Corporate Governance Code for Sri Lanka

1. Introduction

"The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company" (Council, 2012)

A strong Corporate Governance code is vital for Sri Lanka with regards to the recent developments and expansions of business industries. The norm is that all the financial institutions and public limited companies should be complied with good governance practices; yet, it is equally important to adhere with good governance by all types of organisations for their own sake. Regardless of the importance of practicing good governance in Sri Lanka, it has been identified that only a few companies are keen to implement the current Corporate Governance Code. (Senaratne, S., & Gunaratne, P. S. M., 2008).

Due to financial reporting with anomalies or poor internal controls and risk management, number of companies on UK and USA were collapsed unexpectedly in the periods of 1980s and 1990s. (Kariyawasam, S. N. 2010, December 19). These failures became reasons to heighten up the interest in Corporate Governance all around the world in order to safeguard the future of world’s economy. For aforesaid results, it was notable to see the rapid development of concerns about Corporate Governance over the past decades and also the outcome has become a significant part in business as well as in the society and economy.

2. Existing Corporate Governance practices in Sri Lanka

Birth of corporate governance goes back prior to colonization, when Sri Lanka was a centralized kingship state (Heenetigala, 2011). Corporate Governance laws have been started to reform since 1990s in Sri Lanka. There is no global corporate governance model applicable in general; however, these reforms show the originations of Anglo American or Anglo-Saxon Structure of Corporate Governance which are being practiced over the time in U.K, U.S.A, Canada, Australia, and the most of other common wealth countries. Ever since Sri Lankan companies work according to certain expectations of shareholders and parameters given by a local code and regulations.

Regardless of these reforms, several significant corporate scandals took place in recent years. In banking industry, first one to go failure was Pramukha Savings and Development Bank followed by the imminent failure in Seylan Bank. (Edirisinghe, A., 2015). Other than that, Touchwood and Golden Key can be identified as biggest business scandals in Sri Lankan business history. These examples indicate that Corporate Governance system in Sri Lanka may not robust enough or the implementation of it is lacking the required standard.

3. Practices by CBSL & CSE

After the introduction of initial code of Corporate Governance best practice in 1997, Sri Lankan companies have evolved gradually over the time. Practices introduces by local security regime that includes regulatory bodies such as CBSL and CSE have had a tremendous impact on Sri Lankan companies.

3.1. Central Bank of Sri Lanka (CBSL)

For licensed Sri Lankan commercial banks CBSL issued a mandatory code of good governance in April 2008. It has been designed based on fundamental corporate governance principles as a series of rules for the purpose of creating a robust risk management model or a framework for banks which promotes accountability as well as transparency through well-defined policies and oversight by the board of directors. “

The aforesaid code of corporate governance is comprehensively set out to address rules and principles for responsibilities of the board, management functions delegated by the board’s composition, board committees, related party transactions and disclosures, roles of CEO and Chairman. (Today, 2017).

Apart from that, CBSL has also released a Direction on Corporate Governance for registered financial institutions under Act, No 27 of 1988 which sets out rules and principles related to financial institutions as for the same aspects as described above. (Today, 2017). ”

Insurance companies receives monies from the general public through which they operate by premiums and they can be functioning without the rules applicable to financial institutions. Insurance, banking and investment businesses are globally considered to have been managed with few differences in regulatory administration, yet they have to be monitored according to a same way.

3.2. Colombo Stock Exchange (CSE) & Securities and Exchange Commission (SEC)

It is a must for companies to comply with Code of Business Conduct & Ethics for Key Management Personnel and also it is a must to disclose any waivers of the Code for such personnel in a prompt manner. Further, all companies have to disclose if the company possesses a Code of Business Conduct. If a Code is available with companies, it is required to have an affirmative declaration of all Directors and Key Management Personnel in company’s Annual Report that they have declared compliance with the Code. In case of inability to make that declaration, it is required to state the reason for that inability. (SEC, 2013)

Below mentioned are the key/mandatory areas that a company should have to address in their codes of conducts;

• Conflict of interest

• Corruption & Bribery

• Gifts & Entertainment

• Record-keeping & accurate accounting

• Corporate opportunities

• Fair dealing

• Confidentiality

• Appropriate use of company assets & protection

• Compliance with rules, regulations and laws

• Encourage informing of any type of illegal and/or unethical behaviour

Moreover, Directors are required to disclose whether the business organisation adhere to established practices and principles of good Governance and to what extent. The Directors should also include a governance Report in the Annual Report of the company declaring the extent to which the company’s adherence over it. (SEC, 2013)

4. Corporate Governance Fields other than financial regulations

When discussing about Corporate Governance, financial regulations are not the only area to