Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Board as a watch of Organizational Activity: Suitability of
Agency Theory to Companies of Mauritius
Jyoti Devi Mahadeo
Purpose – This paper makes use of the Agency Theory as its theoretical
foundation. The major economic crises both at local and international levels
have had as end result, an increase in the amount of disclosure of internal
activities expected from companies. One main alteration has been the
separation of the CEO and Chairman roles and positions (duality) within
companies. Other disclosures such as attendance and remuneration of
directors have also been requested in many codes of Corporate Governance.
This investigation will look into two aspects in particular, namely board duality
and disclosure of director’s attendance in the annual reports of publicly listed
companies of Mauritius.
Methodology – The targeted companies for this survey are the 38 companies
listed on the Stock Exchange of Mauritius (SEM) for the financial year ending
2011. Content analysis of annual reports and the interview technique were
used to collect and analyse data. In all 30 directors were interviewed.
Findings – Upon analysis of it was found that 37 out of 38 have separated the
CEO and Chairperson’s role.
All 38 companies have disclosed the
attendance of their directors at Board and Sub Committee Meetings. A more
in depth analysis of the situation has been performed following the series of
interview.
Research limitations – Having chosen the listed companies on the Mauritian
Stock Exchange has limited the study to the large public ones only. The
Mauritian economy is made up of some significantly large private companies
too.
Originality/value – The agency theory makes available a clarification of the
duality development experienced by corporations. The process of splitting
duality roles of CEO and Chairman within public corporations appears to have
developed into a reality in Mauritius as well as the disclosure of some
important features.
Track: Management
Keywords: CEO Duality, Directors Attendance, Corporate Governance, Boards of
Directors, Agency Theory, Mauritius
1. Introduction
Major economic upheavals across the globe have compelled companies to change the
make up of their corporate governance structure. Most stakeholders are now giving
______________
Jyoti Devi Mahadeo, Lecturer in Management, Faculty of Law and Management, University of Mauritius
Reduit, Mauritius, Phone: (00230) 4037898, Email: j.mahadeo@uom.ac.mu
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
more consideration to this concern and to the responsibilities of the Chief Executive
Officer (CEO) and Chairman of the Board of Directors. The company‟s organizational
structure describes the principles behind its relationship among the directors,
management, and stakeholders. In the past, it was current practice for many CEOs to
hold dual titles and positions. This has been a major concern of shareholders and a
constant cause for worry, as they often felt their interest was not being safeguarded.
The Agency theory advocates that the dual responsibility is increased with an
organization‟s agency cost because management may possibly tail their own selfinterest by relinquishing a chance that the organization‟s owners might believe to be in
their best interest. The duality roles give the CEO the possibility to rule the board of
directors, and they offer them with an occasion to please their own individual objectives
rather than that of the shareholders. The local code of Corporate Governance has
requested that the positions and roles of the CEO and Chairperson of the Board be
separated. This would have the hoped for effect of getting around the Agency problem.
The main aim of this investigation is to uncover whether the duality CEO/Chairman
relationships that exist in the listed companies of Mauritius and whether they are
contributing to ensure the agency problems to not crop up. In light of the push towards
spitting duality roles, this study will also look into the disclosure of the attendance of
directors at board and sub committee meetings.
2. Literature review
The Agency Theory Structure
A whole array of long established theories adjoining the corporate governance field has
been in existence, namely the legitimacy theory, stewardship theory and the agency
theory. One which has stood the test of time is the Agency Theory of Jensen and
Meckling (1976). This classic theory will be used as the basis for this paper. This
seminal work has formed the basis of a number of papers and reviews in a number of
fields (Eisenhardt (1989), Kosnik, (1987), Ecles (1985), Basu et al, (1985), and White
(1985)).
Jensen and Meckling‟s (1976) comprehensive theory of the firm under agency
arrangements reveal that the principals, that is, the shareholders, can promise
themselves that the agent will build the optimal decisions only if suitable incentives are
granted and only if the agent is being supervised. Motivation incorporates such things
as stock options, bonuses and prerequisites which are directly connected to how well
the outcomes of management‟s decisions dole out the interests of shareholders.
