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SLID Independent Directors Forum discusses Manifestations of Independence in Boardroom Practice

Comments / {{hitsCtrl.values.hits}} Views / Friday, 16 March 2018 00:00

In the past, dignitaries, retirees, and “good old boys” were staples for forming a company’s board of directors. Today, company boards are compelled to face and accept more responsibility than ever before as economic conditions and investors demand a board composition that relies heavily on independent directors, audit committees, ethical guidelines, etc in order to ensure that stakeholders’ investments remain secure.

Corporate governance best practices provide guidelines for boards to encourage, facilitate and affect in practice diversity, wider experience, professionalism and independence. A productive board would have diverse and independent directors actively contributing to the discussions and decisions made in the boardroom with a high level of objectivity and independent thinking in the best interest of the company. 

Quality boards closely monitor the company’s performance, collaborate with the CEO and senior managers, and drive the strategic direction and business results with diligence and due care. Robust board discussions, where directors ask probing questions and challenge each other and the management, are the best indicators of sound leadership and the manifestation of independence in the boardroom.

The 3rd Independent Directors (INED) Forum of the Sri Lanka Institute of Directors (SLID) held recently in Colombo saw senior and experienced directors from the corporate business sector actively discussing ‘Manifestations of Independence in Boardroom practice’ from the perspective of a regulator. The keynote speech was made by Dr. Harshana Suriyapperuma, Director, Corporate Affairs of the Securities and Exchange Commission of Sri Lanka (SEC).

Dr. Suriyapperuma stated that the applicable regulatory framework envisages two facets of responsibility from independent directors. The first is to ensure compliance with regulations and applicable requirements to establish that independence of the director is not impaired. The second is to ensure active contribution from them to uphold the principles of Corporate Governance. Presence of well-governed entities in the capital market is an important contributor for the SEC to achieve its objectives. 

He explained that three out of the four objectives included in the existing SEC Act have a positive correlation with the role played by independent directors and non-independent directors alike. Directors are collectively accountable and responsible to ensure regulatory requirements are complied with. The tone in the Boards of listed companies needs to ensure that Board Sub-Committees are effectively functioning and their recommendations are duly considered by the Board to ensure Board decisions reflect the expectations of all shareholders and are in the best interest of the Company.

To illustrate the importance of the engagement of independent directors (INEDs) in Board decisions to ensure compliance, he also shared several recent examples based on market announcements. He emphasised on the contributions INEDs could make to ensure formal systems, policies and processes are in place and more importantly, are functioning effectively. For example, policies should be in place for the Board to collectively determine matters affecting the company and upon determination the company to make applicable immediate corporate disclosures to the stock exchange of price sensitive information. 

It is not the regulator who will be judging the effectiveness of the role played by INEDs but the shareholders who appointed them. The price an investor is willing to pay for a company’s share is affected by the perception on the level of governance in the company or the lack of it. He further explained that strategic investors, including foreign funds, would be interested to know whether the INEDs are actively contributing and that the required checks and balances are in place in the companies they wish to invest. Investors would consider paying a premium for these aspects.

Voluntary or 

Mandatory Code?

During the past decade, the code of Corporate Governance that was jointly established by ICASL and the SEC was in place and even though it was not mandatory, it was a clear indication that the journey ahead is via ensuring adequate processes are in place to deliver the governance sought by stakeholders.

The SEC felt that a voluntary code was not adequate as INEDs lacked active contribution and it was time to introduce a mandatory code which was incorporated in the updated listing rules.

On a continuous basis, the regulator is inquiring into the best practices of Corporate Governance available to ascertain whether any revision to the existing framework is required to ensure Sri Lanka is not left behind in applicable regulatory advancements, particularly in today’s connected world.

Enforcement rules

The enforcement rules of the Colombo Stock Exchange (CSE) relating to non-compliance with Corporate Governance requirements and non-disclosure of financials/modified audit opinion/emphasis of matter on going concern issues came into effect from 1 January 2018. For example, a company will be non-compliant if the company does not meet the minimum requirements of INEDs and a timeline of three months is given to rectify. If not rectified the company will be transferred to the ‘Watch List’ and if the non-compliance prevails beyond six months trading could be suspended. If corrective actions are not taken the Board of CSE will refer such entities for de-listing. 

In an effective ecosystem of well functioning INEDs, resignations of INEDs within a short period of time could be a sign of governance issues. The new SEC Act awaiting enactment requires directors of listed entities to be fit and proper to perform such duties. The same requirement is applicable to INEDs. The Board of Directors shall at all times deploy adequate resources to ensure compliance with Corporate Governance as non-compliance could lead to de-listing as a last resort if non-compliance is not corrected.

If an INED from a company that was de-listed due to SEC action joins another board, the regulator would require an explanation as to why that INED should be allowed to sit on another board as an INED. Dr. Suriyapperuma ended his address by emphasising that the independent director role is important and that they should play an active role.

The keynote address was followed by an interesting open forum discussion with the participation of Yvette Fernando, Assistant Governor of the Central Bank of Sri Lanka and Damayanthi Fernando, Director General of the Insurance Regulatory Commission of Sri Lanka giving their observations and comments on the regulatory expectations in the financial sector about the role and responsibilities of independent directors in response to the several questions that were raised at this forum. 

The session was chaired by Faizal Salieh, SLID’s Vice Chairman and the wrap-up summary was done by Ravi Abeysuriya, INED Working Committee member. Independent Non-executive directors serving on private and public sector Boards who wish to regularly participate and benefit from the INED Forum may contact the SLID CEO Chaminda de Silva, on 2301647 and express their interest in joining the Forum.

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