Since the turn of the century, developing countries have been adopting corporate governance codes with the promise that they will enhance accountability and growth, while delivering equitable, ethical, and sustainable business practices.
A governance code is a set of guiding principles drawn up by industry to standardise good corporate behaviour. They sensitise company boards and executives to a wide range of interests such as, investors, labour and local communities.
A key governance code – the Cadbury Code – was established in the UK in the early 1990s to improve corporate accountability. Since then, there have been a plethora of codes across the world. In Africa, governance codes have been designed to help address the legacies of colonialism, extractive post-colonial business behaviour and executive excesses. Several countries like South Africa, Kenya, Ghana and Mauritius have already stepped up to the plate.
But it does have some considerable limitations and mainly inefficiencies in public governance. We set out to study trends in the way companies adopt the corporate governance code in Mauritius. The aim was to provide useful insights to other developing countries, particularly in Africa.
Our study found significant levels of compliance with the code in the three years after implementation. But we also found that Mauritian companies picked and chose elements of the code. They implemented the easier ones perceived to be beneficial, or simply the ones that made them look good.
Our findings are important because developing countries have become important channels of foreign investment, but institutional investors remain concerned about firm- and country-level risks which are difficult to evaluate. The corporate governance arrangements in these are not fully understood.
Part of a big reform
Over the last three decades, the Mauritian government worked with international bodies to revamp the country’s regulatory framework for companies. This was part of a drive to encourage local and international investment.
The reforms were wide ranging and included setting up of a stock exchange and adoption of international standards for corporate accounting and reporting. The country also established a number of agencies to regulate financial and professional service sectors. It also embarked on full and partial privatisation of state owned assets as well as the liberalisation of key sectors.
The Mauritian economy emerged from its dual colonial past (it was colonised by both the French and the British) with a number of challenges. One of the main challenges was that it was dominated by a few large conglomerates and state institutions operating in a weak regulatory environment.
The adoption of the codes of good corporate governance in 2004 formed part of this reform movement. It followed a 2002 World Bank/International Monetary Fund report which highlighted governance deficiencies. A code of corporate governance was proposed as a solution.
Inspired by the South African King Code, Mauritius embraced a hybrid corporate governance model. This model mixes the ‘market-centric’ approach (typically practiced in the US and UK) and the ‘relationship-based’ ones (typically Japan, France, and Germany).
A pick and choose game
Our study found that companies were picking and choosing sections of the codes to implement as they wished. The more difficult or uncomfortable requirements were ignored.
For example, until now, information on ownership structures and CEO remuneration remain opaque. We concluded that the reason for this was the relatively small business elite, from which most directors and majority shareholders are drawn. They see some sections of the codes as being incompatible with a tradition of keeping things ‘discreet’. Our investigation also revealed a significant relationship between the implementation of the code and the presence of independent non-executive directors. This confirmed the generally accepted potential of independent non-executive directors as agents of change.
But we also found a limiting factor for the role of independent non-executive directors within Mauritius corporations. Not many of these directors occupy critical posts like board chair and therefore have limited influence.
The recent World Bank/International Monetary Fund report praised Mauritius as an ‘international leader’ on board practices (at par with leading Asian countries, such as India, Thailand, and Malaysia), but also highlighted problems. Directors deemed independent were not sufficiently so in relation to majority shareholders and there is opacity in the appointment of such directors.
The report also noted the pitfalls of a “persistent high concentration of the ownership” in large companies. Almost 60% of the counted companies had one controlling shareholder holding more than 20% of shares. This cannot be good for corporate accountability. It means a form of controller’s roadblock has been allowed to persist.
Some scholars are critical of the usefulness of these “Western-inspired” codes for developing countries. Criticism ranges from a charge that codes aren’t radical enough, they clash with local social and political factors, to being implemented in a rather superficial way.
The “comply or explain” principle traditionally applied to these codes means that there is flexibility to pick and choose. There’s also little market pressure for a more comprehensive adoption; an issue affecting many countries.
The new version of the Mauritius code which was in 2016 provides for an “apply and explain” principle. In this version companies are expected to explain how they have applied the code and flag any areas where the code has not been applied. But even the new version continues to rely on “market discipline”. It is unclear whether this is feasible in markets characterised by high ownership concentration, low shareholder activism and a weak stakeholder base.
Our study of other developing markets also shows that the market discipline approach is not effective where the capacity of regulators is limited. This is particularly the case where local politics retain an ability to dilute enforcement or where the state itself is a significant shareholder and has little to gain from a change in the status-quo.