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2013 Cambridge Business & Economics Conference

ISBN : 9780974211428

Corporate Governance and Firm Performance:


Evidence from the Insurance Industry of Mauritius
Authors
Clifford Appasamy, Financial Services Commission, Mauritius
Matthew Lamport, University of Mauritius
Boopendra Seetanah, University of Mauritius
Raja Vinesh Sannassee, University of Mauritius

ABSTRACT
Does good corporate governance have a relationship with firm performance for the insurance
industry of Mauritius? The relationship between corporate governance and performance has
been examined in extant literature using mainly quantitative information derived from annual
reports or other published financial statements of companies, thus yielding mixed findings.
Studies focus on the quantitative relationship between corporate governance and performance
which occult the fact that an improved Corporate Governance framework should, theoretically,
yield better behaviours/ actions from those responsible of governance in a company.
To fill this gap, this study adopts a three-stage process where, in addition to the quantitative
analysis, i.e. a multiple regression model between Tobins Q as dependent variable and
independent variables identified in literature and derived from information in the annual reports
of each insurer, a Corporate Governance Action Index is constructed using information
collected through a survey on all insurance company and finally develops a multiple regression
model where the Corporate Governance Action Index of each insurer is regressed against
Tobins Q. The results show that there is a relationship between corporate governance and
performance in the insurance industry in Mauritius, which is confirmed qualitatively by the
Corporate Governance Action Index and the regression results of the Corporate Governance
Action index and performance measured in terms of Tobins Q.

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1.

ISBN : 9780974211428

INTRODUCTION

Corporate Governance is defined as the system by which companies are directed and controlled.
It consists mainly of systems and processes established by those responsible of governance, i.e.
the Directors, for the effective and efficient operation of the organization so that it achieves its
strategic goals and objectives. Corporate governance provides the structure through which
objectives are set, the means of attaining those objectives are defined and the mechanisms for
monitoring performance are determined.
Corporate Governance literature dates back to more than 230 years ago. In 1776, Adam Smith
stated on Corporate Governance: The directors of [joint-stock] companies, however, being the
managers rather of other peoples money than of their own, it cannot well be expected, that they
should watch over it with the same anxious vigilance with which the partners in a private
copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to
consider attention to small matters as not for their masters honour, and very easily give
themselves a dispensation from having it. Negligence and profusion, therefore, must always
prevail, more or less, in the management of the affairs of such a company
Sir Adrian Cadbury (1999) enlarged the classical definition of corporate governance and states
that, it [Corporate Governance] is concerned with the balance between economic and social
goals, and between individual and communal goals the aim [being] to align as nearly as
possible the interests of individuals, corporations and society.
A countrys economy depends, inter alia, on the drive and efficiency of its companies.
Therefore, the effectiveness with which directors discharge their responsibilities determines the
countrys competitive position. The board of directors must be free to drive their companies
forward, but exercise that freedom within a framework of effective accountability the essence
of any system of good corporate governance.
Good corporate governance should therefore, rationally, provide proper incentives for the board
of directors and management to pursue objectives that are in the interests of the company and
shareholders facilitating effective monitoring, thereby, encouraging firms to use resources more
efficiently.
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However, there is no clear evidence to suggest that better corporate governance system
enhances firm performance in different market settings. Further, there is no unequivocal
evidence that governance practices are endogenous (Klein, Shapiro and Young, 2005) and
investors are still much sceptic about the existence of a link between good governance and
performance indicators and for many practitioners and academics in the field of corporate
governance, this remains their search for the Holy Grail the link between returns and
governance (Bradley, 2004).
Nevertheless, increasing volume of cross-country and individual country level evidence, some
of which are discussed in this study, mainly suggest a positive link between corporate
governance and firm performance.
Given the importance and relevance of the Insurance Industry in Mauritius in terms of its
contribution to the Gross Domestic Product, this study investigates whether corporate
governance has a relationship with company performance in the insurance industry of
Mauritius. In the last 25 years the Mauritian Insurance Industry witnessed significant
consolidation and a strengthened regulatory framework with the establishment of the Financial
Services Commission as the regulator for the insurance industry in 2001. To date, there are 21
Insurers operating in the insurance industry carry on General and Long Term Insurance
business.

1.2

OVERVIEW OF THE MAURITIAN INSURANCE INDUSTRY

During the past thirty years, the Mauritian economy has diversified from a sugarcane monocrop economy in the 1970's to one based on sugar, manufacturing (mainly textiles and
garments) and tourism in the 1980's. Global business and Freeport activities have also been
growing continuously since the mid 1990s. According to Ali Zafar (2011), in spite of its small
economic size, low endowment of natural resources, and remoteness from world markets,
Mauritius has transformed itself from a poor sugar economy into one of the most successful
economies in Africa in recent decades, largely through reliance on trade-led development.
The gross domestic product (GDP) rose from Rs 122,410 millions in 2000, at market prices, to
Rs 323,459 millions in 2011, at market prices. Financial intermediation sector, which includes
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the insurance industrys input, contributed to about 7.7% to GDP in 2000. Financial
Intermediation sectors contribution to GDP increased to approximately 8.9% in 2011.
According to the register of insurers held by the Financial Services Commission (FSC), as
required by the Insurance Act 2005, as at 31 December 2011 there were 21 Insurers operating in
the domestic insurance industry. 8 were licensed to carry on Long Term Insurance business and
13 were licensed to carry on General insurance business.
Before enactment of the Insurance Act 2005, insurers could carry on both General and Long
Term Insurance business in one company. They were known as composite insurers. However,
for better policyholder protection and in line with international standards, the Insurance Act
2005 prohibits composite insurers. As such companies operating as composite insurers have had
to either separate their insurance business to be carried on in two distinct companies or
discontinue one category of insurance business altogether. The insurance sector is highly
concentrated. The three largest groups have more than 75% percent of total assets. Despite this
high level of concentration, the insurance industry is competitive, operating with high efficiency
and reasonable profitability. According to D Vittas (2003) the Mauritian insurance sector has
taken time to develop and reached a relatively well developed stage. D Vittas (2003) further
recognises that the success of the insurance market in Mauritius underscores the benefits of
operating in a macroeconomic stability and a sound regulation, free from pervasive premium,
product, investment and reinsurance controls that have bedevilled the insurance markets of so
many developing countries around the world. The last ten years have witnessed the growth and
resilience of the Mauritian insurance market. Chart 1 below shows the growing trend of gross
premium and total assets of the Mauritian insurance industry from years 2000 to 2011.

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Chart 1- Growth of Gross Premium and Total Assets over 2000-2011


Total premiums accounted for 4 % of Gross Domestic Product (GDP), at market prices, whilst
insurance company assets to 18% of GDP in 2001. In 2011, total gross premium and total
assets contributed to 6% and 29% of GDP respectively.
Chart 2 below shows the insurance sector and GDP growth over 2001 to 2011

Chart 2: Insurance Sector and GDP Growth 2001 2011

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1.3

ISBN : 9780974211428

RESEARCH PROBLEM

There are theoretical reasons to assume that an improved corporate governance framework will
lead to better firm performance through increase expected cash flows accruing to the investors
and a reduction in the cost of capital.
However, many companies still remain unconvinced and to them, the practical adoption of
good governance principles has been patchy at best, with form over substance often the
norm (Bradley, 2004). Does good corporate governance have a relationship with firm
performance for the insurance industry of Mauritius?

