Executive Summery

 

In global context of the financial crisis and the past situations in Srilankan political, economical and, instability in the country due to various ethnical problems for past 35 years and various radical changes in all the economical and political stability corporate governance become very important factor in any organization in recent years. Therefore this report will analyze the importance and ramifications to Commercial Bank of Srilanka, providing the Srilanken Corporate Governance principles and Suggestions or Recommendations Report by Central Bank of Srilanka and Colombo Stock Exchange. These concepts of Corporate Governance in Srilanken context analyses in the review will then used in critically discussed Commercial Bank of Srilankas present Corporate Governance Principles.

 

In order to achieve and strengthened Commercial Banks Corporate Governance techniques and policies, there will be concise analyze of the current tools for managing Corporate Governance and there will be better recommendation to moving for a brighter future.

 Introduction

 Past few decades the significance of corporate governance has been under spotlight, and criticised with difference polices strenuously. Due to globalisations; many corporate businesses booming and entering to the 21^st century fast world; made the corporate governance in the centre point. Even this has been signifies with bigger collapse of multinational organizations due to Global Monetary Crisis.

 

Banking sectors or in case any other financial organization in particular in much of strict regulations in compare to the any other business entities, because banking sectors are in responsible of safe guarding the rights and customers who deposits the money, make sure the solidity of the system and minimising the risk factors while also act as an important part in capital allotment.

 

The Central Bank of Srilanka and Colombo Stock Exchange polices are not mandatory to the organisations to follow but Srilanken organisations simply need to explain why these recommendations not followed. As these recommendations place an important role; and the organisations should aware of the results and the repercussions from opting and adopting the recommendations.

 

The 2013 CSE and Security and Exchange Committee of Srilanka report lists 6 Major principles, it recommends will assist and help to promote the corporate governance for business organisations. These reports will analyse the principles listed in 2013 SEC Corporate Governance report, hence analysing the Commercial Banks current status with the respective principles.

 

The report starts with look at the structure and policies of Commercial Banks Corporate Governance comparisons to the guidance by the SEC, and the significance of these recommendations. Moving forward, a specific and detailed analysis will be placed in an a attempt to find any serious enhancement that can further strengthen Commercial Bank Corporate Governance position.

 

            The Governance in Srilanka

 

In 2013 the SEC Srilankas publications of Governance Polices and recommendations, these regulations and guidelines for Srilanken organizations to outperformed and achieve solid governance policies.

Not all the policies outlined; are not mandatory by the reports of 2013 SEC. but the companies has to simply provide an explanation to the shareholders that  the reason are; why they were not following the approach  and policies drawn by 2013 SEC. Though it’s not mandatory to follow the policies; due to various stakeholders pressures – majority of the organizations follow the policies and it has increased substantially.

 

According to the SEC report elaborate the 7 core principles that are necessary for any sound corporate governance. 6 Principles and the in association of these recommendations will be analyzed below. Later figure out the ways in which Commercial Bank follow these recommendations.

 

Principal 1: APPOINTMENTS TO THE BOARD

There should be a formal and transparent procedure for the appointment of new Directors to the Board. A Nomination Committee should be established to make recommendations to the Board on all new Board appointments. Terms of Reference for Nomination Committees are set out in Schedule A. The Chairman and members of the Nomination Committee should be identified in the Annual Report.

The Nomination Committee or in the absence of a nomination committee, the Board as a whole should annually assess Board-composition to ascertain whether the combined knowledge and experience of the Board matches the strategic demands facing the Company. The findings of such assessment should be taken into account when new Board appointments are considered and when incumbent Directors come up for re-election. Commercial Bank is used to ensure the Directors are Independent.

Upon the appointment of a new Director to the Board, the Company should forthwith disclose to shareholders:

·        a brief resume of the Director;

·        the nature of his expertise in relevant functional areas

·        the names of companies in which the Director holds directorships or memberships in Board committees; and

·        Whether such Director can be considered ‘independent’,

 

Principle 2:APPRAISAL OF BOARD PERFORMANCE

Boards should periodically appraise their own performance in order to ensure that Board responsibilities are satisfactorily discharged.

The Board should annually appraise itself on its performance in the discharge of its key responsibilities.

The Board should also undertake an annual self-evaluation of its own performance and that of its Committees.

The Board should state how such performance evaluations have been conducted, in the Annual Report.

DISCLOSURE OF INFORMATION IN RESPECT OF DIRECTORS

·        Shareholders should be kept advised of relevant details in respect of Directors.

