Financial Times

Is it time to retire Mr. Director?
By Wise Old Owl
The Companies Act, since its last revision in 1952, imposed a requirement that any director reaching the age of 70 years should retire. Any re-election of a director over 70 years is subject to a separate resolution being passed at an AGM, stating that the director concerned though over 70 years is being re-elected. Some multinational companies have this age restriction imposed from 65 years.

The new draft Governance Code developed by the SEC appears to limit the maximum term of a directorship of a listed company to nine years for non-executive directors. However there appears to be no recommendations on age relating to re-election.

In Sri Lanka, by practice, the resolutions re-electing directors above the age limit is passed routinely like any other re-election of a director. The justification for such re-election on specific grounds of competency or any other valid reasons of shareholder value enhancement capability are never detailed before shareholders (though this was probably the intention of the enactment) nor discussed at the AGM, where the re-election is voted upon. There are several small shareholders who generally wait to jump up and propose and second the re-election and this routine continues annually.

The directors most probably do not even justify their competence before the nominations committee, despite good governance commitments being published in bold letters in annual reports. Most unfortunately, this process continues in listed companies including public interest companies and even public deposit taking companies.

The Sri Lankan Constitution specifically provides that no citizen be discriminated on grounds of race, religion, language caste, sex, political opinion, place of birth or any one of such grounds. Thus it appears that age led discrimination may be possible in Sri Lanka.

The Evidence Ordinance Chapter XI, section 119 states that all persons shall be competent to testify unless the court considers that they are prevented from understanding the questions put to them, or from giving rational answers to those questions by tender years, extreme old age, disease, whether of body or mind, or any other cause of same kind.

In some countries, driving licenses are normally issued until age 70 unless restricted to a shorter duration for medical reasons. There is no upper limit but after age 70, renewal is necessary every 3 years.

The latest mortality tables assess Sri Lankan men at birth as having a life span of 72 years and for women 77 years. In this light, the current practices in Sri Lanka on election of directors appear outmoded. Medical dictionaries refer to age as a constituent element or influence contributing to the production of a result and ageing as the gradual changes in the structure and function of humans that occur with the passage of time.

The aged is defined as a person 65 through 79 years of age and disability evaluation as the determination of the degree of a physical, mental, or emotional handicap. Well before a medically determined disability evaluation becomes necessary, the competency of a director to hold office on grounds of knowledge, skills and attitudes may arise.

Unfortunately, despite good governance commitments, there does not appear to be in most public listed companies, an evaluation with accountability to the shareholders of individual director capability, continuing credibility, integrity and relevance to the discharge of the trustee role and adding shareholder value.

In addition, in the case of aged directors over 65 years, there will be a need for a disability by age evaluation as well. Are these not typical tests of a fit and proper director evaluation? An examination of the list and age of directors of public listed companies, especially public interest companies and public deposit taking companies in Sri Lanka, tell an interesting story.

Can they pass the test of being a credible witness under the Evidence Ordinance and meet the professional and medical evaluation requirements of an independent nominations committee? This list makes Wise Old Owl wonder whether the most significant qualification for office is being aged and even disabled and irrelevant and incompetent to hold the position. If such is the case, what is the commitment to good governance and the plight of the poor depositors and shareholders?

It is timely that the Companies Act and the Codes of Governance are currently under review. Let these reviewers consider whether the age limit of directors of public listed, public interest and deposit taking companies should be 65 years. Any re-election thereafter must be justified both on grounds of capability and absence of age related disabilities.

Such fit and proper tests will improve the credibility and value of the Sri Lankan stock market and financial services sector and provide an assurance to stakeholders in keeping with international best practices.

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