The South Africa Franchise

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02 Nov 2017

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CHAPTER 3

METHODOLOGY

This chapter deals with the methods used for researching the subject undertaken for study.

RESEARCH PROBLEM

The research subject is that of corporate governance in foreign franchises in Mauritius. During the literature review process, it has been found that there are many studies conducted on corporate governance in Mauritius and compliance with the Mauritian code by listed and non listed companies in Mauritius. However, there is a lack of researches on the operations and compliance with code of corporate governance of franchises in Mauritius.

Not all foreign companies doing business in Mauritius operate the same way. Many foreign companies inherit governance principles of their parent entity and moreover they are also called upon to adopt the governance principles of the country of operation.

It has been noted that no information is available on their differences of applying corporate governance and more specifically on the challenges faced by them to incorporate the two governance systems in their organisation.

Given the complexities of framework regulating foreign companies, I found it more appropriate to undertake a study aiming to analyse the corporate governance system of foreign franchises by the Code of Governance for Mauritius and the OECD Guidelines For Multinational Enterprises 2011.

3.2 SCOPE OF THE STUDY

The foreign companies being a wide market in Mauritius, the study undertakes to focus on franchise only and will be limited to a case study on the fast food industry.

The governance system of franchises will be studied and their dual compliance to the OECD Guidelines For Multinational Enterprises 2011 and the Code of Governance for Mauritius will be analysed.

3.3 RESEARCH QUESTIONS

Are principles and Code of Corporate governance being applied?

How does franchise incorporate OECD Guidelines for Multinational Enterprises 2011 and the Code of Governance for Mauritius in their operation?

The difficulties faced by franchise in relation to the compliance to good governance

3.4 RESEARCH OBJECTIVES

Analyse practices of corporate governance models of franchise

Study the reporting framework

Analysis of governance structure

To study compliance with established policies of Mauritius

To analyse compliance with OECD guidelines for multinational companies (2011)

CONTEXT AND BACKGROUND

3.5.1 Case Study 1 – The US Franchise

The Fast food industry is dominated by the KFC franchise followed by Pizza Hut. However, McDonalds seems to be slow to take off.

The United States and Mauritius signed a Trade and Investment Framework Agreement in 2006, and every year delegations from both governments meet to discuss ways of strengthening and expanding trade and investment relations between our two countries. Moreover, negotiations are ongoing for a Bilateral Investment Treaty (BIT). The BIT will provide additional protection to and further encourage investment flows between the United States and Mauritius.

The US franchise encompasses the mentioned brands as hereunder:

Table 3.5.1 - The USA Franchise

FRANCHISOR

BRANDS

PARENT ENTITY

HISTORY

1.

Pick N' Eat Ltd

(Food and Allied Industries)

Kentucky Fried Chicken

KFC,Louisville, Kentucky

USA

KFC (formerly Kentucky Fried Chicken) is a fast food restaurant chain headquartered in Louisville, Kentucky, United States, which specializes in fried chicken. An "American icon", it is the worlds largest fried chicken chain with over 17,000 outlets in 115 countries and territories as of December 2011.

Pick N Eat Ltd opened its 1st KFC outlet in 1983 at Curepipe. It presently has 20 outlets in Mauritius and employs 500 persons.

2.

Chicago Restaurants Ltd

McDonald

McDonald's Corporation,., Oak Brook,

USA

McDonald's is a global foodservice retailer with more than 34,000 local restaurants serving nearly 69 million people in 119 countries each day.

McDonald opened its 1st outlets in Port Louis in 2001. It presently has three outlets in Mauritius.

3.

Sopral Ltd

Pizza Hut

(Happy World)

Pizza Hut, Inc.

7100 Corporate Drive

Plano, TX 75024

USA

Pizza Hut (corporately known as  Pizza Hut, Inc.) is an American restaurant chain and international franchise that offers different styles of pizza along with side dishes including salad, pasta, buffalo wings, breadsticks, and garlic bread.

As of 2012, there were more than 6,000 Pizza Hut restaurants in the United States, and more than 5,139 store locations in 94 other countries and territories around the world. It presently operates 12 outlets in Mauritius.

4.

Hyvec Food Ltd

Charleys

Barcelos

USA

Two additions to the fast food franchise in Mauritius. The franchise opened in December 2012.

3.5.2 Case Study 2 – The South Africa Franchise

Mauritius seems to be the favourite franchise destination of South Africa. Many fast-food brands have established themselves through Master franchise. Islands Famous brands operates most franchise fast food such as Spurs, Panarottis pizza, debonnairs pizza, Steers and wimpy, fishaways, mugg and beans.

Table 3.5.2 - The South Africa Franchise

FRANCHISOR

BRANDS

PARENT ENTITY

HISTORY

1.

Island famous brands

Spurs Restaurants

Spur Corporation

South Africa

Spur franchise is a family sit-down restaurant specialising in steak. Established in 1967, there are over 40 Spur restaurants in South Africa. Spur franchises are now also in the UK, Australia and Mauritius. 

