Mandatory rules for bank directors could ruin their independence -shareholder

A respected Sri Lankan investor says draft mandatory corporate governance rules for banks appears to be specially targetted to meet the wishes of a very powerful minority in the Sri Lankan corporate world.

K.C. Vignarajah, in a letter to the Central Bank Governor on this issue, said:

Some of the concerns raised by many people in this draft is the proposal that directors of the banks serve no more than eight years in that position.

In the case of permanent directors their valuable experience, innovation, skills and knowledge of pioneers in the banking and financial sector will be denied to many unique banks. One outstanding example - the eminent services of Dr. Lalith Kotelawala who has brought great innovation and unprecedented heights of CSR to banking, financce, insurance, housing and other vital sectors of the economy. He pioneered many of these, and did not acquire others or manipulate shareholdings to get control. In fact there was an outstanding case of rescuing a failed financial institution on special invitation.

Independent Directors – This change is not necessarily a guarantee of their “independence”. In fact, if implemented, it may actually serve the contrary interests by forcibly retiring directors who have proved their sturdy independence beyond any doubt. Certain powerful vested interests (which may also be highly influential in high political and regulatory circles, as well as in certain other competing banks and/or in other entities acting in concert) may well be awaiting this opportunity, having been thwarted by independent and minority shareholders, responsible executives, staff officers’ and employees’ unions and finally by the highly respected Appeal Courts! We cannot resist alluding to the saga of the failed attempts to remove the Chairman of Commercial Bank Mahendra Amarasuriya. This appears to be yet another conveniently conducive Act in the saga of wily influential controlling interests, to circumvent the courts, independent shareholders, executive staff, employees and other stakeholders.

In this context, the track record of the “Independent Directors” will be a better yardstick of their independence/performance. This should be decided by the shareholders who are independent of the major/controlling interests and executive directors of the company/bank who manage the business of the company. The same method should also be adopted in the election of auditors in order to give them true independence from the controlling interests and directors. This would ensure proper checks and balances through fair, transparent and democratic means.

Tighter rules may be required to preclude conflicts of interest, in particular, entities or individuals or their close relatives with heavy exposure to bank loans should not be accommodated under the category of “Independent Directors” on the boards of those banks. It is ironic that in-laws are not considered close relatives and therefore can be ‘independent directors.’

Independent men of integrity and fairness of judgment and a sufficient personal stake in the well-being of the company are the need of the day in the field of board appointments. Those without a sufficient personal stake, appointed under current or proposed rules tend to be mere mercenaries.

The collusion between crooked directors, corrupt auditors, and compliant lawyers has been the cause of many corporate swindles and failures. The invisible clubs they form to rob the shareholders and other stakeholders are many. There have been sly proposals by these vested interests to appoint “independent directors” by the ICASL (Chartered Accountants Institute), Institute of Directors, Colombo Stock Exchange (CSE), etc. There are far too many allegations of corruption, misdeeds, and conflicts of interests levelled at not only many members, but also of members who have been leaders in many of these institutions and who have dodged, faked or circumvented fair and transparent investigations which tend to portray these institutions in very poor light. The collapse of professionalism and failure of institutions is visible all around in today’s context.

It is best to leave the decision to the direct stakeholders, and those affected by the deeds of directors, to extract accountability by elegant democratic principles forming the basis of all the codes of governance, which should evolve from the truly independent shareholders and other stakeholders. Too much of government intrusion into public and civic life has rendered havoc.

It would be healthy to provide for the representation of other multi-stakeholders on the boards of banks to ensure a good balance of checks as well as essential perceptions.

Therefore these boards should include representatives of minority shareholders who are truly independent and are also depositors and constructive with a stake of not less than 0.1% in the company’s shares or Rs. 500,000 (at market value) whichever is less, and a deposit of Rs. 250,000 or more; executive staff/employees unions, who are shareholders and/or deposit holders. Suitable lower amounts may be stipulated taking into other factors in consultation with them.