Controlling involves the bonding of an agent, systematic reviews of management
prerequisites, financial audits, and placing specific limits on management decisions.
These absorb costs, which are a predictable result of the division of corporate
ownership and control. Such costs are not essentially bad for shareholders, but the
monitoring activity they cover has to be efficient (Bonazzi and Islam, 2006).
The Agency theory sheds light on the relationship between the principal (stockholders)
and its agents (management). Essentially, the agency theory justifies the organisational
relationship between the owners of a company and the management, where the
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
principal designates the board, who subsequently elect the management team to carry
out the regular daily business decisions (Abdullah and Valentine, 2009).
The supporters of agency theory consider that in order to reduce the agency costs, a
company should split the duality role of CEO and chairman. The amalgamation of
positions gives rise to several instances of conflict of interest (McGrath, 2009). The
passing on of ownership authority to senior management agents deepens the
probability of moral hazard to subsist. These agency problems come up for the reason
that the unfeasibility of completely contracting for every promising action of an agent
whose decisions influence both his personal welfare and the welfare of the principal
(Brennan, 1995). Starting from this dilemma is how to persuade the agent to operate in
the best interests of the principal.
The theory takes on that when management has diverging decisions, the principal or
agent chooses the best option that enhances their personal self-interest (Davis et al.,
1997). Kochhar (1996) argues that conflicting interests impart an occasion and financial
incentive for CEOs to ignore the shareholders‟ interest. Moreover, the result is that the
principals are not in a position to validate whether their agents‟ behavior is in line with
their own best interests (Hendry and Kiel, 2004). The Agency theory structure portrays
an agent‟s behavior as opportunistic, self-serving, with motivation to satisfy their own
self-serving objective (Podrug et al., 2010).
According to McGrath (2009) study, the CEO duality can worsen with the power of the
board of directors to oversee their activities. CEOs who are coping with the company
are considered to be accountable to the shareholders through the Chairman and the
board of directors. Several authors (Bricker, 1998; Nicholson and Kiel, 2007) have
argued that when the CEO controls the board of directors through the dual role
selection, a mix in the means of communication and lines of authority can delay and
wane the safety looked for by the owners of the company.
Earlier studies have been uncertain and presented a varied mix of outcomes on which
theory is better to study corporate governance. Several studies (Berg and Smith, 1978;
Daily and Dalton, 1994; Rechner and Dalton, 1991; cited in Davis et al., 1997) point
toward the direction that independent boards of directors are closely related with better
company performance. Prior research have not been able to validate convincingly any
connection between the CEO duality and firm performance (Anderson et al., 2007).
Separating the role of CEO and Chairman
The aim of improving corporate transparency by splitting up the duality roles of CEO
and Chairman within pubic corporations has been noticed by several governments
across the world, shareholders and stakeholders. The US government passed the
Sarbannes Oxley Act in 2002 with the view of regaining shareholders confidence. This
has been the case in most Anglo-American countries. The study of Neff and Charan
(2010) revealed that the practice of splitting duality roles within corporations has been
increasing but only gradually.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Several articles (Brickley et al. (1994), Byrd and Hickman (1992) and Cotter et al.
(1997)) have presumed that independent directors are linked with higher firm value,
whereas other studies did not corroborate with this fact. Conflicting viewpoints deem
that splitting duality positions could generate a power struggle between a CEO and
Chairman and a certain degree of resistance which is more important in cases where
the Chairman turns out to be implicated in the daily routines and is administering the
business (Lublin, 2009).
Motivation behind a split role
Following the recent financial collapses, supporters of the split role are even more
persuaded that bringing together the oversight of management and the board of
directors working under a dual role has played a role to the management malfeasance,
ending in the failure of the CEOs ability to look after the interests of shareholders
entirely (Neff and Charan, 2010). Hence, the board of directors under the guidance of
an independent Chairman will most probably be able to protect the interests of
shareholders better. The independent Chairman structure makes the board
independence more powerful (McCafferty, 2009). All stock exchanges‟ around the
world are endeavoring to make the board of directors come out as being more
independent in the eyes of investors (News Editor, 2009).
