AIB (MBA) 2015 Report for the subject "Corporate Governance" by A.R.W.M.M.D.Rohana

1. CORPORATE GOVERNANCE
A.R.W.M.M.D.Rohana Kumara
B.Sc (Sri Lanka), MBCS (UK), MBA (Aus-Reading)
Australian Institute of Business
Master of Business Administration
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2. Executive Summery
The main intention of this assignment (report) is to examines and highlight the deviations or
lapses extent to which the Companies Act 7 of 2007, Articles of Association and the Colombo
Stock Exchange Listing Rules affect the behaviour of the Board of Directors and whether their
entrepreneurial pursuits are hindered due to regulatory framework.
Sir Adrian Cadbury report (1992) defines that “Corporate Governance is the process by which
companies are directed & controlled”. This clearly indicates that the governing body of a
corporate should be Board of Directors. The report is structured around the fundamentals of
corporate governance (CG) and how it leads to successful execution of directors’ duties to the
benefit of all stakeholders.
The Board of Directors is the most important body in corporate. Clear separation of
Management rights (taking initiative and implementation) and governance rights (guidance
approval and oversight) is critically curtails the following potential “agency” risks of the
management.
This report also draws attention to the trustworthy relationship between the corporation and
its stake holders is the essence of good corporate governance, comprising of “CRAFTD”
principles namely Consistency, Responsibility, Accountability, Fairness, Transparency and
Effectiveness, that is deployed throughout the organization.
Also I would like to mention that I have used code of best practices on corporate governance
2013 which was issued by the Carted Institute of Sri Lanka, as tool to evaluate United Motors
Lanka PLC on its practice regarding corporate governance.
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3. Contents
Contents.......................................................................................................................................3
1. Introduction.............................................................................................................................4
2. What is corporate governance?...............................................................................................6
2.1 Separate Roles for decision making .....................................................................................6
2.2 Honesty..................................................................................................................................7
2.3 Accountability.......................................................................................................................7
2.4 Transparency.........................................................................................................................7
2.5 Integrity.................................................................................................................................7
3. Board composition and independence.....................................................................................8
4. Board Effectiveness...............................................................................................................10
5. Corporate social responsibilities...........................................................................................13
6. Recommendations ................................................................................................................14
References.................................................................................................................................16
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4. 1. Introduction
This report is a study of the current Corporate Governing aspects in United Motors Lanka PLC
along with quality recommendations on areas for improvements.
Objective of this assignment;
• Study and identify the lapses and deviations of Corporate Governance of the company.
• Evaluation of the impact / repercussions due to above lapses and deviations of
corporate governance.
• Suggestions and recommendations on implementations of necessary steps using the
concepts, tools and techniques towards structure, process and effectiveness of the
Board of Directors.
1.1 Brief description of the company
United Motors Lanka PLC was incorporated in 1945 as a Private Limited Liability Company. It
was vested with the Government on 8 March 1972 and carried on operations as the
Government Owned Business Undertaking (GOBU) of United Motors. In 1985, the Company
entered into a distributor agreement with Mitsubishi Motors Corporation, Japan and has since
then been the sole distributor for brand new Mitsubishi vehicles in Sri Lanka.
In 1989 the Company was selected as the first Government venture for ‘Peoplisation’ with the
intention of broadening its ownership amongst the public and incorporated as a Public Limited
Liability Company. On 2007, the Company was re-registered under the new ompanies Act No.
07 of 2007 as United Motors Lanka PLC. Since becoming a Public Limited
Liability Company, United Motors has achieved remarkable results and is a leading blue-chip
company in Sri Lanka today which selling,
• All kind of Mitsubishi vehicles.
• All kind of TVS Bikes, Three-wheelers, Tires.
• Perodua, JMC, Zotye, DFSK and MG cars.
• MAC and Valvoline engine oil.
