Yahapalanaya, good governance and intellectual honesty
"Yahapalanaya"or good governance is the doctrine of the present regime in Sri Lanka which has created, to some extent, a feeling of freedom of thought in the public domain.
In this context here are some thoughts shared by Thilak Karunaratne, Chairman, Securities and Exchange Commission of Sri Lanka at a recent event in Colombo organised by the Sri Lanka Institute of Directors. Excerpts: The implementation of the principles of good governance in a country would be futile unless and until the principles of this ideology cascades to all units of the economy. The Asian financial crisis in the 1990's showed us quite clearly how dearly the governments, financial institutions and other corporate bodies had to pay for lack of good governance. The financial crisis of 2007 which was partly due to unethical business behaviour, lack of accountability and transparency also stresses on the importance of good Corporate Governance.Nearly a decade later the dire need for good Corporate Governance continues to torment the economies across the globe. Why is the lack of good governance in organisations detrimental to economic growth? Differently stated why is corporate governance so important? Corporate Governance is concerned about holding a balance between economic and social goods as well as individual and communal goods. One could argue that a Corporate Governance framework encourages efficient allocation of resources. As we all know efficient allocation of resources is a catalyst for economic growth in the real and financial sectors. The Government or the regulator cannot foster Corporate Governance in isolation. It should be a joint initiative by all relevant stakeholders. It is disheartening to note how certain listed entities have not fully understood the importance of good governance. Negligence on their part not only exposes these companies to- wards greater risk but the effect also trickles down to the capital market. Here are a few examples; The infamous NSB/TFC share deal where a stock broker, perhaps acting in concert with sections of the top management of both NSB and TFC (the findings of the SEC investigation on the matter is still pending with the Attorney General for his opinion) sold approximately 7.8 million TFC shares at an highly inflated price of Rs. 50 to NSB. The share price of TFC was around Rs. 30 at that time. After the deal went through the then Chairman of TFC told the media that the deal was completely value driven and an investment for the future of both corporate entities breaking all codes of good governance. On 27th July 2015, the share price of TFC was Rs. 14 and according to the latest annual report the Net Assets value per share was Rs (51.44). The SEC was able to reverse this deal which saved the NSB Rs. 390 million then. Such a phenomenon is not limited to Sri Lanka. At times even world famous companies in developed economies could fall short of good Corporate Governance.
In order to minimise such manipulative actions in the corporate world, the SEC is seriously looking at incorporating in the new Act which is being drafted, the function of whistleblowing by employees as well as audit companies who will bring to the notice of the regulator such misdeeds prior to damage being done. This will help the SEC to take preemptive action.
Complete security for employees and audit firms where their jobs and mandate are concerned and legal provisions protecting them being prosecuted for such affirmative action will be incorporated in the new Act. Where the whistleblowing employees are concerned if the allegations are true they will be rewarded with bounties.
As a director it is your responsibility to divest your personal aspirations and strike a balance between the goals of the organisation and other stakeholders including shareholders. A director is bound to take precautions and act as a prudent man or a woman would do when managing his/ her own affairs. They could be guided by the Corporate Governance Code. They are constantly expected to uphold the principles of accountability, transparency and risk management along with a myriad of other principles prescribed in the Code.
I don't intend to give an in- depth analysis on each of these principles. But let me stress on the importance of accountability of the Audit Committee and its fiduciary responsibility of safeguarding the interest of minority shareholders.
Moving on, when referring to the role of directors one could not forget the pivotal role of Independent Directors in implementing the principles as well as the true spirit and essence of corporate governance.
Ideally they are expected to be truly independent from the management and act as the trustees of shareholders. This implies that they are obliged to question the conduct of organisations on relevant issues. They are also expected to bring objectivity to the oversight function of the Board and improve its effectiveness. One could also argue that they are expected to be responsible for the prevention and detection of fraud.
We often tend to question whether these directors are truly independent. Are they able act on behalf of the shareholders? If not are they faced with conflicting interests? These are a few areas you are expected to ponder upon.
Corporate Governance is a constantly evolving discipline. I urge directors to be pragmatic leaders who would encompass the current changes when formulating and implementing strategies and business processes.This would not be a tedious task if organisations view corporate governance from the perspective of intellectual honesty. Corporate Boards should focus on enhancing transparency, increasing director accountability and giving greater voice to shareholders over critical Boardroom decisions. Equal importance should be given when contemplating on mergers and acquisitions, IT governance, eliminating bribery and corruption, compensation governance and above all continue to adopt stringent measures to mitigate risk.
Why is the lack of good governance in organisations detrimental to economic growth? Differently stated why is corporate governance so important? Corporate Governance is concerned about holding a balance between economic and social goods as well as individual and communal goods. One could argue that a Corporate Governance framework encourages efficient allocation of resources. As we all know efficient allocation of resources is a catalyst for economic growth in the real and financial sectors.