Independence of ‘independent’ directors

BY FS

(December 27, Colombo, Sri Lanka Guardian) Many years ago, when a young banker was invited to the board of a particular company that was led by a doyen in the corporate sector and had mostly ‘older’ businessmen, board decisions were haphazard or taken with just a ‘cursory’ glance at board papers.

“There was no discussion on board papers. The chairperson would say ‘lets’ pass this and everyone says ‘aye’,” the young man recalled. Thus when he explained to the chairperson the need for board papers to be discussed, he drew frowns, groans, objections and ‘what is this young pup trying to do’ response. “Why should we discuss this when we are all agreed?” asked the angry chairperson. “I think even if it ultimately results in the same response (all agreeing to the proposal) we need to discuss these papers before blindly passing them. That is proper governance,” the young man, quietly said. Ultimately he had his way and the proposal was discussed. It was also approved.

Last week, we ran a report where Swiss drugmaker Novartis was involved in a deal to buy eyecare company, US-based Alcon. The story said Novartis’ offer price was however opposed by independent directors on the board as ‘grossly inadequate’.

Which brings us to the point of today’s commentary: Are directors of boards working in the best interests of the company and their shareholders (or their own) and are independent directors (installed specifically to look at issues independently) independent enough?

The question is: Are Sri Lanka’s ‘independent’ directors appointed to corporate board independent enough to take decisions like the example shown in the Novartis case?

The Novartis case illustrates the need for governance in boardroom decision-making and ensuring the independence of ‘independent’ directors. The appointment of independent directors is enshrined in the listing rules of the Colombo Stock Exchange and criteria laid down for their appointment. However the culture in the boardroom is to appoint someone who is familier to the board and who is ‘a friend’ and more often than not, such appointments are made to fulfil a requirement – not because the companies want outsiders in the boardroom to look at issues without bias.

“Its like an old boys club. There are parapet walls built to ensure directors are guarded, protected and their interests preserved. The board room culture in Sri Lanka is not one where board papers or proposals are actively discussed and opposed or objections raised when needed. But corporates talk a lot about governance and accountabilty. The recent happenings at a top chamber where a ‘virtual’ old boys club network controlled the operations in making a crucial decision is much like how many of our corporate boards function,” said another younger CEO.

He says there’s a need to appoint younger people to boards, an issue which is a serious problem in banks and raised at a recent forum. Recently Central Bank Governor Ajith Nivard Cabraal told the Business Times, on the sidelines of his presentation titled ‘Repositioning Banking Towards a Higher Growth Path’ at a Bankers’ Symposium, that there’s an urgent need for fresh ideas, new thinking and novel concepts to reposition the country’s banking sector. “We hardly have directors who are 40 or below in bank boards and we’re lacking in this aspect of bringing in young blood to help set a higher growth path in our banking sector,” he said.

At the same forum, Naomal Goonewardena, Partner Nithya Partners said within boardrooms, the differences of opinion need to be expressed and communicateed effectively in boardrooms.
On non-executive directors, he noted that directors’ longtime association with entities gradually results in an erosion of independence. “Personally I feel that more than five years as a director in the same bank is a disaster,” he said, noting that excessive familiarity (with an entity) is an erosion of independence.
He said that independence is a ‘state of mind’ and urged that more young blood be represented on bank boards.

In an article headlined ‘Call for good corporate governance in Sri Lanka’ which was published recently in the Business Times, the writer (Sierra N Kariyawasam) said that if Sri Lanka needs to tug the hearts of potential (foreign) investors, practising a good Corporate Governance Code is important.
“I believe that it is the responsibility of the Colombo Stock Exchange and the Financial Regulatory Body to encourage companies to implement the country’s Governance Code. Therefore; for a diversified business future in Sri Lanka, it is time for all Boards of Directors to put their thoughts to practice Good Corporate Governance.

Furthermore; practicing the Current Corporate Governance Code will help relevant authorities to establish a proper Corporate Governance Code in Sri Lanka,” the article said. The culture in the boardroom should change to one where the interests of shareholders and stakeholders are reflected and where directors work in these interests and the long-term goal of the company. Hopefully 2011 will see a change in the current culture particularly since many foreign investors would be looking at Sri Lanka and the best-managed and governance-abled companies.