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5. Figure 1.1 – United Motors Group Structure (Source – Annual Report 2013/2014)
The company also initiated skill development trainings for motor mechanics, recognising the
technology advancement and skill development as a part of organization effort to uplift the
local motor mechanics. Along with that company initiated several CSR project all over the Sri
Lanka to uphold the life standards of the people.
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6. 2. What is corporate governance?
The corporate governance is almost based on the Board of Directors of such company. The core
responsibility of the Board of Directors is to make sure that the business is directed
appropriately towards the protection of the interest on the share holders’, on their investment.
The structure and processes of the governing body (Board of Directors) will decide the
effectiveness of the Board resulting long term establishment of the company/business.
To discuss about the concepts of Corporate Governance I would like to take the Code of best
practices on Corporate Governance which was issued by the institute of Charted Accounts of Sri
Lanka in 2013.
Good corporate governance is more than just compliance. It guides organization to achieve
investor and customer confidence and finally it helps to economic growth and financial stability.
The Cadbury Report states that “The country’s economy depends on the drive and efficiency of
its companies. Thus the effectiveness with which their boards discharge their responsibilities
determines Britain’s (country’s) competitive position. They must be free to drive their
companies forward, but exercise that freedom within a framework of effective accountability.
This is the essence of any system of good corporate governance”. (Cadbury Committee Report,
p 10)
2.1 Separate Roles for decision making
Separating the roles of the chairman and the CEO will provide both parties to concentrate on
important vital aspects of the company performance. In United Motors Lanka PLC these two
roles are clearly defined and separated to minimize the risk of human error involving single
person making all the decision.
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7. 2.2 Honesty
Honesty is difference between telling the truth and not telling lie. Refrain from misleading the
stake holders by presenting information with ambiguity. Management expects every employee
of the organization is honest.
2.3 Accountability
Separation of the ownership from the management can create conflicts in many areas. Effective
way to avoid this conflicts is to act with transparency and be accountable of the boards’ actions
to its shareholders and stakeholders. To do that directors of the company always providing
quality information and Shareholders exercise it through their roles as owners.
2.4 Transparency
Transparency helps to increase confidence of investor and customer. United Motors Lanka PLC
discloses all relevant and required information and Voluntary information apart from what is
minimally expected by the law. Such as Corporate Social Responsibilities (CSR) and
Sustainability report.
2.5 Integrity
As a blue chip company in Sri Lanka, United Motors Lanka PLC always promotes positive values
and ensures high standard of integrity at all times. They have adopted a professional behaviour
code (mentioned below) and communicated to all their stakeholders.
• Avoiding conflict of interest
• The inter-relationship with the 3rd
party
• Protect confidentiality
• Commitment to the environment
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8. 3. Board composition and independence
Board Structure is one of the most important aspects of Corporate Governance and at United
Motors Lanka PLC, there are 3 Executive Directors, 2 Non-executive Directors, 3 Independent
Non-Executive Directors and Company Secretary.
The Board namely is as follows:
Nam of the Director Position
Mr. Sunil G Wijesinghe Chairman – Non Executive Director
(Independent)
Mr. C. Yatawara Chief Executive Officer - Executive
Director
Mr. A.C.M Lafir Executive Director - Finance
Mr. R.H Yaseen Executive Director – After Sales
Services
Mr. Eardly Perera Non-Executive Director (Independent)
Mrs. A.H Fernando Non-Executive Director
Mr. A.W Athukorala Non-Executive Director (Independent)
Mr. M Sawada Non-Executive Director
Mrs. R.M Hisham Company Secretary
Table 3.1 – United Motors Lanka PLC Director Board (Source – Authors Work)
Basically there are 4 types of Director Boards exist in the system.
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9. Table 3.2 – Director Board Types (Source – Authors Work)
Director Board of the United Motors Lanka PLC comes under the
Majority Non-Executive Director Board. The Cadbury Report
produced by a committee chaired by Sir Adrian Cadbury (1992)
includes the importance of the wider use of independent non-
executive directors.
Figure 3.1 – United Motors Board Structure (Source – Annual Report 2013/2014)
United Motors Lanka PLC is a public quoted company with limited liability where “all executive
director board” governs the company. All the independent non-executive directors who can
look overall stakeholder interest.
