In the UK the shareholding structure of most public listed companies are dispersed. In Sri Lanka most public listed companies display a concentrated share ownership structure. However the regulatory regime in Sri Lanka including the corporate governance code is seemingly designed to cater to companies in which the shareholdings are dispersed as in the UK. This is because of the significant influence of UK company law and corporate governance codes on Sri Lanka company law and corporate governance codes. This requires reform. The Sri Lanka Corporate Governance Code should be revised to take into account that by far most public listed companies in Sri Lanka display a concentrated ownership structure and the regulatory framework must be changed to take into account of this reality.
The regulatory philosophy which seemingly governs the public listed companies in Sri Lanka is the market principle based approach as is the case in the UK. The market principle based approach may be appropriate for the UK as the capital market in the UK is developed and the market players are sophisticated. However it is contended that a market principle based regulatory approach is not appropriate for Sri Lanka where the capital market is still in the developing stages and the market players are less sophisticated than in the UK. A rule based regulatory approach is best suited for the capital market in Sri Lanka. To this end, a corporate governance statute such as the Sarbanes Oxley Act of the US is more suited than a corporate governance code which lacks statutory force. A corporate governance law which clearly specifies the role and functions expected of Independent Directors and provides for Independent Directors to be held liable for breach of duty and negligence is the need of the hour for Sri Lanka. Independent Directors must be empowered by this law to function effectively.
In view of the concentrated ownership displayed by most of the public listed companies in Sri Lanka the regulatory regime in Sri Lanka must be designed for the protection of minority shareholders. The power of the controlling shareholders must be limited and the minority shareholders must be empowered. The regulatory regime in Sri Lanka must provide for the minority shareholders to appoint Independent Directors to protect their interests which would invariably be the same as that of the company. The current nomination procedure for Non-Executive Directors is flawed as it is dominated by controlling shareholders. It is recommended that minority shareholders be empowered in the regulatory framework to appoint a specific number of Independent Directors.
The provisions of the Sri Lanka Corporate Governance Code at present do not provide the wherewithal for Independent Directors to function effectively. They must be empowered to access any company information. The withholding of such information either by the controlling shareholders or the executive management must be made a punishable offence.Independent Directors must be able to function according to their conscience without the fear of removal by controlling shareholders if they do not toe the line. The regulatory framework must expressly provide the functions of Independent Directors which is to protect minority interests in a market which displays concentrated ownership of companies such as in Sri Lanka.
The appointment of Non-Executive Directors who are not Independent Directors do not seem to be justified as their functions exclude monitoring and are limited to networking and advisory which functions may be performed just as well by the Executive Directors. Therefore the appointment of Non-Executive Directors who are not independent should require a justification which must be disclosed to shareholders. The period of service of a Non-Executive Director should be limited. The number of directorships held by a Non-executive Director must also be limited.
Unless reforms, as suggested in this research, are undertaken the role and functions of Independent Directors in Sri Lanka shall be limited to a mere public relations exercise to show investors and outsiders that the company is well managed and is monitored by Independent Directors. In Sri Lanka, at present there is seemingly little or no useful function that Independent Directors perform in the protection of minority shareholders or in increasing the worth of the company. Therefore the effectiveness of Non-Executive Directors in Sri Lanka is more fiction rather than fact.
There is a need for a more comprehensive study to be commissioned on the effectiveness of Independent Directors in Sri Lanka and a report produced on the lines of the Higgs Report published in 2003 in the UK. The findings of such a report shall serve as a basis for the reform of corporate governance practices in Sri Lanka. Even in the UK no significant work has been done on the effectiveness of Non-Executive Directors or Independent Directors since the publication of the Higgs Report in 2003. It is time that another research on this topic is conducted in the UK too.