Heightened competition from both conventional players and new entrants such as fintechs; the increasingly capital- intensive nature of the business; rapid and disruptive technological developments; demographic and generational changes; and ever tightening regulations: in our contemporary context, the financial services industry faces frictions and forces from an uncertain operating environment.
Such an environment exerts even greater pressure on the industry to demonstrate greater accountability, transparency, good governance, and sound financial and risk management to all their stakeholders in order to maintain sustainable operations.
Accountability and prevention of corruption is possible only through transparency. Accountability and transparency go hand in hand; the latter in fact enables accountability. The Board acknowledges that transparency and accountability are critical to achieving a high-quality governance mechanism that empowers the stakeholders, especially given the role played by the Bank as a financial intermediary.
In its stewardship role, the Board has the ultimate accountability to the Bank’s stakeholders for the activities and performance of the Group. We are aware of the expectations of our stakeholders have of us and of our responsibility to report to them on how we are meeting – and plan to continue meeting – those expectations. Hence, the Board adopts a strategic focus to ensure value creation over the short, medium and long term and takes responsibility for the consequences of the Bank’s actions and the resultant performance; and the Board makes every effort to represent these actions and performance fairly through pertinent disclosures, including those made in this Integrated Annual Report.
This requires clarity as to who is responsible for what and to whom at all levels across the Group. In this regard, the Bank has established a number of committees at the Board as well as the Executive level as elaborated in this Governance Report. These committees are guided by the directions/regulations issued by the Central Bank of Sri Lanka from time to time, and a number of Board-approved governing documents such as policies, frameworks, terms of reference, and charters, which are reviewed and approved by the Board at least annually. Similar Board-level as well as Executive-level committees have been established as required in the subsidiaries and the associate, too. Besides the governing documents upholding Board’s roles and responsibilities, Board oversight on reporting, disclosures on related party transactions, performance evaluation and reward structures, and KPIs that target long-term sustainability, are other supporting practices that promote accountability and transparency. This clear, principled governance structure helps the Group in promoting accountability and transparency across all the levels of the Group.
During the year under review, the Bank adopted a Board approved Anti-Bribery and Anti-Corruption Policy (https://www.combank.lk/info/file/91/anti-bribery-and-anti-corruption-policy) to further enhance our commitment in this regard, which together with the Code of Ethics and the Whistleblowers’ Charter encourage all staff members to be ethical and accountable in their dealings. The Bank also reconstituted the Board- and Executive-level committees during the year consequent to new appointments to the Board and the Corporate Management as well as taking into account the expertise required in the respective committees. Subject to the need to maintain confidentiality, the governing documents that need to be made available to the relevant stakeholders are accessible through the intranet and the Bank’s website, as appropriate.
Achieving transparency is a function of providing information, both financial and non-financial, about the activities, performance and governance of the Group – and ensuring that this information is accurate, complete, and made available in a timely fashion to the stakeholders. In order to enhance accountability and uphold transparency, the Bank takes into account materiality, completeness, accuracy, balance, clarity, comparability and reliability when reporting on its performance. Assurance certificates obtained by the Bank on its financials, internal controls, sustainability, integrated reporting, and GRI indicators, etc. further corroborate the Bank’s own efforts.
The publication of this Integrated Annual Report, which includes extensive voluntary disclosures that go beyond compliance requirements, is a clear demonstration of our accountability to the stakeholders. We have been gradually expanding our focus and disclosures on environmental, social and governance-related aspects.
The Bank is aware that in addition to its financial performance, the overall efficacy of its long-term value creation will be judged by its contribution to the society and the environment. In our view, these are mutually inclusive aspects, and are equally important components in a comprehensive definition of sustainability. A profitable operation is a precondition for being sustainable; the Bank must be able to sustain its performance into the foreseeable future as a going concern. But the Bank must also conduct its enterprise with due consideration to the society and the environment in which it operates so that benefits accrue to the wider community. These two dimensions are dependent on each other such that both need to be present for an enterprise to be sustainable. It is the sustained performance of the Bank that enables it to give due consideration to the society and the environment; but unless it gives due consideration to social and environmental aspects, the Bank cannot renew its ‘license’ to operate within a community, and cannot, therefore, sustain its performance in the long run.
Given that the Bank conducts its operations with the best interests of all the stakeholders at heart and it is backed by exemplary governance practices, as elaborated in this Corporate Governance Report, the Board of Directors is highly confident about the sustainability of the Bank’s operations into the foreseeable future across both dimensions referred to above.
