Transcript Current Views on Corporate Governance in Sri Lanka: Evidence

Current Views on
Corporate Governance in Sri Lanka:
Evidence from Sri Lankan Corporate Boards
Dr. Hareendra Dissa Bandara
Director – Financial Services Academy
Securities & Exchange Commission of Sri Lanka
&
Senior Lecturer in Corporate Governance & Finance
Faculty of Management Studies & Commerce
University of Sri Jayewardenepura
Disclaimer Clause
Views expressed herein are those of the
presenter. They do not necessarily reflect
views of the Securities & Exchange
Commission of Sri Lanka or University of Sri
Jayewardenepura or other staff members of
the respective institutions.
Importance
To Whom
Why
To enhance the governance level of
Company Directors respective companies & thereby the
country’s governance
Capital Market
Professionals
To advice clients in a broader sense
Regulators
To regulate or to provide specific
guidelines
Ｃｏｎｔｅｎｔs
1.
2.
3.
4.
5.
6.
7.
8.
9.
What is corporate governance?
Governance structures
Need for greater corporate accountability?
Major concerns of corporate governance
Objectives of the study
Methodology
What is CGS?
Results: Adherence to the CG Essentials
Current View
What is Corporate Governance?
• “Corporate governance is about promoting corporate
fairness, transparency and accountability.”
(J. Wolfensohn, President - World bank, as quoted by an article in
Financial Times, June 21, 1999)
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What is Corporate Governance? Contd…
“Corporate governance is the system by which business
corporations are directed and controlled.
The corporate governance structure specifies the distribution
of rights and responsibilities among different participants in
the corporation, such as, the board, managers, shareholders
and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs.
By doing this, it also provides the structure through which the
company objectives are set, and the means of attending those
objectives and monitoring performance.”
(Cadbury, OECD, April 1999)
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What is Corporate Governance? Contd…
‘Corporate governance is the mechanism by which companies are
rationalized, directed, controlled and monitored. Corporate
Governance coordinates different types of stakeholders such as
shareholders, directors, managers, employees, creditors,
customers, global environment and the rest of the society to
enhance corporate performance and wellbeing as a common goal.
Major considerations of a system of corporate governance are:
 how successfully companies formulate the rational; the
reason for existence & future direction
 how effectively corporate decisions are made; guidelines
and procedures
 how well the board on behalf of shareholders appraise
managers’ decision making, and monitor the execution
 how fruitfully the different stakeholders are facilitated to
achieve the goals’
(Dissa Bandara, 2006)7
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Governance Structures
US Governance Structure
Stockholder
Report
Appoint
Chairman
Board of Directors
Appoint
1.
2.
3.
4.
5.
Nomination Committee
Reward Committee
Inspection Committee
Finance Committee
Executive Committee
Report
CEO
Executive Management
Dissa
Source: Based on Dissa Bandara (2003)
9
Japanese Governance Structure
Appointment
Appointment
/dismissal of Directors
(Board of)
Statutory
Auditors
at least majority
must be outside
auditors in case of
a large company
Source: Based on Dissa Bandara (2003)
Duty of Care
Decide the
administration of
affairs of the
company
Supervise
execution of duties
of directors
Sri Lankan Governance Structure
External Governance Mechanism
Shareholders
Internal
Governance
Mechanism:
BOD
CEO
External
Auditors
Executive & NonExecutive Directors
Committees (Ind)
The relationship
among various
components in
determining the
rational, direction and
performance
Employees
Creditors
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SHAREHOLDERS
External Auditor
Shareholders delegate power to the board of
directors
BOARD OF DIRECTORS
Chairman
Non-executive Directors
CEO and
Executive Directors
Audit Committee
Financial
Reporting
F
u
n
c
ti
o
n
s
Risk
Management
Remuneration
Committee
Internal Controls
M
o
n
it
o
ri
n
g
Nomination
Internal Auditor
Committee
Conduct of the
business and
other
operational
matters
Board delegates the powers to management
MANAGEMENT
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EMPLOYEES
12
Need for Greater Corporate Accountability?
Separation of ownership and control
– Berle and Means (1932) recognise that the
separation of ownership and control gives rise to
a conflict of interest between insiders (managers)
and outsiders (shareholders) with diffuse
ownership.
