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The fact that
the rate of inflation declined in 2002 does not mean that prices
declined. What the indices indicate are that prices continued to
rise in 2002 on top of the increases in the previous years. Only
the rate of increase in prices had decelerated. What this means
is that in the last two years (2001 and 2002) prices increased by
about 25 percent, a high burden to consumers with fixed incomes.
Household expenditure that cost Rs. 10,000 two years ago, would
now cost Rs. 12,500. A second problem is that the indices cover
mostly basic consumer items that are consumed by the lower income
groups. The consumption patterns of the readers of this column are
most likely hardly reflected. The indices
certainly reflect the price rises of basic commodities like, rice,
wheat flour, sugar, bus transport costs and basic drugs that may
be a small proportion of expenditure of the middle class and certainly
the affluent. These indices do not reflect price increases of processed
and luxury foods or many items of daily consumption of most readers.
If those items you consume have risen in prices more than the basic
items covered by the index, then your cost of living is underestimated
by the index. A third statistical factor is that the annual increase
in prices is an average of prices for the year. As pointed out earlier,
in 2002 prices rose much less during the earlier months and gained
momentum in the latter months. When averaged the price increase for the year is lower than that for the latter months that are in the minds of the readers. While the readers' perception of price increases is governed by the most recent experience in purchases, the index is an average. Finally, it must be mentioned that the price increases in the indices are not as slight as the figure would tend to suggest. A 25 percent increase in prices in the last two years is a material increase in prices. Business ethics
and good governance Today, Corporate
Governance has evolved to a level where the outcome pursued is "a
system which assures corporate decisions that are efficient and
effective". At the same time, the foundation for the practices
seems to be resting on the philosophy that corporate decisions need
to be internally challenged in an effective manner in order to assure
and establish its validity and long-term sustainability. Perhaps it
could be said that there is almost a paradigm shift from the previous
concept of "managed" corporations to the more modern model
of "governed" corporations. This shift is based on the
fact that "managed" corporation boards hired, monitored
and fired management, while today's "governed" corporation
boards are expected to promote and foster efficient and effective
decision-making. Hence, in a way, corporate governance is no longer
pre-occupied only with structures and procedures such as Audit Committees,
Remuneration Committees, Internal Control systems, etc; but more
importantly, concerned with governance processes which attempt to
decrease the possibility of corporate mistakes, and if mistakes
are made, increase the speed at which corrective action is taken. Irritants In Sri Lanka
it is observed that many companies are today influencing the overall
lifestyles of millions of people. Nevertheless it is noted with
some concern that there are very few governance policies or practices
which addresses those concerns. While many practices are designed
from the point of view of safeguarding corporate stakeholders, there
appears to be few which are to protect the environmental, national
and local communities, employers, customers, suppliers and contractors.
This wide gap is being felt by many and today several civil groups
are questioning the validity of the governance practices as existing
today, in that they are not wide enough to cover the host of other
stakeholders as well. While there
are laws to protect the environment in Sri Lanka, and these are
being enforced by statutory authorities and local bodies, there
are very few companies who voluntarily disclose their corporate
policies vis a vis the environment. There is also a general perception
that corporations recklessly and negligently pollute the environment
in many ways and in that context, a demand from the investor community
that corporations should publicly disclose their policies and practices
to safeguard the environment as a part of their overall CG practices,
may be a step that would be of great benefit to the community. Exploitation While there
is a regular lament within the corporate community about the very
low productivity in the country and general labour unrest and inefficiencies,
little has been done to address these issues in a positive customers
exploited practical manner. In Sri Lanka,
many companies seem to operate on the basis that customers, suppliers
and contractors are groups that need to be exploited to the maximum.