Justice K Sripavan
Colombo, February 25, 2022
How we govern (Principles D.5 and D.6)1
As per the disclosure requirements of the Banking Act Direction No. 11 of 2007 on Corporate Governance (the Direction), in the chapter on Governance and Risk Management of this Report elaborate the structure, overarching principles, and components of the Bank’s corporate governance framework. In addition, the Bank has complied with the principles enumerated in the Code of Best Practice on Corporate Governance – 2017 (the Code) issued by CA Sri Lanka.
The External Auditors of the Bank, Messrs Ernst & Young have submitted their Assurance Statement to the Central Bank of Sri Lanka (CBSL), post their review of the Bank’s compliance in line with the Direction.
Extent of compliance in line with the Direction is disclosed in Annex 1.1 , while compliance with the Code is presented in Annex 1.2 . The Bank has also complied with all the disclosure requirements under the prescribed format issued by the CBSL for publication of Annual Financial Statements, and a comprehensive disclosure statement thereon is given in Annex 1.3 . As the Bank is fully compliant with all the applicable requirements of the Direction, the Colombo Stock Exchange (CSE) has exempted the Bank from disclosure of compliance with the regulations stipulated in Section 7.10 of the Continuing Listing Requirements on Corporate Governance.
Bank’s approach to governance
As the Bank holds the fiduciary responsibility of accepting and deploying vast sums of uncollateralised public funds, the importance of maintaining public trust and confidence for its long-term success and sustainability cannot be overemphasised. To this end, the Bank considers exemplary conduct on the part of all its employees as absolutely essential to good governance, be it from the Board of Directors at the highest governing body to the members of Corporate Management, or from Senior Management to staff at most junior level. Hence, Commercial Bank has put in place a system of good corporate governance - the system of rules, practices and processes that guides corporate behaviour – which ensures a disciplined approach to making decisions and executing them with the interests of all stakeholders at heart. This system has been the bedrock of over 100 years of existence and sustainable value creation.
At Commercial Bank, good corporate governance is not limited to legal and regulatory requirements alone, but is viewed as a collective responsibility that serves as the foundation for financial integrity, sustainable performance, and investor confidence. While it is a strong and highly effective risk management tool, it simultaneously paves the way for the Bank to exploit opportunities. Given this huge responsibility, the Bank has an unwavering commitment to good corporate governance and conducts its affairs with the utmost intellectual honesty, integrity, and diligence whilst being mindful of its obligations to society and the environment. This tone is set at the topmost echelons of the Bank’s Corporate governance and echoes through the entire work culture at the Bank.
While the commitment to good corporate governance has been in place for over a century, the underlying framework is regularly reviewed and updated to be in line with the evolving regulations and best practice, thereby consistently and successfully guiding the Board, Board Committees, Management, Management Committee and staff in performing their stewardship roles. This framework is underpinned by the governance principles of leadership, integrity, effectiveness, accountability, transparency, sustainability, and shareholder engagement. These principles guide the Bank's Management in all its decisions relating to Board oversight, delegation of authority, division of responsibilities, resource allocation, risk management, compliance, performance appraisal and compensation, related party transactions, and financial reporting. The heavily awarded and accoladed status of Commercial Bank resulting in it being the most awarded bank in the country, bears testimony to its commitment towards good corporate governance Refer Awards and Accolades for the details of awards and accolades won by the Bank during the year under review).
Objectives of the Bank’s Corporate Governance System
As the largest private sector bank in Sri Lanka, Commercial Bank touches the lives of millions of Sri Lankans in various capacities, and these stakeholders in turn have high expectations of their interactions with the Bank. Given that this trust and confidence is imperative for the long-term success of the Bank, the Corporate Governance system has been designed with a view to ensure the following as envisaged in its Business Model:
- Adequate oversight on Management to ensure due diligence on key decisions and implementation of strategies as intended
- Establish clear ownership and accountability on key and emerging risks
- Maintain efficient systems and processes, with any issues, incidents and risks being quickly identified, assessed, and escalated
- Provide efficient decision making for timely and effective outcomes in order to achieve results as expected
- Maintain that business as well as support service functions are sufficiently resourced with required competencies and maturity
- Ensure the remuneration framework is properly aligned to the long-term success of the Bank
- Make certain that activities comply with policies, laws, regulations, and ethical standards in both letter and spirit
- Warrant assets are safeguarded
- Guide the Bank and its Group companies to be more stable, resilient, and future ready
- Create value sustainably for all stakeholders over the short, medium, and long-term
In order to achieve the objectives stated above, the Board has ensured the following:
- Roles and responsibilities are clearly distributed among the Board, Board Sub-Committees, Management and Management Committees, with approved charters and Terms of Reference which are reviewed annually
- Clear reporting lines and frequency of reporting are established
- Legitimate needs, interests, and expectations of all the stakeholders are taken into consideration
- The highest degree of fairness, transparency, and accountability is upheld
- Principles for countering bribery and corruption have been set out, and the management of bribery and corruption risk through the adoption of an Anti-Bribery and Anti-Corruption Policy and communicating same to all staff clearly indicating that zero tolerance for non-compliance has been put in place
- Negative externalities to society and the environment are minimised
- Lives by the claims made and values associated with the Bank’s brand reputation
Key regulatory requirements and voluntary codes relevant to the Bank and elements of its Corporate Governance Framework are depicted in Figure 26.
