Corporate Governance
Corporate Governance tests the board's accountability, independence and disclosure under the CA Sri Lanka Code of Best Practice, the Companies Act No. 7 of 2007, SEC rules and CSE Listing Rules. Expect scenario questions that ask you to identify governance failures and recommend fixes.
Core rules
- Board: provide effective leadership and a balance of executive and non-executive directors so that no individual dominates. Separate chair and CEO; the chair should be independent on appointment. Independent directors must be free of material business, family, tenure or other relationships that could impair judgement.
- Committees: audit, remuneration and nomination committees should be properly constituted, with independent non-executive members and clear terms of reference. The audit committee oversees financial reporting, internal control and external audit.
- Risk and control: the board sets risk appetite, maintains a sound internal control system and discloses how it has done so. Internal audit should report functionally to the audit committee.
- Shareholders: protect voting rights, facilitate participation, approve related party transactions and disclose material matters. The Code operates mainly on 'comply or explain'; statute and listing rules impose mandatory requirements.
Worked example
A listed company has seven directors: the chair (a former CEO), the CEO, the CFO, two executive directors and two non-executive directors. One non-executive is a former audit partner who retired 18 months ago and still advises the company for a fee. The audit committee is the CFO, that former partner and one other non-executive. Problems: only 2/7 directors are non-executive, below the expected balance; the chair is a former CEO and may not be independent; the former partner's cooling-off period and continuing fee impair independence; the audit committee includes an executive and lacks a majority of independent members. Remedy: appoint additional independent non-executive directors, reconstitute the audit committee under an independent chair, stop the paid advisory relationship or treat the director as non-independent, and explain the transition in the governance report.
Traps
- Treating 'comply or explain' as a free pass without a credible explanation.
- Equating 'non-executive' with 'independent'.
- Ignoring cooling-off periods and fees paid to former auditors.
- Allowing the CEO or CFO onto the audit committee.
- Missing related party approval and disclosure.