Corporate governance refers to the course whereby suppliers of capital endeavor to ensure that executives of the firms in which they endow grant an adequate return. It addresses the agency problem whereby the shareholders are the ultimate owners of the firm and want to ensure that managers, who are separate from the shareholders, act in the shareholders’ best interests rather than the interests of managers. Recent high-profile scandals (Enron and WorldCom) have focused increased attention on the agency problem and corporate governance mechanisms. Subsequent to these incidents, US lawmakers responded with tougher regulations such as the Sarbanes-Oxley Act of 2002.

Mauritian regulators have been in the process of drafting parallel initiatives, and while Mauritius has not fully enacted such regulations, cross-listed firms, which are quite plentiful, are subject to much of the regulation. Although the study of agency problems and corporate governance is not new, few studies have attempted to provide a direct link between corporate governance metrics and stock valuation. Nevertheless, we recognize that any such search should be embarked upon with a number of vital caveats. Initially, a search for any causal link is inherently difficult: while we make no claim about the direction of any link between governance and value, our goal should include an investigation of whether governance does matter to Mauritian investors and whether any connection between governance and stock performance can be established. A second major challenge in this area relates to the measurement of “good governance.” While the literature has provided some guidance in terms of important governance factors, there is no universally-accepted definition of what identifiable and measurable factors constitute good governance, or how any such measures should be weighted as part of the construction of an overall governance index. A third challenge relates to timing. Should we expect to find any link between corporate governance and short-term stock performance, or longer-term performance? A fourth challenge relates to the measurement of value and performance. Some studies focus on valuation metrics such as market-to-book ratios or price-to-earnings ratios as proxies for relative values.

Such measures rely on accounting-based data which clearly can have some limitations. Another simple approach of focusing on actual stock performance and examining “raw” returns ignores the possibility that returns can be driven by various risk factors inherent in stock investments. Given these challenges, it may be surprising to find any links between governance and stock performance. Nonetheless, in terms of addressing each of the challenges, a rigorous investigation of the relationship between this governance measure and stock valuation is essential.

For this purpose, an index should be constructed in order to pierce the opacity that lies in the Mauritian corporate system today. First, “let data decide” in terms of the direction of perceived causality between governance and performance. The investigation should develop a corporate governance ranking of Mauritius’ largest firms, those in the SEMDEX as of at least two to three years. Third, the investigation should implicate different timeframes, from three months to five years. This index will allow analysts to examine the awareness in the marketplace to governance factors and investigate the market’s reaction to this “new” information. Fourth, risk-adjustment mechanisms should be employed throughout the investigation. Despite numerous challenges, we will surely unearth evidence that corporate governance does seem to matter to Mauritian investors.

<B>Nitish Benimadhu

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