Figure – 26: Key regulatory requirements, voluntary codes, and elements of Corporate Governance Framework
The foundation of the governance structure of the Bank is built on the well-defined roles and responsibilities, greater accountability, and clear reporting lines of the Board, Board Committees, Management, and Management Committees. The Board and Board Committees- assisted by consultants where necessary- are responsible for setting strategy, defining the risk appetite, and exercising oversight while Management and Management Committees are responsible for executing strategy and driving performance. Responsibility and accountability for conducting operations and assuming risk under the purview of the Management lies with the strategic business units and support functions. The governance structure of the Bank is given in Figure 27.
Board of Directors (Principles A.1, A.1.5, A.4 and A.10)
The Board of Directors plays a pivotal role in demonstrating good corporate citizenship, ethical behaviour, transparency, and accountability whilst also warding off all forms of corporate malfeasance. The Board of Directors- the highest decision-making authority with responsibility for the sustainability of the Bank- provides leadership by setting strategic direction, defining risk appetite, approving remuneration policies, and making appointments to the Board and Corporate Management. Under the due diligence and oversight of the Board, Corporate Management is responsible for the execution of the strategy, day-to-day operations, and for implementing an effective system of internal control. The Board and Corporate Management have a clear mutual understanding of their respective roles, delegated authority, and boundaries. Based on trust and respect, the Board and Corporate Management work within a productive and harmonious relationship which is a pre-requisite for good corporate governance and organisational effectiveness. This has proved to be one of the key reasons for the many achievements of the Bank, and has contributed to positioning the Bank as the benchmark private sector bank in the country and also being regarded as one of the two Domestic Systemically Important Banks (D-SIBs) in the country, currently having the Highest Loss Absorbency rate.
The Board comprised of twelve Directors at end of 2021 (ten as at end 2020). Each Director is an eminent professional in his or her respective field and holds the skills and expertise necessary to constructively challenge the Management and enrich deliberations on matters set before the Board. They understand and appreciate the dynamism and complexity of the operations of the Bank, its subsidiaries, and the associate, particularly in the wake of emerging global developments threatening to challenge conventional business models. Ten of the Directors (eight as at end 2020) are Independent Non-Executive Directors (INEDs), ensuring a higher degree of autonomy. Directors act in the best interest of the shareholders, avoiding any conflicts of interest.
Diversity and inclusion
Diversity and inclusion go hand in hand at the Bank, with a wide array of diverse people and voices being inclusively heard in the working environment, all towards the overall progress of the Bank. The Board of Directors mirrors this diversity and inclusion by comprising of members with expertise in accounting, banking and finance, economics, agriculture and chemical industry, engineering, information technology, law, risk management, and international capital markets. Having risen to the highest echelons of Government institutions or private sector organisations, they bring their independent judgement to bear on matters reserved for the Board. Bringing together banking, entrepreneurial, investor, and regulatory perspectives, the Board is able to explore matters from diverse points of view to facilitate long-term value creation. The Company Secretary assists the Board in discharging its responsibilities.
The diversity in the Board's composition has enabled it to bring a unique perspective to the Boardroom, enhancing dynamics and effectiveness while promoting healthy and constructive exchange of views, leaving no room for groupthink.
Profiles of the Board members which include the qualifications, memberships in Board Committees, and both current and previous significant appointments as well as the profile of the Company Secretary are given in the section on Board of Directors and Profiles .
