Code of Best Practices on Corporate Governance 2013 launched

Thursday, 26 September 2013 00:00 - - {{hitsCtrl.values.hits}}

By Cheranka Mendis Sri Lanka yesterday received the latest revised ‘Code of Best Pra-ctices on Corporate Governance 2013’ by The Institute of Charted Accountants of Sri Lanka (CA Sri Lanka) and Securities and Exchange Commission, as the two bodies ceremonially launched the code to a distinguished gathering of professionals. As the country progresses towards an economy that promotes wider development and growth agendas in keeping with the ever-evolving world market, it would do well to follow and abide by a Code of Best Practices on Corporate Governance, which would result in increasing investor confidence and accelerated corporate performances, among many other benefits. While strong business ethics, sound policies and procedures and an effective monetary system are considered vital ingredients of a well-established corporate governance system, it is important to keep revising and renewing the practices to remain relevant and in line with international best practices. The latest code launched yesterday was the fourth edition of the code, which was initiated by CA Sri Lanka in 1997. Kicking off the launch, CA Sri Lanka President Sujeewa Rajapakse noted that while there has been much debate across the world on the subject of corporate governance, in a Sri Lankan context, with the recent developments and expansions in the business sector, it is a vital component for companies in Sri Lanka to move with good corporate governance. While most of the listed companies in Sri Lanka follow this code, there is still a sizeable amount of companies yet to join in the initiative, which aims to promote corporate governance, transparency and accountability. Rajapakse reflected that CA Sri Lanka was the pioneer in introducing good corporate governance and principles to the country with the introduction of the code of best practice on matters related to financial aspects for corporate governance way back in 1997, which was subsequently updated in 2003 and then in 2010. Taking into account the changes happening in other parts of the world, a special committee was appointed to review the Code of Best Practice of Corporate Governance, which was issued in 2010, he said. “The publication launched today is a result of the efforts of the committee which was co-chaired by Asite Talwatte and Sujeewa Mudalige, who are both past Presidents of CA Sri Lanka,” Rajapakse said. “Today, we are witnessing vast developments in the country from new highways, ports and power plants, various mega building projects not only in Colombo but also in other parts of the country. The North and East Provinces are also witnessing various developments. As Sri Lankans try to achieve ambitious economic goals, applying such codes is important for a company as it will help the nation become truly prosperous.” At a time when the country is inviting foreign investors, Sri Lankan companies must seriously take action to implement the Corporate Governance Code as it reflects well on the organisation as well as on the country. “I believe the review of the code is a timely effort to ensure that corporate governance principles remain relevant and in line with international best practices.” The involvement of the Securities and Exchange Commission with the code began in 2008. Agreeing with Rajapakse that the code is likely to be reviewed within the next few years, SEC Chairman Dr. Nalaka Godahewa assured that even though this is the fourth edition, it is far from being the last. “There are many things happening in the corporate world almost every day and the principles and practices of corporate governance keep evolving. We in Sri Lanka must also keep pace and must improve.” He remarked that corporate governance refers to a set of principles, processes and systems by which a company is governed and provides guidelines as to how a company can be directed and controlled in a manner that will eventually increase shareholder value while taking care of all stakeholder interest in the long run. Some say corporate governance essentially provides guidelines on how the board should overlook the way the management is managing the company, while at the same time providing guidelines on how the board should be accountable to its stakeholders, Godahewa said. “When it comes to listed companies, almost everywhere in the world at least some of the aspects of corporate governance have become mandatory.” In Sri Lanka, since 2008 there are certain provisions of corporate governance that have been included in the listing rules, he asserted. “However, as the corporate governance practices keep evolving, it is time for CSE to have a fresh look at the listing rules and observe the kind of improvements that could be brought in to make the system much better.” Godahewa stated that the apex body for securities regulatory in the world, the International Organization of Securities Commissions (IOSCO) has over the past 10 to 15 years taken a keen interest in the practices of corporate governance as well. IOSCO conducts worldwide surveys to identify corporate governance practices across the globe and share the information with the membership, which includes Sri Lanka. “Two key areas IOSCO is particular about in corporate governance are: a. Ability of the board to make independent judgment; and b. Protection of the minority interest,” he reflected. “We are also quite concerned that these areas are well covered in Sri Lanka.” Fundamentally, the level of confidence associated with the company increases with the application of corporate governance. “Everyone likes to deal with a company which is known to have good corporate governance practices,” he stressed. “This is vital for Sri Lanka as the country is now trying to attract foreign investors.” Not only listed companies but unlisted companies as well need foreign investor support to sustain our ambitious growth plans. Foreign investors look for corporate governance practices. Godahewa said: “Usually if a company is engaged in this, share prices will go up and it’s easier to reach capital at a lower cost and there are so many other benefits involved.” Speaking on the code, Corporate Governance Committee Co-Chairman Asite Talwatte observed that a series of discussions was held for recommendations prior to putting together the 2013 code with key changes compared to the Corporate Governance Code 2008. “The code was put together keeping in line with best practices globally while keeping it relevant to the country and its economic activities, hence the reason for long period of discussion and debate.” From 2011 to 2012, many meetings were held for a consensus of an appropriate code for the Sri Lankan market having made many references and had several discussions, etc. “I am sure there will be various views on the relevance, timeliness, appropriateness and so on. In that sense it is important to note that it is not just some hand-me-down but an adaptation to suit what we believe.” Pix by Lasantha Kumara

