The buck stops …

The phone rang. It was my jolly-mood economist friend, Sammiya (short for Samson), on the line wanting to discuss corporate governance issues. “Hi my friend,” said Sammiya. “Hi there,” I replied. “There is a lot of talk these days about corporate governance and the roles of the chairman and the CEO of a company,” he said, adding that the Securities and Exchange Commission (SEC) was preparing guidelines on the role of a chairman and a CEO.

“There are serious governance issues here and eventually the chairman of a company has to take full responsibility for the affairs – good or bad – of a company. The buck stops there,” I said.

For the record, the SEC recently circulated a paper titled ‘Public Consultation on Segregation of Chief Executive Officer and Chairman Role performed by one individual in Listed Entities’ which is available on the SEC website, seeking public comments.

The paper discusses the separation of these two roles, often performed by one individual. “The best practice on Corporate Governance discourages concentration of power in one individual. An established norm is that there should be a clear division of responsibilities at the level of Board of Directors (BOD) of the Company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. As best practice, the Chairman is expected to be an independent non-executive director and shall not perform the role of the CEO,” it said.

Currently, there is no specific rule relating to the separation of the CEO and Chairman positions. Due to the absence of such a rule, the SEC says that certain public listed companies have the role of Chairman and CEO/ Managing Director (MD) performed by the same individual, which it believes is not good for corporate governance. Conflicts of interest could also emerge.

Sammiya and I discussed at length the role and responsibilities of chairmen and CEOs, particularly in the context of listed companies and their responsibility towards shareholders. The role of independent directors also came under discussion.

In recent times, companies have come under intense scrutiny with guidelines and codes of conduct suggested by key institutions on governance issues. However much a company claims to be socially responsible with several CSR initiatives and ‘feel good’ projects towards the community, if its governance structures are weak, then the organisation won’t succeed as a ‘good, socially responsible’ corporate citizen.

Institutions such as the Institute of Chartered Accountants and the Sri Lanka Institute of Directors are constantly working on guidelines for company boards of directors on proper governance.

Many years ago, the entry of independent directors was heralded as a timely initiative but whether it has achieved what it set out to do remains still to be seen.

Sammiya, who has a reasonable knowledge of corporate governance, says the separation of powers between the chairman and the CEO is a good initiative. “The Chairman and board should deal with strategy and planning, while the CEO executes these directions. If he fails in these tasks, he is held accountable, reprimanded and/or eventually dismissed,” he said.

Independent directors on the other hand should perform the role of observer and be an evaluator of the performance of a company. They should strictly function in an independent capacity, make sure the company is on the right path as a “good and socially responsible citizen”, and their observations and dissensions recorded at board meetings and even listed in annual reports. There should be provision in the rules to ensure that dissensions of independent directors are listed in annual reports in the pursuit of truth and transparency.

The chairman, as an independent director, should be responsible to all stakeholders, not only the majority stakeholders but also the minority shareholders, which is not the case today. More often than not chairmen of companies look after the interests of the majority stakeholders (who appoint the former), often shouting down a few vociferous minority shareholders who raise issues of concern at annual general meetings (AGMs).

Good governance activists like K.C. Vignarajah, a valiant crusader many years ago to save the country's share market from the grip of manipulators, have often spoken out at AGMs urging directors to be more transparent and ethical. However, these sane voices are shouted down and eventually AGMs, despite companies having issues in their balance sheets, become just tea-coffee-and-snacks’ gatherings.

Under the proposed new regime of the role of directors, the chairman of a company would have to perform the role of a neutral umpire and represent the interests of all stakeholders, not merely those who have a majority stake. This is governance of the highest order.

Independent directors are often silent and not persistent when they see something wrong happening in the affairs of a company. Another problem in appointing independent directors to boards is the tendency to appoint people whose expertise in marketing and management is then sought – through the board of directors – to help run the company. This is not the role of independent directors, which in other words, should be that of a neutral umpire evaluating performance and ensuring that the right decisions have been made in terms of good corporate behaviour.

The SEC should also re-examine the role of independent directors and empower them with more authority and functions, compared to what is evident today.

As I continued my conversation with Sammiya, I looked out of the window and saw it was a beautiful morning with the rays of the sun casting patterns of light and shade through the branches of the Margosa tree. It had rained the previous night, but was sunny this morning.

Gathered under the tree were Kussi Amma Sera, Mabel Rasthiyadu and Serapina. What were they discussing, I wondered. Like everyone else in Colombo, it was politics and who would be the presidential candidates.

“Kawda oya hithanne Pohottuwa apeksakaya kiyala (Who do you think would be the Pohottuwa candidate?)” asked Serapina. “Gota mahattaya, enawa mie (No doubt its Gota Sir),” said Kussi Amma Sera, a long-time supporter of the Rajapaksas.

“Kawda enne Eksat Jatika Pakshayen (Who is coming from the UNP)?” asked Mabel Rasthiyadu. ‘

They continued their discussion, while I continued my conversation with Sammiya.

“According to the SEC, in governing boards in many other countries the roles of the chairman and CEO are separate,” he said. Indeed it was so.

The SEC said that in Norway, the CEO cannot be a member of the board; in the Netherlands the chairman of a supervisory board should be independent within the meaning of best practice; in Malaysia the positions of chairman and CEO are held by different individuals; in Australia the chairman of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity; and in Singapore the Chairman and CEO are separate persons.

As I wound up, Kussi Amma Sera came in with another refreshing cup of tea saying, “Irida loku davasak (Sunday is a big day)”. She was referring to the SLPP announcement of its candidate. “Ov… ov (Yes, yes),” I said, hoping that whoever wins the next presidential election will ensure good governance, transparency and be accountable to the people. Too much to ask, eh!