1.4

AIM OF RESEARCH

All insurance companies have to adhere to best corporate governance practices as laid down in
the Code of Corporate Governance issued by the National Committee on Corporate Governance
for Mauritius and the Insurance Act 2005. The aim of this study is to examine the relationship
between corporate governance and performance in insurance companies in Mauritius.

1.5

PAPER OUTLINE

The remainder of this paper is structured as follows:


Section 2 provides a literature review of the conceptual models of corporate governance and the
framework of corporate governance that are used as parameters to develop the regression
models. Section 3 describes the methodology, model and parameters used. Section 4 discusses
the results and findings and Section 5 concludes.

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2. LITERATURE REVIEW
2.1

INTRODUCTION

Corporate governance is defined the set of procedures, processes, behaviours and attitudes
according to which an organisation is directed and controlled. The corporate governance
framework specifies the distribution of rights and responsibilities among the different
participants in the organisation such as the board, managers, shareholders and other
stakeholders and lays down the rules and procedures for decision-making. It is the set of
mechanisms put in place to oversee the way organisations are managed and long-term
shareholder value is enhanced.

2.2

CORPORATE GOVERNANCE FRAMEWORK

Researchers and practitioners that have studied the relationship between corporate governance
and performance used different Corporate Governance frameworks. Empirical studies focus on
specific dimensions or attributes of the corporate governance framework like board structure
and composition; the role of independent non-executive directors; other control mechanisms
such as director and managerial shareholdings, ownership concentration, debt financing,
executive labour market and corporate control market; top management and compensation;
capital market pressure and short-termism; social responsibilities and internationalization.
Over the years, research undertaken on the relationship between corporate governance
framework and company performance showed mixed findings, some positive, neutral or
negative relationships.
2.4.1

Independent Directors

An independent director is defined per the Code of Corporate Governance as a director who is a
non executive. He/ She is not a representative of or an immediate family (spouse, child, parent,
grandparent or grandchild, director based on shareholders agreement) of a significant
shareholder. He/ she was not in employment as an executive director for the preceding 3 years
by the company or the group. He/ She is not a professional advisor to the Company or group,
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not a significant employer, debtor, creditor or customer of the Company and the Group and
holds no contractual relationship with the Company or Group or has no material business or
other relationship with the Company or the Group.
It may be argued that independent non-executive directors bring more independence on the
board given their no-relationships with the company. The participation of independent nonexecutive directors, as advocated by the Code of Corporate Governance for Mauritius, is
designed to enhance the ability of the firm to protect itself against threats from the environment
and align the firms resources for greater advantage.
However, research on the relationship between independent directors [as an attribute of
corporate governance] and performance yield with mixed results. While the study by Wen et al.
(2002) found a negative relationship between the number of independent non-executive
directors on the board and performance, Bhagat and Black (2002) found no relationship
between independent non executive directors and Tobins Q 1. It should be noted that according
to section 30 of Insurance Act 2005, no insurer shall have a board of directors composed of
less than 7 natural persons of which 30 per cent shall be independent directors, or such other
number and percentage as may be approved by the FSC.
Positive findings

Beasley (1996) undertook an analysis of 150 companies where 75 of these companies


have been victims of frauds (fraud companies") and 75 companies have not been
involved in frauds (no-fraud companies). Beasley found that no-fraud companies
have boards of directors with significantly higher percentages of independent directors
than fraud firms. Moreover, the likelihood of financial statement fraud decreases when
the number of independent director on the board increase.

A survey of 515 Korean firms undertaken by Black et al. (2006) show that firms with
50% independent directors have 0.13 higher Tobins Q (roughly 40% higher share
price) which is consistent with the view that greater board independence causally
predicting higher share prices in emerging markets.

Tobins Q, measured as the market value of equity capital and the book value of firms debt
divided by book value of assets
1

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Anderson, Mansi and Reeb (2004) show that the cost of debt, proxied by bond yield
spreads, is inversely related to board independence. Similarly, Ho (2005) and Brown
and Caylor (2004) find strong and positive correlation between non-executive
independent directors and corporate performance.

Neutral or negative findings

Several surveys of empirical studies find no convincing evidence that more independent
directors on the board improve firm performance (Fosberg, 1989; Hermalin and
Weisbach, 1991; Lin, 1996; Bhagat and Black, 1999, 2002).

Haniffa and Hudaib (2006) argues that market perceives multiple directorship as
unhealthy and do not add value to corporate performance.

2.4.2

Separation of Chairperson and CEO role

Several studies have examined the separation of roles of CEO and chairperson. It is widely
argued that the principal-agent problem is more obvious in a business environment where the
same person holds the positions of CEO and chairperson. CEO duality has a way of influencing
the overall performance of the firm. The rationale for the separation of CEO and chairpersons
position was first suggested by Fama and Jensen (1983). Yermack (1996) reported that firms are
more valuable when the CEO and chairpersons positions are held separately. To date, however,
empirical evidence on the CEO duality is mixed. It should be noted that separation of the CEO
and chairman role is mandatory for all insurers in Mauritius according to the Code of Corporate
Governance and the Insurance Act 2005.
Positive findings

Baliga, Moyer and Rao (1996) find weak evidence that duality of board chairman and
CEO affect long term performance of US companies. On the other hand, Rechner and
Dalton (1991) find that firms opting for independent leadership consistently outperform
those relying upon CEO duality.

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Yermack (1996) and Brown and Caylor (2004) also support the notion that firms are
more valuable when the CEO and board chair positions are separate.

Neutral or negative findings

Finlestein and DAveni (1994) find that board vigilance is positively associated with
CEO duality, and association is stronger when both informal CEO power and firm
performance are low.

2.4.3

Board Committees

The Board of Directors is the focal point of the corporate governance system and is ultimately
accountable and responsible for the performance and affairs of the company. Delegating
authority to board committees does not in any way discharge the board of directors of its duties
and responsibilities. Board committees are a mechanism to assist board and its directors to
discharge their duties through a more comprehensive evaluation of specific issues, followed by
well considered recommendations to the board.
Positive findings

Abbott, Park and Parker (2000) report that in the US, firms with audit committees which
follows the minimum thresholds of both activity (at least two meetings in a year) and
independence are less likely to be sanctioned by the SEC for fraudulent or misleading
reporting.

Klein (2002) finds a negative relation between audit committee independence and
abnormal accruals. For US large public companies, a nomination committee displays
better performance under both market-based and accounting-based measures over
companies without such committee (Wallace and Cravens, 1993).

Neutral or negative findings

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Ezzamel and Watson (1997) do not find strong relationship between pay and
performance among the UK companies with remuneration committee and other
governance variable. Similarly, Klein (1998) finds no apparent correlation between
share prices and the composition of specific oversight board committees.

2.4.4

Managerial Ownership

It may be argued that managerial ownership of shareholding in the organisation affects the
corporate governance system. Managers having a stake in the organisation may be argued to
favour short term decisions that increase profitability however several studies find mixed
findings between managerial ownership and performance.
Positive findings

Hambrick and Jackson (2000) find managerial holdings to be associated with


subsequent corporate performance and managers with a meaningful stake in the
organization are pivotal factor improving corporate governance.