All through Europe, Canada and Australia, businesses have employed the independent
Chairman structure successfully (News Editor, 2009). On the other hand, the UK ha put
into practice the split role within corporations over a decade ago (McKinsey and
Company, 2004; Neff and Charan, 2010). Based on a survey of McKinsey and
Company (2004), in order to make a smooth transition to the split role, companies
should carefully take into consideration five elements which are essential for a
successful result:
These fundamentals are:
1. Leading the process – Only independent directors should lead governance boards,
whereas directors apart of the management team should not be the Chairman of the
board of directors. When independent or outside directors fill the Chairman position, the
perception from stakeholders is an increase in board independence.
2. Right form, right thing – Companies may be better off when dual CEOs give up both
titles of CEO and Chairman. The overall success for a split model increases when the
retired CEO exits completely from the firm. Boards should also avoid downgrading
CEOs because can only result in perplexity and uncertainty (Neff and Charan, 2010).
3. Defining the roles – The comprehensive roles of both CEO and Chairman should
concede a CEO the authority to manage the organization while power given to the
Chairman should be the responsibility of the board of directors and for corporate
governance (Neff and Charan, 2010). Boards of directors should make available
oversight, advice and consultation to CEOs, while also overseeing CEOs and putting
into effect the disciplinary actions (Finkelstein and Mooney, 2003).
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
4. Appointment of the right people – A CEO should be intellectually capable and be
motivated, but CEOs must defer to authority and be willing to work in collaboration. On
the other hand, Chairperson must command high level of integrity, leadership skills and
lack the desire to become CEO, which in turn promotes an effective mentorship to
CEOs. In addition, it is important that CEOs and Chairmen harmonize each of their
skills, operating styles and personalities (Neff and Charan, 2010).
5. Fostering positive relations – Though the relationship is well known to be not always
very smooth, CEOs and Chairmen ought to nurture a functional relationship which is
built on trust in each other and they should deal with any personal differences and share
organizational responsibility
The first proposition for this paper is:
P1: An increase in duality (separating the CEO and Chairman role) will lead to the better
monitoring of organizational activities.
Sub Committees
The Audit Committee
An audit committee has the mandate of enabling financial reporting, and providing
assistance in the efficient and effective management and accountability. Audit
committees also offer an „internal control structure‟ which allows directors to have
practical assurance that their company is “in control.”(Lynn, 1993). In particular, a
suitably composed audit committee can enhance the quality, objectivity and credibility of
financial reporting. It will make possible the preservation of independence for both the
internal and external auditors. The committee will also make communications between
the board auditors (internal and external) smoother. It can also lend a hand to directors
to accomplish their legal responsibilities and reinforce the role of non-executive
directors (Guthrie and Turnbull, 1995).
The Remuneration Committee
The main „raison d‟etre‟ of a remuneration committee always varies. Committee
members are most of the time taken up in all sorts of decisions, extending from the
reviewing of nature and amount of remuneration to recommendations, and to actual
endorsement of remuneration for the CEO and the senior executives as well as the
directors (Brown, 1995). Companies are not compelled to set up remuneration
committees, there are external factors which create the need for them. They are
expected to be made up of mainly Independent Non Executive Directors. On the other
hand, remuneration committees are by no means an absolute response to challenges in
this area. Non-executive directors are less impartial than it seems, whether out of
allegiance to colleagues (Hill, 1996).
The Nomination Committee
The nomination committee is the latest addition to the trio of main oversight board
committees. The main roles of the nomination committee are to lessen the traditional
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
iron grip of senior executives, namely the CEO, when it comes to the choice of board
members, and to develop the process by which board membership is expected to be
judged and candidates are identified and retained (Thompson, 1998). Moreover, in
order to situate and review potential candidates, the nomination committee also reflects
on how best to accomplish a sense of balance between the board‟s executive and nonexecutive members as well as related issues such as term (Thompson, 1998).