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1932
Separation of Ownership and Control
Ownership
Shareholder
Control
1
Director
2
Management
Board of Directors leads the company and is the link between
‘Owners’ and ‘Managers’
1. Determine the Future Direction: Aims, policies & strategies on
behalf of the owners
2. Monitor the progress of Management Execution
Separation of Ownership and Control Contd…
– Agency Problem:
The greater the degree of separations, the greater the
agency problem.
– Agency Cost:
Because of the costs of information and the difficulties in
monitoring managers, rational managers undertake
behaviour which shifts wealth from shareholders to
themselves. This results in agency costs: loss in market
value relative to the value if no agency problems existed.
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Major Concerns of Corporate Governance
Align the interests of managers and shareholders
Prevent managers from pursuing own interests
Prevent high and excessive executive pay
Overcome agency costs associated with the
separation of ownership and control
Avoid abuse of power
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Objectives of the Study
• To examine the level of compliance of
Sri Lankan companies on corporate
governance (CG) principles based on
a proposal of Governance Research
Institute of Sri Lanka (GRIS)
• To understand the current views on Sri
Lankan corporate boards
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Methodology
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Sample, Data & Time Period
• Sample: 59 Companies Listed on the CSE
• Data: BoD related Qualitative & Quantitative Data
• Method of Data Collection: TRIANGULATION;
Questionnaire Survey, Informal Interviews, Annual
Reports & Publications, Governance Database of
Governance Research Institute of Sri Lanka (GRIS)
• Time Period: 2006 - 2010
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Sample
Sector
No
1 Bank Finance & Insurance
2 Beverage Food & Tobacco
Chemicals &
3 Pharmaceuticals
Construction &
4 Engineering
5 Diversified Holdings
6 Footwear and Textiles
7 Health care
8 Hotels & Travels
9 Information Technology
10 Investment Trust
11 Land & Property
12 Manufacturing
13 Motors
14 Oil Palms
15 Plantations
16 Power & Energy
17 Services
18 Stores & supplies
19 Telecommunications
20 Trading
Total
No. of
Companies
35
20
Access
Restrictions
(20)
(13)
9
(9)
3
0
3
11
4
6
32
2
9
18
33
6
5
18
4
7
4
2
8
236
(6)
(4)
(2)
(23)
(2)
(9)
(11)
(23)
(6)
(5)
(12)
(4)
(7)
(4)
0
(5)
(165)
5
1st Sample Incomplete Data Final Sample
15
7
4
9
15
7
(3)
5
(4)
9
7
10
7
10
6
6
2
3
71
(2)
(3)
(12)
59
What is CGS?
Corporate Governance Score (CGS) is a measure of
adherence to CG practices & policies (based on GRIS)
• This CGS is;
an assessment of individual companies based on their CG
practices to measure the compliance with the CG standards /
practices
• NOT a kind of audit, a financial recommendation, credit rating
nor an advice for a particular need
• Again it is;
NOT an indicator of financial or commercial performance
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Basic Strata of CGS
Principle Areas
I. Mission & Role of the BOD and
Committees
II. Rights of Shareholders & Minorities
CGS Category
CGS-BOD
CGS-Sh
III. Relationship with Stakeholders
CGS-Stake
IV. Role & Leadership Responsibility of
CEO
CGS-CEO
V. Role of Executive Management
CGS-Mgt
VI. Disclosure and Transparency
CGS-DisTrans
Principles &
Sub Areas
14 Principles
74 Sub areas
10 Principles
46 Sub areas
10 Principles
40 Sub areas
12 Principles
44 Sub areas
12 Principles
40 Sub areas
12 Principles
42 Sub areas
Separation of Ownership and Control
Ownership
Shareholder
Control
1
Director
2
Management
Board of Directors leads the company and is the link between
‘Owners’ and ‘Managers’
1. Determine the Future Direction: Aims, policies & strategies on
behalf of the owners