·        The Annual Report of the Company should set out the following information in relation to each Director:

·        name, qualifications and brief profile;

·        the nature of his/her expertise in relevant functional areas;

·        immediate family and/or material business relationships with other Directors of the Company;

·        whether Executive, Non-Executive and/or independent Director;

·        names of listed companies in Sri Lanka in which the Director concerned serves as a Director;

·        names of other companies in which the Director concerned serves as a Director, provided that where he/she holds directorships in companies within a Group of which the Company is a part, their names need not be disclosed; it is sufficient to state that he/she holds other directorships in such companies;

·        number/percentage of Board meetings of the Company attended during the year;

Commercial Bank has taken use of online media to webcast the details to the stake holder’s in-order to keep the transparency.

 

       Principle 3: REMUNERATION PROCEDURE

Companies should establish a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his/her own remuneration.

To avoid potential conflicts of interest, the Board of Directors should set up a Remuneration Committee to make recommendations to the Board, within agreed terms of reference, on the Company’s framework of remunerating executive directors. (These also include Post Employment Benefits as well as Terminal Benefits)

Remuneration Committees should consist exclusively of Non-Executive Directors, and should have a Chairman, who should be appointed by the Board

The Chairman and members of the Remuneration Committee should be listed in the Annual Report each year

The Board as a whole, or where required by the Articles of Association the shareholders, should determine the remuneration of Non-Executive Directors, including members of the Remuneration Committee, within the limits set in the Articles of Association. Where permitted by the Articles, the Board may delegate this responsibility to a sub-committee of the Board, which might include the CEO

The Remuneration Committee should consult the Chairman and/or CEO about its proposals relating to the remuneration of other Executive Directors and have access to professional advice from within and outside the Company, in discharging their responsibilities.

THE LEVEL AND MAKE UP OF REMUNERATION

Levels of remuneration of both Executive and Nonexecutive Directors should be sufficient to attract and retain the Directors needed to run the Company successfully.

The Remuneration Committee should provide the packages needed to attract, retain and motivate Executive Directors of the quality required but should avoid paying more than is necessary for this purpose.

In-order to avoid any discrepancies Commercial Bank has assigned a committee to re assess and evaluate the remuneration procedures before it goes on the table.

The Remuneration Committee should judge where to position levels of remuneration of the Company, relative to other companies. It should be aware what comparable companies are paying and should take account of relative performance, but should use such comparisons with caution, mindful of the risk that they can result in an increase of remuneration levels with no corresponding improvement in performance.

Principle 4: CODE OF BUSINESS CONDUCT & ETHICS

Companies must adopt a Code of Business Conduct & Ethics for Directors and Key Management Personnel and must promptly disclose any waivers of the Code for Directors or others. These principles closely monitor the Agency theory of Separating the Roles of CEO and Chairman. There are two key tasks at the top of every public company – conducting of the business of the Board, and facilitating executive responsibility for management of the Company’s business. There should be a clear division of responsibilities at the head of the Company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision.A decision to combine the posts of Chairman and CEO in one person should be justified and highlighted in the Annual Report. Commercial bank has

KGDD Weerasingha has chairman and Director the board and Jegan Durairatnam as CEO. Highlighted the distinction between the both roles.

All Companies must disclose whether they have a Code of Business Conduct & Ethics for Directors and Key Management Personnel and if they have such a Code, make an affirmative declaration in the Annual Report that all Directors and Key Management Personnel have declared compliance with such Code, and if unable to make that declaration, state why they are unable to do so. Each Company may determine its own policies in the formulation of such a Code, but all Companies should address the following important topics in their respective Codes:

·        Conflict of interest;

·        Bribery and corruption;

·        Entertainment and gifts;

·        Accurate accounting and record-keeping;

·        Corporate opportunities;

·        Confidentiality;

·        Fair dealing;

·        Protection and proper use of company assets;

·        Compliance with laws, rules and regulations (including insider trading laws); and

·        Encouraging the reporting of any illegal or unethical behavior.

  Principle 5: CORPORATE GOVERNANCE DISCLOSURES

Directors should be required to disclose the extent to which the Company adheres to established principles and practices of good Corporate Governance.

The Directors should include in the Company’s Annual Report a Corporate Governance Report, setting out the manner and extent to which the Company has complied with the principles and provisions of this Code. In-order to provide the Banks liquid data & information to the stakeholders, Investors, depositors Timely manners the Directors and Key personal will have the access to the details. This principle is vital for any organization to make any important decision by the board.

  Principle 6: AUDITING AND FINCIAL REPORTING

This is a mandatory for all the financial and banking sector organizations. The major focus on this recommendation is to assign an external audit committee by Board of directors. Commercial banks Director Board is directly deals with the audit committee.