Few companies function on the basis that the long-term health of
each of those groups is vital to its own long-term sustainable development
and growth. It appears that many of the aspects of good governance
are almost completely ignored in Sri Lanka and it is perhaps time
that special efforts be taken to include such practices into the
range of practices that should be recommended for adherence by corporate
entities. The ICASL ED
on Board Room Governance has provided for Board Processes and Evaluation
and hence the Sri Lankan literature could be said to cover these
aspects to some degree. However, as per the results of a survey
carried out by the Cabraal Consulting Group (CCG) in September '02,
survey the physical practices and application of these processes
seem to be woefully inadequate. In emerging
economies such as Sri Lanka, corporate entities face a severe dearth
of qualified and competent persons who may be able to undertake
such responsibilities. In the past
and even at present, in the case of certain companies, non-executive
directors were usually retired "eminent persons" who were
either ceremoniously adorning boards, or persons who were being
rewarded with directorships because of some past favour he or she
had rendered to the CEO. Perhaps rather unkindly, some non-executive
directors were even referred to as being "fat, dumb and comfortable."
Board meetings were usually "cakes and tea" affairs with
board members usually jostling amongst themselves to endorse whatever
decisions the Chairman or CEO wishes to take, as fast as possible. Fortunately,
events and initiatives of the recent past have changed this situation
to some extent. Today's shareholders, especially some of the institutional
shareholders and some rather vociferous minority shareholders, are
a lot more alert of the directors' contributions to management,
and they are now demanding that non-executive directors really earn
their fees. The non-executive directors are not spared flak when
companies decline. Many are in fact, being held liable for all of
the company's actions. Judges and regulators are also tough on them.
These developments have resulted in creating a marked change in
the overall functioning of non-executive directors. So much so,
some persons are now nervous about taking positions as directors
and are even shying away from being directors. Some others may however
say, it is a case of "when the going gets tough, the not-so-tough
running away" and not hence contend that one should be too
uncomfortable about such an outcome. Audits too
onerous? At the same
time, the old story that auditors are getting too cozy with their
clients is also surfacing... again and again. A survey conducted
by the Investor Responsibility Research Centre revealed that 72%
of the $5.7 billion in fees paid by 1,200 public companies to their
auditors in 2000 was for non-audit services. Similar findings would
probably surface in emerging economies as well. Over the past
three or four years, it would have been observed by the Sri Lankan
business community that many corporate entities proudly state in
their annual reports that they are complying with a wide variety
of corporate governance practices. They also state very diligently
that, as good corporate citizens, they adhere to some Code of Best
Practice or another. Notwithstanding such "good" feelings, there is today a growing and nagging concern among many investors who have some insight into the manner in which many Sri Lankan companies actually operate, that companies do not, in actual fact, follow the Corporate Governance practices in spirit and form, although they say they do so. In the course
of the empirical study on Corporate Governance (CG) Practices in
Sri Lanka carried out by the Cabraal Consulting Group in September
2002, one of the stunning findings was that sufficient evidence
was not available to even weakly confirm that many of the corporate
governance practices that corporate entities said publicly that
they were following, were in fact being practiced professionally
and diligently. Nevertheless, probably in order to show a good picture
in their Annual Reports and to appear as a "good corporate
citizens", practicing "state of the art" corporate
practices, such claims seemed to have been made quite nonchalantly
or perhaps even casually. In the absence of an independent and professional
review of the company claims, no disbeliever could state with any
certainty or conviction, that some practice or another was not carried
out or that the adherence to some other practice was overstated
or exaggerated. This outcome therefore, raises a very significant
issue. i.e., when corporate entities are technically given the opportunity,
or even coaxed and encouraged into making "price sensitive"
statements, (there is enough evidence to show that corporate governance
compliance statements are "price sensitive") and such
claims are not subjected to any review as to its veracity, is the
corporate community inadvertently exposing itself to a dangerous
abuse of the system? Could it be said that they may even be tacitly
encouraging and/or promoting such abuse? During the
Sri Lankan survey, it was seen that a number of Sri Lankan companies
assessed during the survey were merely setting out certain selected
extracts from the Institute of Chartered Accountants of Sri Lanka
(ICASL) Code of Best Practice or the Cadbury Guidelines without
a clear link or reference to the rest of those Reports. There was
no clear disclosure as to how those guidelines were actually being
followed. Some of the
larger companies which appeared to be getting conceptual inputs
from specialized Annual Report production firms, seemed to be following
a set template with a pre-configured checklist of reporting topics.
