Thursday 08th May, 2008 Banking & Finance Page 3 Creating an New thinking on risk environmentally sensitive management in banks needed work force at HSBC by P. Samarasiri, Assistant Governor, regulations all over the world were quickly liabilities on deposits and debts and to meet Central Bank of Sri Lanka introduced in a possible attempt to prevent such their financial obligations relating to other In response to the Directions on Corporate scandals and failures in future, and to soothe the financial services such as lending and payments Governance issued to banks by the Central Bank nervous minds of investors, both local and inter- services without interruption. Any potential on December 26, 2007, various views have been national. risk which may damage this public confidence expressed on the nature of the corporate gover- Modern Corporate Governance Codes have will cause depositors’ run on banks as well as nance that should be in banks. Therefore, this extensively addressed several major governance customers’ default on their obligations to banks article is published to educate the general public issues. These include transactions with related- which will eventually lead to liquidity crisis, about the background of the corporate gover- parties of the institutions such as directors, insolvency and failures of even well-run banks. nance literature, the need for a specific corpo- their close relations and businesses, conflicts of The literature of bank failures in many coun- rate governance mechanism for banks and the interest, creative accounting methods to hide tries shows that failures of some banks may nature of corporate governance introduced by adverse financial outcomes, ownership/share- cause contagion on the banking system due to the Central Bank. holder concentration and dominance, lack of damaged public confidence. shareholders’ voice, lack of independence of What is Corporate Governance? auditors and strategic direction toward long- ! Business involving money creation Any institution, whether it is state or pri- term wealth creation. In general, while related- Banking system has the ability to create Ranil Fernando and Ranjula Mendis of Team ‘Corporate Real Estate’ vate, conducts a business or economic activity party transactions have been at the very centre money through its business and this created receiving the winner’s certificate and award from Nick A Nicolaou Chief which involves several categories of stakehold- of many of Asia’s scandals, corporate scandals money is the largest component of the money in Executive Officer for HSBC Sri Lanka and Maldives ers such as owners/shareholders, employees, in the US and Europe have stemmed mostly circulation available for financing/facilitating HSBC concluded its much the common objectives of - customers and general public. Therefore, it is from creative accounting which hid the true pic- economic transactions. Therefore, the business awaited first ever “Inter supporting the group’s com- necessary that the business of any institution ture of financial transactions of a company. The of banks is carried on a public good which is Departmental Competition mitment to climate change, should be organized and conducted in a certain current financial market turmoil prevailing in money, and banks are part and parcel of the on Climate Change” by creating an environmentally management structure designed to protect the developed countries since August, 2007, and monetary and financial system of the country. announcing the finalists of sensitive workforce and iden- interests of its stakeholders which will mitigate resulting bank failures have raised several The failures of banks will adversely affect the the competition. Four teams tifying methods of reducing its business risks and ensure its sustainability monetary conditions and economic well-being of were selected for their inno- emissions and efficient use in the business. This management structure the public and cripple the monetary/financial vative thinking and were of resources. properly documented and adopted by an institu- system. Maintenance of monetary and financial awarded first, second and Out of many productive tion is the corporate governance. Therefore, cor- system stability to facilitate the economic stabil- third places by chief guest and innovative proposals, porate governance is about how the busines ity is the key responsibility of the Central Bank. Nick A Nicolaou, Chief Prof. Ajith de Alwis, former affairs of an institution are oragnised with a The public undertakes transactions (such as Executive Officer of HSBC Head of the Department of good risk management mechanism in a trans- deposits, investments and payments) through Sri Lanka and the Maldives Chemical and Process parent and accountable manner in the interest various types of money payment instruments at a special ceremony held at Engineering and a Senior of both the institution and its stakeholders. because of their confidence that such moneys the Bank premises in April Lecturer at the University of Corporate governance activists, practitioners serve as the legal tender, i.e., currency, or can be 2008. Moratuwa selected four of and researchers have developed certain corpo- converted into currency without delay. The The first place was the best teams. rate governance codes consisting of certain gov- maintenance of the public confidence in the awarded to the “Corporate The criteria for selecting ernance principles or certain principle-based legal tender is the responsibility of the Central Real Estate” team, whilst the best proposals were governance rules and, therefore, certain best Bank. Any contagion of failures of banks and teams “Operations based on practical guidelines practices in corporate governance are available large scale withdrawals of deposits will lead to Development and Design” – originality, ease of imple- in the literature. These best practices generally liquidity crisis in the financial system because and “Human Resources” mentation, carbon and relate to responsibilities, affairs and conduct of the amount of money held by the public by way were awarded second place. resource savings and need the board of directors, senior executive manage- of deposits with banks is significantly greater The “Card Centre” team was for team work. ment and board-appointed committees and dis- than the amount of currency in issue