SEC Chief on corporate governance

30 July 2015 03:39 am Views - 1392

Quotes Dante and says hottest places in hell are reserved for corporate offenders

Following is the speech by Securities and Exchange Commission (SEC) Chairman Thilak Karunaratne, delivered at the certification ceremony of Board Leadership Director Certification Programme conducted by the Sri Lanka Institute of Directors (SLID) on July 28.

On a personal note, I joined SLID at its inception as a life member but could not play an active role in your organization due to other commitments.

Prior to establishing SLID in the year 2000 there was another Institute of Directors which commenced operations in the 1970’s and as a young executive with a multinational with local operations I successfully followed a one year part time course in Business Management conducted by them. However, I am unaware of what happened to that institute later on. 


Good governance promise
“Yahapalanaya” or good governance an expression in vogue today among  emerging nations especially in Asia such as India, Indonesia, Sri Lanka and even China with current regimes in these countries coming to power promising the people to implement the essence of this phenomenon in their administrations. I am happy to note that by and large this promise has been kept by the present regime in Sri Lanka.

However implementation of the principals of good governance in a country would be a futile effort unless and until the principals of this ideology cascades to all units of the economy. In such a context one could not undermine the importance of corporate governance in organizations.

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. We saw how Prime Minister Shinzo Abe of Japan stressed the importance of corporate governance in Abenomics with the aim of restructuring the Japanese economy.

Why lack of good governance in organizations is 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. 


Joint initiative
The Government or the regulator cannot foster corporate governance in isolation. It should be a joint initiative by all relevant stakeholders. 

I am pleased to note that several organizations have come forward to further this cause by offering various formal educational programmes. The SEC has rendered its support for such initiatives over the years. As examples, during Ronnie Peiris’s tenure as your Chairman, the SEC supported your educational programmes by providing resource personnel from our Commission. We have also partnered with Accounting Bodies in Sri Lanka and provided the relevant impetus in formulating a corporate governance Code. I also appreciate the commitment made by the corporate world to adhere to this ideology in their organizations. The enthusiasm to follow programmes of this nature is a manifestation of this interest. Let me also take this opportunity to applaud the dedication of the Directors to pursue this training programme amidst their busy schedules.


Ground-breaking code
Mervyn King, Chairman of the King Report - The King Report on corporate governance is a ground-breaking code of corporate governance in South Africa - very correctly articulated the true gist of corporate governance. 

I quote “Organizations need to practice qualitative corporate governance rather than quantitative governance thereby ensuring it is properly run” unquote. Again he said “You cannot legislate good behaviour”. Thus genuine efforts should be made to adhere to the true spirit and essence of the code.

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 towards greater risk but the effect also trickles down to the capital market. Just to quote some 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 Hon. Attorney General for his opinion) sold approx 7.8 million TFC shares at highly inflated price of Rs 50.00 to NSB. The share price of TFC was around Rs 30.00 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 14.00 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 NSB Rs 390 million then.

Such phenomenon is not limited to Sri Lanka. At times even world famous companies in developed economies could fall short of good corporate governance

• In 2007, Lehman Brothers was ranked the #1 “Most Admired Securities Firm” by Fortune Magazine. But in 2008 it was revealed that Lehman executives together with the company’s auditors, Ernst & Young hid over $50 billion in loans disguised as sales. The company went bankrupt after the incident, the largest bankruptcy in the history of US. 
•  Toshiba Corp., the 140-year-old electronics conglomerate that has its hand in everything from installing power lines to supplying iPhone parts, has been embroiled in an accounting scandal since May this year. The investigation has found out that the company has overstated operating profits by at least 151.8 billion yen ($1.2 billion) between 2008 and 2014. The company’s chief executive announced his resignation last week and two previous CEOs who retained company posts are also resigning. 

For those who believe in hell I would say with apologies to Dante, “ the hottest places in hell are reserved for those who commit such offense in the corporate world”.

In order to minimize 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 is 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 organization 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.


Pivotal role 
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 organizations 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.

We do understand that at times organizations might encounter certain constraints when implementing the prescribed principles. In such situations we could mitigate these constraints through joint initiatives rather than deviating from the given principles.

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 organizations 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.

Let me reiterate that good corporate governance is something that largely comes from within. In simple terms it is doing what is right. Therefore one must not ask whether it is legal but rather rephrase the question to “is this the right thing to do”. I conclude by wishing all the recipients of Board Leadership Director Certification all the very best in their future endeavor especially in implementing good governance in their corporates. 
Quotes
* Let me reiterate that good corporate governance is something that largely comes from within

* Corporate Boards should focus on enhancing transparency, increasing director accountability and giving greater voice  to shareholders over critical Boardroom decisions