MTI Consulting

MTI Consulting is a leading multinational consultancy company operating in 8 countries across Europe, Middle East, South East and Eastern Asia. MTI has been instrumental in providing their expertise in 33 countries / 5 continents handling 275 plus cross - industry projects.

An interview was conducted on the Draft Mandatory Code of Corporate Governance for Licensed Banks in Sri Lanka and the overall framework of corporate governance with Yatila Wijemanne Senior Business Analyst of the Legal & Governance Unit. MTI Consulting recently launched their Corporate Governance Audit Tool which focuses on evaluating the level of governance within a company.

Q: Today, corporate governance has become a global 'buzzword', why has it developed to such importance?

A: Firstly, the concept of corporate governance consists of numerous and far ranging definitions accorded by persons within the legal and non - legal fields. For present purposes corporate governance should be seen as the manner in which companies are controlled and managed in a proper manner following principles such as transparency, accountability and integrity. These principles should not be name sake, but ethically practiced by companies.

"Today corporate governance occupies the centre piece of the corporate world and will continue to do so for many decades to come" 

Yes, today corporate governance occupies the centre piece of the corporate world and will continue to do so for many decades to come. The main reason for the re - ignition of importance toward corporate governance could be traced back to the unprecedented corporate catastrophes in the US. The most famous being the Enron and WorldCom sagas. The collapse of these companies resulted in a massive erosion of confidence, especially within the investor group in the US. The loss of confidence had a significant 'domino effect' within investors around the World. Therefore, investors or for that matters shareholders who are the owners of companies required assurances that the directors and the management were safeguarding their interests.

The US Government understanding the gravity of this situation enacted the Sarbanes - Oxley Act to enhance the level of corporate governance, thus preventing the occurrence of such corporate devastations. The international community realizing the need for such measures followed. For that matter even the OECD revised their guidelines on corporate governance.

"… a significant proportion of multinational and semi - large companies around the World will only do business with companies practicing principles of good governance." 

The importance of following principles of corporate governance has proliferated so fast that a significant proportion of multinational and semi - large companies around the World will only do business with companies practicing principles of good governance. Empirical and secondary evidence points that companies complying with principles of corporate governance would experience a significant boost in inward foreign investment.

Therefore, the stage is setting at the moment for companies to re - organize themselves to adhere to principles of corporate governance to operate, develop and expand in the global market.

Q: In the Sri Lankan context what is your view on the existing national policy framework on corporate governance?

"In Sri Lanka a number of reputed companies, especially related with banking & finance collapsed due to inadequacies in the level of corporate governance" 

A: In Sri Lanka a number of reputed companies, especially related with banking and finance collapsed due to inadequacies in the level of corporate governance. Therefore, a stepping stone to strengthen the standard of governance in the entire corporate sector from the perspective of a legislative framework could be seen through the enactment of the New Companies Act.

Despite the traditional duties and responsibilities of directors such as acting in good faith and standard of care, the New Act has been instrumental in extending the responsibilities of directors in their day to day operations. For instance, sections 219 and 220 of the New Act are concerned with the health of the company - where directors are under a duty to consider whether the company can pay its debts. If the company is not in a position to pay their debts a number of procedures should be followed by directors to remedy the matter. On assumption that directors fail to act in the specified manner they would be held liable. Expansion of directors' duties and responsibilities would assist the corporate sector to improve the level of governance. However, there is a necessity to seek proper advice when undertaking such matters.

In addition, the banking sector in Sri Lanka will have to comply with the Mandatory Code of Corporate Governance for Licensed Banks in the near future. Furthermore, the Micro - Finance Bill, yet to be enacted would transform the structure of governance within institutions, organizations and companies dealing in this area.

Q: A Mandatory Code of Corporate Governance for Licensed Banks in Sri Lanka is in the process of finalization, what would be the overall impression of such measures to enhance the level of corporate governance within the banking sector?