or curren- awarded third place The competition from its closure of financial position of the institution. cy held by banks. According to the estimate of amongst 45 teams actively inception in 2007 has already Accordingly, the management of an institution money in circulation in terms of broad money taking part in this year’s implemented some of the can adopt its own corporate governance code M2, the deposits held by the public with the competition. best ideas such as recycling designed following the best practices which will banking system consist of 87% whereas the cur- The competition was paper and toner cartridges, suit the nature of the business of the institution rency held by banks constitute only 3% of such open to all internal depart- rain water harvesting, min- and stakeholders. Furthermore, various regula- deposits. Therefore, maintenance of the public ments and branches within imising utility waste, creat- tory and supervisory authorities also have com- confidence is the key for the banking system sta- the bank and each entity was ing a paperless environment, menced prescribing certain corporate gover- bility. requested to make a presen- improving processors to nance codes for the institutions falling within issues relating to governance and risk manage- tation on initiatives that reduce turn around time, their purview because of the inadequacy of the ment of banks and financial institutions. The ! Fiduciary responsibilities of banks could be implemented to trading in used paper for institutions’ voluntary corporate governance failure of banks to comply with very basic rules Banks are the authorized agents of money to minimise the direct impacts notebooks with third party codes, given the significance of such institu- relating to credit and liquidity risk manage- facilitate the functions of money, i.e., a medium on climate change. suppliers and reducing the tions to the general public and the economy. ment, usage of complex structured finance prod- of exchange, a unit of accounts, a deferred pay- Each entry was scruti- use of plastic bags by dis- Corporate governance principles had its ori- ucts to transfer credit risk to investors who did ments system (borrowing and lending) and a liq- nised and evaluated against tributing cloth bags to staff. gins in the 19th century although the term not understand such risks or products, resorting uid store of wealth. The public conventionally “Corporate Governance” itself came into vogue to unsound/risky business models, lapses in treat banks as the safest places for keeping their in the latter part of the 1980s. The need to focus understanding and oversight of the boards of savings. This is the general public faith/confi- Eagle call centre upgraded on good corporate governance practices mainly directors on complex businesses and risk man- dence in banks which is the foundation of the Eagle upgraded its Call “We endeavour to continu- arose as a response to the separation of owner- agement models of banks and difficulty in valu- banking business. The majority of the public is Centre into a state-of-the-art ously innovate and improve ship and control following the formation of joint ing the complex finance products to reflect their not aware of financial analysis techniques to facility to provide greater our service standards and stock companies in the 19th century in Europe. market value (fair value accounting problem) assess the safety and soundness of banks and convenience and enhanced product offerings. We have The owners or shareholders of these joint stock are some of them. As a result, a new wave of direct financial gain/yield on deposits such as service to all its valued poli- upgraded this facility to companies, who were not involved in day-to-day reform to governance in banks is now in vogue interest rates is not the deciding factor for them cyholders. ensure efficient and speedy operational issues, required assurances that in developed countries. to keep deposits. The banks carry on business on Now, policyholders need service to our most important those in control of the company, i.e., the direc- such deposits whereas the amount of sharehold- to dial only one hotline num- stakeholders – our cus- tors and managers, were safeguarding their Why a new version of corporate ers’ funds utilised in this business is relatively ber - 2310310 for all their tomers.” said a spokesperson investments and accurately reporting the finan- governance is required for banks? very low. Because of the special privilege given to insurance needs. for the Company. cial outcome of company’s business activities. banks to raise funds through deposits from the A value-addition provided In February 2006, the Thus, directors were the original targets of cor- This is required because of the need to con- public, the need for shareholders’ funds for the by this facility is that policy- Aviva Group acquired a porate governance, and practices and principles duct banking business in a safe and sound man- conduct of business of banks is less and, there- holders only need to remem- majority stake in Eagle, with were designed to protect the interests of the ner, given the specific nature of the business fore, the return to shareholders would be large. ber one hotline number to NDB bank remaining a signif- shareholders from misdemeanours of directors. and its importance to the society as highlighted To be continued find answers to all their icant shareholder. However, the current thinking recognizes a com- below. Insurance related queries Aviva is the world’s oldest pany’s obligations to the society more generally The author holds a BA (Special) Honours Degree in and needs. insurance group, with a histo- in the form of all stakeholders, and it has been ! Specific business risks dependent on Economics from the University of Colombo and a MA in For motor related calls the ry dating back 300 years to this new thinking that has driven the studies public confidence Economics from University of Kansas, USA, mainly cover- Call Centre will be opera- 1696. and practices of good corporate governance to The banks are the apex financial intermedi- ing the subjects, Econometrics, Monetary Economics, tional 24-hours of the day, Today it is the world’s the levels it has reached today. Massive corpo- aries licensed by the Monetary Board to carry International Finance and Macroeconomics. He is