It opened its 1st franchise outlets in Mauritius in 1995 and presently owns 8 outlets restaurants for Spurs, Panorottis and DoRego’s.

Debonair/ Steers and wimpy/ Fishaways/ Mugg & Bean

South Africa

Debonair Pizza is a leading pizza restaurant brand in Africa. It was founded in 1991 by two university students. Debonair presently has 12 outlets in Mauritius.

The Island famous brands Ltd is the master licensee for these mentioned brands and operates 9 outlets for steers and wimpy, fishaways and Mugg & bean.

2.

Kilmun Holdings Ltd

Nando’s

South Africa

Nando's is a South African casual dining restaurant group originating from the Mozambique-Portuguese community with a Portuguese Mozambique theme.  Founded in 1987, Nando's operates in thirty countries on five continents. Nando's specializes in chicken dishes with both lemon and herb, medium, hot, extra hot or extra extra hot Peri-Peri marinades (properly known as Galinha à Africana). In some countries, Cando’s has other flavour options like mango and lime or Mediterranean.

There are currently 3 Nando’s restaurants in Mauritius.

Mauritius and South Africa signed Memorandum of Understanding in February 2009 for cooperation in areas such as Economic development, Industrial and trade, Cross border investment, Physical and economic infrastructure, Public Private Partnership, Technical issues and Skills development.

The Trade and Investment Framework Agreement (TIFA) were signed in Washington in September 2006. It has the objective to promote investment and expand trade between Mauritius and South Africa. The ultimate objective is to conclude a Free Trade Agreement (FTA) to facilitate free trade between the two countries.

RESEARCH METHODS

Justification of the Research Methodology used

The research methodology used for the research is a comparative case study as researches has shown that franchise licenses are from USA and South Africa only. Given that the research aim to compare and analyse the corporate governance system of the franchise fast food industry, an in-depth understanding is needed. Hence, a comparative study analysis seemed to be a more appropriate approach.

The Case study Methodology

Case study is an ideal methodology when a holistic, in-depth investigation is needed (Feagin, Orum, & Sjoberg, 1991). Researcher Robert K. Yin defines the case study research method as an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used (Yin, 1984, p. 23).

Many well-known case study researchers such as Robert E. Stake, Helen Simons, and Robert K. Yin have written about case study research and suggested techniques for organizing and conducting the research successfully.

3.6.3 Steps for the case study research

Determine and define the research questions

Select the cases and determine data gathering and analysis techniques

Prepare to collect the data

Collect data in the field

Evaluate, validate and analyze the data

Prepare the report

STEP 1 – Research Questions

It establishes the focus of the study by forming questions about the situation or problem to be studied and determining a purpose for the study. Research questions always start by why and how. For this study, the research question step has been addressed at paragraph 3.3 and 3.4.

STEP 2 – Selection of the case

The researcher determines whether to study cases which are unique in some way or cases which are considered typical and may also select cases to represent a variety of geographic regions, a variety of size parameters, or other parameters. A useful step in the selection process is to repeatedly refer back to the purpose of the study in order to focus attention on where to look for cases and evidence that will satisfy the purpose of the study and answer the research questions posed.

For the purpose of this study, the following parameters have been used in selecting the cases:

Fast Food Industry

Business Model franchise

US and SA franchise

STEP 3 – Data Gathering and Analysis Techniques

Sampling

Sampling is the act, process, or technique of selecting a suitable sample, or a representative part of a population for the purpose of determining parameters or characteristics of the whole population.

A sample is a finite part of a statistical population whose properties are studied to gain information about the whole (Webster, 1985).

For the purpose of this research the study subject has been chosen at random and by considering the parameters mentioned in STEP 2.

Documentation

The preliminary part of the research consists of gathering data about franchise operations in Mauritius and background information to be able to compare the structures and functioning. Information has been obtained from available resources such as the website, Annual return, Annual report and field research.

Surveys

Surveys are the most common research methods used to gain hard facts. Survey methods include desktop survey, questionnaires and interviews. For the purpose of this study, a desktop survey as well as questionnaires has been used.

Desktop Survey

Desktop Surveys are a non-intrusive and extremely time efficient method of first phase planning. A desktop survey will help to determine areas of potential difficulty, particularly areas of high utility congestion. This service is extremely cost effective as fast identification of failure points will save both time and expense on further investigation which is likely to be more intrusive.

For this study, a desktop survey was conducted using the annual returns and annual Report of the franchises as at paragraph 3.5.1 and 3.5.2. Documentation for Hyvec Ltd could not be obtained given that it is a newly established company (2012) and has not yet file its Annual return and financial statements.

The purpose of using annual returns and annual reports of the franchises was to gather information on their corporate governance system through their corporate governance report and ownership structure.

The main advantage of Annual reports is that they are regularly being produced and hence offer an opportunity for a comparative analysis of management stances and strategies across reporting periods (Niemark, 1995).