The Board should establish formal and transparent arrangements for considering how they should select and apply accounting policies, financial reporting and internal control principles and maintaining an appropriate relationship with the Company’s Auditors. The Board should present a balanced and understandable assessment of the Company’s financial position, performance and prospects.

The Board’s responsibility to present a balanced and understandable assessment extends to interim and other price-sensitive public reports and reports to regulators, as well as to information required to be presented by statutory requirements.

The Audit Committee should be comprised of a minimum of two independent Non-Executive Directors (in instances where a Company has only two directors on its Board) or exclusively by Non-Executive Directors, a majority of whom should be independent, whichever is higher.

The Chairman of the Committee should be a Nonexecutive Director, appointed by the Board.

  Principle 7: COMMUNICATION WITH SHAREHOLDERS

The Board should implement effective communication with shareholders. There should be a channel to reach all shareholders of the Company in order to disseminate timely information. The Company should disclose the policy and methodology for communication with shareholders. The Company should disclose how they implement the above policy and methodology.

Commercial Bank has taken and uses all the new technology to webcast the annual general meeting to the shareholders timely manner.

The Company should decide the person to contact in relation to shareholders’ matters. The relevant person with statutory responsibilities to contact in relation to shareholders’ matters is the Company Secretary or in his/her absence should be a member of the Board of Directors.

The process for responding to shareholder matters should be formulated by the board and disclosed.

.  Critical Review of Commercial Bank Limited Corporate Governance

 According to the overview of the Srilankan principles & Regulation of corporate governance analysed earlier in the report, there are two principles that are very significance impact on the financial/ banking industry.

 

·        Principle 4: CODE OF BUSINESS CONDUCT & ETHICS

·        Principle 6: AUDITING AND FINANCIAL REPORTING

 

Principle 4: As per Commercial Banks Corporate Governance Statement; Business Conduct and Ethics takes a significance part. It provides us the principles to make the right decisions all the time.In establishing and maintaining an ethical culture in the Bank, the examples set by the Members of  Board of Directors, the Corporate Management, Executives and Senior Staff would exert a powerful influence on all employees.

It is critical to maintain high ethical standards in decision making at the higher levels of management. It should be ensured that all necessary safeguards are in place to avoid situations of impairment of decisions due to various circumstances such as relationships, friendships, inducements, gratifications or conflicting interests.

While it is important for all employees to use their personal and business relationships to canvass business opportunities and to obtain advantages in negotiating business deals or transactions for the Bank, they should avoid situations that may lead to impairment of business decisions and create conflicts of interest by declaring their connections, relationships and other underlying circumstances to their Superior Officers where appropriate.

 

Principle 6: This covers the auditing and financial reporting; this principle is one of the most important features not only in banking sector but also in any financial corporate governance. Commercial banks Governance report 2014 KPMG act as an external auditor, and KPMG attend all the Committee meetings and General meetings.

KPMG Audit Committee comprised of a two independent Non-Executive Directors. This will help them to review the reports and over sight the financial statement.

A clear understanding of risks surrounding the business activities is essential for any organization to create sustainable stakeholder value through executing its strategies. Commercial bank has reinforced the overall strategy of an organization with a prudent risk management strategy so that the opportunities could be optimized while minimizing the effects of down-side risks.

Accordingly, Basel Committee on Banking Supervision has formulated broad supervisory standards and guidelines to inculcate industry best practices across the banking institutions through ‘Basel Accords’ (Basel II, the second of the Basel Accords which has been extended by Basel III). While Basel Accord encourages convergence towards common approaches and standards, the ultimate purpose of these rules is to create financial stability and resilience in financial sector institutions.

In addition to meeting the requirements stated in the Risk Management Framework prescribed by the regulator, the Bank has progressed well in implementing the International Best Practices of Risk Management by acquiring risk management software systems for Credit, Market and Operational risks.

   Conclusion

 It has been widely noted through the report that Commercial Bank Limited Srilanka has complies with the entire SEC and Central bank of Srilanka recommended corporate governance.

 This subject is ever changing and highly significant impact on Global market as well as the Global economy.

As Per the 7 Principles created by SEC; that has created a guideline for corporate governance in Srilanken Banking sector. In-order to further improves the corporate governance of Commercial bank there were some recommendations listed below.

 

Commercial bank is one of the best and oldest banks in Srilanka and awarded 10 consecutive years. With the recommendations stated below; only would strengthen the already established Bank. Commercial Bank is already placed all the best practice in corporate governance to the organizational structure. 

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