the view that board sub-committees had no effect on FP (Theoroudou 1998; Weir, Laing & McKnight 2002).
As suggested in agency theory, the monitoring function of board sub-committees is an important mechanism of CG. To test this, the following hypotheses are suggested:
3.4.4 Corporate Reporting and Firm Performance
Corporate Reporting (CR) is an important mechanism of CG that represents board accountability. The board of directors is answerable to the shareholders and other stakeholders. The purpose of corporate reporting is to disclose information that is useful to stakeholders who have an active interest in the firm (Zairi & Letza 1994).
CR includes financial reporting (means by which management communicate FP and CG to outside investors) and information beyond what regulations require firms to provide to their shareholders and other stakeholders. It comprises of mandatory reporting required by regulations like Companies Act, accounting standards and The Stock Exchange listing requirements as well as voluntary disclosures.
18.104.22.168 CSR Reporting
CSR Reporting involves voluntary disclosure of corporate actions concerning social and environmental issues (Nielsen & Thomsen 2007).
CSR is defined as
"achieving commercial success in ways that honour ethical values and respect for people, communities and the natural environment". (Liyanage 2007)
CG is about its relationship with stakeholders, so the organisation activities must be directed in such a way that it meets the needs of various stakeholders (shareholders, employees, creditors, suppliers, customers, government and the community). Therefore, an effective governance mechanism must ensure the interests of all stakeholders are met.
Several researchers argue that a business has an obligation beyond profit maximization and should make a positive contribution to society (Carroll 1999; Fisher 2004). They believe corporations have a variety of social obligations which range from meeting the regulatory and legal obligations to benevolent activities like for instance, helping the needy communities.
According to Buhr and Graftstrom (2007), there are a large number of companies which talk about their CSR activities as a critical success factor and refer to CSR as a business policy that creates new market opportunities, competitive advantage and customer satisfaction. It also builds goodwill, improves their reputation, strengthens their brand names and helps companies to attract and motivate employees.
On the other hand, Welch and Wazzan (1999) found no relationship between CSR and FP. Aupperle, Carroll & Hatfield (1985) did not detect any significant relation between CSR and FP. Mulyadi & Anwar (2011) and Apria (2011) also concluded there is no significant impact of CSR on performance.
Prior research has reported a relationship between CSR reporting and FP. According to the stakeholder theory, CSR reporting practices of firms affects the value of firm. Based on the arguments it is suggested to test the following hypotheses:
3.5 Proxies for financial performance
The majority of prior studies have examined the association between CG and FP using TQ as a proxy for FP (Hermalin and Weibach 1991; Yermack 1996; Hovey et al. 2009). Some studies used both accounting and market measure to quantify performance. In their study, Biener et al. (2004) and Bhagat and Bolton (2008) and Jackling and Johl (2009) used ROA and TQ as performance measures. Bauer et al. (2004) used Net Profit Margin, Returns on Equity and TQ as performance indicators.
4.0 Research Methodology
This chapter is devoted to the methodology adopted to meet the objectives of the study.
The introduction of CG practices in Mauritius aimed to provide a mechanism to improve investor confidence and trust in management and promote economic development of the country.
4.1 Research objectives
This research will determine relationships between the CG practices of board structures (consisting of leadership, composition, board committees) and corporate reporting of CSR Reporting and FP of listed companies in Mauritius.
4.2 Data sources
Data for research can be derived from two main sources. Original data, which is referred to as primary data, is collected at the source. For example, survey data, questionnaires, observations and experimental data. Data which already exists is referred to as secondary data, such as annual reports, books, published statistics and internal records kept by companies (Veal 2005). Evidence required to test the hypotheses in this study is based on annual reports which include a governance report and published statistics. Therefore data derived for this study is from secondary sources.
4.3 Gathering of data
The data and information required for the study were collected from the Mauritian Stock Exchange websites, annual reports, the Mauritian Stock Exchange publication The Handbook of listed companies and the SEM Factbooks.
The data required included board leadership, composition of the board, board committees and CSR Reporting practices of firms.
Performance data used in the study were Return on Equity (ROE), Return on Assets (ROA) and TQ. The data on size, which includes total assets, were extracted from the Mauritian Stock Exchange publication The Handbook of listed companies and market capitalisation was partly calculated using the formula and partly was obtained from the SEM Factbooks.
4.4 Data processing and analysis
The raw data will be processed. This process will be done with help of appropriate statistical tools. The Statistical Package for Social Science (SPSS 20) and Microsoft Office Excel 2007 have been used. The analysis included descriptive statistics, Pearson's correlation and Regression Analysis.
4.5 Defining variables for the study
Since the aim of this study is to assess the relationship between good CG practices and FP. Hence I need to consider an integrated framework of variables which comprises good governance practices and FP. The reason for choosing these variables is that they are in line with what has been considered to matter in CG and also most of them could be obtained by looking only through annual reports of listed firms.
