Strengthening Yahapalanaya in the

financial sector

The Government decision to pay GK depositors highlights over and over again the
need for better regulation, the need to make people accountable and improve
governance in the financial sector

Friday, 24 July 2015

The level of debate on good governance (Yahapalanaya) has helped the
many Yahapalana activists to move the topic to the center stage quickly
and decisively in the last eight months.
The 19th Amendment was a huge victory for good governance. On the
other hand, the regulators have also been forced to reexamine their views
on how institutions should be organised and governed and they have been
made to sweat out to get their act together and to promote good

governance within their own institutions.

The Government decision to pay GK depositors highlights over and over
again the need for better regulation, the need to make people accountable
and improve governance in the financial sector. The role that corporate
governance plays in corporate performance is now well documented.
The success of a company is often directly connected to the character and
the relationship of the directors and the top management of the company
and when directors dont put self-interest and self-preservation ahead of
stakeholder interest.
Good governance in general gives the company the protection to operate
effectively, the ability to do whats right for the company and for the
shareholders, win the confidence of the public and improve the public rating
of the institution. Promoting good governance ultimately separates good
companies from poor-performing companies.
Sri Lanka
In Sri Lanka, attempts to improve corporate governance in the past have
been through the adoption of voluntary codes. We have generally followed
the British methodology of enunciating principles rather than rules. The
issue of governance has much to do with a value system and unless the
values are clearly accepted, perhaps the only other way in which the end
could be achieved is through imposition, although this is distasteful.

Some of our companies have chosen to i

nterpret these principles in a manner that gives them the flexibility to
ignore the principles when it suits them. Thus, in the context of Sri Lanka,
the introduction of a mandatory code, which incorporates Principles and
Rules to be followed, was timely, desirable and commendable, simply
because financial institutions occupy a special position of trust in the
national economy.
They create financial stability and shape the pattern of credit distribution
and overall supply of financial services. Hence there is a necessity for
enforcing effective corporate governance structures in the financial sector.

Better governance
Then one of the key factors on which the regulator has sought to build a
better governance framework is by having a number of independent
directors on boards. While this is commendable in theory, it needs to be
borne in mind that mere independence as defined in the code will not
ensure that the director will or can make the required contribution.
In fact, given the incestuous corporate relationships prevalent in our small
country, the Chairmans school buddy who fits the codes definition of
independence may in reality be less independent than someone who is
not independent in terms of the code.
It is also a matter for debate whether the so-called independent directors
who receive fixed and rather nominal fees for their services and have no
real stake in the business are sufficiently motivated to enhance enterprise
value.
However, true independence and effectiveness of an independent
director can only be measured by the directors actions in the boardroom
and the freedom and willingness to leave the board if he is forced to
compromise on the principles of good governance and not merely through
the application of rules.

Boards therefore need to somehow find broader sources of information, so

they are not relying on one or two people, there is no substitute for
spending time with management of different departments or sectors having
them present directly to the board, visiting operations not interfering but
to understand what is really happening.
A board is expected to create and enhance the competitive advantage of
the firm, identify and manage corporate governance risk at firm level and to
overcome the systemic risk across the industry through shared standards of
corporate governance practices.
Future
The practice of good corporate governance followed by financial institutions
will allow them to gain the trust of the depositors, investors, the customers
and the community at large. This will have a positive impact on the firms
reputation and it will be recognised as a fair and a transparent company.
This image will help the firm to prosper in the long run and achieve its goals
more quickly.
In the final analysis, the solution for good governance can only lie with
boards; they need to realise that good governance can benefit their firm in
many ways. They have to work up the courage to create exciting
challenging jobs with real decision making authority to both senior
executives and others alike.
Therefore, independence is not about no-shareholding, it is more about
how independent the director is in his thinking. Finally, good corporate
governance is about instilling the right values into the people and also to
influence the company to move beyond just the short -term profit
consideration.
(The writer was a bank director from 2003 to 2014.)
Posted by Thavam