Good governance should be in all companies, not only listed ones
The caption in the Business Page of the Daily Mirror recently read “Tough Regulator will ensure better governance”.
This is a positive and welcome signal for the country’s capital market. In Sri Lanka there are many public companies which are not listed where the control is exercised by few individuals/families.
The minority shareholders very often are neglected and even their rights are not recognised.
Those in control operate the companies as if they are the sole owners, besides paying themselves huge salaries and charge all their personal expenses to the company accounts. Many of these companies very often run at a loss and no payment of dividend is therefore possible. These companies resort to large scale borrowings from banks and the funds so obtained are not deployed in the interest of the companies.
The banks also encourage lending as they have to meet lending targets. More often than not these borrowings end up as non-performing loans.
The banks in the composition of lending, makes provision for such risks, thereby increasing the lending rates to the general public which has a negative effect on growth in the country and competitiveness for businesses. Such lending can also have a serious effect to the banking system.
The solution lies in ensuring governance at these companies. Provisions in the Companies Act spelling out rights to minority shareholders have not been effective in controlling the acts of the directors of such companies.
The auditors only express an opinion on the financial statements and take the position that their mandate is for expression of opinion on the financial position of the company and not on governance issues. Bad governance therefore has repercussions on banks, loss of tax revenue, risk of closure of business and its impact of employees and finally the minority shareholders.
The Registrar of Companies’ role is very limited. Minority shareholders are unable to enforce some of the previsions in the Act as they involve large legal and other costs.
Now that the new government is addressing issues of the past with a view to bring good governance the Minister in charge of this subject should address the matters highlighted. A special unit set up under the Registrar of Companies for a special audit on a random basis selection of companies setting out specific terms of reference may serve as check on organisations and mitigate the bad governance process.
Stephan Ignatius
Moratuwa