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Director Board Type
All Executive Director Board
This structure mostly
suitable and found in many
small, family firms and
start-up businesses.
Majority Executive Director Board
Majority Non-Executive Director Board All Non-Executive Director Board

10. 4. Board Effectiveness
The Board is responsible to stakeholders for creating and delivering sustainable stakeholder
value and to fulfil this a robust Corporate Governance Framework is critical in maintaining
investor trust and business integrity. United Motors Lanka PLC governance policies and
practices and sets out the framework in which the Board manages the Company in ensuring a
sustainable business.
United Motors Lanka PLC practice good corporate governance framework which entails three
key components;
• Internal governance structure
• Assurance
Regulatory framework
4.1 Internal governance structure
The internal governance structure is the components that are embedded within the company in
order to execute governance related initiatives, systems and processes.
At United Motors Lanka PLC, Board is supported by the following board committees to internal
governance:
• Board Audit Committee
• Remuneration Committee
• Nomination Committee
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11. The Chairmen of each of these committees mentioned above reports the outcome result of the
committee meetings to the board and the necessary decisions are incorporated in the minutes
of the board meetings .The company secretary acts as secretary to all board committees.
4.1.1 Board Audit Committee (BAC)
Board of audit committee of the United Motors Lanka PLC comprises 3 Non-Executive Directors
and two of them are independent directors, who help for good Corporate Governance of the
company. They are Mr A.H Fernando (Chairman of BAC) with Mr Sunil G Wijesinghe, Mr A.W
Athukorala.
The United Motors Lanka PLC Audit Committee is to ensure that the company fulfils its
responsibilities for the financial process in accordance of the requirement sections of 151 (2) &
153 (2) to 153 (7) of the Companies Act no. 7 of 2007. It is also responsible for the appointment
of external auditors, reviewing accounting principles, policies, practices and examining all
documents in the financial statement on a test and evidence basis.
The BAC of United Motors Lanka PLC hold 5 meetings per financial year to discuss and monitor
the activities mentioned above.
4.1.2 Board Remuneration Committee (BRC)
Board of the Remuneration committee of the United Motors Lanka PLC comprises 2
Independent Non-Executive Directors. There is a very visible and transparent procedure on top
executive and director remuneration. This in fact fulfills the requirement of good corporate
governance. They are Mr Sunil G Wijesinghe (Chairman of BRC) with Mr A.W Athukorala.
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12. The role of the BRC is to identify, consider and propose suitable candidates who possess the
background, experience and knowledge in business, technology, finance and or management,
as to maintain an appropriate balance of skills and experience on the Board. BRC also ensures
that each Director for appointment as new Directors must be approved and make
recommendations to the Board with regard to the remuneration of the Executive, Non-
Executive Directors and any key positions within the Senior Management.
4.1.3 Board Nomination Committee (BNC)
Board of the Remuneration committee of the United Motors Lanka PLC comprises 2
Independent Non-Executive Directors, 1 Non Independent Non-Executive Director and Chief
Executive Officer. They are Mr Sunil G Wijesinghe (Chairman of BRC) with Mr A.W Athukorala,
Mr C Yatawara and Mrs A.H. Fernando.
The members of the BNC continue to work closely with the Board of Directors in reviewing the
structure, size, composition and skills required for a steady, strong and successful organization
and advising the Board in relation to nominations, retirement, succession and training of the
board members.
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13. 5. Corporate social responsibilities
Corporate Social responsibility and sustainability is added to United Motors Lanka PLC
Corporate Governance portfolio so as to contribute to the growth and development of Sri Lanka
in a socially and environmentally responsible manner.
Figure 5.1 – United Motors Sustainability Planning (Source – Annual Report 2013/2014)
5.1 Annual education scholarship and school requirements donation program
This initiative provide education scholarships for poor students and students of differently
abled war hero’s in all around the Sri Lanka to support them. This will provide them to have
proper school requirements (Infrastructure and educational materials) to continue their
studies.
