A recent announcement about guidelines on ‘fit and proper’ directors to institutions regulated and licensed by the Securities and Exchange Commission (SEC) reminds one of the famous proverb: “See no evil, hear no evil, speak no evil.”
This is not to say these guidelines are not essential or is a requirement. It is, without a doubt, a must and in this context the SEC deserves the blessings of the state, the public and the market for initiating such a consultative process towards implementing these guidelines.
However in the Sri Lankan context, how effective is the implementation of laws and guidelines in the corporate and non-state sector? Professionals including accountants, lawyers and the like have gone scot free when it comes to even self-regulatory guidelines. The issues that the Institute of Chartered Accountants of Sri Lanka have faced over the years with activists like Nihal Sri Ameresekere and Amrit Muttukumaru knocking on the doors of this ‘august’ professional body for the results of various disciplinary committees probing allegations of impropriety against top accountants are well known.
Provisions in the SEC’s ‘fit and proper’ rules call for assessment of a director’s - (a) Ability to carry on the regulated activity competently, honestly and fairly; and (d) Reputation, character, reliability and financial integrity.
In the light of what was discussed earlier is it possible to make a proper assessment of an individual’s character unless there an effective policing or surveillance unit to check all the facts submitted by the applicant, similar to the stringent process that some embassies including the US in screening new applicants for high-profile posts?
Does the ‘fit and proper’ rules for directors of financial institutions governed by the Central Bank work effectively? At least two or three top officials of banks should never have been approved under these guidelines on ethical grounds after figuring prominently in the oil hedging deals, and getting away scot free.
Yet these ‘fit’ and proper’ rules were firmly enforced in the case of a foreign bank that was involved in the hedging case, owing to the growing enmity between the regulator and the bank. Rules applied using different principles!
This week, according to a newspaper report, the head of the broking firm that was involved in the controversial National Savings Bank deal in buying a stake in The Finance Co (TFC) was one of the sellers of the stock. Is that a ‘fit and proper’ thing to do? With these new SEC guidelines still not in place, the market is awash with all these unsavoury dealings, eventually questioning ethics, governance and fair-play in the markets.
Many are the instances of conflicts of interests in all sectors of the corporate world. The inquiry, some years back, into a top member of the Ceylon Chamber of Commerce over its involvement in a court ruling had its share of conflicts of interests between members of the ‘probe’ committee and the company concerned.
Last year, a powerful company bought stock in a growing, new entity in a private placement and subsequently the former acted as the advisor to the IPO (Initial Public Offer) and finalized its sale price, which drew all-round surprise and condemnation. Was that ‘fit and proper’? No wonder, small retail players have pulled out of the IPO market, disgusted at the sense of fair-play and justice.
What about the way non-executive, independent directors are appointed? In one recent appointment, the independent director of a hotel company was also a full-time, employee of another company, whose parent group owned the hotel.
K.C. Vignarajah, which this column repeatedly refers to as Sri Lanka’s sole stock market watchdog and fighter for the rights of independent minority shareholders (IMS), is again knocking on the doors of justice. This time, he is raising a series of issues, as seen in the article on this page, on Watawala Plantations Ltd and the alleged stripping of its assets and transfer to other companies. He’s urging the SEC to act in the interests of not only the shareholders but all the investing public to ensure justice prevails over injustice. Most of the assets that have been transferred were the ones that brought profitability to the company in a sector (tea) that is struggling to survive on production alone. While just a few stand-alone tea estate companies are surviving, most of the regional plantations that are profitable are those that have an equal share of rubber plantations which have been thriving in recent years and ensuring sustainability of those tea estates.
Therefore how does the SEC assess an individual’s “ability to carry on the regulated activity competently, honestly and fairly; and whether he or she has a good reputation and is of good character, reliability and financial integrity?
In a general sense, these guidelines are common features in any recruitment process in the public or private sectors. Most companies seek these attributes in new applicants and go by references or some well known person’s affidavit. Unfortunately in today world’s, it’s the well-known person, not the man-on-street, who are the culprits. In the political scene, you see many of them – Mervyn Silva for example - brazenly violating the laws of the land and proudly pronouncing that they are protected by the highest in the land.
That is happening in the stock market too, and led to the unfortunate resignation of the former chairperson of the SEC, Indrani Sugathadasa.
So far the SEC under its new chief, former parliamentarian Thilak Karunaratne is making all the right moves. It could do better but given the circumstances in which every institution in this country is highly politicized, the SEC is left with Hobson’s choice in doing what is physically possible, at this moment, with the hope that eventually it would be able to operate as an independent body, not by statute alone.
The cases and instances of conflicts of interests of directors are so numerous to state here that, finally it’s not the guidelines on ‘fit and proper’ directors that the public would watching but rather SEC’s effective, ‘no holds barred’ enforcement of these guidelines.
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