For the purpose of this study I shall define the CG variables as follows:
Composition of boards
4.6 Design of the Variables: Measurement of Variables
0 for combined leadership & 1 for separate leadership.
Non-executive directors to number of directors.
A score calculated based upon its composition and its term of reference.
Market capitalisation +Total assets-Shareholders funds
Profit after tax
Profit after tax
Book value of Total assets
Price per share multiplied by total number of outstanding shares
Total number of directors
Book value of total assets
4.6.1 Leadership Structure
The study will represent dummy variables for board LS as literature on CG widely used the same method to operationalise the board LS (Abdullah 2004, Haniffa & Hudaib 2006; Lee & Lam 2008). If one person occupies the role of chairman and the CEO, it will be coded '0' because it will be classified as combined leadership. If the roles are occupied by two separate individual, it will be classified as separate leadership and will b coded '1'.
4.6.2 Board Composition
A mostly used approach to operationalise the BCOMP is the proportion of non-executive directors to total directors (Abdullah 2004; Laing & Weir 1994). For this study BCOMP is defined as the number of NEDs divided by the total number of directors on the board.
4.6.3 Board Committees
The Code states that all companies should have, at a minimum, an ACOM and a CGCOM, Section 3.5. Past studies presented the presence and absence of committees by dummy variables (Laing & Weir 1999). But for this study, it will be based on its composition and its term of reference with respect to The Code.
4.6.4 Corporate Reporting
CR includes financial reporting and information beyond that required by legislation. Reporting on CSR activities of the organization are information that is voluntarily disclosed. In content analysis qualitative information is converted to quantitative measures by counting. Word count (Deegan & Gordon 1996) is a robust measure in which counting errors are less likely than other measurements (Campbell et al. 2003). Word count was used to measure the level of CR since words appear to be more appropriate unit if analysis (Gray et al. 1995; Wilmshurst & Frost. 2000). That is, how many times "CSR" has been mentioned in the Annual Reports.
4.6.5 Board Size
Board size is considered as a variable that can influence CG practices and FP in this study. This variable is measured using total number of directors (Abdullah 2004; Keil & Nicholson 2003).
4.6.6 Firm size
Firm Size (FSize) can be related to CG characteristics and can be correlated with FP. FSize can be represented by market capitalisation and book values of total assets of the firm.
The size of a company measured by market capitalisation represents the total value of a company. Market capitalisation is a market estimate of the value of a company based on expected future prospects, economic and monetary conditions. Investor confidence is reflected in the market capitalisation. Investment in companies with higher market capitalisation has lower risk compared to the firms with lower market capitalisations. Prior empirical studies find that FP is positively related to market capitalisation (Yarmack 1996).
Firm size can also be measured by the book value of firms' total assets.
4.6.7 Performance measures
The existing literature on CG practices has used accounting-based performance measures, such as ROE and ROA and market-based measures, such as TQ as proxies for FP (Abdullah 2004, Bhagat & Black 2002, Daily & Dalton 1993). Since I am aiming to study the impact of CG mechanisms on FP, I took the measures widely used for listed companies namely ROE, ROA and TQ.
Tobin's Q is measured using the firm's market value to book value ratio. It is a measure of growth prospects of assets, defined by the future profitability of the assets in relation to their replacement value (Leng 2004).
TQ compares the ratio of a company's market value and the value of a company's assets. If the value of the TQ is equivalent to 1.0, it indicates that the market value is reflected in the assets of the company. A ratio greater than 1.0 indicated market value is higher than the company's recorded assets. Therefore a higher TQ encourages companies to invest more capital because the value of the company is more than the price they paid. This creates more value for shareholders. On the other hand, a TQ of less than 1.0 indicates that the market value is lower than the assets of the company which suggests that the market may be undervaluing the company.
ROE measures the rate of return on shareholder's equity. It shows how well the company uses the shareholders' investments to generate earnings. This measures the efficiency of generating profits from each dollar of shareholders' equity. A higher ratio indicates a higher return. ROE is calculated as follows:
ROA shows the profitability of the company's assets in generating profits. It indicates the effectiveness of the companies' assets in increasing shareholders' economic interests (Haniffa & Hudaib 2006). It also shows the efficiency of management in using its assets to generate earnings. ROA is calculated as follows:
4.7 Statistical Analysis
4.7.1 Descriptive statistics
Prior studies on CG widely used descriptive statistics (Abdullah 2004; Lam & Lee 2008). Central tendency and dispersion are measured using descriptive statistics. Mean, mode and median are the most commonly used measures of central tendencies. The most important measure of the central tendency is the mean. Mean, Minimum and Maximum have been used in this study. Descriptive statistics in this study showed to which extent the firms have adopted the recommendations of the Code and the trends of the FP variables in 2011.