2. Monitor the progress of Management Execution
Important Empirical Evidence
Adherence to CG Principles/Practices
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Overall CGS - BOD Adherence
100%
Maximum Possible CGS-BOD
56%
Mean (CGS-BOD)
NON-COMPLIANCE
Corporate Governance Score
0
50
Mean (CGS-BOD)
Score
165
100
150
200
250
300
Maximum Possible
CGS-BOD
296
44%
General Compliance Details
STD
7%
30%
Range
39%
Min
69%
Max
56%
Mean
Maximum Possible
CGS-BOD
Maximum
Possible CGSBOD
Score
296
100%
Mean
Max
Min
Range
STD
165
203
115
88
20.12
Top 10 CGS-BOD
Rank Order
Company
Sector
Score
1
2
3
4
5
6
7
8
9
10
AAA
BBB
CCC
DDD
EEE
FFF
GGG
HHH
III
JJJ
BFI
DIV
BFI
BFI
BFI
DIV
Hotels
Manu
Manu
Manu
203
199
198
197
192
191
188
187
186
185
Worst 10 CGS-BOD
Rank Order
Company
Sector
Score
1
2
ZZZ
YYY
Manu
Manu
115
119
3
XXX
Land & Pro
120
4
5
WWW
VVV
BFI
Manu
132
139
6
UUU
Land & Pro
140
7
TTT
Manu
140
8
SSS
Land & Pro
143
9
RRR
Plantation
143
10
QQQ
Land & Pro
144
2
130-139
6
2
# CGS-BOD
200-210
4
190-199
10
180-189
12
170-179
160-169
6
150-159
140-149
1
120-129
0
2
110-119
# of Companies
Frequency Distribution of CGS-BOD
14
12
10
8
11
9
5
1
High & Low CGS-BOD Groups
1. High CGN Group:
9 firms with score greater than 185
2. Low CGN Group:
10 firms with score less than145
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Low CGS 10 Firms
2
# CGS-BOD
200-210
4
190-199
6
180-189
1 SD
=
20.12
170-179
8
Mean = 165 = 56%
12
160-169
14
150-159
140-149
130-139
120-129
110-119
# of Companies
High & Low CGS-BOD Groups
1 SD
=
20.12
10
0
High CGS 9 Firms
1 SD
=
11.2
40
35
30
25
20
15
10
5
0
1 SD
=
11.2
Avg. 36.3
No. of Firms
High & Low CGS Japan - 2003
10
15
20
25
30
35
40
45
50
55
60
65
70
75
CGN
Low CGN Group 25 Firms
High CGN Group 25 Firms
Source: Dissa Bandara (2003)
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High & Low CGS Japan - 2008
40
1 SD
=
12
35
No.of Firms
30
1 SD
=
12
25
20
Avg. 37.8
15
10
5
0
10
15
20
25
Low CGN Group 25 Firms
30
35
40
45
CGS
50
55
60
65
70
75
High CGN Group 30 Firms
Source: Dissa Bandara (2008)
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Composition of CGS-BOD
Specific Areas
Point Allocation
20
1: Determining Future Direction
20
2: Policy Formulating Practices
3: Engage in Strategic Thinking
20
and Planning
25
4: Board Structure & Practices
5: Board Membership &
16
Orientation
25
6: Board Meetings
45
7: Board Committees
8: Board-CEO & Senior
20
Management Relationship
20
9: Board – Staff Roles
10: Monitoring & Evaluation
25
Practices
12
11: Legal & Ethical Compliance
12
12: The Entity
16
13: Stakeholders
20
14: External Relations Practices
OVERALL
296
Score Obtained
13.33
12.88
Compliance Level
67%
64%
13.38
67%
14.28
57%
8.52
53%
14.49
24.39
58%
54%
9.93
50%
9.17
46%
11.68
47%
7.72
7.11
7.76
10.44
165
64%
59%
48%
52%
56%
Composition of CGS-BOD
Specific Areas
Point
Score
Allocation Obtained
Compliance
Level
3: Engage in Strategic Thinking and Planning
20
13.38
67%
1: Determining Future Direction
20
13.33
67%
2: Policy Formulating Practices
20
12.88
64%
11: Legal & Ethical Compliance
12
7.72
64%
12: The Entity
12
7.11
59%
6: Board Meetings
7: Board Committees
25
25
45
14.49
14.28
24.39
58%
57%
54%
5: Board Membership & Orientation
16
8.52
53%
14: External Relations Practices
20
10.44
52%
8: Board-CEO & Senior Management Relationship
20
9.93
50%
13: Stakeholders
16
7.76
48%
10: Monitoring & Evaluation Practices
25
20
11.68
9.17
47%
46%
296
165
56%
4: Board Structure & Practices
9: Board – Staff Roles
OVERALL
3: Engage in Strategic Thinking and Planning
Specific Areas
The organization’s corporate plan & annual budget is fully
1
discussed by the board prior to its approval.
The financial status of our organization is regularly reviewed
2
and needed board actions are taken thoughtfully but quickly.
Board leadership takes steps to ensure that financial reports are
3
thoroughly understood by board members.