Panel Discussion The launch of the Code of Best Practices on Corporate Governance 2013 was followed by a Panel Discussion, where various aspects of the code and its bearing on the economy were discussed. The panellists were all committee members of the Corporate Governance Committee except for SEC Chairman Dr. Nalaka Godahewa. The other panellists were Asite Talwatte (Co-Chairman of the committee), Dr. Harsha Cabral, Ronnie Peiris and Priyanthi Peiris. The discussion was moderated by Co-Chairman of the Corporate Governance Committee Sujeewa Mudalige. Following are excerpts from the Q&A session: Q: 16 years since the first code was introduced in 1997, we have seen so many institutions collapsing, some in the recent past. Do you think it is time to make some of these provisions mandatory? Our culture/nature is that anything voluntary will not work. What is your take on that? Dr. Nalaka Godahewa: Some of the provisions are already in the CSE listing rules. My thinking is that you can make provisions mandatory but you have to give it time. It is always good to bring it as a voluntary move first, give the companies time to take it on, get used to that and then make it mandatory. If you bring a mandatory requirement straight away, it will be a bit over-regulatory in a way which is also not good for a market. It has to be more of a disclosure regime, where more than bringing controls you encourage people to disclose what they are doing and take time and learn. Best practices are better than mandatory provisions. But it has to be made mandatory with time. Some of the new things brought in with the new code have to be discussed by the CSE and brought into the listing rules as appropriate. Q: Maintaining the right balance between regulations and having corporate governance is important. Have we been able to strike this balance in the new code as an emerging market looking for FDI? Asite Talwatte: I think so. This is why we had so many discussions prior to this. Business performance is important. In the provision of good governance, you should not stifle the growth of a corporate. My view is that ultimately growth and development of capital market and performance of corporates are important. We were conscious of this. Ultimately the majority rule ought to prevail. We were very conscious about maintaining this balance while being responsible as corporate citizens to ensure that there is no opportunity for widespread misuse of funds brought in by investors to corporates. Q: You represent one of the widely-held groups which is extremely diversified, where shareholding itself is over 50% from overseas investors (JKH). How do you see diligent compliance with a code such as this help attract foreign investors as there is a huge appetite for JKH shares from foreign investors? Ronnie Peiris: What we have gathered from our investors, big and small, is that they like governance structures which are not only compliance and legal oriented but very performance oriented as well. My fear when we look at codes of best practices, etc., is the obsession with compliance and the very little attention we pay to the performance structure. It is the whole operating model that works – the way you treat your employees and the way you treat your suppliers encompasses the governance code. It is the operating model we have that attracts the shareholders. Don’t get me wrong, I’m not saying we must ignore such codes. There are some mandatory obligations placed by the Companies Act and listing rules and SEC, etc., and best practices espoused by institutes such as Charted Institute that we are obliged to take on as they are in the best interest of the company and stakeholders. However, making these mandatory in a short term is, in my opinion, not the right thing. We must introduce it slowly with the right balance. We mustn’t stifle the entrepreneurial aspects of the performance. I think what Sri Lanka is suffering from now is a stifling of the entrepreneurial aspect. The more and more stifling rules that you bring even in codes of best practices, you will kill the entrepreneurial spirit. Then people will be hesitant to get listed, etc. For JKH shareholders, the balance that we have brought in while conforming to the legal aspects, which is the performance orientation, is what has been a key success. Q: Today’s Daily FT (25 September) headlines mention that someone accused in a murder case is being appointed as a non-executive director in a company. Have we gone back 15 years with the code or are we moving forward? Dr. Harsha Cabral: There are Ten Commandments, pansil, ata-sil or dasa-sil that a person is expected to follow. If you follow them, it’s true and good but you are not asked to go to church on Sundays by law; and if you do that maybe you’ll be treated as a good person. Over time some of these commandments become law (such as stealing). But when you look at CBSL with regard to banking and non-banking supervision they are brought in by way of directives, much more than the mandatory code we have. The mandatory code we have today is very, very minimal. It is more or less on a voluntary basis that we go on improving to ensure that corporate bodies act in a proper way and that proper governance and best practices are adopted. Maybe as we go along we have to improve the mandatory areas, perhaps depending on the jurisdictions. If we look at our own areas especially in the Asian region – Singapore, Malaysia – they are more regulatory regimes. Depending on certain regimes you might have to introduce regulatory mechanisms and mandatory mechanisms in such a way that corporate governance is brought in a more effective manner. However, overall it is a voluntary concept. Corporate governance mechanisms deal with the spirit of proper governance. As to the question on the non-executive director, I will be hesitant in commenting as I am looking after the interest of SEC in an ongoing litigation. However, I must say there are mechanisms in the Companies Act which prevents the appointment of directors where it says if you are charged, there is a way in which the shareholders can decide on the matter. The mechanism to appoint and remove directors is specifically set out. Q: There is always perception among minority shareholders that companies always give preference to either overseas shareholders, institutional shareholders and major shareholders and that they are privy to information that an average shareholder doesn’t have access to. Why is there a disparity? Priyanthi Peiris: I do not know whether it is right to say that preferential treatment is given to institutional and foreign shareholders but definitely the major shareholder is in a position where they are privy to information. Being a major shareholder, the appointment of the board and majority of the directors and sometimes the impending directors can be appointed by them. By the virtue of the position they enjoy, they are privy to information. However, communication we are now introducing would be a good thing to be followed by companies in this regard.