The Corporate Governance Committee
A rising committee that is acquiring regard lately is the corporate governance committee
(Tobey, 1996). Corporate governance committees normally looks into the following:
reviewing of corporate governance principles, monitoring compliance and acting as a
resource for individual directors and the company as a whole on topical issues of
corporate governance and ethics.
Hence, the second proposition for this paper is:
P2: An increase in disclosure of directors‟ attendance at board and sub committees
meetings will lead to better monitoring of the organizational activities
3. Research Design and Methodology
The reviewed literature on corporate governance has uncovered that in many countries
already there has been the move towards the separation of the role of the CEO and
Chairperson of the Board and also the disclosures of other corporate governance
features. This investigation makes use of annual reports of listed companies published
on their websites to determine the extent of duality in Mauritius and how many
companies have disclosed the attendance of their respective directors. Annual reports
are important documents which can be relied on to provide authentic information. In
addition 30 company directors were also interviewed to dig out more concerning this
topical issue. The interview technique is an appropriate one as it allows the interviewer
to delve into the issue as much as he or she deem important. The list of questions can
be found in Appendix A.
As mentioned the companies identified for this study were the listed companied of the
local Stock Exchange (www.sem.mu). The annual reports of the respective companies
were downloaded from the websites or requested by letter. Upon receipt of the reports,
a content analysis was undertaken to capture the information requested. To supplement
the content analysis of the annual reports, a series of semi-structured interviews were
undertaken with 30 directors of the listed companies. For confidentiality purposes their
identity are not disclosed.
Limitations of the study
Having made use of the listed companies in the Mauritius, has significantly limited the
study to the large companies of Mauritius. Any statistical deductions or generalizations
made outside of this population will probably be spurious in nature.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
4. Research Findings
Content Analysis of Annual Reports
The main findings reveal that all companies listed on the Stock Exchange have
conformed with the requirement of the Code of splitting the CEO and Chairperson role
and position. Most of them 35 out of the 38 have appointed Non Executive Directors
(NEDs) as chairperson of the Board of Directors; the other 3 companies (representing
7.9%) have gone a step further by appointing an Independent Non Executive Director
(INED) as chairperson of the Board. It is important to note that one organization in the
Banking sector has appointed the previous CEO as „chairperson‟ of the board which
based on the study of Neff and Charan (2010) might not be the best thing to do if one
wants the duality system to work. Only one company did not fully comply with this
feature of the Code. It is an international company and in 4 out of the 10 meetings they
had the NED Chairperson could not attend and the local CEO had to chair the meeting
himself. On the other hand, all the 38 companies (100%) have disclosed the
attendance of their directors at board meetings and sub committee meetings.
Therefore, it may be concluded that after nearly a decade following the legal
requirement to enact the code, all local companies are now able to implement these two
aspects. Hence, allowing the conclusion that companies are striving towards more
transparency.
Analysis of Interview Data
Dual Role
Based on those findings, follow up interviews were deemed important and undertaken.
All the 30 directors (18 Independent Non Executive Directors and 12 Non Executive
Directors) interviewed were unanimous on the fact that the dual role of
CEO/Chairperson has had a positive impact on the company. 9 directors confirmed that
their companies implemented this aspect of the Code only after a few years (varying
between 3 to 4 years). The others (21 directors) informed that their organisation were in
a position to put this requirement of the Code into practice in the year whereby the code
was expected to be enacted itself.
Reluctance to have Independent Director to Chair the Board
However, they had mixed feelings (18 out the 30 did not think it was a good idea) as to
whether they should have an Independent Director chairing the Board. Several reasons
were put forward, namely:
1. the lack of trust in independent directors was the most prominent answer.