Board process (Principles A.1.6, A.1.7 and A.6)
The Board agrees on a schedule of meetings at the beginning of each year and meets at least once a month. Additional meetings are also convened if the circumstances so require. With the assistance of the Company Secretary and in consultation with the Managing Director/Group Chief Executive Officer, the Chairman is responsible for determining and preparing the agenda for the meetings. Board members also have the opportunity to propose items for inclusion in the agenda for discussion. The agenda, together with the accompanying Board papers, is circulated to the members of the Board by the Company Secretary, one week in advance of the dates fixed for the meetings. This provides Board members with adequate time to study the contents, call for additional information if required, and be prepared for productive deliberations. The agenda and all Board Papers are circulated electronically to Board members via the BoardPAC, ensuring absolute confidentiality of the information, providing instantaneous delivery, and of equal importance, cost saving on printing of papers, which is one of the many green initiatives. This system has helped the Bank conduct Board and Board Committee meetings uninterrupted even during the pandemic. The Directors regularly attend the meetings, physically and/or virtually, and actively participate in deliberations. Urgent Board papers are submitted at short notice or tabled at the meetings on an exceptional basis. Board members typically spend, at a minimum, seven days a month on Board-related matters. In the best interest of the Bank, one-third of the Directors can call for a resolution to be presented to the Board, if required.
Figure 28 provides details of attendance at Board meetings including membership status, mode of attendance, positions held by the Board members in sub committees, and the tenure on the Board.
Minutes of deliberations and decisions made at the meetings are maintained in sufficient detail. On occasion if the need arises, members of the Corporate Management are invited to make presentations to the Board on the performance of areas coming under their purview. Members of the Board are also allowed to seek independent professional advice, if necessary, at the Bank’s expense. The Bank has also obtained a Directors’ and Officers’ Liability Insurance Policy, affording them protection against any allegations in the conduct of their duties.
Figure – 27: Governance structure
Conflicts of interest (Principle A.10)
The Bank has a meticulous system in place to avoid conflict of interest. At an individual level, members of the Board declare conflicts of interest situations and withdraw from taking part in deliberations on/exercising influence over matters where conflict or the appearance of conflict of interest arises. The actions are appropriately minuted for future reference. In addition, the affiliations and transactions of Directors are regularly reviewed to ensure that there are no conflicts or relationships that might impair Directors’ independence. The Board approved Related Party Transactions Policy of the Bank sets out the procedure to be adopted in granting accommodations to the Directors, their close family members, and entities in which the Directors hold directorships, as permitted by the rules and regulations of the CBSL and within the terms and conditions such facilities are provided to other customers of the Bank. Such facilities, if any, are reviewed and recommended by the BCC and are submitted to the Board for approval. Once approved, details of such facilities are tabled at the next scheduled meetings of the BRPTRC for information purposes. The section on “Directors’ Interest in Contracts with the Bank ” discloses the details of transactions carried out in the ordinary course of business on an arm’s length basis with entities where the Bank’s Chairman or Directors serve as the Chairman or as a Director in another entity, while Note 63 to the Financial Statements carries information on Related Party Disclosures. At the point of joining and annually thereafter, the Directors declare their interests, and necessary procedures are in place to ensure that there are no conflicts of interest which will compromise the independence of members. A register of such declared interests is maintained by the Company Secretary of the Bank and is available for inspection by shareholders or their authorised representatives as required by the Section 119 (1) (d) of the Companies Act No. 07 of 2007 and amendments thereto.
Board meetings (Principle A.1.1)
In the year 2021, the Board held fifteen (15) scheduled meetings (seventeen in 2020) of which one (01) meeting (one meeting in 2020) was devoted exclusively to deliberations on strategy, with all members of Corporate Management being present. Thirteen (13) meetings (fifteen meetings in 2020) were devoted to matters including large and material transactions, review of performance, review and approval of a revised budget for 2021, review of policy frameworks, capital planning, strategy, and risk. Subsequent to the election/re-election of Directors at the Annual General Meeting (AGM) in place of those who retired by rotation, a further meeting was held to review and revise the composition of the Board Committees.
Such meetings are seen to provide an effective forum for discharging the oversight responsibility of the Board, and although the outbreak of COVID-19 resulted in the physical format of these meetings needing to change, creating a new challenge to holding such meetings, the Bank successfully handled the transition to virtual platforms. All meetings of the Board and Board Committees were conducted in accordance with guidelines issued by the health authorities, with limited physical attendance taking place while some of the Directors connected via virtual platforms. As such, the Bank showcased its ability to adapt to the new normal during the pandemic, thereby continuing its successful pattern of corporate governance.