Annual report is an important medium for disseminating social and environmental information to public (Cowen, Ferrerri and Parker, 1987; Guthrie and Parker, 1989, 1990; Roberts, 1992; Neu, Warsame, and Pedwell, 1998).

Annual reports are mandatory by law and need to be submitted to the Companies’ Division.

Questionnaires

Questionnaires consist of written questions which may be open ended or closed questions. With questionnaires large amount of data can be collected and more quickly.

The questionnaires have been more or so design to gather qualitative information on compliance with the OECD Guidelines for Multinational Enterprises 2011 and the Code of Governance for Mauritius. (Appendix A)

Questionnaires were forwarded to each of the organisation. Only queries which could not be gathered from documentation were formulated in the questionnaires. Hence, the questions included try to gain information as much as possible that can be used for different analysis to be undertaken.

Questions 1,2,4,5 and 6 were formulated to gain information on board governance and risk management, control mechanism and appraisal system in place.

Question 3 and 7 relates to disclosure and integrated social reporting as mention in the Code of Corporate Governance for Mauritius and OECD Guidelines for Multinational Enterprises 2011.

CHAPTER 4

ANALYSIS OF FINDINGS

4.1 COMPARATIVE ANALYSIS OF KEY STRUCTURE AND FUNCTIONING

From documentation and field research, information on the structure and functioning of each franchise was gathered and thus a comparison could be made establishing credentials for further analysis. Figures submitted below are for the financial year 2009, 2011 and 2012.

Table 4.1 Comparison of key structure and functioning

US franchise

South African franchise

Chicago Restarants Ltd

Sopral Ltd

Pick N Eat Ltd

Island Famous Brands

Kilmun Holdings

Income per year

Rs100,014,055

Rs194,205,000

Rs824,116,965

Rs20,488,933

Rs11,752,422

Total Expenditure per year

Rs31,454,229

Rs96,425,939

Rs24,850,665

Rs10,924,793

Operating Costs (excl of staff cost)

Rs18,465,657

Rs23,345,466

Rs8,319,107

Staff costs

Rs12,988,572

N/A

Rs962,156

Board Meetings per year

1

1

1

1

Number of staff

48

500

Outlets

3

12

20

9

3

Year of operations

2001

1983

1995

2012

Source: Annual Report, Financial Statement and Questionnaires

4.1.1 Revenue and Expenditure

From findings, it can be ascertained that the revenues generated from operations by each of the franchises differ largely. Kilmun Holdings Ltd has registered the lowest earnings of Rs11,752,422 while Pick N Eat Ltd has surpasses all the franchises and generated an income of Rs824,116,965.

Pick N Eat Ltd representing the KFC brands has emerged not only as a leader of US franchise but also of the whole market. From the table above, it is deduced that the US franchises are performing better than the South African franchises.

Figure 4.1.1 Revenue and Expenditure analysis

The US franchises dominate largely the consumer market generating an income 31 times more than SA franchises.

The large differences of earnings from operations can be due to:

Number of outlets

The total income accounted for are from all outlets. Thus it can be ascertained that the higher the number of outlets, the larger the profit.

Figure 4.1.1(a) Number of Outlets

However, it is worth pointing out that both Kilmun Holdings Ltd and Chicago Restaurants Ltd have three outlets but the first mentioned is generating an income of Rs11,752,422 only while the last mentioned is generating an income of Rs100,014,055.

Kilmun Holdings Ltd represents the Nando’s Brands while Chicago Restaurants represents the McDonald brands. The differences in income generated clearly gives indications of consumer preferences.

Strategic Alliance

The SA franchises, that is, Islands Famous Brands Ltd and Kilmun Holdings Ltd are unknown in Mauritius while on the other hand the US franchises (KFC and Pizza Hut) have benefited from the expertise of alliance with leaders in the Mauritian corporate world such as Food and Allied Industries which is a subsidiary of Espitalier Noel Ltd and Sopral Ltd, a subsidiary of Happy World ltd.

Both Espitalier Noel Ltd and Happy World Ltd are leaders in the Mauritian businesses and have countless expertise and knowledge of the Mauritian market, demographic features and well versed with the unique culture of Mauritius. This alliance has proved to be a fruitful for KFC and Pizza Hut. This opinion can be proven through the case of McDonalds. Chicago restaurants Ltd is unknown to Mauritian despite 11 years of existence and does not possess the business knowledge and expertise as companies like Espitalier Noel Ltd and Happy World Ltd.

However, it should be noted that the SA franchises are relatively new in the Mauritian market.

Product positioning strategy

Positioning is a concept in marketing which was first introduced by Jack Trout ( "Industrial Marketing" Magazine- June/1969) and then popularized by Al Ries and Jack Trout in their bestseller book "Positioning - The Battle for Your Mind." (McGraw-Hill 1981)

Positioning is about the perception of your products by its target customers. Product positioning is achieved by focusing marketing activities on a positioning strategy. Product, Pricing, promotion and channels of distribution all are geared to maximize the chosen positioning strategy.

