Restoring efficiency and integrity: Reforming board practices in State Owned Agencies

Wednesday, 1 January 2025 00:28 -     - {{hitsCtrl.values.hits}}

Their effectiveness is often undermined by politicisation in board appointments, inefficiency, and a lack of 

transparency and accountability 


Introduce legal provisions to hold boards collectively responsible for institutional failures

Effective governance is the cornerstone of any successful organisation, and Government-appointed boards play a pivotal role in steering public institutions toward success. In Sri Lanka, however, the appointment process for board members has become increasingly politicised, often lacking the transparency, accountability, and professionalism necessary for good governance. This has led to persistent issues such as mismanagement, inefficiency, and corruption, particularly within State Owned Agencies (SOA) which are a significant contributor to the nation’s ongoing economic crisis for decades.

The inefficiency and high costs associated with these SOEs underscore the urgent need for structural reforms, starting at the board level. A new approach to governance at this level is critical for reversing the current economic trends and ensuring long-term sustainability.

In Sri Lanka, Government-owned or partially-owned organisations exist in various forms, playing a crucial role in the public sector. These include:

1.Fully Government-owned enterprises (State-Owned Enterprises – SOEs):

  • These are entirely owned by the Government and operate in sectors such as energy, transportation, and finance.

Examples include Sri Lanka Railways, Ceylon Electricity Board (CEB), and Sri Lanka Ports Authority.

2.Partially Government-owned enterprises:

  • These entities are jointly owned by the Government and private stakeholders, with the Government retaining a controlling share. Examples include SriLankan Airlines (partially privatised) and Ceylon Petroleum Corporation (CPC), which has undergone partial privatisation but remains mostly State-controlled.

3.Semi-Government organisations:

These organisations are established by the Government to manage specific functions, operating with some degree of independence. Notable examples include Sri Lanka Tourism Development Authority.

4.Regulatory agencies:

  • These bodies oversee and regulate sectors such as telecommunications, finance, and transport. Examples include the Telecommunications Regulatory Commission of Sri Lanka (TRCSL) and Securities and Exchange Commission of Sri Lanka (SEC),

5.Public utilities:

  • These are Government-controlled entities providing essential services like water, electricity, and fuel. Examples include National Water Supply and Drainage Board, Ceylon Electricity Board (CEB), and Ceylon Petroleum Corporation (CPC).

6.Government-Linked Companies (GLCs):

  • These are companies where the Government holds a significant stake but operates with more autonomy than traditional state enterprises. Examples might include Sri Lanka Telecom, a State-controlled but publicly listed company.

These organisations serve a range of vital purposes, from delivering essential public services to regulating key industries, and play a critical role in Sri Lanka’s economy and governance. However, their effectiveness is often undermined by politicisation in board appointments, inefficiency, and a lack of transparency and accountability. To improve governance and performance within these institutions, comprehensive reforms are needed, with a particular focus on addressing the challenges associated with board appointments.

Key board responsibilities

At the heart of effective board governance lie three core responsibilities: strategy, compliance, and risk management. To ensure optimal performance, boards should set clear Key Performance Indicators (KPIs) and objectives, encompassing financial targets, sustainability goals, public and employer satisfaction and ultimately, these enterprises play a key role in driving national progress and public welfare.

The inclusion of independent directors is essential, as their impartiality can drive more balanced decision-making and improve governance quality. Moreover, the compensation for board members, particularly independent directors, should be competitive to attract qualified professionals with the expertise needed to guide the organisation effectively.

Adopting international best practices

To overcome the current governance challenges, Sri Lanka must embrace global best practices for appointing and managing board members and chairpersons. Ensuring that board appointments are merit-based, transparent, and held to high standards of accountability is key to revitalising public institutions, restoring public trust, and ultimately driving national economic recovery.

Key reforms for Government appointed boards

1.Transparent selection process

  • Merit-based appointments:

Board members should be appointed based on their qualifications, experience, and integrity rather than political affiliations. A rigorous and structured selection process, including formal interviews, must evaluate candidates’ expertise, ethical standards, and alignment with the organisation’s vision and long-term goals. This ensures accountability, compliance, and sustained performance.