Chen, Guo and Mande (2003), however, report a monotonic relation between Tobins Q
and managerial ownership. Using 123 Japanese firms-level data from 1987 to 1995, they
find that Tobins Q increases monotonically with managerial ownership, thus,
suggesting greater alignment of managerial interests with those of stockholder with the
increase in ownership.

Neutral or negative findings

Using heteroscedasticity robust residuals to account for nonlinearity of insider


ownership, Short and Keasey (1999) report a cubic form of relationship between
managerial ownership and firm performance for UK companies, due to possible effects
of alignment (Jensen and Meckling, 1976, convergence of interest) and entrenchment
(Morck, Shleifer and Vishny, 1988, high level of managerial ownership).

2.4.5

Foreign Directors

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Foreign Directors is believed to increase independence of the board and bring more specialised
knowledge and experience, improving the corporate governance system. However, studies
below show mixed findings on the relationship of foreign directors and performance.
Positive findings

Oxelheim and Randy (2003) study show that firms in Norway and Sweden with
foreign directors have higher Tobins Q.

Neutral or negative findings

Black et al. (2006) provide evidence that for Korean firms, the presence of foreign
director does not predict higher market value

2.4.6

Board Size

The number of directors on the board of directors is assumed to have an influence on


performance. The board is vested with responsibility for managing the firm and its activities.
However, there is no agreement over whether a large or small board does this better. Yermack
(1996) suggests that the smaller the board of directors the better the firms performance.
Yermack (1996) further argued that larger boards are found to be slow in decision making. The
monitoring expenses and poor communication in a larger board has also been seen as a reason
for the support of small board size (Lipton and Lorsch, 1992; and Jensen, 1993).
However, there is another school of thought that believes that firms with larger board size have
the ability to push the managers to pursue lower costs of debt and increase performance
(Anderson et al., 2004).
It should be noted that according to section 30 of Insurance Act 2005, no insurer shall have a
board of directors composed of less than 7 natural persons of which 30 per cent shall be
independent directors, or such other number and percentage as may be approved by the Fsc).
Positive findings

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Anderson et al. (2004) show that the cost of debt is lower for larger boards, presumably
because creditors view these firms as having more effective monitors of their financial
accounting processes.

Brown and Caylor (2004) add to this literature by showing that firms with board sizes of
between 6 and 15 have higher returns on equity and higher net profit margins than do
firms with other board sizes.

Neutral or negative findings

Limiting board size is believed to improve firm performance because the benefits of
larger boards (increased monitoring) are outweighed by the poorer communication and
decision making of larger groups (Lipton and Lorsch, 1992; Jensen, 1993).

Yermack (1996) documents an inverse relation between board size and profitability,
asset utilization, and Tobins Q.

Conyon and Peck (1998) also conclude that the effect of board size on corporate
performance (return on equity) is generally negative.

2.4.7

Board and leverage

It may be argued that large boards with superior monitoring ability pursue higher leverage to
raise the value of the firm. Shareholders are represented by the Board of Directors, and other
stakeholders usually find ways to control the activities of management to ensure value
maximization.
Financial institutions such as banks have the skills and other resources to control the activities
of firms, thereby serving as a useful tool for minimizing the principal-agent conflict. Financial
institutions take a special interest in seeing that the management of firms where they have
relationship take measures that will improve the performance of the firm. For example, Shleifer
and Vishny (1997) found a higher incidence of management turnover in one of the developed
countries in response to poor firm performance.
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2.4.8

ISBN : 9780974211428

Insider Ownership

Insider ownership refers to directors and managers ownership of shareholding. Like managerial
ownership discussed above, directors ownership may be argued to affect the governance
systems of companies. However extant literature show mixed findings on the relationship of
insider ownership and performance.
Positive findings

Agrawal and Knoeber (1996) and Ho (2005) find greater insider ownership to be
positively related to performance. Morck et al. (1988) also find a positive relationship
between board ownership and firm performance in the 0-5% ownership range, but a
negative relationship between 5-25% indicating as ownership convergence of interest,
and a positive influence of management ownership beyond 25% level.

McConnell and Servaes (1990) report a curvilinear relationship between Tobins Q and
the fraction of common stock owned by corporate insiders. But unlike Morck et al.
(1988) study, the curve in their study slopes upward until insider ownership reaches
approximately 40% to 50% and then slopes slightly downward.

Neutral or negative findings

Holderness, Kroszner and Sheehan (1999) report a rise in managerial ownership from
13% in 1935 to 21% in 1995. In comparison to Morck et al. (1988) finding with 1980
data, the relationship with this 1995 sample was weaker.

Brown and Caylor (2004) find no evidence of positive relationship between operating
performance or firm valuation and either stock option expensing or directors receiving
some or all of their fees in shares.

2.4.9

Ownership Concentration

Studies on corporate governance have identified two basic corporate ownership structures:
concentrated and dispersed. In most developed economies, the ownership structure is highly
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dispersed. However, in developing countries where there is a weak legal system to protect the
interests of the investors, the ownership structure is highly concentrated. According to La Porta
et al. (La Porta et al., 1998), ownership concentration is a response to differing degrees of legal
protection of minority shareholders across countries. A highly concentrated ownership structure
tends to create more pressure on management to engage in activities that maximise investors
only. The empirical literature has examined the relationship between ownership concentration
and performance, and the results are mixed. Demsetz and Lehn (1985) found no relationship
between firm performance and ownership concentration.
However, other studies such as McConnell and Serveas (1990) found a positive relationship
between ownership concentration and firm value.
Positive findings

Cross-sectional analysis of Wruck (1989) indicates that the change in firm value at the
announcement of a private sale is strongly correlated with the resulting change in
ownership concentration after the sale and the purchasers current or anticipated future
relationship with the firm.

Neutral or negative findings

Agrawal and Knoeber (1996) find no significant relationship between performance and
stockholdings of block-holders. Holderness and Sheehan (1988) argue that the
frequency of corporate-control transactions, investment policies, accounting returns and
Tobins Q are similar for majority owned and diffusely held firms.

On the other hand, cross-sectional analysis of Lehmann and Weigand (2000) indicates
significantly negative impact of ownership concentration on profitability as measured by
the return on total assets which supports the view that large shareholders inflict costs on
the firm.

2.4.10

Family ownership

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Family ownership is a common feature amongst insurers in Mauritius. Family ownership is


argued to affect the governance system of companies especially in the nomination of directors.
Again, extent literature show mixed findings on the relationship between family ownership and
corporate governance.
Positive findings

MCConaugby, Mathhews and Fialko (2001) find that family controlled firms in America
have greater value, operate more efficiently, carry fewer debts than other firms

Neutral or negative findings

Studies like Jacquemin and de Ghellinck (1980) and Prowse (1992) find no relationship
between performance and family ownership in French and Japanese firms.

2.4.11

Institutional investor ownership

Institutional investor ownership has an impact on the governance system and governance
structure of companies. It affects directors nomination and given their shareholding power in
some cases they materially affect decision taking in companies. Some studies suggest positive
relationship between institutional investor ownership and performance while other studies find
no relationship between institutional investor ownership and performance
Positive findings

Short and Keasey (1997) show that in the absence of other large external shareholders,
institutional investors have a significant positive effect on the firm performance.
Management tends to become entrenched at higher levels of ownership in the UK since
they do not enjoy the same freedom as their US counterparts to mount takeover
defences, and institutional investors in the UK are more likely to coordinate their
monitoring activities.