Product Differentiation Strategy

Marketers use the product differentiation strategy to retain competitiveness in the market. The US product and SA products are so far being differentiated by their special flavours, secret ingredient and methods of cooking as in the case of KFC and Nando’s.

Pricing

The price of a product may determine the target market and views of a specific product. High priced products are viewed as luxury products and the target market are usually the rich and famous people while a marketer may position his product as and affordable product for the whole population by selling it a low price.

In Mauritius, it was noted that the prices of the US products ranges from Rs200 upwards while the SA products are slightly more expensive. You can end up spending Rs1000 for two persons at Spurs while you may disburse only Rs100 at KFC.

Promotion

Promotion is the communication means used to reach consumers and includes advertising, public relations, personal selling and sales promotion.

Advertising covers communication ranging from cinema commercials, radio and Internet adverts through print media and billboards. Public relations include press releases, sponsorship deals, exhibitions, conferences, seminars or trade fairs and events. Word of mouth is any apparently informal communication about the product by ordinary individuals, satisfied customers or people specifically engaged to create word of mouth momentum. Sales staff often plays an important role in word of mouth and Public Relations.

The US brands (McDonalds, KFC and Pizza Hut) are world recognized products while the SA products are lesser known. Advertising and promotions plays an important role in attracting customers of the US products. These three brands have used media advertising, Bill boards and promotions.

However, it is noted that SA brands relies more on its word of mouth marketing. For the time being the SA brands have been successful at attracting only customers who are already aware of their brands. It will take more than word of mouth for the SA brands to be able to create awareness among people.

Channels of distribution

The channels of distribution refer to how the products are made available in the market. The place will determine the accessibility of a product. The US brands such as KFC and Pizza Hut prefers accessibility and is available at almost every corner of the streets while the SA franchises opted for hypermarkets.

Low income earners cannot afford to go to hypermarkets as the prices are very high such as at Bagatelle. Operating at the Bagatelle hypermarkets are SA brands outlets such as Spurs and Nando’s. The low income earners customers have to account for transport expenses.

This can only confirm that the SA franchises targets the upper middle class customers. A site visit at each of the franchises outlets clearly depicts their marketing strategy.

The outlets of US franchises (KFC, Pizza Hut and McDonalds) are family oriented. The US brands is for low budget people and promotes a closer to customers attitude.

4.2 GOVERNANCE STRUCTURE

A franchise is differentiated according to its distribution of ownership rights, decision making rights and residual income rights. The franchise system in Mauritius are mapped mostly on the business models formats whereby franchisees pay for the license to trade under the brand name and are provided with the know-how, materials and training. As stated in chapter 3, the franchise industry in Mauritius is dominated by the US brands and the South Africa brands.

4.2.1 Ownership structure

In the wake of corporate governance scandals, ownership structure is attracting a lot of attention. It is often perceived that ownership structure plays an important role in a firm’s performance and profit maximisation. One of the mechanisms of corporate governance is ownership structure.

An analysis was undertaken to ascertain:

whether the companies under study are owned by a majority shareholder;

class of shares; and

structure of the Board

For the purpose of this research, a majority shareholder is deemed to be an investor who owns the majority of the total ordinary shares issued or who obtained the majority through an investments of its fully owned subsidiary.

Shareholders

It was noted that four of the five of the company analysed have a majority shareholder as follows:

Figure 4.2.1(a) Share owners analysis

It was noted that there is no foreign ownership for the US franchise while the South Africa franchise have a mix of Mauritian and foreign majority owners. The no majority ownership is explained by equal shareholding.

It was also noted that shareholders of four of the five companies, the majority of the owners are companies rather than individual. Excepting one company from the South Africa franchise where the exclusive shareholder is an individual. Two companies which included both corporations and individuals are from the US franchise. The individual shareholders in the three companies are also the company directors. Moreover, it was found that two of the companies from the US franchise are subsidiaries of a group of companies.

Figure 4.2.1(b) Shareholdings analysis

(b) Class of shares

Class of shares carries voting rights. It was noted that all the five companies are private companies with ordinary shareholding except one company which also included preference A shares.

© Board Structure

The aim of this analysis was undertaken to see whether franchisors appoint their representatives on the board. Earlier analysis shows that 50% of South African franchise have a foreign majority owner. Our study reveals that one of the two South African franchises have a foreign director.

Despite earlier findings were that US franchises do not have a majority foreign shareholder, one of the three US franchises has a foreign director.

