Independent director’s true independence is measured by boardroom actions-Dinesh
28 Jan 2013 - {{hitsCtrl.values.hits}}
By Chiara Tissera Q: Unlike before, there is now a big connection between good governance, profitability and investor confidence. Are our directors geared to address all these issues?
The problem is most boards meet only once a month or once in three months and are composed of individuals who also hold demanding full-time jobs as CEOs or executive directors in other listed companies.
Given those circumstances, it’s is difficult to believe that board members, even the most experienced and the best skilled of them, will uncover systemic flaws or acts of malfeasance, particularly in complex institutions. That’s what regulators, auditors, and internal controls are for – to help boards to identify excessive risk and point out wrongdoing.
A board’s main job is to hire and manage the CEO based on his performance and values, the quality of his team and the coherence of his business model.
When boards are operating, as they should, directors are engaged in a vigorous, candid dialogue with the CEO and his top leadership team about strategy and having the right mix of talent in place to execute key company initiatives. And they should actively spend time, talking to employees and customers to look for signs that the company vision and mission are understood and shared by all employees, that company values are more than lip service. If this happens, they are not only protecting stakeholders by studying the numbers but by deploying good judgment based on facts and data they have collected on their own.
Q: What do boards need to do to manage this transition?
For a start, boards must have the right kind of people serving on them: Board members who, in very limited time, can exercise good and sound judgment and act with courage and resolve when dealing with issues. Therefore, boards need members who have a special ear, the kind that can hear a presentation and discern between over-promises and over-deliverers, between glib salesmen and those they would bet their own money on.
Board members should also know the company, the business and the people running the show and care about the progress of the institution deeply. Therefore for boards to become successful and effective, they must move away from being largely ceremonial and from simply rubber-stamping the decisions of management and be willing to reward and recognize management’s performance based on predetermined criteria. Therefore it is important that the board has competence within it to understand other disciplines such as Law, Economics, marketing, Human Resource Management and Technology, so that a multidisciplinary approach is taken to managing risks and growing the business.
Q: 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. Has this worked to improve the quality of governance?
This has certainly helped, however it needs to be borne in mind that mere independence as defined in the code will not ensure that the director concerned 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 so-called independent director who receives fixed and rather nominal fees for their services and have no real stake in the business is 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.
Q: Sri Lanka hopes to achieve US$ 2 Billion FDI this year. Do we have the skills support this effort?
I have said this many times that one area that Sri Lanka can make some headway in the short term to achieve this goal is by promoting Sri Lanka as a favourable destination for business services outsourcing. The global out sourcing market is currently worth over US$400+ Billion, with India exporting some US Dollars 50+ Billion worth and China $30 Billion, while Sri Lanka’s share was just over US Dollars 60+ million. Big multinationals operating in the West despite high unemployment levels in their countries are still looking to reduce their cost of operations by spreading operations globally and cherry-picking countries for their particular skills set. So this is an area the industry and the government should continue to address and work together to promote a strong general education and training system to have a standard level of skills in the work force. In fact I am hoping to address some of these difficult Skills issues in my new book.
Q:Some sectors in the economy say they can’t find the right people, and as a result filling a job can take months according to them?
The main reason could be that they want workers who need no training, who can step in immediately to do a job. Another reason is they aren’t paying the market rate. There is no evidence that there is any short supply of people who are educated or who are trained broadly. They need to drop the idea of finding perfect candidates and look for people who could do the job with a bit of training and practice.
There are plenty of ways to get workers up to speed without investing too much time and money, such as putting new employees on extended probationary periods and relying more on internal hires who know the culture and practices better than outsiders would. So it is a fundamental change from business as usual.
Q: Sri Lanka has set an ambitious target of achieving a $ 4,000 per capita income by 2016. Is this achievable?
Overall, the country’s macroeconomic fundamentals have strengthened over time. Sri Lanka provides very strong prospects in tourism and infrastructure, which can attract the interest of foreign investors. Also when compared to other South Asian countries, Sri Lanka is relatively open to foreign investment. It offers a relatively open financial system, moderately good infrastructure, and generally capable workers.
The government is continuing to invest in improving infrastructure including roads, ports, airports-both international and domestic, power, telecoms and hotels. The government has also ramped up the investments into social overheads, particularly education, health, IT, vocational training, skills development, recreation and sports, all of which would help towards the $ 100 billion GDP goal. The progress in the five economic hubs ports, aviation, commercial, knowledge and energy would be key to this drive. Also, Sri Lanka needs to innovate and upgrade its production process and move up market with value addition and enhanced productivity.
Q:What role would and should the financial institutions play to achieve the $ 4,000 per capita income?
The key thing amongst all the economic drivers would be the new developments in the banking sector. Significant increases in private sector credit with access to long term external financing is required. Therefore banks would have to be more forward-looking, innovative and develop new business models to manage these future opportunities and position themselves. Also there is a need to strengthen the SME banking capability and to support capacity building with in SMEs.
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By Chiara Tissera