5.1 Annual blood donation program
This initiative have been conducting blood donation program to support national blood
transfusion services to collect required blood samples. Which provide the employees to
contribute their blood for the good cause and make them proud about themselves as well as
save life who need blood.
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14. 6. Recommendations
After analysing the Director Board structure of United Motors Lanka PLC, my recommendation
is that organization need to further strengthen following characteristics of an independent
director in the Director Board.
• Free from any interest and any business or other relationship which could reasonably be
perceived to, materially interfere with the directors ability to act in the best interest of
the company.
• Has no material contractual relationship with the company or another group member
other than as a Director of the company.
• Is not a material supplier or customer of the company or other group or an officer of, or
otherwise associated directly or indirectly with, a material supplier or customer.
• Is free from any interest and any business or other relationship which could reasonably
be perceived to, materially interfere with the directors ability to act in the best interest
of the company.
• Has not served on the Board for a period which could, or could reasonably be perceived
to, materially interfere with the directors ability to act in the best interest of the
company.
• Within the last three years has not been employed in an executive capacity by the
company or another group company, or been a Director after ceasing to hold any such
employment.
• Within the last three years has not been a principal of a material professional adviser or
a medical consultant to the company or another group of company, or an employee
materially associated with the service provided.
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15. Apart from that I would like to give further recommendation about separation of chairman and
chief executive officer positions in the United Motors Lanka PLC.
• Chairman is only the head of Board of Directors not of the Company
• Company law does not indicate much about specific roles of the chairman.
• Company’s’ constitution determines the appointment of chairman, the duties of the
chairman, and other aspects.
• Separation of the chairmanship and CEO position will enable the chairman to
concentrate more on the following;
1. Leadership of the Board team as chairman’s primary duty
2. Management of meetings
3. Strategic leadership
4. Chairman should ensure that the CEO and Corporate Management highly
concentrated on performance (strategy formulation, Policy making)
5. Being an intermediary between the Board and corporate management
6. Maintenance of strong relationship with CEO at all times.
7. Arbitration between Board members & Others
8. Being the public face of the Company
According to my observation and understanding there should be good Director Board to have a
good corporate governance in an organization. There should be more CRS projects needs to be
done with the help of employees to create good image about the organization. Currently the
amount of CSR project is very less and not visible to majority of the population in the country.
As an automobile trading company, there should be a corporate goal to minimize the carbon
emission from the vehicles and need to sale fuel efficient vehicles or the hybrid vehicles to their
customers and mostly promote them.
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16. Director board should have more transparency about the audit, remuneration and nomination
information and procedures. Clear separation of Management rights (taking initiative and
implementation) and governance rights (guidance approval and oversight) is critically curtails
the following potential “agency” risks of the management. That will build the trustworthy
relationship between the corporation and its stake holders.
References
United Motors Lanka PLC Annual Report 2013/2014:
https://www.cse.lk/cmt/upload_report_file/697_1401883622482.pdf
Companies act 7 of 2007:
http://www.drc.gov.lk/app/comreg.nsf/200392d5acdb66c246256b76001be7d8/$FILE/Act%207%20of
%202007%20%28English%29.pdf
Sri Adrian Cadbury report 1992:
http://www.ecgi.org/codes/documents/cadbury.pdf
Tricker, B 2015, Corporate governance: principles, policies and practices, 3rd
edn, Oxford
University Press (ISBN: 9780198702757).
Subramanian, G 2015, ‘Corporate Governance 2.0’, Harvard Business Review, vol. 93, no. 3, pp.
96–105.
Kang, H, Cheng M & Gray, SJ 2007, ‘Corporate governance and board composition: diversity and
independence of Australian boards’, Corporate Governance: An International Review, vol. 15,
no. 2, pp. 194–207.
Nikolic, J & Er k , J 2011, ‘Boards of directors models and role in corporate governance’,
Management, no. 60, pp. 68–75.
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