Corporate governance ‘compliance level at 56%’

By Azhar Razak

A recent study to assess the Corporate Governance Score (CGS) among 59 listed firms in the island has found that 56 percent of those companies included in the survey had adhered to principles of good corporate governance with firms ‘strong’ in some areas but ‘weak’ in others.

The study on CG which is, however, still being finalised is conducted by a team of academics headed by Dr Hareendra Dissa Bandara, director, Financial Services Academy of the Securities and Exchange Commission of Sri Lanka, who is also a senior lecturer in corporate governance and Finance at the Faculty of Management Studies and Commerce of the University of Sri Jayewardenepura.
“Although we can’t still reveal the names of the companies until we have finalised discussions, we have found that four out of five firms who had topped the CGS scores are from the category of ‘Banks Finance and Insurance’ with other firms in the top 10 CGS scores from the diversified, hotels and manufacturing sectors,” Dr Bandara told a recent seminar on corporate governance organised by the Financial Services Academy, the training arm of the Securities and Exchange Commission (SEC).

Explaining the composition of the scores, he said that, firms had overall achieved a compliance level of a remarkable 67% with regard to specific areas like engaging in strategic thinking and planning and determining future direction, 64% compliance on policy formulating practices and legal and ethical compliance but were weaker in other areas such as board – staff roles, monitoring & evaluation practices and stakeholders compliance levels at 46%, 47% and 48% respectively.
“The methods of data collection deployed for the study (conducted from 2006-2010) were through triangulation, questionnaire survey, informal interviews, Annual Reports, other publications and GRIS while the objectives of the study is to understand the current views on Sri Lankan corporate boards and examine the level of compliance of Sri Lankan companies to the CG principles based on Governance Research Institute of Sri Lanka (GRIS),” Dr Bandara outlined.
Meanwhile, Jane Diplock, the chairperson of the executive committee of the International Organization of Securities Commissions (IOSCO) and the current chairperson of the New Zealand Securities Commission, who also spoke at the seminar said recent events in the corporate world such as the global financial crisis has further emphasised the importance for companies to adhere to the best principles of CG.

“Following the recent set up of the International Integrated Reporting Committee (IIRC) it is possible that a few years from now, Environmental, Social and Corporate Governance (ESG) may be made a requisite for firms to comply,” she remarked outlining that the present jurisdictional frameworks may be pulled into broader international frameworks.
She argued that good governance relates to good business quoting that a recent survey conducted by KPMG had suggested that 84 percent of 200 global institutional investors were willing to pay a premium for shares in a well governed company.
ESG describes the three main areas of concern that have developed as the central factors in measuring the sustainability and ethical impact of an investment in a company or business.
Within these three areas are a broad set of concerns that are increasingly being included in the non financial factors that figure in the valuation of equity, real-estate, corporations and all fixed-income investments.

ESG is the catch-all term for the criteria used in what has become known as Socially Responsible Investment.
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.
The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.

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