"The rules that have to be compiled would come across exhaustive, but it is a clear move forward in taking the level of corporate governance within the banking sector to the next level" 

A: As I briefly mentioned earlier, the Mandatory Code would be instrumental in developing the standard of corporate governance within the banking sector. It should be noted that the Mandatory Code should not be looked at in isolation of the provisions within the present Banking Act. Close scrutiny of the Draft Mandatory Code extensively spells out the responsibilities of the Board, Directors, Management and many more areas. These responsibilities should be followed through the rules that have been entrenched under each category. The rules that have to be compiled would come across exhaustive, but it is a clear move forward in taking the level of corporate governance within the banking sector to the next level. As a result, the banking sector should be actively consulting the necessary resource persons to deal with the Mandatory Code on providing advisory and re - structural programs.

Q: The Draft Mandatory Code of Corporate Governance has included many responsibilities on the Board; do you think that such responsibilities would be a hindrance for the development of the banking sector?

A: With the global re - ignition of importance toward improving the standard of corporate governance, a school of thought has emerged which argues that improving the level of corporate governance, especially within emerging markets such as Sri Lanka, would be a barrier toward the growth of the corporate sector. This is because the Board, Directors and the Management would be under greater scrutiny - checks and balances. There is some truth to this argument. However, when one considers the overall benefit of improving the level of corporate governance, the benefits outweigh the costs as seen through empirical and secondary evidence.

"The Draft Mandatory Code has laid continuous emphasis toward the necessity to consult experts not only within the legal field but other associated fields when concerning the decision making of the Bank" 

If one looks at the responsibilities of the Board the Mandatory Code details for instance the composition of the Board and the requirement to understand risk management mechanisms in the interests of depositors, creditors, shareholders and other stakeholders. Furthermore, aspects relating to the appointment, duties and responsibilities of the Chairman and CEO have also been included. The Draft Mandatory Code has laid continuous emphasis toward the necessity to consult experts not only within the legal field but other associated fields when concerning the decision making of the Bank. Furthermore, extensive rules have been drafted on corporate governance elements such as transparency and accountability.

"…it is imperative for the banking and financial sector as a whole to prepare themselves for the changing environment of corporate governance…" 

The areas for compliance are far - reaching and it is not feasible within this interview to detail all aspects within the Mandatory Code relating to the responsibilities of the Board. However, it is imperative for the banking and financial sector as a whole to prepare themselves for the changing environment of corporate governance in the country.

Q: What are the main duties of Directors in relation to the Mandatory Code?

A: When looking at the duties and responsibilities of directors one cannot look at the Mandatory Code in isolation. The reason is that the Companies Act and the Banking Act will play a vital role in determining the duties and responsibilities of directors. Furthermore, the existing regulations and directives will be important in demarcating the boundaries of directions. It is also imperative to make a distinction between director and non - executive directors. The duties and responsibilities attached to these to forms of directors are rather different.

As I discussed previously the Companies Act has enhanced the level of duties and responsibilities on directors expanding on the traditional duties of directors. If we look at the Banking Act, the Act specifically mentions the areas for compliance by directors in relation to general bank supervision, supervision of off - shore units, supervision to issue list of qualified auditors and even supervision to terminate contracts which are some examples of the detailed list.

So, specifically to the Mandatory Code the manner in which aspects such as the fitness of a director should be evaluated, issues on conflict of interest, directors as shareholder issues, the required qualifications and experience has been expressly spelled out where banks should comply. In comparison to international mandatory codes of conduct on corporate governance within the banking sector, one could see a clear advancement within the Draft Mandatory Code in Sri Lanka. From an overall perspective many other duties and responsibilities are attached on directors, which undoubtedly lead to clear checks and balances on directors.

Q: The Draft Code requires banks to formulate an Annual Corporate Governance Report, would it be wise for banks to seek external assistance to draft the Corporate Governance Report to stress neutrality and transparency?