Many surveys across the world have shown that investors pay more
for shares of companies who have good CG practices. The Global Investor
Opinion Survey, 2002 released by McKinsey & Company clearly
showed the importance today's investors place on good corporate
governance. 63% of investors said they would avoid certain companies
with unreliable CG, while 57% stated that they would increase or
decrease their holdings based on the company's CG practices. Over
80% of Asian investors ranked good CG as equally or more important,
relative to financial issues. A significant percentage of investors
(78%) said they would be willing to pay a premium for a well-governed
company. The September
'02 survey findings clearly revealed that several companies which
ranked higher with regard to their stated adherence to CG practices,
displayed higher PE ratios than their counterparts whose stated
CG practices were lower. It could therefore be said with some authority
that investors of today are prepared to pay a premium for companies
with good CG practices. It is no secret
among many in the investing community that the knowledge and appreciation
of governance practices is very limited amongst many directors.
Unfortunately, there are very few who could train such directors
either!! For example, in the case of the implementation of practices
such as Independent Board appraisals, CEO appraisals, CEO succession,
Nominating Committee processes, Remuneration Committee processes,
etc., many directors are not sure as to how those processes could
be worked or even how they should work!! Whistle-blowers In emerging
economies, especially in South Asia, whistle-blowing could be a
somewhat risky enterprise, and it is quite likely that if members
of the staff or top executives were to expose wrong-doing, they
would almost certainly be subjected to harassment and/or penalized
in some way. In Sri Lanka, there have been very few cases where
whistle-blowers have been successful in exposing instances of wrong
doing, but more often than not, the reverse would be true; and it
is unlikely that any material change would take place in this regard
in the near future. An issue that
it is also quite pertinent is the quality, integrity and independence
of regulators. Especially in smaller economies, "old boys clubs"
and "cocktail buddies" have taken root where persons with
obvious conflicts of interest sit on judgement on many corporate
issues, as Members of Commissions, Members of Supervisory Bodies
and other Regulatory authorities. Such blatant disregard of good
governance principles hardly promotes confidence, and should be
exposed and discouraged at every turn. In Sri Lanka
there is a plethora of regulators in many forms. Any person looking
at these institutions from outside is bound to assume that these
organizations are all working satisfactorily, supporting each other
effectively and are all part of a frame work which results in promoting
and ensuring a very high quality of governance in the country. Unfortunately
however, although all these institutions have been established to
fulfil some major need, it is sad that not all are playing such
dynamic and/or useful roles. There are many instances which are
surfacing again and again with regard to conflict of interest, family
bandyism, arrogant or arbitrary behaviour, poor understanding of
issues, obvious bias, painful bureaucratic procedures, etc. These
shortcomings very often make those institutions to be less than
credible and effective. Therefore not only is it necessary to head-hunt
outstanding persons to fill regulatory roles and invite them to
carry out the tasks ahead with integrity and efficiency, but also
restore confidence in the regulatory system by ensuring that there
is consistency in the decision making processes. Shareholder
greed Kelly argues
that corporate boards that represent only shareholders are like
feudal societies that served the interests of the aristocracy. She further
insists: "People say we need better alignment between management
and shareholder interests, but I say no, that's the problem. Paying managers
in stock increases the incentive for them to cook the books or to
engage in shortsighted behaviour that might boost the stock price
now while eroding the long-run value of the company". It is also
fairly obvious that the majority of CEOs' and the directors who
hire them serve together on boards, belong to the same clubs and
business groups or share educational backgrounds. This sometimes
leads outsiders to suspect that social connections and old school
ties play a far more important role than ability and skills. A few
years ago, the Sri Lankan newspapers were full of news and advertise Advertisements
which portrayed a certain CEO and his management team as "masterminds"
who could even turn straw into gold! However, within a few months
it was clear that it was only a huge gold bubble that had been built
up and once this suspicious bubble burst, the company went into
a tailspin and had great difficulty in even surviving. Almost all
the problems arose from the many unwise decisions and recklessness
practiced by the CEO, the board and the CEO's management team. Of
course, as may be expected, when the crunch came, the CEO made a
hasty retreat with a handsome package, hoping perhaps to return
someday to turn more straw into gold!! Our corporate scene has many
instances of this nature to show and would probably experience more
in the future. A few well-run, professionally managed and forward-looking
companies have moved away from this type of "connection"
based recruitment towards more tangible and skill-oriented recruitment
practices and those companies are already reaping the benefits. CEO pay
up At the same
time, CEOs at 23 corporations under investigation for improper accounting
were paid $1.4 billion, or an average of $62 million each, in the
last three years. Meanwhile, their companies' stock values plunged
$530 billion, or about 73% of their total value, and their companies
laid off a total of 162,000 workers!! Another interesting
finding is that the average CEO pay package at major American corporations
has been estimated to be between $ 10 million and $ 25 million,
according to several sources. William J. McDonough, President of
the New York Federal Reserve Bank, decried the fact that while 20
years ago, the average CEO's earnings were 42 times the average
worker's, today the average CEO earns 500 times what the average
employee earns. McDonough notes: "I find nothing in economic
theory that justifies this development... I can assure you that
CEOs of today are not 10 times better than those of 20 years ago."
