The Chairman of the Securities and Exchange Commission of Sri Lanka (SEC), Dr Nalaka Godahewa last week said the principle of transparency within the corporate governance framework is a ‘weak area’ amongst listed companies. Speaking at the seminar on ‘Corporate Governance’ at the Directors Symposium for the NBFI sector, Dr Godahewa said that the principle of transparency within the corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation including the financial situation, performance, ownership and governance of the company.
“This is another weak area amongst some of our listed companies. Even though we can be proud of high disclosure standards maintained by most of our public listed companies still there are some companies who do not have much regard for disclosure requirements. If a listed company fails to submit a Quarterly or Annual Report within the stipulated time, enforcement actions are initiated by transferring these companies to a Default Board until the requirement is fulfilled. But disclosure requirements go beyond financial information. We expect the companies to keep shareholders informed of any material development in the company,” the SEC chairman said.
Noting that the SEC keeps receiving complaints from minority shareholders of certain companies about decisions which are made favoring the controlling shareholders, the Chairman further noted that the SEC, being the regulator alone cannot prevent such things happening within existing provisions of the Act and exiting regulations.
“But regulations are improving. Shareholders have to know their rights under the Companies Act to challenge these,” he pointed out.
He further added that there are questions raised about some past IPOs where the funds raised are not yet used for the original purpose.
“If there are valid reasons for such delays it’s the duty of the Board Members of such companies to make sure shareholders are kept informed. Failure to do so affects the overall investor confidence of the market,” the Chairman highlighted.
He added, “We all know that foreign participation of CSE is currently around 30%. The Net Foreign Inflow to the Colombo capital market over the last three years is around Rs.90 billion. But our concern is that most of these foreign activities are limited to a few companies. What is the reason for this? Why hasn’t more than 2/3rd of the 293 listed companies in our market not yet benefited from this surge of foreign investments? The conclusion we can arrive is that it has a lot to do with the level of confidence that investors have about governance structures of these companies.”
The SEC Chairman also mentioned that a market survey conducted recently by SEC, both the local and foreign investors rated ‘company reputation’ and ‘trust in management’ as more important factors in making an investment decision than just looking at the history of returns.
“So obviously investors are more confident of the future of companies which are better governed. The findings of this local survey is, in fact, similar to a global survey conducted by the McKenzie group a few years ago where it was found that institutional investors would be willing to pay a premium of 22% for investments in well-governed companies, as opposed to other companies with comparable market potential but poor in Corporate Governance. It is important for us to remember that no market has a divine right to investors’ capital. If a country does not have a reputation for strong Corporate Governance practice, capital will flow elsewhere. If investors are not confident with the level of disclosure also, capital will flow elsewhere,” Dr. Godahewa said.
Speaking on the way forward, Dr. Godahewa noted that in 2015, SEC is planning to take another major step and establish a system to give due recognition to public listed companies who excel in Corporate Governance.
“We have already started discussions to introduce a national award for excellence in Corporate Governance. We are hoping to rate all public listed companies on the effectives of governance. The Institute of Chartered Accountants who partnered us in formulating the Code of Best Practices on Corporate Governance, will partner organizing this event. You will hear more about this when we launch the competition most probably during the first quarter of 2015,” he concluded.
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“This is another weak area amongst some of our listed companies. Even though we can be proud of high disclosure standards maintained by most of our public listed companies still there are some companies who do not have much regard for disclosure requirements. If a listed company fails to submit a Quarterly or Annual Report within the stipulated time, enforcement actions are initiated by transferring these companies to a Default Board until the requirement is fulfilled. But disclosure requirements go beyond financial information. We expect the companies to keep shareholders informed of any material development in the company,” the SEC chairman said.
Noting that the SEC keeps receiving complaints from minority shareholders of certain companies about decisions which are made favoring the controlling shareholders, the Chairman further noted that the SEC, being the regulator alone cannot prevent such things happening within existing provisions of the Act and exiting regulations.
“But regulations are improving. Shareholders have to know their rights under the Companies Act to challenge these,” he pointed out.
He further added that there are questions raised about some past IPOs where the funds raised are not yet used for the original purpose.
“If there are valid reasons for such delays it’s the duty of the Board Members of such companies to make sure shareholders are kept informed. Failure to do so affects the overall investor confidence of the market,” the Chairman highlighted.
He added, “We all know that foreign participation of CSE is currently around 30%. The Net Foreign Inflow to the Colombo capital market over the last three years is around Rs.90 billion. But our concern is that most of these foreign activities are limited to a few companies. What is the reason for this? Why hasn’t more than 2/3rd of the 293 listed companies in our market not yet benefited from this surge of foreign investments? The conclusion we can arrive is that it has a lot to do with the level of confidence that investors have about governance structures of these companies.”
The SEC Chairman also mentioned that a market survey conducted recently by SEC, both the local and foreign investors rated ‘company reputation’ and ‘trust in management’ as more important factors in making an investment decision than just looking at the history of returns.
“So obviously investors are more confident of the future of companies which are better governed. The findings of this local survey is, in fact, similar to a global survey conducted by the McKenzie group a few years ago where it was found that institutional investors would be willing to pay a premium of 22% for investments in well-governed companies, as opposed to other companies with comparable market potential but poor in Corporate Governance. It is important for us to remember that no market has a divine right to investors’ capital. If a country does not have a reputation for strong Corporate Governance practice, capital will flow elsewhere. If investors are not confident with the level of disclosure also, capital will flow elsewhere,” Dr. Godahewa said.
Speaking on the way forward, Dr. Godahewa noted that in 2015, SEC is planning to take another major step and establish a system to give due recognition to public listed companies who excel in Corporate Governance.
“We have already started discussions to introduce a national award for excellence in Corporate Governance. We are hoping to rate all public listed companies on the effectives of governance. The Institute of Chartered Accountants who partnered us in formulating the Code of Best Practices on Corporate Governance, will partner organizing this event. You will hear more about this when we launch the competition most probably during the first quarter of 2015,” he concluded.
www.nation.lk
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