Decision making rights

Decision making rights are regulated by the Franchise Disclosure Document (FDD) between the franchisor and the franchisee. Training, marketing and advertising, supplier, locations, products and prices, software and fees are all govern by the FDD. A study was undertaken to analyse the decision making rights of franchise:

Table 4.2.2 Decision making rights

Goal Factor

US franchise

South Africa franchise

Marketing strategy

Franchisor

Franchisor

Product and Pricing policy

Franchisor

Franchisor

Procurement and supply of materials

Franchisor

Franchisor

Location of store

Franchisor

Franchisor

IT Software

Franchisor

Franchisor

Equipments

Franchisor

Franchisor

Quality assurance

Franchisor

Franchisor

Staffing and training

Franchisee

Franchisee

Employee compensation

Franchisee

Franchisee

Dividend distribution

Franchisee

Franchisee

Community Service

Franchisor/Franchisee

Franchisor/Franchisee

Financing

Franchisee

Franchisee

Franchise are limited in their decision making rights given that they are bounded by a contract agreement. Franchises benefits from the managerial support of the international brands for organisational performance. From marketing strategy to quality assurance, all franchisor ensure that the franchisee follow the system of the parent company.

The franchises have discretion on staff employment however training are given by the franchisor to ensure that employees pursue the same goals as the franchisor and provide customer service as expected to avoid any disrepute to the international brands.

The products to be marketed, the suppliers of materials and location of store are approved by the franchisor. Equipments and furnishing to be used by the franchise store are also approved by the franchisor. Period quality checks are undertaken by the franchisor.

Employee compensation are decided by the franchisee upon the regulating labour laws. Dividend distribution depend on the policy of the franchise company.

With regards to community service, the franchisees can support any community causes and can give donation at their own discretion however franchisees are expected to follows the corporate social responsibility policy of the franchisor.

Financing for investments are arranged by the franchisees however the US franchisor help by providing a list of banks that have expressed lending interest while the South Africa franchisor assist in business plans and cash flow forecasts.

4.2.3 Regulatory Requirements

According to the desktop survey, all companies in the case studies reported thereon comply only with the Mauritian Companies Act 2001.

4.3 COMPLIANCE WITH CODE OF CORPORATE GOVERNANCE FOR MAURITIUS

"If you are looking for signs that governance is working, look for clear purpose, inspiring vision, shared values, robust relationships, reciprocal accountability and balanced measurement." (The Corporate Reporting Jigsaw, Centre for Tommorrow’s Company).

Compliance with this Code is a requirement as from reporting year ending 30th June 2005. Non-compliance should be disclosed.

Table 4.3 Compliance with Code of Corporate Governance for Mauritius

Provision as per the Code

USA Franchise

South Africa Franchise

Board and Directors

Comply

Not comply

Board Committees

Comply

Not comply

Risk Management, Internal Control and Internal Audit

Control systems in place

Not available

Auditing and Accounting

Comply

Not available

Integrated Sustainability Reporting

Comply

Not Comply

Communication and Disclosure

Part compliance

Not Comply

Source: Field research and Questionnaire

4.4.1 Board and Directors

Composition of the Board

Composition of Board is central to good governance practice. Section 2 of the Code for Corporate Governance for Mauritius specifies the need to have a balance Board composed of:

At least 2 executive directors

Non-executive directors

At least 2 independent directors

Table 4.4.1(a) Composition of Board

USA Franchise

South Africa Franchise

At least 2 executive directors

66.6% (2/3)

100% (2/2)

Non-executive directors

66.6% (2/3)

0%

At least 2 independent directors

0%

0%

Executive Director has been defined in the Code as a director who is involved in the day to day management. Chicago Restaurants Ltd, Kilmun and Island Famous Brands Ltd have only two Executive Directors. Sopral Ltd has three Executive Directors while Pick and Eat has only one Executive Director. In a total of 5 franchises, only four companies met this requirement of the Code. Out of the three US franchises, one did not meet this requirement. Overall, 80% of the franchises in Mauritius meet this requirement.

Non-executive Director has been defined as a director not involved in the day to day management. Despite meeting the requirement of at least two Executive Directors, the SA franchises do not meet the requirements of the Code for Non-Executive Directors. On the other hand, 66.6% of the US franchises meet this requirement, that is, two of the three US franchises have Non-Executive Directors.

Independent directors remain a problem in Mauritius as most businesses are family owned. In the franchise business also, this phenomenon remains. According to the Code, an Independent Director is a non-executive director, is not employed by the company or the group and has no significant contractual relationship with the company or the group.

All the franchises did not have an Independent Director. It was noted that in three companies namely Islands Famous Brands, Chicago Restaurants Ltd and Sopral Ltd, the Directors are also shareholders of the company. Hence, they cannot be said to be independent as they have conflict of interests.

Pick N Eat Ltd also does not have Independent Directors as most of its Directors are also Directors in other subsidiaries of the group. However, account need to be taken that the Code state that there are no obligation to have independent directors for Corporate Holdings Structures. Pick N Eat Ltd and Sopral Ltd forms part of a holding structure.

Table 4.4.1(b) Overall Analysis of Composition of Board

USA Franchise

South Africa Franchise

At least 2 executive directors

40% (2/5)

40% (2/5)

Non-executive directors

40% (2/5)

0%

At least 2 independent directors

0%

0%

60% of the US and SA franchises do not have Non-Executive Directors. The remaining 40% are made up by the US franchises.

According to findings, the composition of board of most of the five companies does not meet the requirements of the Code of Corporate Governance for Mauritius.