Perhaps such a disparity takes place in certain Sri Lankan companies
as well, and maybe it is time that remuneration levels were examined,
assessed and a study carried out to ascertain the exact situation,
and as to whether this issue needs any response. The Committee
of Concerned Shareholders and James McRitchie, Editor of "Corporate
Governance" have jointly filed a Petition for Rulemaking with
the US SEC recently. According to the Petitioners, the Petition
seeks to create "corporate democracy and true accountability".
They have requested the SEC to amend its Rules so that all Shareholders,
using the Shareholder Proposal process, will be able to nominate
Director-candidates. They claim that the general understanding that
management reports to the Board is a myth, and that the actual position
is that the board "reports" to the CEO. They insist that
strengthening the definition of "independent" Directors
will have little impact, as long as they (the so-called independent
directors) owe their positions to the CEO. An investor
from Germany has apparently summarized the current system and captured
the spirit of the contention as follows: "When I started to
invest in the USA about 3 years ago, I was sure that elections of
directors are fair. ... So when I discovered that elections of directors
of USA public companies are not democratic I was very surprised
and disappointed. ... This is exactly how voting in communist countries
worked. Everyone could vote, but there was just no choice of candidates.
The point was not how to be elected, but how to get on the election
list. With this system no changes were possible, so there was no
motivation to improve the governance." On the downside
however, this situation has also, perhaps in an indirect manner,
led to many investors tending to perceive and believe that corporations
which follow good corporate governance practices are risk free and
that the good governance practices offer some kind of a guarantee
against business risk and the uncertainty of business as well. The
disappointments being expressed about CG practices when corporate
failures take place is probably a manifestation of this growing,
genuine belief. This is a dangerous and misleading trend and can
quite effectively damage the positive build-up about the concept
that is prevailing today. Enron collapsed
because their "governance" systems failed and in such
an outcome it is quite obvious that it is the board which has to
be held principally responsible because it is the board who should
set up an effective governance system. For all intents and purposes,
the Enron board seemed to have been very well constituted with former
CEOs, a former business school dean, a renowned economist, and other
competent people. The reality was that many of the directors were
chosen by the CEO and not by a nominating committee comprising of
"independent" directors. To take a position of opposition
of the management and the CEO (who effectively exercised control
over the composition of the board) could have possibly led to their
removal from the board and possibly spelt the end of those various
forms of direct and indirect financial and other support. Would any corporate
affairs watcher imagine that the above stated circumstances relating
to Enron is an isolated incident in the corporate world? Needless
to say, it would be clear to anyone with even a superficial knowledge
of the actual happenings in the corporate world, especially in emerging
economies, that this type of "cozy CEO/director or director/director
relationships" are rampant and more the norm than the exception.
This Enron type of compromise and back scratching obviously occurs
routinely in many Sri Lankan companies as well, and it is quite
certain that most Sri Lankan could list out many such instances
very easily. Unfortunately
in Sri Lanka, there are many instances of clear violations of ethical
behaviour, but very little has been done about it. |
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