The Code of Best practice (“Guidelines”) on corporate governance is a joint initiative by The Institute of Chartered Accountants and the Securities & Exchange Commission of Sri lanka. The principles laid down in these guidelines are divided into two categories:
Section 1: The Company:
A.1.The Board: Every public company should be headed by an effective Board, which should direct, lead and control the Company.
A.2. Chairman and Executive Officer: 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.3. Chairman’s Role: The Chairman’s role in preserving good Corporate Governance is crucial. As the person responsible for running the Board, the Chairman should preserve order and facilitate the effective discharge of Board functions.
A.4. Financial Acumen: The Board should ensure the availability within it of those with sufficient financial acumen and knowledge to offer guidance on matters of finance.
A.5. Board Balance: It is preferable for the Board to have a balance of Executive and Non-Executive Directors such that no individual or small group of individuals can dominate the Board’s decision-taking.
A.6. Supply of Information: The Board should be provided with timely information in a form and of a quality appropriate to enable it to discharge its duties.
A.7. Appointments to the Board: There should be a formal and transparent procedure for the appointment of new Directors to the Board.
A.8. Re – Election: All Directors should be required to submit themselves for re-election at regular intervals and at least once in every three years.
A.9. Appraisal of Board Performance: Boards should periodically appraise their own performance in order to ensure that Board responsibilities are satisfactorily discharged.
A.10. Disclosure of Information In Respect of Directors: Shareholders should be kept advised of relevant details in respect of Directors.
A.11. Appraisal of Chief Executive Officer: The Board should be required, at least annually, to assess the performance of the CEO.
B. Directors Remuneration
B.1. 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.
B.2. 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. A proportion of Executive Directors’ remuneration should be structured to link rewards to corporate and individual performance.
B.3. Disclosure of Remuneration: The Company’s Annual Report should contain a Statement of Remuneration Policy and details of remuneration of the Board as a whole.
C. Relations with Shareholders
C.1. Constructive use of The Annual General Meeting and conduct of General Meeting: Boards should use the AGM to communicate with shareholders and should encourage their participation.
C.2. Communication with Shareholders: The Board should implement effective communication with shareholders.
C.3. Major and Material and Transactions: Further to complying with the requirements under the Companies Act, Securities and Exchange Commission law and Colombo Stock Exchange regulations; as applicable, Directors should disclose to shareholders all proposed material transactions, which if entered into, would materially alter/vary the Company’s net assets base or in the case of a Company with subsidiaries, the consolidated group net asset base.
D.Accountability and Audit
D.1. Financial Reporting: The Board should present a balanced and understandable assessment of the Company’s financial position, performance and prospects.
D.2. Internal Control: The Board should have a process of risk management and a sound system of internal control to safeguard shareholders’ investments and the Company’s assets. Broadly, risk management and internal control is a process, affected by a Company’s Board of Directors and management, designed to provide reasonable assurance regarding the achievement of Company’s objectives.
D.3. 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.
D.4. Disclosures: The names of Directors (persons in the parent company’s committee in the case of a group company) comprising the Audit Committee should be disclosed in the Annual Report.
D.5. Code of Business Ethics and Conduct: 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.
D.6. 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.
Section 2: Shareholders:
E.1.Shareholder Voting: Institutional shareholders have a responsibility to make considered use of their votes and should be encouraged to ensure their voting intentions are translated into practice.
E.2. Evaluation of Governance Disclosures: When evaluating Companies’ governance arrangements, particularly those relating to Board structure and composition, institutional investors should be 25 encouraged to give due weight to all relevant factors drawn to their attention.
F. Other Investors
F.1. Investing/Divesting Decision: Individual shareholders, investing directly in shares of companies should be encouraged to carry out adequate analysis or seek independent advice in investing or divesting decisions.
F.2. Shareholder Voting: Individual shareholders should be encouraged to participate in General Meetings of companies and exercise their voting rights.
G. Sustainability Reporting
Sustainability reporting is the practice of recognizing, measuring, disclosing and being accountable to internal and external stakeholders for organizational performance towards the goals of sustainable development in the context of the overall business activities and strategy of the entity and be directed to the target stakeholders, usually, shareholders, employees, consumers, society and Government.
Conclusion: The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.