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Wednesday, 10 July 2013 00:10 - - {{hitsCtrl.values.hits}}
Public interest
As a result of the exponential expansion of the scope business today, the “public interest” aspect of corporate entities has increased hugely. Businesses are no longer considered mere vehicles for making money for its owners. Activities of large corporations affect almost everybody in a society; from thousands of shareholders, employees, lenders, consumers, the larger economy, neighbours, to even those unborn generations with a stake in sustaining that environment could be considered stakeholders.
As a consequence the need for transparency in the governance of such entities has become a fundamental concern of all good governments, law makers and regulators.
An independent director is expected to keep vigil on behalf of the stakeholders who are not usually represented on the board of directors.
Independence
The listing rules of the Colombo Stock Exchange endeavour to introduce the idea of corporate governance to the public companies. One of the current rules of listing calls for the appointment of independent directors to the board of the company. As a result we now see the appointment of so called outsiders to the boards of listed companies. Generally these are well known names, and more often than not, come with professional backgrounds.
The rules themselves provide guidance as to the degree of independence that is expected of the independent directors. Among the criteria ( defined in the negative)he/she should not have been employed by the entity in the preceding two years, no business /material business relationship directly or indirectly with the entity, no significant shareholdings and so on.
The criteria adopted by the Sri Lankan authorities and perhaps more importantly the approach of other jurisdictions is that an independent director ought not be “dependent” directly or indirectly upon the corporate entity. Whether a few rules in the listing requirements combined with an obviously deficient regulatory culture are sufficient to ensure the sense of independence needed for the task is a moot point.
Political patronage
It is an obvious fact that Sri Lanka’s relatively small stock market is dominated by a handful of individuals and business interests. A market capitalisation of less than US$ 20 billion and a small listing of about approximately 300 companies leaves room for a few individuals to command a dominance which would not be possible in larger and better regulated markets.
From what is reported, the pernicious effect of political patronage presently is at levels never witnessed before. Several of the big players of the market are also holding very high positions in the Government structure, some even in positions of determining policy affecting the very markets they are deeply invested in!
Challenging situation
It is undisputed that a good number of our listed companies are controlled by the promoters or family interests. In fact the big fish among them have control over several such companies. It is not uncommon to hear boastful claims by some of them on the number of listed companies under their command and control!
The so-called independent directors owe their election to director boards to the brute voting strength of the majority shareholders, and, most of them in Sri Lanka promoters or family members. If need be, the independent directors could also be removed or eased out by the controlling shareholders. It is a challenging situation, which will test acutely the real mettle of an independent director.
Conflict
Recently we came across in an annual report a situation where a so-called independent director also figured in the “director’s interests section”! In other words, the company did not even notice the theoretical impossibility of an independent director having an interest in contracts of the company.
If that director has a pecuniary interest in company activity can he/she be called an independent director? In the rules there is a general suggestion of a nine-year limit to the period of service of an independent director. Should an independent director seek to extend that period, knowing very well that he will require the support of the major shareholder to succeed in the attempt?
Benefits from related parties
Another potential area of danger to the independence of such a director arises from benefits from related parties. For argument’s sake, can an independent director at Keells Food Products for example, receive benefits from Keells Hotels, another entity by definition?
Such situations can easily arise in cases where professionals such as lawyers, accountants, architects are appointed to boards of corporate entities. Although they may not receive direct benefits from that particular corporate entity, are they receiving benefits and contracts from other entities under the control of the major shareholders of the first entity?
Role of an independent director
It is not suggested that the role of an independent director is to be disruptive and necessarily opposed to the major shareholders. On the contrary, they should endeavour to be a voice for good governance with the overall and long term interest of the corporate body as their goal. This does not mean that their opinions should always prevail. The executives, more experienced in that area of business are probably better judges of business opportunities. On the other hand, the role of the independent directors is to represent other stake holders while encouraging transparency and good governance in the management of the corporate body.
Naturally it is a role that calls for judgment, maturity and integrity. Given the lukewarm regulatory mechanisms operating and the dominance of a pervasive culture of cynical self-interest, whether the so-called independent directors play this role or are in a position to play such a role is a question that should be examined by all stake holders of our corporate world.
The writer is an Attorney-at-Law and a freelance writer.