2. The lack of knowledge about the company culture would be a hindrance.
3. The role of the Independent Director is to safeguard the interests of stakeholders only
and this will be in conflict with his role as chairperson. Moreover, a Non Executive
Director could easily handle both aspect of the role.
4. Some of the newly listed companies have been family businesses which over the
years and have become very successful and are very reluctant to have outsiders in
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Proceedings of 8th Annual London Business Research Conference
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control of „their‟ board.
organization.
There is still that strong feeling of belonging with the
Impact of implementation – improved leadership
All directors were unanimous again with the fact that the Code has a positive impact on
the board running. The decisions were being taken in a more rational fashion.
Stakeholders interest were being given due consideration. The prevailing culture was
improved and a balanced mix of directors was elected each year. Moreover, the duality
system has improved the leadership structure of Boards of Directors, thereby ensuring
better monitoring of organizational activities. This is supported by the findings of Neff
and Charan (2010).
Sub-committees
All directors confirmed that they were members of at least one of the sub-committees of
the Company. One of the directors was the Chair of the Audit committee. He is an
accountant by profession and informed that he has worked very closely with the internal
auditors of the company and with the external ones too. He did not notice any case of
malpractice or where members of the senior management were not taking the best
decisions/actions for the firm. On the other hand, another independent director who
was a member of the remuneration committee admitted he struggle on a decision within
his sub-committee concerning the „extra remuneration‟ of a newly appointed director. In
the end, a compromise was reached any they conveyed their decision to the Board.
Attendance at Meetings
The attendance of directors to board and sub committee meetings makes a huge
difference. In addition, the directors have emphasized on the fact that they keep
following up on all activities undertaken by the company during the year. This allows
them to express their opinions and discuss their views during the Board meetings. All
directors interviewed have acknowledged that they felt they adequately contributed to
the board discussions. They (25 out of 30 directors) have also recognized the input of
fellow directors to the Board. The remaining 5 directors felt that the contribution of the
others was not at par, and that the latter were not doing their share of ‘homework’ prior
to attending meetings. Hence, it can be concluded that attendance is generally well
viewed.
5. Conclusion
The objective of this study was to determine the dual CEO relationships that are present
in listed companies in Mauritius. The agency theory advocate that dual responsibilities
increase an organization‟s agency cost since management might chase their own selfinterest by doing without opportunities that the owners possibly will believe to be in their
best interest. The handing over of shareholder power to corporate agents had the effect
of piling on the existence of moral vulnerability. Duality had, on the other hand, enabled
CEOs to carry out authority over the board of directors in order for CEOs to please their
own individual objectives. The study on hand has revealed that this has not been the
case in Mauritius. Most companies have abided by the requirements of the Code and
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
hence, giving reassurance to shareholders and stakeholders that their interest is being
looked after.
Table VIII Duality of new 2010 CEO titles by industry sector
Membership and attendance to sub Committees are important since they are in a way
the „conscience‟ of the company. It was found in both the annual reports and interviews
that board members have been actively participating in the sub committee activities.
Only in two cases it was reported that there has been some disagreement among board
members. It is important to note that board committees, mainly the key trio of audit,
remuneration and nomination committees, are crucial outward and visible signs of good
corporate governance. Yet, the mere institution of a committee is no assurance that it
will in fact help to develop corporate performance, above all as the board may or may
not choose to apply the committee‟s recommendations.
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Proceedings of 8th Annual London Business Research Conference
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Appendix A
Interview Questions
1. Does the board of your company practice CEO Duality (CEO and Chairperson are
separate?
2. Does your Company have a Non Executive Director or Independent Non Executive
Director as Chairperson of the Board?
3. Why not an INED?
4. For how long has this practice been the practice?
5. Have you seen/perceive major changes in the operations of your company since this
implementation?
6. Are you a member of a sub committee/s?
7. Which one/s? Have you noticed any Agency problem?
8. Were you present at all board meetings? Do you have an alternate director?
9. Do you believe your presence at the meetings made a difference?
10. How do you perceive the contribution of you fellow directors in the Board?
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