Ho (2005) reports that significant institutional investors holdings raise board vigilance,
which in turn has a positive effect on firm performance.

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Lehmann and Weigand (2000) find positive impact of ownership concentration on


profitability for firms with financial institutions as largest shareholders which is
consistent with the view that banks are better (more efficient) monitors to lower the
agency costs.

Neutral or negative findings

Agrawal and Knoeber (1996) find no significant relationship between performance and
institutional stockholding

2.4.12

Takeover control

Brickley and James (1987) and Schranz (1993) argue that independent directors might be
effective monitoring mechanism in case of restricted takeovers as the proportion of independent
directors is negatively correlated with salary expenditures, or takeovers might be good control
mechanism when there are few independent directors on the board.
However, Agrawal and Knoeber (1996) report a negative relation between greater corporate
control activity (number of takeovers within a firms industry) and performance while a study
by Franks and Mayer (1996) suggests that hostile takeovers do not perform a disciplining
function in the UK in 1985 and 1986 as high board turnover does not derive from past
managerial failure.
2.4.13

Other control mechanisms

Other control mechanisms in respect of the agency problem between shareholders and the
Board of Directors relate to limiting CEO tenure in office, Board assessments and controls in
respect of Debt financing. The relationship between these monitoring mechanisms and
performance are also mixed. Some show positive relationship while others find neutral or
negative relationships.
Positive findings

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Study by Ho (2005) shows that more debt financing is positively related to rigorous risk
assessment of the board and negatively related to environmental protection policy,
competitive potential and average price-book value ratio for 1997-1999.

Study by Florackis (2005) report that debt-maturity structure is significantly related to


performance, meaning that debt-maturity can help align interests of managers with that
of shareholders and, therefore, enhance firm value.

Neutral or Negative Findings

Agrawal and Knoeber (1996) find that more debt financing is negatively related to
performance. Moreover, they do not find significant relationship between performance
and executive labour market control.

2.4.14

Corporate governance structure

The corporate governance structure such as ownership structure, board composition, board size,
debt, and CEO duality have a great influence on performance. Documentary evidence suggests
that the relationship between corporate governance structure and firm performance can either be
positive (Morck et al., 1989), negative (Lehman and Weigand, 2000), or neutral (Von Thadden
and Bolton, 1998).
Positive findings

Core, Holthausen and Larcker (1999) report that CEOs can earn greater compensation
from firms with weaker governance characteristics like CEO being the chair of the
board, large board size, greater percentage of outside directors being appointed by the
CEO, relaxed retirement age for outside directors and presence of increasing proportion
of outside directors serving three or more other boards Hall and Liebman (1998) and
Main, Bruce and Buck (1996) find that when stock options are included, a stronger payperformance link can be identified.

Agrawal and Samwick (1999) report that executives pay-performance sensitivity for
executives at firms with the least volatile stock prices is greater than that at firms with
most volatile stock prices.

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Examining the relation of managerial rewards and penalties to firm performance in


Japan, the US and Germany, Kaplan (1994a, 1994b) reports that poor stock
performance and inability to generate positive income increases the likelihood of top
management turnover in these countries.

In another study, using time series data from the UK and Germany, Conyon and
Schwalbac (2000) report a significant positive association between cash pay and
company performance in both countries.

Neutral or negative findings

Using panel data on large publicly traded UK companies gathered between 1991 and
1994, Conyon and Peck (1998a) document that board monitoring, measured in terms of
the proportion of non-executive directors on a board and the presence of remuneration
committees and CEO duality, do have only a limited effect on the level of top
management pay.

An analysis of 199 of the Times Top 1000 listed firms by Ezzamel and Watson (1997)
confirms that changes in executive pay are more closely related to external market
comparison of pay levels than to changes in either profit or shareholder wealth. Core,
Holthausen and Larcker (1999) report that excess CEO compensation has a significant
negative association with subsequent firm operating performance as well as stock
returns. Similar negative relationship between excess director compensation and firm
performance is reported by Brick, Palmon and Wald (2006). Recently, Duffhues and
Kabir (2008) questions about the conventional wisdom of using executive pay to align
managers interest with those of shareholders after finding no systematic evidence that
executive pay of Dutch firms is positively related to corporate performance.

2.4.15

Social Responsibility and Corporate Governance

Internationally the focus of a company and its societal role is widening. The trend is for
companies to formulate objectives of a non-financial nature towards the achievement of

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balanced economic, social and environmental performance. Many studies have focused on the
relationship of social responsibility of the firm and performance.
Positive findings

Verschoor (1998) and Ho (2005) argue that companies committed to ethical behaviour
have higher overall financial performance than those without such explicit undertakings

Neutral or negative findings

Study by Coffey and Wang (1998) shows that managerial control with more executive
directors tend to be more supportive of corporate philanthropic behaviours than broad
diversity of having more independent non-executive directors.

2.4.16

Competitive or Collaborative board politics

Simmers (1998) finds that quality speed of board strategic decision process and the outcomes
are strongly related to collaborative politics but goal achievement and unrestricted funds are
weakly associated with collaborative politics and Ogden and Watson (1999) report considerable
improvement in the customer service and higher resulting shareholder returns since
privatization of UK water supply industry in 1989.
On the contrary, Wahal (1994) analyses 9 activist funds over a 9 year period and their holdings
in different companies and finds no evidence of long term stock price performance
improvement of targeted firms. Besides, performance continues to decline even three years after
targeting.
2.4.17 Internationalisation
Sanders and Carpenters (1998) survey of a sample of large US firms suggest that the proportion
of independent directors on the board is positively associated with the degree of
internationalization. Similar finding is also reported by Ho (2005).

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2.4.18 Compliance with Code


Using a sample of big German listed corporations, Goncharov, Werner and Zimmermann (2006)
conclude that the firms with extended compliance with the Code are priced with a premium of
3.23 EUR on average and the stock performance of the firms with higher compliance is 10
percentage points higher.
It should be noted that all insurance companies in Mauritius have to comply with the Code of
Corporate Governance established by the National Committee on Corporate Governance.

2.6

INSURANCE BUSINESS AND CORPORATE GOVERNANCE

Strong governance in the insurance sector requires two lines of defence. The first line of
defence consists of the internal organs of the company, that is, its management, the systems of
risk management, internal audit and internal controls, the companys actuary and the Board that
should have oversight of them all. External measures provide the second line of defence. These
cover both the supervising authority that oversees the insurance companies and market
mechanisms that monitor and influence the sector. Both lines of defence are needed to ensure a
high level of transparency and accountability in the sector. Furthermore the burden on the
supervisory authority is significantly reduced if the companies internal governance
arrangements are strong, or where the market provides an effective form of discipline through
enhanced levels of transparency.