A: Your question holds a lot of truth. Because international experience shows that companies have faced many problems by neglecting this aspect. Accordingly, keeping in mind the core elements of corporate governance such as transparency, accountability, integrity and independency it would be wise for licensed bank and even companies in Sri Lanka to seek external advice to re - organize their structure or system of governance as seen in the US and Europe, for that matter in Far East Asia.

Q: What do you think would be the success level of following Mandatory Codes on Corporate Governance?

A: It is premature to assess the success level of the Mandatory Code. However, the success level will depend on how banks will re - structure their system of governance to meet the demands of a changing culture of corporate governance. Moreover, the manner of implementation and monitoring will play a significant role. But, from a different angle the mandatory codes have their own inherent weaknesses which would in some cases allow an unethical Board within a bank to exploit the weaknesses with the assistant of experts.

Q: Finally, is good corporate behavior good for business? And how can one assess the level of corporate governance within a bank?

"Definitely, 100% good corporate behavior is extremely important for good business. This is a fact well understood through international and even local experience" 

A: Definitely, 100% good corporate behavior is extremely important for good business. This is a fact well understood through international and even local experience. If we further consider this aspect - Let's look at the situation before and after the collapse of Enron. The concept of 'Home Bias Effect' was slowly eliminating itself from developed countries due to the globalization of financial markets, which was seen prior to the collapse of Enron. However, collapse of Enron and even other multinationals during the last decade again created a situation of greater emphasis toward the 'Home Bias Effect'. This was mainly due to the loss in confidence in the system of corporate governance in the entire world. As a result, corporate governance is vital to attract investment, expand to international markets, promotion of sustainable business development, image building, communal welfare and many other aspects related with achieving business objectives.

In order to assess the level of corporate governance within the banking and other associated sectors, one should seek external expert assistance for purposes of evaluation under specific corporate governance related criteria. This as I mentioned before would highlight transparency of the bank or company in matters related with corporate governance. From a holistic point of view the entire corporate sector should seriously consider their respective standard on corporate governance to avoid unforeseen devastations in the future as witnessed through international and national corporate failures. Thank you.

Photo: Yatila Wijemanne - Project Manager and Senior Business Analyst of the Legal & Governance Unit
 

The Global Banking Industry has been subjected to intense and increasing levels of regulations (from Sarbanes Oxley to Basel 11), that has demanded these financial services institutions to dedicated significant focus on ensuring compliance. In Sri Lanka too, Mandatory Code on Corporate Governance will demand that local financial services institutions ensure compliance.

The Mandatory Code will be instrumental in developing the standard of corporate governance within the banking sector in Sri Lanka. The Mandatory Code should not be looked at in isolation of the provisions within the present Banking Act. Close scrutiny of the Draft Mandatory Code extensively spells out the responsibilities of the Board, the Directors, Management and a number of other pivotal areas.

MTI's Senior Business Analyst (Legal & Governance) Yatila Wijemanne said, "these responsibilities should be followed through the rules that have been entrenched under each category. The rules that have to be compiled would come across as exhaustive, but it is a clear move forward in taking the level of corporate governance within the banking sector to the next level."

The Mandatory Code details for instance, the composition of the Board and the requirement to understand risk management mechanisms in the interests of depositors, creditors, shareholders and other stakeholders. Furthermore, aspects relating to the appointment, duties and responsibilities of the Chairman and CEO have also been included. The Draft Mandatory Code has laid continuous emphasis toward the necessity to consult experts not only within the legal field but other associated fields when concerning the decision making of the Bank. Extensive rules have also been drafted on corporate governance elements such as transparency and accountability.

The level of success of the mandatory code will depend according to Yatila Wijemanne on "how banks would take up the challenge to re - organize their respective structures to deal with the changes in the level of corporate governance". Business Analyst Lihini Fernando said "the stage is set to analyze the way in which banks would comply with the Mandatory Code".

