Many years ago, it was considered to be quite fashionable and indeed a matter of pride to be appointed as a director of a company, more so where the company concerned was a listed company on a stock exchange. The standing and professional reputation of directors endured to the benefit of the concerned company in terms of business transactions, raising capital, competitive marketing edge, etc. 

Some directors did not attach much significance to the duties that they owed to the company, shareholders, stakeholders and indeed, to society at large. The issues of responsibility and liability also did not assume much concern so long as the company was deemed to be well run under the oversight of a good chairman and a chief executive officer. Textbooks on company law until the 1950s listed “sleeping directors” as one category of directors. Financial recessions, mismanagement within companies, the collapse of large conglomerates, bankruptcies of banks and finance companies leading some depositors even to commit suicide fuelled the need for company law reform and more importantly to develop norms of ‘corporate governance’. 

Robert Ian (Bob) Tricker wrote the first book to use the title ‘corporate governance’ in 1984. This was based on his research at Nuffield College, Oxford. He was also the founder-editor of the research journal Corporate Governance: An International Review. Sir Adrian Cadbury is the author of the first corporate governance code in the UK in 1992. 

According to Sir Adrian: “I have always regarded Bob Tricker as the Father of Corporate Governance since his 1984 book introduced me to the words corporate governance”.

The work of Sir Adrian Cadbury became the blueprint for corporate governance codes in many parts of the world. In Sri Lanka, it was in 1997 that the Institute of Chartered Accountants (Institute) released a Code of Best Practices on matters related to financial aspects of Corporate Governance. The sixth edition was developed by a committee under the chairmanship of Asite Talwatte and released this year by the Institute. Pioneering work on Corporate Governance at the Institute was done by Chandra Jayaratne, Nivard Cabraal, Reyaz Mihular, Sujeewa Rajapakse and Arjuna Herath, just to name a few of those who were associated with these endeavours. The Securities and Exchange Commission (SEC), though established in 1987, took some initiatives much later in tandem with the Institute. For instance, the SEC together with the Institute published the “Code of Best Practices on Corporate Governance” in the year 2008 and 2013 in order to establish good corporate governance practices in the Sri Lankan capital market.

More recently, in September 2023, the SEC under the chairmanship of Faizal Salieh, a long-time advocate of corporate governance, issued a directive to the Colombo Stock Exchange (CSE) to amend the listing rules of the CSE covering certain aspects of corporate governance. Some were debatable matters such as the segregation of the roles of Chairman and CEO – certain empirical studies demonstrate that this is not necessarily a strategy leading to better management and better outcomes.

Another directive was issued by the SEC to the CSE on 6 October 2023 in terms of which the CSE is required to identify non-compliance in relation to the following Listing Rules, namely

a) Non-submission/delayed submission of Annual Reports;

b) Non-submission/delayed submission of Interim Financial Statements;

c) Non-disclosure/delayed disclosure of revision of ratings; and

d) Non-disclosure of material information, as per the CSE Listing Rules.

After giving an opportunity to be heard to the listed entity and to the Directors and after considering the submissions, the CSE can take any one or more of the following disciplinary actions and/or administrative sanctions on the listed entity and/or its Directors:

(i) Imposition of a penalty not exceeding Rs. 5 million in respect of the aforesaid non-compliance;

(ii) Issuance of a Letter of Caution;

(iii) Issuance of a Letter of Warning;

(iv) Issuance of a Public Reprimand to the Board of Directors of a listed Entity which has committed the non-compliance.

Even though the intention might have been to ensure better compliance with Listing Rules, a number of legal issues arise as to whether or not this Directive is ultra vires the powers of the SEC and/or CSE. For instance, can the CSE be empowered by the SCE to impose a penalty up to Rs. 5 million on directors of a listed company? Can the power to impose penalties be delegated, even assuming that the SEC Act empowers such a penalty to be imposed for delaying the submission of annual reports? The submission of an annual report can get delayed by a few days for a number of reasons beyond the control of directors. 

At a time when Sri Lanka is trying to woo foreign investors to set up listed companies in the Port City and elsewhere, will not such investors have serious concerns? An imposition of a fine can have serious consequences in relation to the Central Bank ‘fit and proper’ person criteria; applications for foreign visas, etc. Even a ‘Public Reprimand’ can have negative implications in foreign trading.

Of course, there are certain safeguards and defences that can be developed. 

(The writer is a former DG and Chairman SEC and Insurance Board of Sri Lanka; ex Director Public Utilities Commission and the National Procurement Authority; Chairman, IOSCO Presidents’ Committee in 2005; former Chairman Orient Finance PLC.)

Seminar on New Corporate Governance Rules

A seminar on the New Corporate

Governance Rules will be held on 1 February from 2 p.m. to 5 p.m. at the Movenpick Hotel, Colombo 3.

It is organised by the Asian Pathfinder Legal Consultants and Corporate Management Consultants in association with JCI Colombo Mid Town.

Dr. Dayanath Jayasuriya PC, former Chairman and DG SEC, will discuss the above directive issued by the SEC, its implication to Listed Companies, its Directors and the Market. Renuke Wijayawardhane, Chief Regulatory Officer CSE, will speak on the New Rules on Corporate Governance. Malik Cader, former DG SEC and Kithsiri Gunawardena, Chief Operating Officer LOLC Holdings will be participating in the discussions.

The seminar is meant for directors of listed companies, compliance officers, lawyers, accountants, auditors, company