2.7

CORPORATE GOVERNANCE FRAMEWORK FOR INSURERS IN MAURITIUS

The Insurance Industry in Mauritius is regulated by the Financial Services Commission. The
FSC licenses, under the Insurance Act 2005, insurance/reinsurance companies as well as
insurance service providers (Insurance Broker, Insurance Agent (company /individual),
Insurance Manager, Insurance Salesperson and Claims Professional) to conduct insurance
business activities.
The Insurance Act 2005, administered by the FSC, is aligned with the International Association
of Insurance Supervisors (IAIS) standards and principles and focuses on specific regulatory
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issues relating to capital adequacy, solvency, corporate governance, early warning systems and
the protection of policyholders.
On 22 July 2005, the FSC issued a circular (CL010705) requiring all its licensees to comply
with provisions of the National Code of Corporate Governance which lays out the minimum
criteria expected from its licensees concerning good corporate governance. It is mandatory for
licensees of the FSC, including insurers to ensure full compliance with provisions of the Code.
The Code on Corporate Governance applies to all companies listed on the Stock Exchange of
Mauritius (SEM), Banks and Non-Banking Financial Institutions amongst others. The Directors
of these companies have to report in the Annual Report whether the Code of Corporate
Governance has been adhered to, or if not to give reasons where there has not been
compliance and where applicable state the alternative practice adopted. Additionally, there
should be a corporate governance section in the Annual Report where the company should
disclose information on: shareholders, dividend policy, director, senior management, related
party transactions, dealing in shares, shareholders agreement, remuneration per director, terms
of reference of board committees, share option plans and policies and practices. The Board of
the companies is responsible for the implementation and compliance with the Code on
Corporate Governance.

3.1

DATA AND RESEARCH METHODOLOGY

INTRODUCTION

The relationship between corporate governance and performance has been examined in extant
literature, as expanded above in section 2; using mainly quantitative information derived from
annual reports or other published financial statements of companies, thus always yielding mixed
findings. Some report positive relationships while others report neutral of negative
relationships. Studies focus on the quantitative relationship between corporate governance and
performance which occult the fact that an improved Corporate Governance framework should,
theoretically, yield better behaviours/ actions from those responsible of governance in a
company. This qualitative aspect in respect of the contribution of corporate governance to
performance is not usually considered when establishing a relationship between corporate
governance and performance.
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Therefore, the need for qualitative information to supplement the quantitative analysis is
prominently felt. To fill this gap, this study adopts a 3 phase process:
Phase 1:

To establish whether there is a relationship between corporate governance and


performance, a regression model is built. Tobins Q is used as dependent variable
and a corporate governance framework, using attributes identified in literature, as
independent variables. Information about the independent variables is derived from
the annual reports of each insurer.

Phase 2:

It is argued that a good corporate governance framework yields better


actions/behaviours from directors. However, this argument cannot be tested by
information derived from annual reports [on paper]. Therefore to establish whether
there is a factual relationship between corporate governance and performance, a
Corporate Governance Action Index is constructed using information gathered
through a survey conducted on all insurance companies.

Phase 3:

The Corporate Governance Action Index of each insurer is regressed against Tobins
Q to establish whether there is a real link between corporate governance and
performance in the insurance industry of Mauritius.

3.1

REGRESSION MODEL CORPORATE GOVERNANCE AND PERFORMANCE

Initially using similar methodologies as in various prior studies (refer to Appendix 2),
examining the relationship between Corporate Governance and firm performance, a regression
model is built using attributes of corporate governance as identified in literature as independent
variables and Tobins Q as dependent variable.
3.1.1

Dependent variable Tobins Q

Tobin's Q (Q) was developed by James Tobin in 1969 as the ratio between the market value
and replacement value of the same physical asset. Q plays an important role in many financial
interactions. It has been employed to explain a number of diverse corporate phenomena such as
cross-sectional differences in investment and diversification decisions (Jose, Nichols, and
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Stevens (1986) and Malkiel, Von Furstenberg, and Watson (1979)), the relationship between
managerial equity ownership and firm value (McConnell and Servaes (1990) and Morck,
Shleifer and Vishny (1988)), the relationship between managerial performance and tender offer
gains (Lang, Stulz and Walkling (1989)) and financing, dividend and compensation policies
(Smith and Watts (1992).
However, despite its influence and analytical power, Q is rarely used in real-world decision
making because of managerial unfamiliarity and the unavailability of accurate and timely data.
For financial analysts desiring Q data they have to perform the Lindenberg and Ross (1981) and
Land and Litzenberger (1989) procedures. But these procedures are so complex and
cumbersome that it is highly unlikely that even the most dedicated analyst would ever attempt
to undertake them.
Therefore, given the aforementioned potential of Q in the analysis of a number of important
corporate phenomena explanations, in this study, the Simple Approximation of Tobins Q
developed by Kee H Chung and Stephen W Pruitt (1994) is used as the dependent variable in
this study and is modified to fit data and information available from insurance companies
financial statements. The simple approximation of Q is defined as the market value of equity
plus the book value of debt divided by the book value of total assets. It should be noted that Q is
used for this study instead of any other performance measure (e.g. Return on Assets) as used in
other prior studies (Appendix 2) because Q is a cumulative measure of performance which is
most appropriate for Insurance Companies because for an insurance company profitability is
important but the most important and crucial factor for its survival is to meet Capital Adequacy
Requirements and the on-going solvency requirements.
Therefore, for the purpose of this study, the simple approximation of Q is modified because:
(a) Most insurance companies are not listed therefore to obtain the Net Asset Value (NAV)
of each insurer would be a cumbersome exercise.
(b) In addition, all insurers have to prepare financial statements according to International
Financial Reporting Standards which advocates the use of fair valuation of assets and
liabilities.

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(c) An insurer, according to Insurance Act 2005, shall not, without the approval of the FSC,
given generally or in a particular case, mortgage, charge or otherwise encumber its
assets, directly or indirectly borrow any asset or by means of any surety, give any
security in relation to obligations between other persons except where the security is
provided under a guarantee policy which the insurer is authorised to issue under its
licence.
Therefore, for the reasons above:
(a) It is assumed that the value of equity as disclosed in the financial statements reflects the
Market Value of Equity.
(b) Since insurers have no long term liabilities in the form of loans in their financial
statements in compliance with the Insurance Act 2005, given the nature of insurance
activity, it may be argued that the respective insurance funds of the insurer may be
considered as debts of the insurer towards its policyholders.
Q, in the context of this study, is calculated as:

Q=

3.1.2

General

Share capital + GI Fund+ OCR Fund + Short term liabilities

Insurance
Long Term

Total Assets
Share capital + LT Fund + Short term liabilities

Insurance

Total Assets

Independent Variables and their Measurement

The choice of the corporate governance framework is based on review of extant literature. In
addition, in selecting the independent variables reference is made to recent prior studies (refer to
Appendix 2)
The Corporate governance framework is selected also on the basis that each independent
variable strengthens the overall corporate governance framework of the Company. For example
it is assumed that more independent directors will bring more independence to the board, more
non executive will strengthen independence. The proportion of executive directors strengthens
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Board size and increases effectiveness of the board. More board meeting signifies more
directors interactions and discussions strengthening accountability and making the board more
cooperative and reliable. More subcommittees indicate more delegation of board responsibility
making the whole board more effective and reliable.
Independent variables are collected from the Corporate Governance disclosure section from the
Annual Reports of each insurer.
The independent variables and their measurement are in Table 8 below

#
1
2
3
4
5
6
7
8
9
10
11

Table 8: Independent Variable and their measurement


Independent Variable
Measurement
Insider
Proportion of Executive Directors to total Directors on the Board
Non-Executive
LN (Number of Non- Executive Directors)
Independence
Proportion of Independent Directors to total Directors on the Board
Board Size
LN (Total Number of Directors)
Meeting
LN (Number of board meetings)
Meeting Attendance
Average attendance of Directors in Board Meetings
Subcommittees
LN (Number of sub-committee established by Board)
Subcommittees Meeting
LN (Number of board Subcommittees meetings)
Subcommittee Attendance
Average attendance of Directors in Subcommittee Meetings
Size (Control Variable)
LN (Total Assets)
Age (Control Variable)
Difference between the observation year and the year in which the

12

insurer was licensed.


