Directors stepping down

By Duruthu Edirimuni Chandrasekera

With the advent of the new governance regulations for licensed commercial banks (LCBs) most who hold director positions will have to vacate them making way for fresh blood.

Ananda Silva, Director Bank Supervision told The Sunday Times FT that this section deals with the director board's composition in LCBs where it is said that the total period of service of a director other than a director who holds the position of CEO shall not exceed nine years and that such period in office shall be inclusive of the total period of service served by such a director up to January 1, 2008.

In the case of two or more directors who have served more than nine years as at January 1,2008 the code says that out of those whose period of service has exceeded nine years, the longest serving needs to resign by the end of 2008 and thereafter, at the end of each succeeding year, the remaining directors need to have vacated office in sequence, at least one director each year (on the basis of the longest to the shortest length of service as a director) until all directors who served more than nine years as at January 1, 2008 resign. The final date for the completion of the process will be December 31, 2011.

Central Bank Governor Nivard Cabraal said that the Central Bank issued Directions on Corporate Governance for licensed banks, with a view to making the board of directors responsible and accountable for the business of banks and to promote a healthy and robust risk management framework for banks.

"The implementation of these Directions would also provide an opportunity to the market, namely depositors, investors, and other stakeholders to monitor the performance of banks," he added. Silva said that there is also a rule where those who are above 75 years will get one year to retire and those who are between 70 and 75 years will have two years.

The Central Bank in a statement issued early this week has said, that as a result of these Directions, under section 3 (2) of the Banking Act Direction No. 11 of 2007 - Corporate Governance for LCBs out of a total of 212 directors, 36 directors (17%) would need to exit on a staggered basis, due to serving more than 9 years and/or the age being over 70 years. "According to the information available at the Central Bank currently, the possible exits of the directors to whom these provision would apply would be 13 (6%) by 31 December 2008, 10 (5%) by 31 December 2009, 4 (2%) by 31 December 2010 and 9 (4%) by 31 December 2011," it said.

"The Central Bank wishes to re-assure all concerned that, contrary to certain claims made by a few interested parties, there would not be an immediate need for all the current directors to whom these Directions are applicable, to step down forthwith, since adequate transitional provisions have been incorporated into the Directions to ensure a smooth transition."

Silva, explained that under the Basel II guidelines there are three directions - namely supervisory oversight, internal governance and market discipline. "Internal governance was where banks were expected to govern themselves with good cooperate governance, but they did not come up to the mark. Therefore the Central Bank after extensive discussions and inputs from the LCBs themselves, decided to make corporate governance mandatory," he said.

When asked as to why the nine years period to resign from a directorate, Silva said that usually directors are appointed every three years. "So, after three terms they should give a chance for others to succeed them," he explained.

Cabraal said that only seven percent of the capital in a bank is contributed by directors and the rest comes mostly from the depositors. "As such it is important to have a mandatory code of governance to safeguard the depositors," he added.

R. Theagarajah, Managing Director, Hatton National Bank (HNB) told The Sunday Times FT that the corporate code of governance gives impetus to both shareholders and depositors to have confidence in banks.

"I have been involved with the process of putting out this code from March last year and a fair number of inputs have been from me as a representative of HNB," he said.

He said that at HNB there are five directors who fall in to the two categories of the maximum tenure of nine years. "Rienzie Wijetilleke, Dr. V. P. Vittachi, D. H. S. Jayewardena (Harry Jayewardena), M. V. Theagarajah and R. K. Obeysekara come under the over nine year rule, but it is a 'first in first out' rule," he said, adding that the longest serving directors will retire first.

When asked who would go first, he said, "It is not fair to make a comment within the first week that the regulation has come into effect, but these facts will be discussed with board and various options evaluated." However, he stressed that compliance will be achieved "We will comply with the directions as early as possible," he said. banking industry analysts said that it is likely that Dr. Vittachi will step down sooner than Jayewardena followed by the others.

In Commercial Bank, out of the 10 Directors, there including Mahendra Amarasuriya, Chairman, Dr. H. S. Wanasinghe and B. R .L. Fernando will be the first to step down.

"Dr. Wanasinghe is over 70 years old and the other to two directors has each served over nine years," a senior Commercial Bank officer said.

At NDB Bank, there are only two directors - S. T. Nagendra and G. C. B. Wijeyesinghe who will need to step down as they are over the stipulated age limit.

The directors at Nations' Trust Bank does not come under any of the categories.

Nihal Fonseka, CEO DFCC told The Sunday Times FT that presently none of the bank's directors falls into any of the categories. "At the moment there is no one who has either surpassed nine years at DFCC or who is over 70 years, holding directorship," he said.

Sampath Bank has one director - Edgar Gunatunga also its Chairman, who is more than years. Out of the 12 directors at Seylan many will need to retire. However senior officials at the bank refused to comment on the law.

A senior Central Bank officer noted that the age limit of 70 years stipulated was because, 'some directors in LCBs being very old almost never participated at board meetings and thus there was no substantial contribution by them to the bank.' "Due to these reasons, the shareholders and depositors cannot depend on them for the wellbeing of the banks," he added.

However some argue saying that those who have served long in an LCB, have more experience and can be relied upon to do better for the banks, whereas Central Bank is of the view that there should be 'fresh blood' to make them more dynamic.
"The business of banking depends extensively on public confidence.

The boards of directors of banks have a greater fiduciary responsibility when compared to other businesses, as banks primarily have to account for large quantum of depositors' funds which are much higher than the corresponding shareholders' funds.

Therefore, as explained in the Principles to the Directions, the new rules have been framed, taking into consideration the need for banks to: (a) gradually infuse new ideas into boards; (b) keep abreast of the rapid changes in the banking industry, particularly the new and innovative instruments, technologies, products, systems and processes; and (c) manage existing and new risks effectively," the Central Bank statement further said.