Business Times

Stepping up on Corporate Governance practices key to investment

By Duruthu Edirimuni Chandrasekera

Considering the linkages between good corporate governance company performance, and sustainable economic development, improving corporate governance practices has become an important element in the Sri Lankan corporate sector, but they need perking up on certain vital areas, if they’re to attract international capital, according to experts.

“The rights and equitable treatment of shareholders, the role of stakeholders, disclosure and transparency, and the responsibilities of the Board of Directors have gained acceptance in the local listed firms and most observe local codes of corporate governance (CG) in the spirit of best international practice,” Dr. Hareendra Dissa Bandara, Senior Lecturer in CG and Finance, Sri Jayewardenepura University told the Business Times on the sidelines of a presentation on ‘CG best practices and current views on CG in Sri Lanka’ organized by the Securities and Exchange Commission recently.

He said firms are above par on strategic planning, determining future direction and policy formulating practices, according to his study on listed firms, but their monitoring and valuation procedures pertaining to companies’ boards, stakeholder relationships and defining board member and staff roles don’t match up.

“Much of the interest to CG issues in emerging markets has focused on the part governance can play in improving entry for emerging market companies to equity capital, whether from domestic or international sources. An increasing volume of empirical evidence also indicates that well-governed companies receive higher market valuations,” he said.

He noted that this study reveals that firms which participated in the study agreed that good CG is a public good and can be considered a pillar of sustainable economic development on par with good environmental and social practices.

“The degree of interest in CG is quite high (more than 70) and firms hope to enhance their performance and speed-up decision making through their (home-grown) CG systems,” he added. The firms in the land and property sector scored the least at 39% in board-staff roles, which was an area that explored whether the responsibilities of the board are clearly defined and separate from those of the management and staff, board members not assuming roles and responsibilities belonging to staff, etc.
Diversified sector at 70% was the highest in the strategic thinking area and the hotel and travel sector firms were bad at 44% in monitoring and evaluation practices. While the banking, finance and institutional sector recorded 83% in legal compliance it was poor at 41% in the area of relationship with the stakeholders.

“The CG in listed firms needs to have a minimum standard,” Dr Bandara said. Jane Diplock, Chairperson, Securities Commission New Zealand making her presentation on CG best practices noted that by adopting international CG practices, Sri Lanka is in a better footing to attract international capital.

“Improving corporate governance presents opportunities to manage risks and add value to clients. In bad corporate governance environments, poor standards and weak enforcement are barriers to investment,” she told the Business Times.

She noted that CG is a vital plank in investor protection and that good CG is good business. “CG enhances investor confidence and without investor confidence, securities markets stagnate or decline,” she noted. She added that better CG leads to transparency and better disclosure, thus providing the opportunity to establish relationships with all stakeholders in fair and more productive terms.

She also pointed out that the firms’ reputational risk is particularly serious when minority shareholders and other stakeholders stand to lose from governance abuses. “Poor governance undermines the integrity of publicly traded securities and discourages the use of public markets as a means to channel investment,” she said.

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