CORPORATE PERFORMANCE

Effective implementation of the ‘G’ in ESG – Kiran Dhanapala

Addressing governance issues is vital for Sri Lanka’s long-term sustainable development. The annual report on Sri Lanka by the UN High Commissioner for Human Rights highlights the interconnectedness of human rights and governance with the impacts of the economic crisis.

Good governance requires strong institutions – and corporates too.

The outgoing Ambassador of the EU to Sri Lanka and the Maldives Denis Chaibi recently encouraged the country’s business leaders to promote good governance practices in their workplaces.

Meanwhile, the Securities and Exchange Commission (SEC) has instituted tighter corporate governance rules for listed companies in line with international standards.

This revision of rules will focus on governance structures related to directorates and board committees of corporates, as well as guidelines on the number of members a board can have, criteria for director independence and so on.

The SEC intends to build investor and stakeholder confidence through strengthened management and governance practices.

Sri Lanka has low labour participation rates for women despite its relatively high educational attainments. If we are to proactively improve productivity, economic inclusivity and growth, the nation needs to address barriers to women’s participation in the formal labour force using policy reforms and governance improvements.

Good governance is linked to several issues such as board diversity. Research by the Bayes Business School – City, University of London, examined the role of board and leadership diversity in financial institutions, and fines imposed by US regulators, between 2008 and 2018.

It was noted that having more female directors in banks means lower and less frequent fines for banking misdeeds. Both correlation and causation existed even with controls for other factors such as bank and board size, the ages of directors, return on equity and so on.

The study used robust data on fines by all US regulators, as well as offences, dates and so on. Interestingly, it showed that a critical mass was required for this effect – not tokenism with one female director on a board. It found that ideally, at least three women on a board are needed to change corporate dynamics. And the effect is stronger in banks where both female directors and women in senior executive positions exist. It implies that women bring different skill sets and contributions, to strengthen monitoring and risk management, which result in good business.

For Asian boards, corporate governance is vital but they have some way to go to be truly ‘future fit.’ A study by the Center for Creative Leadership (CCL) concludes that companies require greater focus on strengthening and empowering their boards for success.

Its survey of over 400 mid to large companies in Asia found that their boards were under-prepared. Furthermore, board leadership development was often misunderstood to mean having high profile board directors who usually don’t improve the quality of governance leadership on Asian boards.

Good collective leadership includes clarity of mandates for key stakeholders; individual accountability; and diversity of skills, capabilities and human resource attributes of board members.

The study identified five ways corporate boards in Asia can improve.

Firstly, it’s important to understand the link between external and internal governance, and its impacts on the entity. Country context in terms of corruption, bureaucracy and so on impacts a company’s governance practices.

It’s also important for Asian boards to neutralise cultural impacts such as hierarchy, which can inhibit openness in the boardroom.

The unevenness of Asian boardroom power dynamics needs to be counteracted by continuously discussing, reflecting on and debating ways to strengthen governance processes and tools.

Secondly, board members should buy into the corporate values, mission and vision. It’s necessary to assess their key motivations since commitment will influence the quality of leadership they provide. Board members must also have a learning mindset.

Thirdly, board diversity contributes to organisational performance.

While Asian boards have skills diversity, they lack ethnic, tenure, generational and gender diversity. The constitution of boards should go beyond the usual accountants, lawyers and former CEOs, and include members who are ‘future ready’ with digital, AI and sustainability skills, and so on.

Fourthly, terms of reference and performance measurement mechanisms for board members need to be in place. And their roles and organisational expectations must be clearly identified.

Finally, a trust-based corporate culture is vital for collaboration and commitment. Trust and transparency between the board and its CEO are important for debate and engagement, rather than simply rubberstamping management proposals.

Debate and quick decision making are vital products of a trust-based culture.