The annual report of the organization and independent auditor
4
is reviewed and needed actions are taken in a timely way.
Board members are well aware of their legal responsibilities
5
for the organization’s financial management.
1: Determining Future Direction
Specific Areas
Organization’s mission and purpose are clearly understood and
1
accepted by the board.
The members of the board have reached consensus on a vision that
2 indicates where the organization will be headed over the next 3-5
years.
The full board collaboratively reviews and updates the
3
organization’s strategic plan at least every two years.
Staff develops and carry out annual plans based on the board’s
4
approved strategic plan.
The board is well-briefed by the management on annual
5
plans/action plans developed by staff.
2: Policy Formulating Practices
Specific Areas
If a new policy is needed for the board or the organization as a
1 whole, the issue is clearly presented to and discussed by the
board.
2
The full board approves all new organizational policies before
they are implemented.
Policies exist for key areas such as finance, personnel, safety,
3
and ethics, and all functions unique to our organization’s work.
4
Our organization’s policies are effectively communicated to all
board members.
The Board reviews policies at least annually and updates them
5
as needed.
9: Board – Staff Roles
Specific Areas
The role and responsibilities of the board are clearly defined and
1 separate from those of the management & staff (Monitoring vs
Controlling).
The board takes the primary responsibility for developing the
2
organization’s policies.
Board members never assume roles and responsibilities that
3
belong to staff.
The board delegates to the organization’s Chief Executive
4 sufficient authority to lead the staff and carry out the
organization’s mission.
5
When a problem or conflict arises between board and staff,
parties move quickly and effectively to resolve it.
10: Monitoring & Evaluation Practices
1
2
3
4
5
6
Specific Areas
Board members are adequately knowledgeable about the
organization’s programs/projects and services.
Periodically review with the CEO the possibilities of adding
new programs/projects and services, and modifying or
discontinuing current programs/projects and services.
The board keeps itself informed of the organization’s
performance against predetermined plans and goals.
The effectiveness of the board and committee structure is
assessed every year.
Annually assess the individual members’ satisfaction with
their participation on the board.
Regularly evaluate the effectiveness of the board meetings.
13: Stakeholders
Specific Areas
1
Has the Board identified key stakeholders?
2
What is the state of the relationship with the key stakeholders?
3
How well do entity's objectives reflect stakeholders’
expectations?
4
Is there a policy determining how the entity will relate with
stakeholders?
Sector-wise CGS-BOD
Point
Allocation
BFI
1: Future Direction
20
2: Policy Formulating
Overall
Plantation Complianc
e
BFT
Diversi
fied
Hotel &
Trav
Land &
Property
Manufact
16
13
13
14
11
12
13
13
20
14
13
13
13
11
12
14
13
3: Strategic Thinking
20
15
13
14
13
12
13
14
13
4: Board Structure
25
15
14
16
14
12
14
14
14
5: Board Membership
16
9
8
10
9
7
8
9
9
6: Board Meetings
7: Board Committees
25
45
15
26
14
24
16
27
14
24
13
21
14
23
15
25
14
24
8: Board-CEO & Mgt
20
10
10
11
10
9
10
10
10
9: Board – Staff
20
10
9
9
10
8
9
9
9
10: Monitoring
25
12
13
12
11
11
11
11
12
11: Legal compliance
12
10
7
8
7
6
7
7
8
12: The Entity
13: Stakeholders
12
16
7
6
7
8
8
10
7
8
6
6
7
8
7
8
7
8
14: External Relations
20
11
11
12
10
9
10
10
10
296
178
165
180
164
143
160
166
165
CGS-BOD Components
CGS-BOD Components
Sector-wise Compliance
Point
Allocation
BFI
BFT
Diversified
Hotel & Trav
Land &
Property