Remuneration of directors

According to the Code, companies should include a transparent "Statement of Remuneration Philosophy". It was noted that none of the companies under study provided such statements. No details of remuneration paid to each director was disclosed. The extent to which the directors retain remuneration from a subsidiary was not indicated.

Director Selection, Training and Development

The Code specified that an induction program for Directors should be in place to that a company maintains a well informed and competent board.

Board and Director Appraisal

The Code state that companies must have controls in place to promote their continued survival and profitability and that directors should be assessed both individually and collectively as a board.

Board Committee

Section 3.5 of the Code of Corporate Governance for Mauritius specifies that "all companies should, at a minimum, have an audit committee and a corporate governance committee". In addition the Code also suggests that, if necessary, the following sub-committees could be created:

Risk Committee

Remuneration Committee

Nomination Committee

"Delegating authority to board committees or management does not in any way discharge the board from its duties and responsibilities. Board committees are a mechanism to assist the Board and its Directors in discharging their duties through a more comprehensive evaluation of specific issues, followed by well-considered recommendations to the board".

Two of the three US franchise forms part of a group holding. Given their ownership structure both the franchises avers that they follow the principle of the group.

Code state that in cases of corporate holding structures, subsidiary companies would not be expected to have separate sets of board committees and in the case of wholly owned subsidiaries. Thus, analysis for this part would be undertaken on the Holding companies for Pick N Eat Ltd and Sopral Ltd, that is, Happy World Ltd and ENL Limited.

Table 4.4.2 Board Committee

USA Franchise

South Africa Franchise

Audit Committee

66.6% (2/3)

0%

Corporate Governance Committee

66.6% (2/3)

0%

Risk Committee

66.6% (2/3)

0%

Remuneration Committee

33.3% (1/3)

0%

Nomination Committee

33.3% (1/3)

0%

It was noted that that complying companies used different appellations for the committees but much or less performing the same duties as specified for the above mentioned committees.

For companies falling under holding structures, it was noticed that while Happy World Ltd provided the terms of reference for its committees, the terms of references for ENL Ltd Committees was not disclosed.

No disclosures was made with regards of the committees established for companies falling under SA franchises.

Risk Management, Internal Control and Internal Audit

It was ascertained that all the US franchise complies with the requirements however no such disclosures and information was made available by the SA franchises. The US franchises set as objectives in minimising risk such as financial risk and capital management risk.

Auditing and Accounting

Section 6 of the Code of Corporate Governance for Mauritius specifies that Board should minute the facts and assumptions used in the assessment of the going concern status of the company at year end. The law requires that financial statements of companies be in conformity with International Financial Reporting Standards (IFRS).

Accordingly all financial statements of all the five franchises were prepared in conformance of IFRS.

Integrated Sustainability Reporting

The trend is for companies to formulate objectives of a non-financial nature towards the achievement of balanced economic, social and environmental performance now generally referred to as "triple-bottom-line".

Integrated sustainability reporting primarily looks at policies that focus on the social context, physical environment and community within which the company operates with the aim of achieving long term objectives and social aspirations as defined, recognised and formulated by the company.

Section 7 of the Code of Corporate Governance for Mauritius specifies that reporting should be made as regards to:

Ethics

Environment

Health and Safety

Social Issues

The code requires that relevant information be disclosed in a corporate governance report within the annual report. However it was noted that companies stated that Board of Directors assumes all tasks of compliance and governance without providing any disclosures.

Table 4.4.5(a) Integrated Sustainability Reporting

USA Franchise

South Africa Franchise

Ethics

66.6% (2/3)

0%

Environment

66.6% (2/3)

0%

Health and safety

33.3% (1/3)

0%

Social Issues

33.3% (1/3)

0%

Ethics

A Code of Ethics is advisable so as to distinguish between ethical and unethical practices. However, it was found that none of the five companies under study disclosed adopting of Code of Ethics except for Pick N Eat Ltd whereby the Group Holding Company states that "The Company is committed to high standards of integrity and ethical conduct in dealing with its stakeholders. The Company adheres to the Code of ethics issued by the Mauritius Employers’ Federation and Model Code of Conduct for directors and employees of private sector companies issued by the Joint Economic Council".

Safety, Health and Environment

Environment, health and safety issues are of great concern to the population especially if foods are concern and taking into consideration of recent events regarding environmental issues of the Pizza Hut of Quatre Bornes and KFC whereby Salmonella bacteria was found in their products.

After the debacles of the two US franchises one would assume that greater care would be taken for disclosures on Health and safety. Nonetheless, none of the five franchises disclosed about compliance of Health and Safety except for ENL Ltd, group holding of Pick N Eat Ltd who stated compliance to Occupational and Health Safety Act 2005.

Social Issues

Social Issues relates to diversity of ethnic group for employment and ownership structure. It was established that Pick N Eat Ltd follows the no discrimination principles as the company as from February 2013 is employing eight (8) persons of impaired hearing ability in its outlets. Moreover, appropriate logistics support was given to enable them to perform their duties.