Average annual gross premium growth

Growth(Control Variable)

3.1.3
Perf =

Regression Model

0 + 1 (INS) + 2 (Nonexe) + 3 (Ind) + 4 (Siz) + 5 (mee) + 6 (meeat) + 7


(Subcom) + 8 (Subcommee) + 9 (Subcomeeat) + 10 (CoSiz) + 11 (CoAge) + 12
(CoGrw) +

Where:
Perf = Performance
Ins = Executive directors
Nonexe = Nonexecutive directors
Ind = Board Independence
Siz = Board Size
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3.2
3.2.1

ISBN : 9780974211428

mee = Board Meetings


meeat = Board Meeting Attendance
Subcom = Subcommittees
Subcommee = Subcommittees Meeting
Subcommeat = Subcommittees Meeting Attendance
CoSiz = Company Size
CoAge = Company Age
CoGrw = Company Growth
= error term

CORPORATE GOVERNANCE ACTION INDEX


Survey

It is argued that a good corporate governance framework yields better actions/behaviours from
directors. Therefore, on this assumption, a Corporate Governance Action Index is constructed
using information gathered during a survey conducted on all insurance companies. A
questionnaire is circulated to all insurers. Given the nature and complexity of issues involved in
the questionnaire where questions relate to the core aspect of management of an insurance
company, its governance, one questionnaire was circulated to each insurance company. The
questionnaire was required to be filled by either the Chief Executive officer or Director or
Compliance manager or Finance manager or Human Resource Manager or any Senior Manager
having direct involvement in the management and access to the Board of directors of the
insurance company for, at least, the last 4 years.
The questionnaire collects the respondents level of agreement to action-oriented behavioural
statements concerning the board of directors of its company. All questions point to the same
direction on a likert scale of 1 to 7 where 1 is total disagreement and 7 total agreements. Based
on the results therefore an index may be constructed. Attributes of the Corporate Governance
Action Index are presented in table 9 below:
Table 9: Attributes of Board Actions / Behaviours
Attributes of Board
Actions/Behaviours

Independence

Leading statement in the questionnaire

Board includes independent, non-executive directors who have no


direct relationships with the company.

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Accountable

Board ensures that Management acts in the interests of the


shareholders and is collectively answerable to the shareholders for
managements actions.

Transparent

Board ensures that satisfactory communication takes place with


shareholders and is based on a mutual understanding of needs,
objectives and concerns.

Responsible

Board provides suitable oversight of risk management and maintains


a sound system of risk measurement and control.

Diligent and ethical


behaviour

Directors maintain good standards of business conduct integrity and


ethical behaviour and operate with due care and diligence and at all
times act honestly and openly.

Appropriate number of Executive


Directors
Company is headed by an effective board of directors which is
Effective
responsible for governance.
Appropriate number Non-Executive
Directors
Board works as a cooperative and reliable team in the interest of all
Cooperative and
Appropriate number of shareholders
independent
and other stakeholders
reliable
Directors
INDEPENDENT
Appropriate Board SizeBoard ensures that employees are fairly treated and appropriately
Fair
remunerated
ACCOUNTABLE
Appropriate number of board
meetings
TRANSPARENT
To control the Corporate Governance Action Index, the corporate governance
framework used
in directors
the regression
model in paragraph
All
attending
all board3.1.3 is linked to the attributes of the corporate governance
meetings
action index as follows:
RESPONSIBLE
Appropriate number of
CORPORATE GOVERNANCE FRAMEWORK
subcommittees
Appropriate number of committee
meetings
All directors attending all committee
meetings
Appropriate company size

DILIGENT AND ETHICAL

EFFECTIVE

BOARD ACTIONS/
COOPERATIVE
AND
RELIABLE
BEHAVIOURS
FAIR

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Growing company

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3.3

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REGRESSION MODEL - CGA INDEX AND PERFORMANCE

To examine the relationship between corporate governance and performance, a regression


model is built using the independent variable as per table 10 below and Tobins Q as dependent
variable
Table 10: Independent Variables and their measurement
Independent variables
Measurement
Independence

Independence CGA Index

Accountability

Accountability CGA Index

Transparency

Transparency CGA Index

Responsibility

Responsibility CGA Index

Diligent and Ethical Behaviour

Diligent and Ethical Behaviour CGA Index

Effectiveness

Effectiveness CGA Index

Cooperative and Reliable

Cooperative and reliable CGA Index

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Fairness

ISBN : 9780974211428

Fairness CGA Index

Regression model:
Perf =

0 + 1 (Inde) + 2 (Acc) + 3 (Trans) + 4 (Resp) + 5 (DeBe) + 6 (Effe) + 7


(CORe) + 8 (Fair) +

Where:
Perf = Performance measured in terms of Q
Inde = Independence CGA Index
Acc = Accountability CGA Index
Trans = Transparency CGA Index
Resp = Responsibility CGA Index
Debe = Diligent and Ethical Behaviour CGA Index
Effe = Effectiveness CGA Index
CORe = Cooperative and reliable CGA Index
Fair = Fairness CGA Index
= error term

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4.

ISBN : 9780974211428

ANALYSIS AND FINDINGS

The findings and analysis of the models developed in this study, in line with the methodology
explained in section 3 above, are presented below. Data for Q and independent variables were
collected for the years 2009, 2010 and 2011 from the annual financial statements of each
insurer, measured and fed in SPSS. A multiple regression model is used, as in various prior
studies (Appendix 2). The general purpose of multiple regressions (the term first used by
Pearson in 1908) is to learn more about the relationship between several independent or
predictor variables and a dependent or criterion variable.

4.1

REGRESSION MODEL CORPORATE GOVERNANCE AND PERFORMANCE

As explained in the methodology, phase 1 of this study examines whether there is a link
between the corporate governance framework (independent variables) and performance (Q
dependent variable) using information collected from annual reports of each insurer [on paper].
Perf =

0 + 1 (INS) + 2 (Nonexe) + 3 (Ind) + 4 (Siz) + 5 (mee) + 6 (meeat) + 7


(Subcom) + 8 (Subcommee) + 9 (Subcomeeat) + 10 (CoSiz) + 11 (CoAge) + 12
(CoGrw) +

Where:
Perf = Performance
Ins = Executive directors
Nonexe = Nonexecutive directors
Ind = Board Independence
Siz = Board Size
mee = Board Meetings
meeat = Board Meeting Attendance
Subcom = Subcommittees
Subcommee = Subcommittees Meeting
Subcommeat = Subcommittees Meeting Attendance
CoSiz = Company Size
CoAge = Company Age
CoGrw = Company Growth
= error term
4.1.1

Model summary and ANOVA

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From the Model Summary, we observe that the coefficient of multiple determinations is 0.593
i.e. about 60% of the variation in performance is explained by the independent variables. The
regression equation appears to be very useful since the predictive capacity of the model is at
about 20%.
On the ANOVA table it is observed that P value <0.05, therefore, at 95% confidence level, there
exists enough evidence to conclude that at least one of the independent variables is useful for
predicting insurance performance as measured by Q; therefore the model is useful.
It may be concluded that there exists a relationship between corporate governance and
performance in the Insurance Industry of Mauritius. To analyse this relationship, the
correlations coefficients need to be observed:
Coefficientsa
Unstandardized Standardized
Coefficients
Coefficients
Model
1

Std.
Error

(Constant)

-.189

.378

Insider

-.024

.087

.201

Beta

Sig.

