With recent developments and expansion in the business arena in Sri Lanka, it is vital to move on with a good Corporate Governance Code. It is a fact that the responsibility of overall governance should be borne by the management of public limited companies and financial institutions. However; it is important to practice good governance by all companies, for their own benefit. Despite the fact that it’s vital to practice good governance, the figures indicate to us that very few companies in Sri Lanka are keen to implement the current Corporate Governance Code.
‘Corporate Governance is the system by which companies are directed and controlled’ (The Cadbury Report, 1992, 2.5).
Corporate Governance reflects in which ways companies should be governed. Companies governed by Corporate Governance achieve their objectives. The objective of a company is maximising the shareholders’ wealth. A company is a legal entity and it takes on a collective and organised entity through many different individuals. It is working towards to achieve a common goal.
This legal entity has to operate effectively and efficiently to achieve the common goal. It must implement the procedures and practices to ensure that the company effectively operates to achieve objectives. The legal procedure of the company is set out in its written constitution. Apart from the main legal documents, other procedures are embedded in the code of best practice.
In the UK and USA there were a number of companies, which collapsed unexpectedly in the 1980s and 1990s. Financial reporting of irregularities or inadequate internal controls and risk management were analysed as the causes of these corporate failures. With these scandals interest in Corporate Governance has been heightened in the world, not to talk about a grim future, but to talk about a sanguine future of the economy in the world. Therefore; the concerns about Corporate Governance have developed rapidly during the past decades and the outcome has taken an important part in business as well as in the economy and society.
Therefore if Sri Lanka is looking forward to many investors to come to the country, the companies must seriously take action to implement the current Corporate Governance Code. Although there have been many research studies carried out in developed natios to establish the relationship between firm performance and Corporate Governance, the empirical research evidence on this area is open in Sri Lanka. However the practice of Corporate Governance is being considered important in many nations and specially in developed countries - eg. countries such as UK, USA, China. Creating new positions for Corporate Governance, while they have their own Company Secretarial team is evidence as to how those countries value the practice of Good Governance as important for their successes.
Therefore; if Sri Lanka needs to tug the hearts of potential investors, practising a good Corporate Governance Code will immensely help to attract more investors. The recent scandals in Sri Lanka (Ceylinco Group is a good example) should prompt us to put our thoughts into action to implement Corporate Governance in our companies. I believe that it is the responsibility of the Colombo Stock Exchange and the Financial Regulatory Body to encourage companies to implement the country’s Governance Code. Therefore; for a diversified business future in Sri Lanka, it is time for all Boards of Directors to put their thoughts to practice Good Corporate Governance. Furthermore; practicing the Current Corporate Governance Code will help relevant authorities to establish a proper Corporate Governance Code in Sri Lanka.
(The writer is a professional Chartered Secretary practising in the UK and Sri Lanka. She has a Masters degree in Corporate Governance)