Strengthen role of genuine Independent Directors in quoted companies

By Gihan De Silva

The accepted definition of “Independent Directors” is that they are not associated with the organisation in any form except for holding a seat on the Board and have no material relationship with the organisation. This requirement helps Independent Directors to avoid developing a conflict of interest and to maintain an objective viewpoint in decision making processes of the quoted company with hundreds of small shareholders.

Like most things in Sri Lanka we know that this is only a wish, in reality the Independent Directors in our big companies are mere pawns of the company bosses. If the respective Boards and the minority shareholders honestly examine the conduct of their Independent Directors, they will see what scoundrels many of them really are. It is well known that some Independent Directors act as brokers for company bosses, while others provide professional services like law, accountancy or secretarial services, directly or indirectly.

So much for being independent!

The Securities and Exchange Commission is considered the watchdog of our stock market.

In a country like Sri Lanka where most of the public companies are controlled by primary holders controlling more than 50% of the company stock, the SEC’s role in protecting the interests of minority public shareholders is paramount. Although it is expected of so-called Independent Directors to protect small shareholders/stakeholders, often these directors are themselves sleazy, cosying up to the company bosses and collecting fees and other benefits in different ways.

If the SEC demands these Independent Directors to declare in the form of “sworn affidavits” the various benefits they have received from the company/its controlling owners, the truth will be known.

It is sad that our SEC is not examining the failure and the gross abuse of trust by these so-called Independent Directors. The SEC should take swift punitive action barring them from holding office in public companies if it is found that they have neglected their duties as trustees of minority interests in these companies.

Perhaps even the laws have to be changed, and the role of independent directors strictly defined. Any independent director in breach of his ethical duties should be ineligible to hold office in public companies for a lengthy period

If the SEC takes a passive role the same disaster that befell thousands of depositors in corrupt finance companies can happen to the minority shareholders in public companies. An active alertness by the watchdogs is extremely vital in a country like Sri Lanka where corruption and sleaze are considered fair means in commercial matters. An area of particular betrayal of trust happens in large conglomerates where some companies in the group make profits while others are in deep debt and near bankruptcy. The owners of these companies transfer funds from these profitable companies to their loss making companies for tax manipulation or money laundering. The minority shareholders are in the dark about these transfers of funds from these profitable companies which should really be their profits. The so-called Independent Directors are colluding in these related party transactions which harm minority shareholders. The minority shareholders are robbed of the fruits of their investment.

I hope the authorities and even the various companies realise the questionable quality of these Independent Directors and take firm action to strengthen the role of genuine Independent Directors for the sake of developing a proper equity market.