Corporate governance - the key under New Companies Act

By Lalin FERNANDOPULLE

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A single shareholder can take a company to court or provide information to the external regulator to take legal action against the board of directors for not complying with the principles of corporate governance under the New Companies Act, said Senior Partner Nithya Partners, Aritha R. Wikramanayake.

He was addressing a seminar on ‘Regulation, Governance and Legal Responsibilities of the Directors of Registered Finance Companies’ organised by the Department of Supervision of Non-Bank Financial Institutions of the Central Bank.

Wikramanayake said world renowned corporates such as Enron and Worldcom became major scandals due to their failure to observe the spirit of the law. The life line of financial institutions is the implementation of code for corporate governance.

“Gone are the days where directors could attend board meetings and get away without being accountable to its shareholders.

The directors are collectively responsible for the welfare of the company and every shareholder”, he said. Corporate governance is not a legal concept. It is neither corporate law nor corporate social responsibility.

Corporate governance is an internal system encompassing policies, processes and people which serves the needs of shareholders and other stakeholders by directing them and controlling management activities with good business savvy, objectivity and integrity.

He said the company has to incorporate corporate governance - not to be forced from outside. The board must take the responsibility to implement it. Failure to implement a program on corporate governance will have disastrous consequences.

Central Bank, Governor, Ajith Nivard Cabraal said financial institutions should take a look at the major crisis that global financial institutions underwent last year and make prudent decisions to be ahead of them.

“A financial institution has an indirect responsibility towards the growth of other institutions. Depositors of an institution that had failed will lose confidence in others.

Prudent risk management and adherence to regulations and directions is vital for better performance of an institution,” the Governor said.

Partner Nithya Partners, Naomal Goonewardena said that a potential insolvency case requires a director who believes that the company is not able to pay its debts as they fall due to call for a board meeting immediately to decide whether the company should be continued or wound up.

If the company is continued and the decision has been made wrongfully and is subsequently liquidated all directors other than those who voted in favour of the winding up would be liable for the loss suffered by the creditors.

Directors should act in the best interests of the company and not in a manner which is reckless or grossly negligent.

The director should exercise the degree of skill and care that may reasonably be expected of a person of his or her knowledge and experience.