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The level of debate on good governance (yahapalanaya) has helped the many yahapalana activists to move the topic to the centre stage quickly and decisively in the last eight months. The 19th Amendment was a huge victory for good governance. On the other hand, the regulators have also been forced to re-examine their views on how institutions should be organised and governed and they have been made to sweat out to get their act together and to promote good governance within their own institutions. The government decision to pay Golden Key (GK) depositors from July 24, 2015 highlights over and over again the need for better regulation, the need to make people accountable and improve governance in the financial sector.
The role that corporate governance plays in corporate performance is now well documented. The success of a company is often directly connected to the character and the relationship of the directors and the top management of the company and when directors don’t put self-interest and self-preservation ahead of stakeholder interest. Good governance in general gives the company the protection to operate effectively, the ability to do what’s right for the company and for the shareholders, win the confidence of the public and improve the public rating of the institution. Promoting good governance ultimately separates good companies from poor-performing companies.
Sri Lanka
In Sri Lanka, attempts to improve corporate governance in the past have been through the adoption of voluntary codes. We have generally followed the British methodology of enunciating principles rather than rules. The issue of governance has much to do with a value system and unless the values are clearly accepted, perhaps the only other way in which the end could be achieved is through imposition, although this is distasteful. Some of our companies have chosen to interpret these principles in a manner that gives them the flexibility to ignore the principles when it
suits them.
Thus, in the context of Sri Lanka, the introduction of a mandatory code, which incorporates principles and rules to be followed, was timely, desirable and commendable, simply because financial institutions occupy a special position of trust in the national economy. They create financial stability and shape the pattern of credit distribution and overall supply of financial services. Hence, there is a necessity for enforcing effective corporate governance structures in the financial sector.
Better governance
Then one of the key factors on which the regulator has sought to build a better governance framework is by having a number of ‘independent’ directors on boards. While this is commendable in theory, it needs to be borne in mind that mere ‘independence’ as defined in the code will not ensure that the director will or can make the required contribution. In fact, given the incestuous corporate relationships prevalent in our small country, the chairman’s school buddy who fits the code’s definition of ‘independence’ may in reality be less independent than someone who is ‘not independent’ in terms of the code.
It is also a matter for debate whether the so-called ‘independent’ directors who receive fixed and rather nominal fees for their services and have no real stake in the business are sufficiently motivated to enhance enterprise value. However, true independence and effectiveness of an ‘independent’ director can only be measured by the director’s actions in the boardroom and the freedom and willingness to leave the board if he is forced to compromise on the principles of good governance and not merely through the application of rules.Boards therefore, need to somehow find broader sources of information, so they are not relying on one or two people, there is no substitute for spending time with the management of different departments or sectors having them present directly to the board, visiting operations- not interfering but to understand what is really happening. A board is expected to create and enhance the competitive advantage of the firm, identify and manage corporate governance risk at firm level and to overcome the systemic risk across the industry through shared standards of corporate governance practices.
Future
The practice of good corporate governance followed by financial institutions will allow them to gain the trust of the depositors, investors, the customers and the community at large. This will have a positive impact on the firm’s reputation and it will be recognized as a fair and a transparent company. This image will help the firm to prosper in the long run and achieve its goals more quickly. In the final analysis, the solution for good governance can only lie with boards; they need to realize that good governance can benefit their firm in many ways. They have to work up the courage to create exciting challenging jobs with real decision-making authority to both senior executives and others alike. Therefore, independence is not about ‘no-shareholding’, it is more about how independent the director is in his thinking. Finally, good corporate governance is about instilling the ‘right values’ into the people and also to influence the company to move beyond just the short-term profit consideration.
(Dinesh Weerakkody was a bank director from 2003 to 2014)