MTI Consulting is a leading multinational consultancy company operating in 8 countries across Europe, Middle East, South East and Eastern Asia. MTI has been instrumental in providing their expertise to clients in 33 countries across 5 continents while handling 275 plus cross - industry projects.

Photo: Yatila Wijemanne, Senior Business Analyst and Project Manager of Legal & Governance Unit, Lihini Fernando Business Analyst.
 

India has ranked next only to China in registering high GDP growth. The Indian manufacturing output has been increasing year over year and the composites industry has been growing at about 20% in the last couple of years. The need for composites is increasing day by day and it is predicted that the composites market will grow by 4 times the current consumption by the year 2010. This report discusses in detail the large need for composites and the many new applications that will emerge. The presence of many multinationals together with a growing need for applications will ensure a steady market growth for the composites in India.

Indeed, Southern India is different from the north. Whether it be the manufacturing hub of Chennai in Tamil Nadu, or the high tech city of Bangalore in Karnataka, or the famous education state of Kerala (world re-known for its amazing near 100 per cent literacy levels) the south of India does stand out for its economic dynamism and openness.

Chennai is the capital of Tamil Nadu and thought by many to be the commercial capital of Southern India. Chennai is known as the Detroit of Asia due to its automotive facilities, but is also building a strong telecommunications presence thanks to Nokia (there are direct flights between Helsinki and Chennai on Finnair), and it also had a busy port and related transport facilities in road and rail.

Chennai and its economic importance to the South, and indeed to the rest of India’s growing economy: “Everything’s hot in Southern India – including the temperature! Our patch extends from Chennai to Bangalore and even into Kerala. The diversity of the region is bringing in a wealth of opportunity, Chennai’s strength in manufacturing is well known but it is building up its high tech capability, Bangalore is well known as the home of computer icons Infosys and Wipro and aviation, whilst Kerala is strong in education and medical services – including medical tourism.”

These are some of the industries that are at the forefront today, but there are many more industries that are poised for growth in the near future. All this is part of the great opportunity that is being put forth by India.

India provides a booming opportunity for the national and international players to expand and be part of a booming economy and to take advantage of the rising tide. India provides companies with an opportunity to expand their operations, grow their top line & bottom line & also diversify the business risk through a multi country presence
 

The Legal & Governance Consulting Unit of MTI Consulting has researched and developed a Corporate Governance Audit Tool, which is being rolled-out to the Sri Lankan Market. This was announced at a recent media interface by Yatila Wijemanne, the Senior Business Analyst - Legal & Governance Consulting Unit of MTI Consulting.

MTI Corporate Governance tool will evaluate the standard of Corporate Governance within companies with special focus on evaluating the inter stakeholder relationships such as employees, creditors and shareholders.

Yatila Wijemanne said, "Companies complying with principles of good Corporate Governance have seen a significant inward boost of foreign investment and substantial recognition from the international and national community. Empirical and secondary understanding points out that certain companies practice principles of good governance, but inherent weaknesses limit them from full maximization. MTI's - CGA will be a vital tool in identifying areas for further improvement within companies' current Corporate Governance structures."

The structure of Corporate Governance is vital to ensure the smooth functioning of a company and the business as a whole. Creditors, shareholders and the public have been questioning the effectiveness of laws and regulations concerning governance within a company, and specifically for Sri Lanka, a number of finance companies have failed mainly due to inadequacies within the system of governance.

"In a global environment where ethical forms of governance are vitally important the corporate sector should independently evaluate their system of governance and enhance their standards accordingly," added Yatila Wijemanne.

MTI Consulting is an international strategic management consultancy with operations in Bahrain, Dubai, UK, India, Austria, Pakistan, Sri Lanka, Malaysia, Mexico and Bangladesh. MTI has provided solutions to clients in over 275 projects in 33 countries across 5 continents.

Photo: MTI's Senior Business Analyst of the Legal & Governance Unit Yatila Wijemanne