Greater independence sought for ‘independent’ directors

There is a growing need for independent and minority shareholders to have confidence in a fair democracy that would in turn, stimulate the stock market. It must be transparent and be run by honest people. These were some of the issues that were raised at a workshop held by the Colombo Stock Exchange (CSE) and the Securities & Exchange Commission (SEC) of Sri Lanka on accountability and governance recently.

K.C. Vignarajah, former Chairman of the Ceylon National Chamber of Industries (CNCI) with an interest in protecting the rights of minority shareholders brought up several important issues pertaining to the regulation of the stock market.

"The Sri Lankan stock market can still be an attractive place despite all the troubles in the country. It is our future but I care a lot that people shouldn't get hurt." Vignarajah feels the SEC and the CSE have let down the investing public by failing to ensure transparency, due disclosure, accountability and the presentation of true and fair financial statements and for not having procedures in place for appointing independent directors and auditors. The controlling interests and executive directors should play no part in the appointment of independent directors because of the direct conflict of interest. "This is where the SEC and others should be involved."

Not only directors but auditors should also be elected by independent shareholders. Since the responsibility of auditors is to audit the working of the management, the fact that management chooses them and is involved in their remuneration does not make for a conflict free situation. "The CSE wants to glamorize and sanctify this conflict situation by getting them to declare they are independent," Vignarajah told The Sunday Time FT. "But there is no procedure. You can't glamorize this. Independent directors should be appointed by independent shareholders and minority shareholders."

The CSE is required to give out the latest accurate information on the performance of the stock market on a weekly basis for the benefit of the investing public. However, a lot of the information is quite misleading. "Sujeeva Mudalige made a good presentation that the values and ratios put out by the CSE were often outdated," said Vignarajah. He added they should be updated immediately, especially after bonus and rights issues. "Otherwise, it would be misleading because investors would make the wrong decisions." According to Vignarajah, CSE Chairman Nihal Fonseka agreed with those observations and promised to look into the issues in depth and institute some changes.

The SEC has the power to define the code of corporate governance. After all, the purpose of capital market development is to attract people to the stock exchange. Vignarajah's greatest worry is that the CSE, with its opening of branches in Matara, Kandy and Kurunegela, will turn it into a casino. "There should be informed choices which everyone can support and be proud of.
The companies and directors should be acting correctly. Otherwise, poor people will invest and it will be a major fiasco." The stock market is made on choices so the information must be accurate which is why the SEC and CSE must perform their duties with prudence.

Unfortunately, even the laws and regulations are made to satisfy the directors. "It is not surprising that some of the auditors have jumped into the fray, enthusiastically taking the side of the directors, again exhibiting the characteristics of being lapdogs of the directors, instead of being the watchdogs of the members and of the public interest. This is very unfortunate, as indeed the story of Enron, WorldCom, etc. is being enacted here. In those countries, the miscreant directors and auditors went to jail, and one committed suicide out of shame. The SEC, CSE and even the Institute of Chartered Accountants of Sri Lanka (ICASL) should wake up to their responsibilities and the investing public," he said.

Director General of the SEC Channa De Silva said that the oath the directors have to sign declaring their independence is the first step towards a greater level of corporate governance. "As a first step, it is sufficient." The SEC is planning on running several workshop and programmes on the independence of directors. De Silva added that directors will have to stand as professionals and answer to the public when they take decisions and exercise due care and diligence. "This is a global issue. In companies which have good dialogue with their minority shareholders, it is right for the main board to consider their nominations but the nomination has to add value to the organization. It has to be a person who has a good background and good experience and adds value to the organization."

"We are trying to make corporate governance mandatory through a process which has two steps. The first is for companies to publish their annual accounts from 1 April 2007 to 31 March 2008. After 1 April 2008, it will be totally mandatory for companies. If they don't comply, they will under the rulings of the consumer listing requirement and violating a condition and they will be exposed to that," he added.

“It appeared from SEC Director General Channa De Silva's presentation that he's aware of the need to improve standards in presentation and disclosure to stakeholders. He seems genuine in this attempt. Whether he will actually implement them or if some commissioners are blocking him is seriously in doubt. He should build a healthy dialogue with minority shareholders," he said.