Zeroorder

Partial

-.499

.620

-.273

.786

-.182

.118

.287 1.701

.095

.187

-.144

.080

-.315 -1.810

.076

-.034

.328

.180

.421 1.823

.075

-.034

-.095

.066

-.224 -1.448

.154

-.187

Board Meeting Attendance

.510

.202

.505 2.526

.015

.365

.343

Number of Subcommittees

.019

.108

.033

.176

.861

.332

.025

Number of Subcommittees

-.080

.061

-.203 -1.309

.197

.026

.045

.044

.258 1.019

.313

.252

.146

Company Size

.027

.017

.272 1.593

.118

.019

.224

Company Age

-.025

.030

-.131

-.821

.416

.049

.066

.169

.050

.388

.700

-.042

Non-Executive
Board Independence
Board Size
Board Meeting

-.045

Collinearity
Statistics

Correlations
Part

-.039 -.032

Tolerance

VIF

.503

1.990

.198

.474

2.109

-.253 -.210

.447

2.237

.212

.253

3.956

-.205 -.168

.565

1.771

.294

.338

2.958

.020

.383

2.614

-.186 -.152

.563

1.776

.118

.211

4.748

.185

.465

2.151

-.118 -.095

.531

1.884

.056

.813

1.230

.238

.254

Meetings
Average Subcommittee
Meetings Attendance

Company Growth

.045

a. Dependent Variable: Tobins Q

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It is observed that not all independent variables are actually significantly correlated to Q. At 1%,
5% and 10% significance level, it appears that some of the predictor variables can be removed
from the full model as unnecessary.
Hypothesis:

Criteria:

H0: Variable is not useful

If p > 0.01, 0.05 and 0.10 accept H0

H1: Variable is useful

If p < 0.01, 0.05 and 0.10 reject H0

It is observed that the hypothesis is supported for Non-Executive, Board Independence, Board
Size, and Board Meeting Attendance and to some degree Company Size (11%). It is however
interesting to note that Board Independence, measured in terms of the proportion of independent
directors to total number of directors, and Board size, measured in terms of the Natural
Logarithm of the total number of directors, is negatively correlated to performance. Further, the
correlation between non-executive directors and Q is significantly higher in terms of B.
At the outset, it is to be noted that many insurance companies, especially in years 2009 and
2010 were not complying with the requirement of the Insurance Act 2005, i.e. having the
required number of independent directors (at least 2). Many did not have any independent
directors on their board of directors which explains partly the negative correlation. This may be
explained as the years 2009 and 2010 were in the transitional period for implementation of
requirements of the Insurance Act 2005 (transitional period which ended by 31 December 2010)
and many companies were making implementation arrangements.
To explain further this negative correlation, table 11 below provides the average (year 2009
2011) of directorship. It is observed that there are on average more non-executive directors that
independent directors on the BOD. This means that non-executive directors are probably filling
the roles of independent directors and thus driving performance rather than the contrary which
explains the negative correlation and the significance of non-executive directors.
Table 11 - Directorship 2009 -2011

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It is noted that Board Size is also negatively correlated to performance i.e. the larger the board
the less performing the company. Throughout literature, there is no agreement over whether a
large or small board achieves better governance. Yermack (1996) suggests that the smaller the
board of directors the better the firms performance. Yermack (1996) further argued that larger
boards are found to be slow in decision making.
Moreover, Yermack (1996) documents an inverse relation between board size and profitability,
asset utilization, and Tobins Q. It may be argued that limiting board size is believed to improve
firm performance because the benefits of larger boards (increased monitoring) are outweighed
by the poorer communication and decision making of larger groups (Lipton and Lorsch, 1992;
Jensen, 1993).
According to section 30 of Insurance Act 2005, no insurer shall have a board of directors
composed of less than 7 natural persons of which 30 per cent shall be independent directors, or
such other number and percentage as may be approved by the FSC.
Table 11 above shows that on average Board Size = 9 for insurers. Therefore, given Brown and
Caylor (2004) showed that firms with board sizes of between 6 and 15 have higher returns on
equity and higher net profit margins than do firms with other board sizes it may be concluded
that with an optimal Board size is 7 as per requirements of the Insurance Act 2005.
Finally, it is noted that Board Meeting Attendance is significantly correlated to Q. Regular board
meetings allow potential problems to be identified, discussed and avoided and drives the
corporate governance system. No governance system will be effective if directors do not meet
regularly. On average the entire BOD of insurers meet 8 times per year which may be
considered laudable.
To conclude, phase 1 of this study reveals that there is a relationship between corporate
governance and performance and this relationship is driven by Board Independence, NonExecutive, Board Size and Board Meeting Attendance.

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4.2

ISBN : 9780974211428

CORPORATE GOVERNANCE ACTION INDEX

The Corporate Governance Action Index is constructed following the methodology explained in
Section 3 above. All questionnaires despatched were filled and accordingly every attribute of
governance action as explained in methodology was rated. For confidentiality reasons the
results of the index are presented without the real Company Names.
CGA Index 2009

At the outset, it is interesting to note that the overall Governance Index for year 2009 is 0.724.
Results show that in the year 2009, Board Cooperativeness and Reliability has the highest Index
of 0.804. However, most respondents, honestly, reported that Board independence is relatively
low with an industry at 0.589 and 13 companies below the industry average of 0.589. It should
be noted that it is a particularity of Mauritius, because of its smallness, to have totally
independent directors. This fact is highlighted in the Report on Corporate Governance for
Mauritius (2003).
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CGA Index 2010

The overall CGA Index for 2010 improves by 0.014 to reach 0.738 compared to 0.724 in 2009.
The striking feature is that Board independence deteriorates by 0.021 from 2009 to 2010. This
may be explained by the fact that years 2009 and 2010 were in the transitional period for
implementation of requirements of the Insurance Act 2005 (transitional period which ended by
31 December 2010) and many companies were making implementation arrangements. However,
fairness, accountability, transparency, diligence and ethical behaviour improved from 2009 to
2010. It is also interesting to note that the number of CGA Index below the industry average
(highlighted in red) decreased from 73 in 2009 to 63 in 2010.
GCA Index 2011
The Overall CGA Index for 2011 improved from 0.738 in 2010 to 0.746 in 2011.

