Sri Lankan perspective on corporate governance

Corporate Gove r n a n c e i s a debatable concept in the Sri Lankan political, economic and social scenario. Corporate gover nance is aimed at ensuring that fir ms are operated efficiently and in the best interest of share holders and other stake holders such as employees, creditors, suppliers, customers and society. Corporate gover nance provide considerable benefi t s t o f i r ms, s hareholders other stake holders and society at large. The benefit of the corporate governance is as follows. To improved cor porate performance and higher retainance to investors as well as higher levels of remuneration to staff and employees.

To reducing the risk of corporate failures abuses and corruptions mal practices.

To enhance the confidence of investors and lenders those enhancing the fir m’s ability to access low-cost finance.

To increase globalized international capital market. To promoting and developing sound, e f f i c i e nt a nd s t abl e f i nancial market. To facilitate the development of an international competitive corporate sector. As such poorly gover ned fir ms are often exhibits poor cor porate perfor mance, losses and collapse. The collapse of a fir m not leads to losses, but it also has adverse impact on society by undermining the stability of the financial sector, ef ficient resource utilization and the competitiveness of the national economy.

Corporate governance components

Corporate Governance is understood as the system by fir ms are directed and controlled and also a major issue of public policy of national importance and not limited to narrow interest of sharehold- ers with a direct financial stake in the firm. Most of the academic and policy research as well as international experience have led to a global consensus on the genetic principles underline best practice in Cor porate Gover nance. These principles and criteria also treat as a component of the Corporate Governance.

Accountability by the Board of Directors and management to shareholders and other stake holders on how they fulfill their r i ghts and re s ponsibili t i e s i n attaining corporate objectives.

T r a ns p a re nce i s a chi eve d through timely and accurate disclosure of infor mation to allow shareholders, other stake holders and the market to be infor med about financial stated, operations and perfor mances of the firm. Oversight is actively and ef fectively perfor med by the board of directors over management and operations of the fir m to safeguard the best interest of the fir m it’s shareholders and other stake holders.

I nc e nt ive s a re a d o p t e d t o recruit, motivate and retain the best-qualified members of the board of directors, senior management and employees.

Shareholders’ right especially those of minority and outside shareholders and stake holders interest are adequately and clearly defined. Corporate Governance in a company is typically structured around and through the three main and legally constituted decision making control parts of the company. These parts can be shown as follows.

Annual General Meeting of Shareholders. The Board of Directors and

Senior Management led by a chief Executive Officer (CEO) Each of these organs in the company is categorically defined. How effective the system of Corporate Gover nance in a company is will depend on how the rudimentary str ucture is spelt out in g reater detail in the company charter.

Corporate Governance require a number of other pre requiristics. These requirements can be shown as follows.

A culture of corporate gover nance - Values, attitude and behavior should be consistent with good Corporate Governance and among shareholders and stake holders. Board of management employees should be promoted and also Corporate Gover nance made essentially responsibility of ethical corporate culture.

S h a r e h o l d e r a c t iv i s m - Shareholders and other stake holders that the company adopt best practice i n Cor porate Gover nance a nd t he y s houl d actively participate in gover nance of being passive investors.

E x t e r n a l me c h a n i s m o f Corporate Gover nance enforceme n t - T h e e f f e c t ive n e s s o f Corporate Gover nance arrangement and practices within the company is strongly conditioned by the policy and institutional environment within which the company operates should have sound legal framework, enforceability of the law high accounting and auditing standards and competitive products and financial market.

Corporate governance theory

Sri Lankan Corporate Gover nance practice can be analyzed by using the following three theoretical perspectives. Agency perspective Stake holder perspective and Institutional theory perspec- tive.

Agency perspective aims to deal with problems that arise in bilateral relationships where principal and agent are in conflict. The large scale moder n corporations where in professional managers operate, the fir m as the agent for a large g roup of shareholders, present a classical situation in which the agency problems arises. According to the agency perspective, there are three veils that could be identified in large scale organizations. These veils create problems between the agents and the shareholders. These three veil can be categorized as follows,

1. Legal veil insulates shareholders from corporate liabilities, thus sheltering them from the downside of decisions that have onerous financial consequences and partially insulates directors from the negative financial consequences of their actions.

2. Infor mation veil operates in three levels.

I n f o r mat i o n f l o w t h r o u g h shareholders to top management and corporate, directing and essentially se parating ownership and control.

the Board of Directors from relevant infor mation about company.

It insulates managers from infor mation that their employees. 3. Motivational veil operates in four levels.

It insulate share holders from the exposure of the corporation.

Insulate the Board of Directors from directly bearing the consequence of their actions.

I t i nsul at e s t o p managers actions to the shareholders.

It insulate employees from the consequence of their actions to the shareholders. According to the agency perspective, some argue that the gover nance system should be redesigned. In recent times, most of the large scale corporations ran into bankruptcy due to the agency perspect ive. T h e s e f a c t s o f Co r p o r a t e Gover nance makes investors and s t a ke h o l d e r s v u l n e r a b l e whi l e disproportionately protecting the manag ement and the Board of Directors as in the case of Enron incorporation in USA.

T h e s t a ke h o l d e r p e r s p e c t ive highlights moder n cor porations as a nexus of contracts with stakeholders. The institutional theory of Corporate Governance recognizes that corporations should adhere to and incorporate nor malcy that gover n their immediate environme n t . Fo r i n s t a n c e, J a p a n e s e industrial system’s relative stability is a case in point for the positive impact of institutional Corporate Gover nance. However, shift from stakeholder-centered to stockholder-centered Corporate Governance is seen in majority of Japanese fir ms. This is influenced by globalization of capital markets and accounting, change in ownership, and lose of legitimacy.

Sri Lankan experience

The concept of Cor porate Gover nance from the Agency perspective, stakeholder perspective, and institutional theory perspective each of these perspective is applied to examine the difference experience of USA and Japan and to scr utiniz es the experience of Sri Lanka. Analyzing the present Sri Lankan context to enhance governance practice in Sri Lanka’s corporate sector suggest that in Sri Lanka, the demarcations between managing and gover nance have not been clearly understood by the corporate sector. Sri Lankan corporate sector thinks “Governing” is a very difficult job from “Managing”. Accordingly, most of Sri Lanka’s cor porate sector managers and directors do not discharge their responsibilities satisfactorily, and auditors and institutional investors are not playing an adequate role.

In the Sri Lankan perspect ive, f a i l u r e o f t h e C o r p o r a t e Governance in the corporate sector is mainly due to the following reasons. Cost o f re c r ui t ment a dve r s e, selection, political, appointments, moral hazard, stealing, self-dealing, corruption, accounting frauds, (lack of management ove r s i g ht a nd c o nt ro l s c a us e significant financial statement errors in business.)

board members, “Yes People” who will vote with the top management on key decisions. Board members lacking common sense Board members lacking specific knowledge

Suggestions to avert failures

Public enter prises should have and be operated in compliance with corporate charter.

Public enter prises should have a mission statement summarizing the fir m’s objectives, rather and scope of activities.

The board of management and senior managers of the fir m should enjoy operational independence without influences. Disclosures and transparency Audit committee empowered to oversee efficiency