It was difficult to ascertain the policies of the five companies given that such information are treated as confidential. Hence, it seemed more appropriate to undertake an analysis of the two Corporate Holding Structures in relation to their Board of Directors and Shareholders.

A look at the Directors of the Group of ENL Ltd established that all Directors of the group’s subsidiaries are from the same family and same community. An analysis of the Directors and Senior Management team of Happy World Ltd provides the same conclusion as that as the ENL Ltd.

Communication and Disclosures

Communication is vital to ensure that the company is seen as valuing its role in society. Disclosures are important to all stakeholders. Section 8 of the Code of Corporate Governance for Mauritius specifies the need for a separate corporate governance section in the annual report.

The findings revealed that franchises are reluctant to provide relevant disclosures. With reference to the case of compliance statements, we note that disclosing companies (US franchises) provide reasons for non-compliance whereby others (SA franchises) did not provide any explanatory statements.

Hereunder are examples of the non - compliance statements used by the franchises:

Table 4.4.5(c) Examples of compliance and non compliance statements

Avipro Ltd (KFC) & Chicago Restaurants Ltd (McDonalds)

The Company fully adheres to the principles of Corporate Governance. Given the special nature of the Company….it is considered that a Corporate Governance report is not required to be issued as long as the current ownership is in place.

Table 4.4.5(b) Communication and Disclosures

USA Franchise

South Africa Franchise

Annual Report

66.6 %(2/3)

0%

Corporate Governance Report

66.6 %(2/3)

0%

Statement of Remuneration policy

0%

0%

Terms of reference of board committees

33.3% (1/3)

0%

Details on composition of board committees

33.3% (1/3)

0%

Charitable donations

33.3% (1/3)

0%

Political donations

0%

0%

Unfortunately, it was ascertained each franchise in itself did not complied with this section. The statistics of compliance above have been complied taking into consideration group holding structures. Both the two holding groups of the US franchise, ENL Ltd and Happy World Ltd, have disclosed remuneration of its directors however not about its remuneration policy.

In its Corporate Social responsibility report, ENL ltd has disclosed all its social programmes. While ENL Ltd has stated about its board committees, it did not disclosed its composition and terms of reference while on the other hand Happy World Ltd provided all the required information.

4.4 COMPLIANCE WITH OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES 2011

Franchising is one of the modes of entry for companies in international market. For check for compliance with OECF Guidelines for Multinational Enterprises 2011, annual reports of the franchisors were analysed together with the Annual reports of the franchisees.

4.4.1 General principles

Observance of the Guidelines by enterprises is voluntary and not legally enforceable. Obeying domestic laws is the first obligation of enterprises. Enterprises should take fully into account established policies in the countries in which they operate, and consider the views of other stakeholders.

From research, it was noted that all the five companies have adopted and are complying with the Mauritian Company Act 2001. However, except for companies forming part of group holding structures, compliance to the Code of Corporate Governance for Mauritius was not seen.

Moreover, the Guidelines recommend that enterprises apply good corporate governance practices drawn from the OECD Principles of Corporate Governance, that is,

The rights of shareholders

The equitable treatment of shareholders

The role of stakeholders in Corporate Governance

Disclosure and Transparency

There were no reasons that pointed out to non-compliance or compliance during the research study. Moreover, no corporate governance framework was seen in the five franchises. With regards to disclosure, annual reports is an important source of information to shareholders and other stakeholders as well. The five companies provided information on financial performance but not on ownership and governance.

Disclosure

The Guidelines state that Enterprises should ensure that timely and accurate information is disclosed on all material matters regarding their activities, financial situation, performance, ownership and governance. This information should be disclosed for the enterprise as a whole, and, where appropriate, along business lines or geographic areas.

It was noted that disclosure was made in relation to activities, structure, financial situation, performance, and ownership in both the franchisor and its system partner. All the franchisors maintain a level of supervision on operating and management standards. However, there is very little and in some instances no disclosure especially in the US firms relating to governance.

On the other hand, the SA franchisors has a social and ethics committee established, with the aim to oversee the group’s activities relating to social and economic development, corporate citizenship, the environment, health and safety, consumer relationships, as well as labour and employment. No in depth details were disclosed.

Human Rights and Employment and Industrial Relations

Enterprises should, within the framework of internationally recognised human rights, the international human rights obligations of the countries in which they operate as well as relevant domestic laws and regulations.

It was established that the franchises are abiding to the Employers Relation Act 2008. Contributions to National Pensions Fund and National Savings Funds in favour of employers are being made accordingly. No disclosure of the group policy on this section has been disclosed.

Environment

Enterprises should, within the framework of laws, regulations and administrative practices in the countries in which they operate, and in consideration of relevant international agreements, principles, objectives, and standards, take due account of the need to protect the environment, public health and safety, and generally to conduct their activities in a manner contributing to the wider goal of sustainable development.

