Some aspects of Corporate Governance
Corporate Governance is constantly under discussion – and rightly so. Many articles have been written on it, one of the most comprehensive being the “Code of Best Practice on Corporate Governance, 2013″ issued by the Institute of Chartered Accountants of Sri Lanka.
There is one section of it that causes me some concern. I refer to section A5 on page 4 – ‘Board Balance’. In this section there are references to “Independent Directors”. My idea of an independent director would be a director who is independent of any other individual connected with the company. He would be independent in his judgement and his actions. The drafters of the Code would probably not disagree with this. However they have gone on to define in section A.5.4. certain circumstances in which a director would not be considered to be independent. Some of them I find puzzling. One of them is ‘. if he is a significant shareholder of the company.’ Let us, for argument’s sake, say that if he has anything more than 5 per cent of the shares his stake would be considered ‘significant’.
This would mean that if he holds 6 per cent he loses his ‘independence’. I cannot see the rationale for this. I would have thought that an increase in his stake would increase his concern for the health of the company. He would have a greater concern for its welfare. It would not adversely affect his independence in any way. It should increase it. But the drafters of the Code obviously give a different meaning to ‘Independence’ in this instance.
Let me now draw attention to a lacuna in the Code. It does not give any guidance regarding what an independent director should do if the Chairman proposes doing something that the director believes would not be in the best interests of the company. Let us assume that the director has the courage to point this out. After the matter is discussed one of two things could happen. The Chairman could accept the director’s point of view and withdraw his proposal. If that happens there is no problem, and the director would be pleased that he has succeeded in doing his duty. On the other hand, it may happen that the Chairman does not change his mind and decides to go ahead with his proposal. It is here that I have strong views on what should ensue.
The director should calmly accept the Chairman’s ruling but insist that his dissent is recorded in the Minutes. This advice is lacking in the Code. As a consequence no record is made of what may be a significant decision with far-reaching consequences for the company. My experience after over 50 years in the private sector is that there are very few ‘independent’ directors on my definition of independence given above. The vast majority would never dream of contradicting or questioning the Chairman at a board meeting.
They would not dare to ‘offend’ the Chairman. They might even go so far as to consider it improper! That is the reason why so much goes by default in companies and corporations. It is also the reason why directors who do this soon earn the reputation of being ‘diifficult’.I can afford to propound these high standards of independence because I have observed them myself. I was on the board of the State Rubber Manufacturing Company many years ago, having been nominated onto it by the Minister who knew me personally. Things went quite uneventfully until one day the Minister fell out with a lawyer friend of his who had done some work for the Corporation. Rather pettily the Minister instructed the Chairman not to settle the bills submitted to the Corporation by the lawyer. Fairly typically the Chairman and the board were quite ready to humour the Minister, even reluctantly. I was outraged by the injustice of it and wanted the Chairman to minute my dissent. A few weeks later the bills were settled, and the Minister never said a word to me about it. Courage and Independence go hand in hand. Both are necessary for success.