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by Dr. M. S. Samarawickrema

Though the East Asian financial crisis is history now the lessons learnt should not be forgotten for a long time. Many analysts have acknowledged that the main reason for the crisis was the weak system of corporate and financial governance in the affected countries.

In a recent World Bank report it is stated that "the poor system of corporate governance has contributed to the financial crisis by shielding banks, financial companies and corporations from market discipline. Rather than ensuring internal oversight and allowing external monitoring corporate governance has been characterised by ineffective regulators and boards of directors, weak internal controls, unreliable financial reporting, lack of adequate disclosures and poor audits.

However despite the glamour attached to the phrase "Corporate Governance" it is still not well understood in most parts of the world, including the USA where the Enron scandal embarrassed many.

How could corporate governance be looked at from a Sri Lanka perspective? On the positive side we have sound mechanisms to regulate the quoted companies and banks including well established laws, reputed audit firms, regulatory authorities with qualified and experienced personnel.

However as in the case of many developing countries the bane on an independent regulatory mechanism is the political interference which may take various forms from the appointment of top officials to influencing decision-making.

The main regulatory authorities which could be cited are the Securities Exchange which is the Watch Dog of all quoted companies and the Central Bank which is the governing body of all commercial banks and other financial institutions such as finance companies and development banks.

Out of the above two institutions Central Bank up to now can boast of a fine track record with no Bank failures for the entire period they have been in operation. However one must add that there were a few failures of finance companies for which the Central Bank should take some form of responsibility though almost all such failures were due to corruption at the Board level of these institutions. The independence of the Central Bank is mainly attributed to the non-interference of the politicians in making top appointments.

The observations that one has to make of the appointments to the Securities Exchange Council (SEC) however is not all that complementary. Most of the top appointments including that of the present Chairman of the SEC has been made amidst clear conflicts of interest. At present one can see definite conflicts at the very top of the SEC with the head himself being a director of two institutions of which one is making overtures to control the other. These kinds of conflicts of interest breed corruption and makes the corporate community as well as the public lose confidence of the regulator.

The other important segment which should revere corporate governance and display absolute transparency when it comes to issues involving conflict are the Boards of Directors of quoted companies.

Company Law of Sri Lanka is very clear on the responsibility of directors and in short all directors are expected and are duty bound to act in the interest of the company and all decisions taken at the Board meeting should be for the interest of that particular company irrespective of other ownerships or alliances that the director may have with other companies where one may or may not be a board member.

The most common method used by corporate pirates is to get a few directors into a board of the targetted company and then operate through those directors to get control. This is a clear violation and there is every opportunity for the regulatory authorities as well as the minority shareholders to interfere and call for the removal of the offending directors.

Similar conflicts were evident for everyone to see in at least two instances in the recent past one involving two commercial banks and the other between a development bank and a commercial bank.

Our law provides adequate safeguards for minority shareholders which include the right to call for emergency shareholder meetings, to make proposals at shareholder meetings, and more importantly to resort to litigation and prevent the directors from acting in any way which would prejudice the rights of the minority shareholders. Sri Lanka's investors should know that minority shareholders have the right to know fundamental changes before implementation and have the right to call for removal of any or all directors if they act against the interest of the company or display conflict of interest.

While in a non-financial company the ones that can suffer through mismanagement and corrupt practices of directors are the shareholders, in banks and financial institutions there is another segment who could suffer even more than the shareholders themselves. Obviously that sector comprise of depositors who run the risk of losing their life time savings.

The Central Bank and the Monetary Board regulates these institutions making use of the Banking Act and also other regulatory measures used the world over for the protection of banks against mismanagement.

Such of these measures such as,

i. limiting bank ownership to a maximum of 15 per cent,

ii. Placement of restrictions on the types of business carried out by banks,

iii. Segregating banks to different types such as commercial banks, development banks and savings banks, are world accepted risk management methods our banking act has borrowed from the developing banking systems.

In recent times there had been pressure brought about by certain quarters to change the above fundamentals for selfish motives. However the Central Bank and the Monetary Board had displayed how a regulator should act by not succumbing to the pressures and taking two important decisions in the past year preventing on one occasion a bank takeover by one group and on another manoeuvre to take control of a bank through a holding structure.

On both these occasions all the symptoms of breaches of corporate governance were evident including

(a) conflicts of interests on the part of directors,

(b) exceeding the statutory limits on bank ownership and

(c) total disregard for minority shareholders.

Our country has been ravaged by war for the past 19 years and our economy has taken more than what it could during these years showing remarkable resilience.

The country cannot take on any more body blows to the economy and hence it is the duty of everybody to ensure that selfish motives of a few are not allowed to ruin our economy. The media of course can play a very positive role exposing unethical and corrupt practices of directors and of regulators.

The minority shareholders also have an important role to play making use of many rights and privileges granted to them by the law itself. If it is not possible to takeover a powerful company alone the minority shareholders could form themselves into a group or an association to protect their rights.

If the public is civic minded we could prevent many corporate failures. The country requires all of us to act in the national interest in safeguarding the private sector, which is the core of our economy.

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