  • Training and induction:

Sri Lanka should mandate comprehensive induction programs for appointed board members. These programs would familiarise members with governance principles, legal obligations, and the institution’s unique challenges, ensuring they are well-prepared to fulfil their responsibilities effectively.

2.Accountability and responsibility

  • Shared accountability:

Board members must collectively share responsibility for institutional performance and ethical governance. The practice of shifting blame solely to executives or CEOs must be eliminated to ensure accountability at all levels. Introduce legal provisions to hold boards collectively responsible for institutional failures.

Sri Lanka currently lacks robust enforcement mechanisms to hold board members accountable for governance failures. International standards, such as the UK’s Corporate Governance Code and Singapore’s legal frameworks, impose severe penalties including fines, imprisonment, and lawsuits for unethical practices, corruption, or negligence.

Strong legal provisions are essential to deter malpractice and instil a culture of accountability. Globally, there are many instances where board members face personal accountability for their actions, underscoring the need for such mechanisms in Sri Lanka.

3.Performance evaluation

  • Regular assessments:

Annual performance evaluations of individual board members and the board as a whole are critical. These assessments must measure the quality of governance, strategic decision-making, and institutional outcomes to identify gaps and areas for improvement. Ensure Independent Performance Evaluations: An external body must assess and publicly disclose board performance to reinforce transparency.

  • Public transparency:

Results of performance evaluations should be made publicly available to build trust among stakeholders and ensure boards remain transparent, accountable, and aligned with public expectations and publication of annual reports should be mandatory.

4.Avoiding over boarding and conflicts of interest

  • Time commitment: 

Individuals serving on multiple boards risk spreading themselves too thin, compromising their focus and effectiveness. Appointments should consider the time and dedication required to fulfil governance responsibilities.

Conflict of interest management:

Sri Lanka must enforce policies requiring full disclosure of board memberships and potential conflicts of interest. Directors should be mandated to recuse themselves from decisions where conflicts arise. These practices align with global standards followed in Australia and the United Kingdom.

5.Due diligence for appointments

  • Pre-acceptance evaluation:

Prospective board members should undertake comprehensive due diligence to understand the institution’s operations, risks, and challenges before accepting appointments. This ensures informed decision-making and commitment to governance excellence.

  • Government oversight:

The Government must introduce stringent background checks and competency assessments to ensure candidates meet established governance criteria. Past pledges, such as those made by former President Gotabaya Rajapaksa, often fell short due to politicised and ineffective appointments. A transparent, non-partisan process is critical to improving governance quality.

6.Promote diversity: A diverse board brings broader perspectives, enhances decision-making, and ensures balanced leadership.

Why Sri Lanka needs reform

Sri Lanka lags behind global standards in holding board members accountable for governance failures. The absence of a structured framework enables inefficiency and corruption to thrive, eroding public trust and institutional performance. Without meaningful reforms, politicisation of board appointments will continue to hinder progress.

Conclusion

Reforming board practices in Sri Lanka’s Government agencies is not merely an administrative necessity. It is a moral imperative. By prioritising transparency, professionalism, and accountability, Sri Lanka can rebuild public trust and foster institutions that serve the people effectively.

Sri Lanka has a unique opportunity to establish boards that act as custodians of public interest rather than vehicles for political agendas.

By implementing these reforms, we can create a foundation for strong, ethical, and effective governance that benefits the nation for generations to come.

Sri Lanka needs to learn from international best practices, including the governance standards of Australia, the USA (Sarbanes-Oxley Act), the UK Corporate Governance Code, and Singapore.

(The writer is a passionate advocate for good governance and institutional reform, with decades of experience in leadership, strategy, and public service. As the former Group CEO of Sri Lanka Telecom, Lalith has a deep understanding of the challenges and opportunities within state-owned enterprises and the need for efficient, transparent governance. His commitment to national development and reform stems from his belief that Sri Lanka’s progress relies on accountable leadership, ethical practices, and systems that prioritise public welfare over politics. He continues to share his insights through articles, speaking engagements, and advisory roles to inspire meaningful change for the betterment of the nation. He could be reached via email at [email protected].)

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