SEC in fresh move to segregate roles of CEO and chairman

„Publishes new consultation paper to obtain public views on Ceo/chairman segregation and strengthen corporate governance „Listed entities that fail to adopt proposed rule will be required to create a new role of ‘senior independent director’

„Will also be applicable for listed firms, where roles of chairman and CEO are held by immediate family members

„Also plans to introduce a set of criteria to be eligible to be termed as an ‘independent’ director

The Securities and Exchange Commission (SEC) of Sri Lanka appears determined to move ahead with segregating the roles of the chief executive officer (CEO) and chairperson being performed by the same person in the listed entities on the Colombo Stock Exchange (CSE).

The capital market regulator this Monday published a new consultation paper seeking public views to strengthen the corporate governance rules of listed entities, covering the key areas including policies, board and conduct, board subcommittees, relations with shareholders and investors and disclosures in annual reports.

“The chairman and CEO cannot be the same person. Further, the chairman is to be an independent non-executive director,” the consultation paper stated.

The SEC in several occasions in the past had stressed the importance of clear division of responsibilities at board level of a listed firm, to ensure a balance of power and authority that no one individual has unfettered powers of decision. In 2019, it published a separate consultation paper on this, seeking public views.

According to an analysis published in 2019, the same individual performed the role of chairman and Ceo/managing director in 17 percent of listed entities listed on the CSE.

According to the latest consultation paper, the listed entities that fail to adopt the proposed rule will have to explain the reason for non-compliance and will also be required to create a new role ‘senior independent director’ (SID) by appointing one of their independent non-executive directors, with full voting powers.

This rule is also proposed to be applicable for listed firms, where the roles of the chairman and CEO are held by immediate family members or when the chairman is also part of the management team or when the chairman is not an independent director.

Such listed firms will be required to disclose the appointment of an SID in an immediate announcement to the market as well as in the company’s annual report.

The appointed SIDS will be requested to file a report on specific measures to address the issues that may arise due to the absence of segregation.

In addition, the SEC also proposed the minimum one meeting to be held by the SID with the independent directors and the non-executive directors, without the participation of the chairman. “Led by the SID, the independent directors shall meet at least once a year, without the presence of the other directors and the SID should provide feedback to the chairman after such meetings. Further, led by the SID, the non-executive directors should meet without the presence of the chairman at least annually to appraise the chairman’s performance and on such other occasions as are deemed appropriate,” the paper stated. Meanwhile, it is proposed to include minimum two nonexecutive directors or non-executive directors equivalent to one-third of the total number of directors (whichever is higher) in boards of listed entities.

Further, where the constitution of the board of directors includes only two non-executive directors, both such non-executive directors need to be ‘independent’ and in all other instances two or one-third of non-executive directors appointed to the board of directors will be required to be ‘independent’, according to the consultation paper. The SEC also plans to update a set of criteria to be eligible to be termed as an ‘independent’ director. “For a director, who is determined as ‘nevertheless independent’, such director should be independent of management and free of any business or other relationship that could interfere with the exercise of their unfettered and independent judgment,” the paper noted.

The SEC has invited the public to submit their written comments on or before May 15, this year, under the title ‘Public Consultation on Revising Corporate Governance Rules Applicable to Entities Listed on the Colombo Stock Exchange’ by post or email.