Board Composition of a Listed Entity

In September 2023, the Colombo Stock Exchange (CSE) in collaboration with Securities and Exchange Commission of Sri Lanka have amended the Listing Rules applicable for the Public Listed Companies of Sri Lanka.

Major Changes

In my opinion, the most significant changes introduced by the CSE were concentrated in Section 9 of the Listing Rules. These changes emphasize the need for Board Directors to be sufficiently knowledgeable about the evolving risks facing companies. The CSE appears to have made a concerted effort to ensure that boards are equipped to maintain their integrity and to provide assurance to minority shareholders.

The focus on governance, transparency, and accountability in this section is evident in the policies and committee structures mandated for compliance.

Overview of the Directions by the Colombo Stock Exchange via Amendments

1. Composition of the Board (The Topic of the Article)
2. Introduction of the Policies (I will elaborate on this in upcoming newsletters)
3. Composition of Committees for the Oversight of Key Aspects of the Company such as Nominations and Governance, Remuneration, Audit & Related Party Transactions Review (I will elaborate further on the roles of the committees in upcoming newsletters)

Let's understand the Non-Independence-Non-Executive Board Member Roles

Taking a high-level view, executive directors are actively involved in managing the company, making operational decisions and driving day-to-day activities

An independent director, in corporate governance, refers to a member of a board of directors who does not have a material relationship with a company and is neither part of its executive team nor involved in the day-to-day operations of the company.

Key Areas of Focus in Board Composition

Role of Chairman & Chief Executive Officer (CEO)

The rationale behind segregating the roles of Chairman and CEO is clear. When the individual responsible for overseeing the company’s direction and strategy is also leading day-to-day operations, it can undermine the board’s oversight function.

While the rules provide provisions (Appointment of Senior Independent Director - SID) for companies to continue with the same person holding both positions,

it is preferable for organizations to maintain a clear distinction between strategy and operations. This separation helps prevent the Chairman/CEO from exerting excessive influence and ensures balanced governance.

Minimum Number of Independent Directors

The rule requires that at least two or one-third of the total number of directors, whichever is higher, be independent.

Additionally, the rules mandate that all board-appointed committees must be chaired by an independent director, who is not the Chairman of the company.

This ensures that the technical aspects of the organization’s directives and operations are overseen by individuals with relevant expertise, promoting objective governance and oversight.

Criteria of determination of the Independence

Limitations of the Alternative Directors

• Maximum for 1 Year
• Alternate to an Independent Director must have similar capacity

Section 9 of the Listing Rules (including amendments)

Where to find the detailed document, visit CSE Website .

For assistance in declassifying information or ensuring the effective and efficient implementation of the rules, please contact Lakmal Embuldeniya at 0777 34 31 89.

What's Next

Stay tuned for an upcoming newsletters on the policies to be implemented.

1. Policy on the matters relating to the Board of Directors
2. Policy on Board Committees
3. Policy on Corporate Governance, Nominations and Re-election
4. Policy on Remuneration
5. Policy on Internal Code of Business conduct and Ethics for all Directors and employees, including policies on trading in the Entity’s listed securities
6. Policy on Risk management and Internal controls
7. Policy on Relations with Shareholders and Investors
8. Policy on Environmental, Social and Governance Sustainability
9. Policy on Control and Management of Company Assets and Shareholder Investments
10. Policy on Corporate Disclosures
11. Policy on Whistleblowing
12. Policy on Anti-Bribery and Corruption