Financial Times

Directors commitment to ethical behaviour high in Sri Lanka - survey shows
Corporate Governance Survey by KPMG Ford, Rhodes, Thornton & Co.

The key findings of a survey recently conducted on corporate governance in Sri Lanka were mixed on several issues but results show that board commitment to ethical behaviour is high and that the audit committee with greater power to investigate financial reporting is considered as the most important principle to ensure good corporate governance.

The Corporate Governance Survey by KPMG Ford, Rhodes, Thornton & Co. show mixed views on the independence of directors with director succession becoming a challenge for many companies. Further, board involvement in strategy and goal setting is at a high level but could be higher.

Findings, which are available on the KPMG website, also show that the performance measurement of the board and directors may require further enhancement and the audit committee with greater power to investigate financial reporting is considered as an important principle to ensure good corporate governance.

According to the survey, corporate governance is the system or process by which corporate entities, exercising accountability to shareholders and responsibility to stakeholders, are directed and controlled to achieve sustainable improvement in shareholder prosperity. It provides the structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.

In the aftermath of high-profile corporate scandals in recent years as well as the introduction of corporate governance rules by the Colombo Stock Exchange (CSE), corporate governance has become a central issue in organization management. The survey results reflects the high awareness by business leaders in Sri Lanka of the general importance of corporate governance and over 80% of respondents consider is as contributing to the organization's overall performance.

In an introduction attached to the survey, Senior Partner at KPMG Nirmal Fernando stated that recent corporate collapses at the global level, increased regulatory requirements and stronger stakeholder interest in companies has created a positive and proactive interest in corporate governance practices across the globe. At a local level, Mr. Fernando stated that many companies are improving transparency, stakeholder accountability and even extending towards community development and justification of social costs. The improvement of Corporate Citizenship created both quantifiable and non-quantifiable benefits for the corporate institution as well as the various communities with which in interacts and thus facilitates business improvement and sustainability.

KPMG stated that the respondents of the survey are chairpersons, chief executive officers, chief financial officers and other senior executives of major companies listed on the CSE, encompassing different sectors.

Key Findings
Senior executives have high awareness of the benefits of corporate governance: The survey results show that senior executives in Sri Lanka are generally well aware of the general importance of corporate governance. Over 80% of respondents consider corporate governance as contributing to the organization's overall performance and shareholder value.

Most senior executives are satisfied with the current balance between executive and non-executive directors:The existing balance is considered appropriate by 87% of respondents. Most companies in the survey already have a sufficient number of non-executive directors that is necessary to satisfy the requirements by the CSE.

Mixed views on the independence of directors:While some senior executives have high expectations of independent non-executive directors for balancing conflicting interests of the board, others see that mere independence of directors would not improve the company's performance.

Performance measurement of the board and directors may require further enhancement:
Board performance is periodically evaluated in 55% of respondents while executive directors' performance is evaluated by the board in 62% of respondents. For clear accountability of the board and executives, it is essential to measure their performance based on predetermined key performance indicators and link their remuneration to their performance over a long run.

Board involvement in strategy and goal setting is high, but could be higher:In 74% of respondents, the board agrees on strategies and sets goals for management. Reviewing and approving corporate strategies and setting performance objectives for management is considered to be a key function of the board.

Board commitment to ethical behaviour is high: Ethical values are promoted by the board in 87% of respondents. The strong tone at the top is an encouraging sign. However, some respondents report that they need better enforcement mechanisms.

Succession is a challenge for many companies: One fourth of respondents either disagree or are not sure that the succession management has been properly planned in their organizations.
Companies are planning to place more efforts on management performance and effectiveness to improve corporate governance: Fifty-four percent of respondents are planning to place more emphasis on management performance and effectiveness. Risk management and organizational performance measurement are also regarded as areas requiring further effort.

The audit committee with greater power to investigate financial reporting is considered as the most important principle to ensure good corporate governance:Ninety-six percent of respondents agree that the audit committee with greater power could ensure good corporate governance within their companies. It seems that respondents strongly relate corporate governance to financial reporting. Full disclosure of off-balance sheet transactions and CEO's certification of the accuracy of accounts are also pointed out as principles of importance.

Most companies have been active in taking corporate social responsibilities ("CSR") initiatives: Respondents report the board's high commitment in sustainable, social and environmental development. Most respondents have been actively involved in social development initiatives such as tsunami relief, educational support and health and safety awareness.

Increasing board involvement is expected: Seventy-seven percent of respondents foresee that board involvement in corporate governance practices will increase. This is a welcoming trend as a well-functioning board is very important for sound corporate governance.

Board commitment and awareness are the key critical success factors: Many respondents point out that board commitment and their sufficient knowledge on corporate governance are the most important critical success factors to attain good corporate governance.

Corporate governance is considered as business principles beyond regulatory compliance: Approximately 80% of respondents consider that the organization would place as much emphasis on corporate governance compliance as they currently do with the regulatory requirements. However, some perceive corporate governance requirements as a burden or mere formality. This depicts the importance of balancing the substantive merits and demerits in the implementation of corporate governance practices.

Positive impacts of corporate governance on business performance are recognized: The majority of executives observe positive impact of corporate governance on overall business performance. In particular, companies benefit from good corporate governance in the formation of new alliances and partnerships with other entities.

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