currently every day of the year. fifth-largest insurance group rate scandals, taken place in the past are the on business on money in terms of the Banking an Assistant Governor of the Central Bank. He has nearly 25 In case a policyholder and the biggest in the UK. basis for new thinking of corporate governance. Act, Monetary Law Act and other statues relat- year career in the Central Bank in the fields of economics, meets with an accident he or The Group has 59,000 employ- Since the latter part of 2001, the very lively and ing to financial and payments system. This busi- statistics, bank supervision and financial stability. Prior to she can contact the call centre ees world-wide, serving 40 often controversial debate on corporate gover- ness mainly includes raising funds through his current post, he held the posts of Deputy Director, any time day or night in order million customers with £377 nance became an even more turbulent debate as deposits and debt securities, lending and invest- Additional Director and Director of Bank Supervision. to speed up the claims settle- billion assets under manage- a result of the massive corporate scandals and ing such funds and providing services facilitat- During his career in the Central Bank, he has received ment process. ment. failures that rocked the business world, namely, ing domestic and international payments. The extensive training locally and internationally in the fields Enron and WorldCom in the US. Almost as a banks are in the business because of the pub- connected with macro-economic and financial sector poli- knee-jerk reaction, new laws, e.g., the Sarbanes – lic/customer confidence in banks; the belief cies. He has published a number of articles and serves as a A threefold benefit on housing Oxley Act in the US and similar laws and/or that the banks are safe and sound to repay their lecturer at the Institute of Bankers of Sri Lanka. investment from The Finance Presenting TFC Triple Serendib in Katunayake to housing Investment from Heritage Homes in Kandy, Eagle Excellence Award winners The Finance Company. from Privilege Homes in In its quest to reward Excellence, Eagle tant lecturer in the Jaffna University, he rose to Investors receive a threefold Malabe to their newest ven- Insurance Company annually felicitates two lead- become senior professor in Sinhala at the Sri benefit on their investment, ture, LifeStyle housing, ing personalities who have proved their commit- Jayawardenapura University. His contribution as a hence the name ‘TFC Ranala. ment to excellence and professionalism in their researcher particularly in the field of Sri Lankan Triple’. Investments starts at as chosen fields. This year the personalities selected music is without parallel and the books he has Take advantage of the low as Rs. 3.5 million and for the Eagle Excellence Award were Victor published following his research studies have special introductory price can cover a period of 12 or Ratnayake who has excelled in the field of Sri themselves become valuable resource material on housing on offer and ben- 18 months, as per you prefer- Lankan music and Professor Sunil Ariyaratne for research students. He has won State Literary efit from the country’s ris- ence. renowned in the fields of literature, cinema and Awards four times for his publications. At least two ing property values, which The Finance Company is music. of the films he directed – ‘Siribo Aiya’ and ‘Sudu will ensure your investment also proud to cater to your As in previous years, this year too the awards Sevaneli’ were award winners – the former win- grows and will grant you the needs better with the open- presentation was the highlight of the annual Eagle ning the Presidential Award for best direction and best return on your invest- ing of our new Property Convention held at the BMICH to recognize the the other the Sarasaviya Award for best film. ment. Centre for all your housing best of the best amongst the Eagle field force. The Several of his films have been selected for repre- But what makes the TFC solutions. two recipients, who were cheered on their way to sentation at international film festivals. He has Triple Housing Investment Be it building of hous- receive the Awards from Eagle’s Managing Prof. Sunil Ariyaratne and Victor Ratnayake receiving Eagle Excellence Awards from won the highest number of awards as a lyric writer. Plan so special ? Every ing or housing investments, Director, were most appreciative of Eagle’s ges- Eagle’s Managing Director – Deepal Sooriyaarachchi When Eagle Insurance inaugurated the Eagle house comes with a Buy the new TFC Property ture in recognising their contribution to the coun- years ago. Providing a new experience to music as a singer and a music director. It was way back Excellence Award to honour eminent personalities Back guarantee, granting Centre at No. 40, Edward try’s art and culture. lovers, he still draws full houses whenever he per- in 1965 that he was selected as an ‘A’ grade radio in the field of arts six years ago, it was yet another the investor an assured Lane, R.A. DeMel Mawatha, This was the sixth successive year that Eagle forms ‘Sa’. To date there have been 1391 perform- artiste. He has won several Presidential and of the Company’s CSR initiatives. Among the return on their investment. Colombo 3 will suit your Insurance chose two celebrated artistes to be ances both locally and abroad. He has stated that Sarasaviya film awards both as a playback singer recipients are Dr Lester James Peries, Pandit W D The TFC Triple Housing needs. honoured in this fashion. his intention in presenting ‘Sa’ was to inspire and a music director. Amaradeva, Chitrasena and Vajira, Premasiri Investment Plan presents The Finance Company is Best known as a singer of the highest calibre, music fans to appreciate quality music. Professor Sunil Ariyaratne’s role as an aca- Khemadasa, Henry Jayasena, Sybil Wettasinghe, you the opportunity to under the umbrella of the Victor Ratnayake became a household name In his musical career spanning over 45 years, demic, lyrics writer, researcher, author and film Nanda Malini, Joe Abeywickrema and Malini invest in a number of exisit- Ceylinco Group of when he presented his solo performance ‘Sa’ 35 Victor Ratnayake has reached great heights both director has been exemplary. Starting as an assis- Fonseka. ing housing projects from Companies.