1: Future Direction
20
81%
67%
66%
69%
56%
62%
66%
67%
2: Policy Formulating
20
72%
63%
66%
63%
55%
62%
69%
64%
3: Strategic Thinking
20
74%
65%
70%
64%
59%
66%
69%
67%
4: Board Structure
25
61%
57%
65%
57%
49%
55%
57%
57%
5: Board Membership
16
55%
53%
62%
53%
44%
52%
54%
53%
6: Board Meetings
25
60%
58%
64%
57%
50%
56%
60%
58%
7: Board Committees
45
58%
54%
60%
54%
48%
52%
55%
54%
8: Board-CEO & Mgt
20
52%
50%
54%
49%
43%
49%
51%
50%
9: Board – Staff
20
52%
44%
46%
50%
39%
45%
44%
46%
10: Monitoring
25
48%
52%
50%
44%
44%
45%
44%
47%
11: Legal compliance
12
83%
61%
70%
62%
53%
60%
61%
64%
12: The Entity
12
62%
61%
68%
58%
51%
57%
59%
59%
13: Stakeholders
16
41%
51%
60%
48%
39%
49%
51%
48%
14: External Relations
20
55%
53%
59%
51%
45%
50%
52%
52%
OVERALL
296
61%
56%
61%
56%
48%
54%
57%
56%
CGS-BOD Components
Manufact Plantation
Overall
Compliance
Sector-wise Compliance
CGS-BOD
Point Allocation
Components
BFI
BFT
Diversified
Hotel &
Trav
Land &
Property
Manufac
Plantation
Overall
Compliance
1
20
81%
67%
66%
69%
56%
62%
66%
67%
2
20
72%
63%
66%
63%
55%
62%
69%
64%
3
20
74%
65%
70%
64%
59%
66%
69%
67%
4
25
61%
57%
65%
57%
49%
55%
57%
57%
5
16
55%
53%
62%
53%
44%
52%
54%
53%
6
25
60%
58%
64%
57%
50%
56%
60%
58%
7
45
58%
54%
60%
54%
48%
52%
55%
54%
8
20
52%
50%
54%
49%
43%
49%
51%
50%
9
20
52%
44%
46%
50%
39%
45%
44%
46%
10
25
48%
52%
50%
44%
44%
45%
44%
47%
11
12
83%
61%
70%
62%
53%
60%
61%
64%
12
12
62%
61%
68%
58%
51%
57%
59%
59%
13
16
41%
51%
60%
48%
39%
49%
51%
48%
14
20
55%
53%
59%
51%
45%
50%
52%
52%
OVERALL
296
61%
56%
61%
56%
48%
54%
57%
56%
Evidence on International Status
Indicator
Belgium
France
Germany
Japan
Nethlnds
Port
UK
US
1.1 Best Practice
Codes
5
9
6
3
4
4
9
9
1.2 Non-executive
Directors
8
9
5
1
10
3
6
8
1.3 Board
Independence
2
3
2
0
1
0
4
7
1.4 Split
Chairman/CEO
6
2
5
0
5
2
6
1
1.5 Board Committees
3
4
1
0
3
3
6
8
21 Voting Rights
10
6
9
10
6
6
10
9
2.2 Voting Issues
8
8
5
4
5
7
7
3
3.1 Accounting
Standards
2
3
7
0
6
2
9
10
3.2 Executive Pay
3
10
2
2
8
2
10
10
4.1 Takeover Barriers
3
4
3
0
1
2
10
7
Overall Score
5.0
5.8
4.5
2.0
4.9
3.1
7.7
7.2
Country Rank
4
3
6
8
5
7
1
2
4/7/2015
Source:Based on Dissa Bandara (2008)
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Conclusions
The extent of Adherence to CG Principles
•
•
•
•
4/7/2015
Actual CG practices are considerably deviated from the
expected standard (AVG compliance level 56%)
A broad variation in CG practices across the firms (Max
69% & Min 39%)
A considerable variation in CG practices across the
industries (48% - 61%)
Governance level is high in BFI & Diversified (high AVG
score)
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Conclusions
The extent of Adherence to CG Principles
•
Sri Lankan boards are good at;
– Strategic planning
– Determining future direction
– Policy formulating practices
•
Sri Lankan boards are weak at;
– Board-staff roles (not clearly defined and separated)
– Monitoring & evaluation (split the role of Chairman
&CEO)
– Relationship with the stakeholders
Conclusions Contd…
Emerging CG Characteristics
• The degree of interest in the recent discussion on CG is remarkably
high (over 70%)
• Through their CG system they hope to enhance the performance
and speed up of decision-making
• There is a growing tendency of introducing new features like
Independent Directors, BOD training & IR activities
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For Future …
•
Employ a multiple CGS, considering
•
•
•
•
•
•
Sri Lankan CG Principles (to be finalized)
OECD CG Principles
Other Leading Sources like, CalPers
Use Case Study & Critical Incident Method as methodological
tool
External pressure should be increased to get the poor players
to the track
CG practices should be familiarized among corporate level
4/7/2015
Dissa5
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