Sri Lankan bank directors were urged by a corporate lawyer to ‘think straight’ and ‘talk straight’ and cultivate a correct sense of attitudes at a recent symposium for them. “Amongst the critical attributes of bank directors, correct values and attitudes, adequate levels of skills and knowledge, ability to assess the levels of risks which are acceptable from the stakeholder perception and taking risk mitigation steps if necessary, rate the highest,” Naomal Goonewardena, Partner Nithya Partners said, addressing Bank Directors’ Symposium on ‘Repositioning Banking Towards A Higher Growth Path, organised by the Central Bank (CB) early this week.
Speaking on ‘Preventing Scandals through Good Corporate Governance Standards –
Responsibilities of Directors’, Mr. Goonewardena highlighted traits such as the ability to focus on long term business success (and not short term profitability) as being important.
“The obsession with short term profitability must necessarily end,” he said, adding that bank directors should possess the ability to resist ‘following the crowd’. He said that a classic example of toeing the line was when three commercial banks got into identical transactions (hedging) two years ago to be part of an exclusive club, resulting in the inability to assess the degree of their exposures.
He also noted that the aptitude to communicate difference of opinion within boardrooms (notwithstanding cultural impediments to having a questioning attitude) and the capacity to handle conflict of interests’ situations effectively also figure as key qualities of bank directors.
“Within boardrooms, the differences of opinion need to be expressed,” he said, adding that the talent to direct the affairs of the bank by actively participating in the board without however interfering in managerial activity is also important.
He stressed that the consequence of failure as a bank director has serious systemic and long term implications which should never be underestimated.
One Man Shows
Touching on director boards of local banks, Mr. Goonewardena noted that the early part of this decade was exemplified by a lack of regulation on Corporate Governance (CG) related issues.
He said that strong personalities at the helm of the banks result in ‘One Man Shows’.
“Succession plans were not prevalent and during this time, the drop in foreign ownership on the stock market resulted in the banks not being subject to the detailed scrutiny which was customary earlier,” he added.
He noted that the gradual emergence of local groups such as Stassen's, John Keells, Bank of Ceylon, Paints & General, LOLC and Browns etc (in banks) which were dominated primarily by individuals and the increased ownership of licensed commercial banks by the state through Insurance Corporation and Employees Provident Fund / Employees’ Trust was seen during the recent times. However he also noted that some shareholder control is better than no control at all.
“’Other People’s Money’ concept has created local scandals in the financial sector – a classic example being Ceylinco. Also the Finance Company had a full page advert on newspapers on Dr. Lalith Kotelawela (its Chairman) birthday, enhancing the individual’s image,” he said, adding that advancement of personal reputations were predominant in financial institutions which went bust in recent times.
He said that crises in the financial sector arose mainly through such one man shows, lack of controls, faulty business models, etc. “Advancement of employees based on obedience and loyalty rather than competencies was rampant in these organisations,” he added.
Mr. Goonewardena said that these entities were plagued by illiquid assets, high non performing assets, low profitability, high expenses and high Corporate Social Responsibility activities. He also highlighted questionable accounting practices as a main reason for financial crisis’s seen in the recent past.
Speaking on Independent Non-Executive Directors (INEDs), he noted that directors’ longtime association with entities gradually results in an erosion of independence. “Personally I feel that more than 5-years as a director in the same bank is a disaster,” he said, noting that excessive familiarity (with an entity) is an erosion of independence.
He said that independence is a ‘state of mind’ and not a checking the box exercise (in relation to the CG code) and there should be more young blood representing the bank boards.
Way for more young blood
He noted that there are a very low number of young INEDs in banks, presumably arising from not having “credible track records” as required by the CG guidelines. “The INEDs in general are required to provide the advisory role, the watchdog role and the related party monitoring role and in view of the composition of the bank boards, the persons who could be expected to look after the depositor interest fully would be the INEDs,” he said, stressing that INEDs have low knowledge (on bank related activities than the executive directors) and the success of a bank will depend on what they choose and not choose to do.
He also noted that shareholder interest is represented through Non-Executive Directors (NEDs) and it’s important for them to have the ability to see beyond the concept of the bank being “My Bank” or “Our Bank”.
“Complexity of banks makes these directors having a lot more knowledge of the affairs of the bank than the other directors and if they pursue personal objectives, it could put the bank in great jeopardy,” he said.