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It is interesting to note that independence improved in 2011 while cooperativeness,


accountability and responsibility indexes fell in 2011 compared to 2010. It is also noted that the
rating of companies improved from 2009 to 2011 especially for Company B which was taken
over by another company in 2011. The ratings for companies I and O were constant in 2009 and
company U constant in 2011 because these companies had only started operations in those years
and thus had not implemented their systems fully. Company J and T reported to be foreign
branches of International Holdings therefore the respective companies reported not being totally
aware of the operations of the governance systems in their respective Holdings. Companies E
and P are small family businesses with relatively low market share and improved corporate
governance practices which explains the number of Indexes below the Industry Index.

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The CGA Index could be used as an early warning system using the traffic light system analogy
i.e. companies having green light are those whose Index range between 67% - 100% of the
Overall CGA Index. The yellow light companies will be those having an Index range between
33% to 67% and finally the Companies in Red having an Index range below the 33% range. The
CGA Index could be presented as follows:

Thus, Companies E, J, O, P, T and U need to be monitored. As a conclusion, the CGA Index


could be a tool for monitoring governance framework of insurance companies and bring
qualitative information in the analysis of corporate governance.

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4.3

ISBN : 9780974211428

REGRESSION MODEL CGA INDEX AND PERFORMANCE

As laid out in the methodology section, to establish whether there is a real link between
corporate governance and performance in the insurance industry of Mauritius the Corporate
Governance Action Index of each insurer is regressed against Tobins Q as dependent variable
Perf =

0 + 1 (Inde) + 2 (Acc) + 3 (Trans) + 4 (Resp) + 5 (DeBe) + 6 (Effe) + 7


(CORe) + 8 (Fair) +

Where:
Perf = Performance measured in terms of Q
Inde = Independence CGA Index
Acc = Accountability CGA Index
Trans = Transparency CGA Index
Resp = Responsibility CGA Index
Debe = Diligent and Ethical Behaviour CGA Index
Effe = Effectiveness CGA Index
CORe = Cooperative and reliable CGA Index
Fair = Fairness CGA Index
= error term
4.3.1 Descriptive Statistics
The number of cases examined is 61 with a mean of 0.73 for Q and standard deviation of 0.28
Descriptive Statistics
Mean

Std. Deviation

Tobin's Q

.73346

.275256

61

Independence

.58475

.149832

61

Accountability

.77210

.118960

61

Transparency

.81502

.134568

61

Responsibility

.71011

.140526

61

Diligent and Ethical

.69482

.199129

61

Effectiveness

.71770

.165644

61

Cooperative and Reliable

.82370

.128581

61

Fairness

.76993

.171953

61

Behaviour

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4.3.2

ISBN : 9780974211428

Model Summary and ANOVA

From the Model Summary, we observe that the coefficient of multiple determinations is 0.505
i.e. about 51% of the variation in performance is explained by the independent variables. The
regression equation appears to be very useful for making predictions since the predictive
capacity of the model is at about 14%.
On the ANOVA table it is observed that P value <0.05, therefore, at 95% confidence level, there
exists enough evidence to conclude that at least one of the independent variables is useful for
predicting insurance performance as measured by Q; therefore the model is useful.
It may be concluded that there exists a relationship between Corporate Governance Action
Index and performance in the Insurance Industry of Mauritius.
4.3.3

Correlation Coefficients
Coefficientsa
Unstandardized Standardized
Coefficients

Coefficients

Correlations

Std.
Model

Error

(Constant)

1.116

.258

Independence

-.474

.293

Accountability

-1.175

Transparency

Collinearity Statistics

ZeroBeta

Sig.

order

Partial

Part

Tolerance

VIF

4.325

.000

-.258

-1.617

.112

-.102

-.219

-.194

.562

1.780

.446

-.508

-2.636

.011

-.273

-.343

-.316

.386

2.591

.619

.439

.303

1.411

.164

-.061

.192

.169

.311

3.214

Responsibility

.436

.314

.223

1.391

.170

.098

.189

.167

.559

1.789

Diligent and Ethical

.515

.215

.373

2.400

.020

.164

.316

.287

.595

1.681

.351

.369

.211

.950

.347

-.140

.131

.114

.290

3.449

-.127

.466

-.059

-.273

.786

-.147

-.038

-.033

.303

3.301

-.671

.327

-.419

-2.051

.045

-.110

-.274

-.246

.343

2.918

Behaviour
Effectiveness
Cooperative and
Reliable
Fairness

a. Dependent Variable: Tobin's Q

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ISBN : 9780974211428

It is observed that not all independent variables are actually significantly correlated to Q. At 1%,
5% and 10% significance level, it appears that some of the predictor variables can be removed
from the full model as unnecessary.
Hypothesis:

Criteria:

H0: Variable is not useful

If p > 0.01, 0.05 and 0.10 accept H0

H1: Variable is useful

If p < 0.01, 0.05 and 0.10 reject H0

It is observed that the hypothesis is supported for Diligent and Ethical Behaviour, Fairness and
to some degree accountability (11%). Given that Fairness and Accountability have negative
correlations with Q, I believe that the driver in the relationship between the Corporate
Governance Action Index and Q is Diligent and Ethical Behaviour
S. R. Diacon and C. T. Ennew (1996) sought to explore the implementation of corporate ethical
culture and policies as an adjunct to formal forms of corporate governance in UK Insurance
Companies. They surveyed senior executives in U.K. insurance companies to explore the
implementation of ethical policies and codes, to investigate ethical attitudes, and to analyse the
extent to which these policies and attitudes varied among companies. Their results suggest that
ethical policies have a higher profile and ethical attitudes and behaviour are more positive
which support the contention that a strong corporate ethical culture may be utilised to enhance
formal corporate governance instruments. Therefore, it may be concluded that firms with
diligent and ethically driven Board of Directors will perform better. On the overall the results
of phase 3 suggest that the better the Corporate Governance Action Index better performance
will be.

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5.

ISBN : 9780974211428

CONCLUSION

Insurance companies as custodian of policyholders funds have the duty to follow high
standards of corporate governance, and risk management in particular. Insurance policyholders
are largely dependent on the ability of management and the Board of Directors to take
conservative and prudent risks and have sound capital management policies. In addition
policyholders depend on the willingness and ability of shareholders to inject additional capital
when needed, which is somehow dependent on their confidence in the abilities of the Board of
Directors.
Insurance business is characterised by complex principal-agent relationships, as well as
asymmetry in market power and information among various stakeholders. Some agency
problems are common to all insurance entities, while others arise in the context of particular
category of Insurance Business licensed for, namely long term insurance, general insurance
and/or reinsurance. Therefore, strong governance in the insurance sector requires that the
internal organs of the company, that is, its management, the systems of risk management,
internal audit and internal controls, the companys actuary work effectively and the Board
should have oversight of them all.
The activities of directors of any insurance company, whether or not the company is publicly
traded, are subject to review by the Insurance regulator which has almost certainly magnified
the importance of corporate governance and director activities within the context of the
regulatory framework mandatory for all Insurers. This is certainly reflected by the Insurance
Industry Corporate Governance Action index of 0.746 at the end of 2011.
This study provides evidence that there is a relationship between corporate governance and
performance in the Insurance industry of Mauritius and gives both a quantitative and qualitative
motive for Insurers to continue their investment in their Corporate Governance Framework
Whats good for corporate governance is good for the share price

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6.

ISBN : 9780974211428

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