Mean is equal to the sum of all observations divided by the number of values. The equation is as follows:-
The minimum has been used to compare the lowest value and the maximum to compare the highest value of the variables in 2011.
4.7.2 Pearson's Correlation
A correlation analysis was also conducted to test for collinearity among the variables. For this particular study I used Pearson's correlation to measure the strength of the association among the dependent variables that is ROE, ROA and TQ and the independent variables LDS, BCOMP, ACOM, CGCOM, CSR, FSIZE, BSIZE and Leverage. The symbol for Pearson's correlation co-efficient is "r". It can range from -1 to 1, -1 indicating a negative correlation, 0 indicating no correlation and 1 indicating a perfect positive correlation between the variables under test.
4.8 The Theoretical Population
The concept of good CG is so important that I think that it should be applied to all businesses in Mauritius, irrespective of their size.
But the Code applies only to the following business enterprises, which will disclose compliance or give reasons for any non-compliance in their annual reports for regulators and other stakeholders:
Companies listed on the official list of the SEM
Banks and non-banking financial institutions
Large public companies
State-owned enterprises including statutory corporations and parastatal bodies
Large private companies
The above list represents the group that I was interested to generalise but the population of interest was very large and hence it might have resulted in a hard time developing a reasonable sampling plan. Firstly, because it is quite difficult to get an accurate listing of this population and secondly, a national sample of this size can prove to be difficult to mount.
4.9 The study population
Due to the difficulties mentioned above, the study focuses only on listed firms. The companies listed on the official list of Stock Exchange were chosen because it was easy to get an accurate listing of the firms listed on the SEM through the latter's website and more information is available on them as compared to their private counterparts due to disclosure requirements from Stock Exchange Listing Rules. These companies were required to abide to all provision of the Code. The sample used in this study consists of accounting data for 21 firms listed on the SEM.
4.10 Time Horizon
All annual reports were gathered for the year 2011.
4.11 Construction of the Corporate Governance Index
In the study a Corporate Governance Index (CGI) was constructed to measure CG for listed companies at the SEM. In this direction the work closely relates to the financial literature as Klapper and Love (2004), Gompers et al. (2003), Black et al. (2006).
All relevant data needed to construct the index was gathered first hand from annual reports of firms listed on the SEM. A strenuous effort was made to make sure that the data gathered was accurate and would produce reliable results.
The construction of the index was based on the sets of provisions found in the Code. The most significant provisions that could be assessed were included. The provisions extracted were classified in six main headings. The categories are (i) Role of board (subindex A), (ii) Subcommittee of board internal control (subindex B), (iii) Auditing and risk management (subindex C),(iv) Integrated sustainability reporting (subindex D), (v) Disclosure and communication with shareholder (subindex E), (vi) Relationship with stakeholders (subindex F).
The index comprises of six categories that include a total of 60 binary items, for each of them, the company is given a value of 1 if the company comply with a given item and a value of 0 otherwise. Each company is then rated from 1 (poor) to 10 (excellent) in each of the categories based on the number of items complied.
This current chapter discussed the methodology which was used to test the hypotheses suggested in the study. It included the research objectives, the theoretical population and the selection of the sample, data source, design of variables and their measurement. Moreover, the methodology used to collect data and statistical methods used to analyse the data to test the relationship between corporate governance variables in affecting firm performance in Mauritius was also discussed. The results from the statistical tests used will be discussed in the next chapter.
5.0 Results and Analysis
The analysis of the relationship of CG variables and FP variables is discussed in this chapter using the data from the sample. Firstly, the adherence to the CG provisions by the companies under study is examined. This is followed by the analysis of the effect of CG on the performance of these companies.
5.0.1 Analysis of the numbers of companies under study from the different sectors in Mauritius
5.0.2 Analysis of the implementation of CG practices within the companies
All the listed companies are implementing CG within their companies. There has been a positive result for all companies because as from June 2005, all listed companies were required to abide by the Code.
5.1 Analysis of the Board Structure
5.1.1 Members constituting the board
With reference to Table 16.3, it can be seen that 47.5% (10 companies) have their board members in the range of 11-20. This is in accordance with the Business Roundtable Principles of CG (2002) whereby larger companies have 8 to 16 members on their board. Moreover, 52.5% have members in the range of 5-10. None of the company under study has < than 5 members.
5.1.2 Number of Independent and NEDs
From the Table 16.4 it can be seen that the number of independent and NEDs between 5-10 members is 80.9% (17 Companies) while 4 companies have less than 5 independent directors thus making 19.1%. However, it should be pointed out that all the companies under study have at least 2 independent directors as per Section 2.2.1 of The Code. Non-executive and independent directors play a vital role in providing independent judgment in all circumstances.
5.1.3 Board Committees
According to the Code Section 3.1, board committees are mechanism to assist the board and its directors in discharging their duties through a more comprehensive evaluation of specific issues, followed by well-considered recommendations to the board.