Financial Times

Minority Rights – Surely not in Sri Lankan companies!
The recent outcome, following the high profile extra ordinary general meeting of the most profitable local bank with sustainable competitive advantages, was interpreted by some as a victory for minority rights in Sri Lanka. This proposition is far from the truth. There was never a high level of commitment to minority rights in companies in Sri Lanka.

If there is such a commitment how come the election, re-election by rotation and re-election of those over 70 years in age are all handled in such a casual fashion without justification of the capability of the directors and the special value they bring to the board room in assuring good governance and shareholder value enhancement. It is known that some directors adopt a strategy of meeting the minority shareholders who arrive early, ahead of the meeting to avoid questions being raised at meetings.

Minority shareholders must also bear a large proportion of the responsibility for not exercising their role in demanding accountability and good governance.
How many boards annually assess their performance using the format recommended in the Code of Best Practice for Good Governance of the Institute of Chartered Accountants, made compulsory by the Securities Regulator for listed companies? How many boards allocate time to assess how they can serve their trustee and governance roles better and with more efficiency and effectiveness leading to enhanced shareholder value? How many boards assess the general and specific needs to enhance the knowledge, skills and attitudes of directors to guide companies? How many board members allocate a minimum of 80 to 120 hours per annum for capability development, to prepare for meetings, follow up on meetings etc as recommended by some Institutes of Directors? The answer to all of the above questions being “a very few, if at all”, how can there be a commitment to minority rights?

This issue of minority rights is further compounded by some directors regularly attending meetings not having read and at times even without opening the board paper packet and at times making the meetings a place for a regular siesta and feasting.

If a survey is carried out amongst directors to assess their knowledge of and commitment to company law, minority rights, the code of best practice of good governance, expected board room practices, binding key provisions of the articles of association and the memorandum of association objects clause, you will be surprised with the results that are bound to have markings in the lowest quartile.

It has now become a fashion to publish in annual reports a governance report.
This also delivers nothing when the very same company accounts show that company resources and even policyholder resources having been pledged as security for loans obtained by the majority shareholders, contrary not only to expected norms of good governance and minority rights protection but also outside the legal framework. What guidance can minority shareholders expect from professional independent auditors who believe in such a case a note to the accounts instead of an audit qualification or a highlight would suffice.

If directors care for the rights of minority shareholders and creditors, will they not regularly carry out with diligence a review of the “going concern status” of the company, its liquidity, solvency, productivity, effectiveness of resource management and sustainable competitiveness? If they do so how come we have companies going belly up suddenly, continuing to operate with even more than half the equity wiped out, (some times even without a audit qualification) and with large losses due to not having effective risk mitigation strategies in place.

The regulators have also let down the minority shareholders, with many critical issues being determined on a strict interpretation of the words of the statute and regulations rather than the actual intent and spirit.

The best examples have been in respect of the action of majority shareholders “acting in concert”. Even the tax authorities have not supported the minority shareholders by failing to use the provisions relating to “deemed dividend distribution”, where major shareholders do not pay an optimum dividend and fail to justify the rationale for low dividends.

With the auditors, financial analysts/intermediaries and the financial media being more concerned of the repercussions of being truly independent and taking on the leaders of business houses that maintain their cash flows, what hope can minority shareholders have as institutional shareholders also fail to exercise their rights to accountability.

With legal delays and high costs, lack of an effective and independent ombudsman/arbitrator, and effectively enforced chamber codes of conduct, a state of hopelessness faces the minority shareholders.

In the context of the above it was no surprise that a former business leader advised the minority shareholders to seek salvation in organized action outside the legal framework including boycotts, protests and demonstration of peoples power as the way forward to gain due accountability. (The writer could be reached at - wo_owl@yahoo.co.uk).

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