Good governance? Ouch my foot!

by woo

A Sri Lanka Institute of Directors marketing literature announcing a unique opportunity extended to members and non-members reads as follows:

“The Sri Lanka Institute of Directors is organizing an interactive session with the SEC, CSE and corporate leaders to understand and discuss the definition and profile of Independent Directors and the proposed compulsory additions to the Corporate Governance Code for listed companies.

The SEC has indicated that they will be introducing compulsory additions to the corporate governance code for listed companies. The key new guideline is for Independent Directors. The compulsory regulatory requirement of Independent Directors in the board composition could be a double-edged sword. They are intended to protect minority shareholders and improve corporate governance but the acceptance of this compulsory requirement will create some questions especially for family owned companies. This is your opportunity to understand the definition and role of Independent Directors and discuss any concerns or issues in an open forum.”

The members of SLID and non members alike would have recently observed unique governance in practices within a family company, now turned into a listed company. This company has a board of nine directors, six representing the family and three independent directors. The independent directors are all men held in high esteem in their own fields and also for upholding good governance. The company has also been selected for a national business excellence award. It has an audit committee consisting of non executive directors and has published a corporate governance report in the annual report. The company made a public issue in 2004/05 at a premium of Rs.10 per share raising Rs 300 million. In 2005/06 the company made a bonus issue and a rights issue at a premium of three times the par value, with the rights issue raising over Rs 300 million.

The company operates in a sector that has shown growth in the past and is recommended by the analysts to have high future growth potential. The public issue and rights issue were aggressively marketed, showing the future potential of the sector in which the business operates. These marketing initiatives focussed on the expansion of the business with a strong focus on the sector within a defined business strategy.

The Chairman’s report discusses how a significant sum has been allocated for upgrading and new technologies. The performance report discusses the commitment never to lose sight of the vision.

The annual report is very well presented and highly informative and impressive.

A detailed review of the published accounts shows within the group accounts an investment of over Rs. 550 million.

A note to the accounts describes this as an investment in a listed company in excess of Rs 800 million, with a provision for fall in value of over Rs.280 million. The provision for fall in value of investments has been charged in the group profit and loss account in arriving at the net profit for the year. This has resulted in the group results for the year showing a loss in excess of Rs 200 million.

The strange feature in the published accounts is that the company accounts do not show an investment in a listed company. The cash flow statement of the group shows the investment in shares. However the cash flow of the company does not show a similar entry. It only shows an increase in inter company balances by over Rs. 300 million, mainly in respect of a fully owned subsidiary. It can therefore be presumed that this investment would have been made through a subsidiary company. The subsidiaries listed in the annual report also appear dedicated in a focused manner to the sector the business of the company is focussed on and not to another sector the listed company operates in.

Stranger is the absence of any reference to this investment in the Chairman’s statement, Performance Review, Operational and Management Review, and the Directors Report. The Audit report also contains no reference or even a highlight to this investment outside the focussed sector obviously leveraging the funds raised by the public issue and rights issue marketed for expansion and upgrade in the dedicated business sector.

This silence is despite the said investment in the other sector being the highest value entry in the group cash flow and a multiple of the investments in property, plant and equipment. May be this investment is of a strategic nature (though not so specified) with the intent of future conversion to the focussed business sector of the company!

How come the SEC, CSE, Media, Analysts, Professional Investor Associations, and even professional accounting and investment institutions are silent on this strange event that need to be highlighted in the name of good governance and transparency? Will the SLID, SEC, CSE forum provide answers or will the board, independent directors and audit committee provide clarifications? Will the professional accountancy bodies ask questions of the auditors and review the adequacy of standards and good governance codes? Will minority shareholders or their god fathers or even the media seek answers?

Do governance codes exclude fully owned unlisted subsidiaries? Or is window dressing out of scope within good governance?