It was noted with concern that the adopted policy with regards to health and safety and protection of the environment has not been disclosed. But field research showed that all the franchisees uses paper packaging to reduce negative impact on the environment.

Moreover, the Spur International has on a pilot basis introduced since last year programmes for energy savings, water and waste management. The company has invested in energy saving lighting solution and energy usage monitoring system in three of its franchised outlets in Western Cape and intends to roll it out to other franchisees in the year ahead.

4.4.5 Combating bribery, Bribe Solicitation and Extortion

Enterprises should not, directly or indirectly, offer, promise, give, or demand a bribe or other undue advantage to obtain or retain business or other improper advantage.

The code of conduct established with regards to this section could not be ascertained given that the companies opted not to disclose this information in their annual reports and was reluctant to provide additional information.

4.4.6 Consumer Interests

When dealing with consumers, enterprises should act in accordance with fair business, marketing and advertising practices and should take all reasonable steps to ensure the quality and reliability of the goods and services that they provide. During the course of the study, no history of unfair practices was seen. It was noted that the franchisees maintain the quality standards set by the franchisors.

Science and Technology

The chapter thus aims to promote, within the limits of economic feasibility, competitiveness concerns and other considerations, the diffusion by multinational enterprises of the fruits of research and development activities among the countries where they operate, contributing thereby to the innovative capacities of host countries.

The SA group is presently testing various technologies to improve service levels and compliance measurements of its franchisees.

Competition

Enterprises should, amongst others, carry out their activities in a manner consistent with all applicable competition laws and regulations, taking into account the competition laws of all jurisdictions in which the activities may have anticompetitive effects.

Research shows that there are no reasons to point out to unfair competition in Mauritius.

Taxation

It is important that enterprises contribute to the public finances of host countries by making timely payment of their tax liabilities.

Tax liabilities are being paid according however no conclusion could be reached with regards as to whether timely payment is being effected.

CHAPTER 5

CONCLUSION AND RECOMMENDATIONS

5.1 Main Findings

The study analyses and compare the governance practices of foreign franchises in Mauritius. Given the small number of franchises in Mauritius, all the franchises were taken on board and was group into two categories: The US franchises and the SA franchises.

The research aims at finding whether the franchises given their specific structure are complying with the principles of corporate governance. Four analyses were conducted as follows:

5.1.1 Key Structure and Functioning

The first analysis was to compare the franchises’ key structure and functioning to distinguished their key differences and similarities.

It was ascertained that the US franchises are performing better and are leaders of the market. The SA franchises are quite unknown and are yet to make their mark.

Several factors may contribute to the success of the US franchises such as closer to customers, affordability, years of operation, intense marketing and branding.

However, it should be noted that Kilmun Holdings Ltd is very new to Mauritius and has only 1 year of existence.

5.1.2 Governance Structure

Decision rights as expected are limited in the cases studied as they are defined in the FDD. The remarkable point noticed under this analysis was about that the US franchises had no foreign shareholders while the SA franchises studies made up of 50% foreign ownership which can only mean that SA franchises wants to have full control of the businesses while on the other hand the US brands leave the control of the company to the Executive Directors and are content with providing support services, knowledge and expertises.

5.1.3 Code of corporate governance for Mauritius

The third analysis conducted was to ascertain the governance practices of both organisations in line of the Code of corporate governance for Mauritius. It was discovered that both the US and SA franchises lag behind in meeting the Code of Corporate Governance as required. However, the US franchises shows improvement over the SA franchises in terms of communication and disclosures, social reporting and risk management.

5.1.4 OECD Guidelines For Multinational Enterprises 2011

The franchising companies are abiding to the Mauritian Company Law. However, all guidelines are not being followed. Application of a governance framework was not seen. Very little and no detailed disclosure was made. There was no established code of conduct to combat bribery. The most notable policy being adopted under this section are the SA company’s environment programmes.

5.2 Recommendations

During the course of the study undertaken, it was noticed that there is disclosures problems with franchises. Annual report inclusive of Corporate Governance Report was not submitted. The US franchises simply stated that they are compliance to the Code of Corporate Governance for Mauritius while the SA franchises simply omit to provide an Annual Report as well as a Corporate Governance Report.

Annual report and Corporate Governance Report are important disclosures that enable stakeholders to assure of corporate governance and proper practices.

The OECD Guidelines For Multinational Enterprises 2011 provides that MNCs should adhere to Domestic laws. It is recommended that authorities assure compliance to the Code of Corporate Governance for Mauritius as well as The OECD Guidelines For Multinational Enterprises 2011.

The option of having specific guidelines for franchises should be contemplated.

5.3 Limitation of Study and Future Research

The main problems faced for this study was lack of information and reluctance in providing information. No formal data was available on the number of foreign franchises in Mauritius. The case studies used for this study was compiled from the internet. It might be probable that there are other foreign franchise in Mauritius wherein not mentioned.

Most of the information presented were from desktop surveys. There is a remote probability that certain information were not taken into consideration for unavailability. Hence may be a topic for further and future researches.



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