The Board continued to play an active role in strategy formulation, providing directions to the Corporate Management for the preparation of the Bank’s five-year strategic plan spanning 2022-2026. This plan was then reviewed and approved at a meeting specifically convened for this purpose, in December 2021. This meeting saw members of the Corporate Management present plans on areas coming under their purview, and extensive deliberations were made on said presentations, with the Board exploring and evaluating alternative strategies prior to the approval and allocation of resources for execution of the same. The Board continued to give prominence to the capital management strategy in the wake of the increasing tax burden and the potential for higher credit losses following moratoriums and difficulties faced by the borrowers, all in a bid to support growth and ensure sustainable value creation. One of the regular agenda items at the monthly Board meetings is to review performance against the strategic plans, devoting sufficient attention and time to review progress made and to identify areas of concern requiring further attention by the Board. In addition, the Board paid heightened attention to credit quality, closely monitored exposures to risk elevated industries, reviewed the reasonableness of the impairment methodology, monitored movements in staging of exposures, and looked at resolving distressed credit facilities. Further, through periodic presentations made by the respective Chief Executive Officers and/or Managing Directors, the Board also reviewed the performance and future plans of the subsidiaries of the Bank. Due to the new directions issued by the Central Bank of Sri Lanka - Directions No. 13 of 2021 on Classification, Recognition, and Measurement of Credit Facilities and Direction No. 14 of 2021 on Classification, Recognition, and Measurement of Financial Assets other than Credit Facilities in Licensed Banks - which became effective from January 1, 2022 in particular, the Board also reviewed the changes these Directions would require to existing policies, processes and newly introduced policies of the Bank.
Figure – 28: Composition of the Board and attendance (Principle A.4 and A.5)
Figure – 29: Composition of the Board (As at December 31, 2021)
Diversity and Inclusion go hand in hand at the Bank, with a wide array of diverse people and voices all being inclusively heard in the working environment, all towards the overall progress of the Bank.
Board Committees (Principles A.7.1, D.3 and D.4)
Board Committees are appointed both in terms of compulsory requirements and voluntarily. Out of the Nine Board Committees that have been appointed with delegated authority to strengthen governance and to deal with/decide on certain subject-specific and specialised matters, five are mandatory whilst four are voluntary. Four out of five mandatory Committees have been formed as required by the Direction, while the Board Related Party Transactions Review Committee has been formed as required by the provisions of the Securities and Exchange Commission of Sri Lanka (SEC). The other four voluntary Board Committees have been established considering the business, operational, information technology, and strategy development needs of the Bank as permitted by the Bank’s Articles of Association. Constituted with Board-approved Terms of Reference, these Committees hold regular meetings- once a quarter as the minimum- and report proceedings to the Board for information/approval. The Board Committees have sought guidance and advice of external consultants on several occasions. Further, each of the Directors served in a minimum of three Committees during the year. The Board, however, retains responsibility for all Committee decisions, thereby ensuring the continuance of good corporate governance.
Proceedings of the Board Committees were regularly reported to the Board and any concerns identified in relation to specialised areas were also referred to them for oversight. The minutes for these meetings carefully ascertain and record the views and deliberations of the Directors on issues under consideration.
The composition, areas of oversight responsibility under respective mandates, key activities in 2021, and attendance of members at the Board Committee meetings are given in the respective Board Committee reports .
Executive Management Committee
The Executive Management Committee (EMC) comprises of all Corporate Management members including the Managing Director/Group Chief Executive Officer and the Chief Operating Officer, who are also the two Executive Directors (EDs) of the Bank. The primary responsibility of the EMC is to implement strategy- as approved by the Board under the leadership of the Managing Director/Group Chief Executive Officer- and deliver on the performance objectives, while ensuring that the risks undertaken by the Bank are within the risk profile approved by the Board. The EMC has a number of responsibilities such as laying down policies, making operational decisions, monitoring financial performance against budgets, reviewing achievement of strategic goals set for business divisions, allocating capital, monitoring the progress of implementing the Digital Road Map, managing risk, deliberating on human resource development including health and safety, fortifying the compliance function, and solving operational and customer issues. Beyond the above functions, the EMC also reviews and deliberates information prior to Board review, thereby ensuring that the Board is provided with all material information in a timely and detailed manner, thus aiding the Board to effectively fulfil their oversight responsibilities as Directors. In addition, the EMC meetings provide all members with the opportunity to gain a 360o view of the Group’s operations.
This year, seven members of the Corporate Management, including the CEO, were re-designated to reflect the role they play in the subsidiaries and the associate of the Group, thereby maintaining relevance within the EMC.
The names, designations, qualifications, and experience of EMC members are given in the section on Corporate Management and Profiles , while the names of Senior Management related to the Bank’s operations in Sri Lanka, Bangladesh, the Maldives, Myanmar, and the subsidiaries in Sri Lanka are given in the section on Senior Management .
In addition to the Board Committees and the EMC, corporate governance consists of several other Management Committees created along subject specific lines to facilitate decision-making and executing Board- approved strategies. These Management Committees are set under delegated authority from the Managing Director/Group Chief Executive Officer.
Based on approved Terms of Reference, the Management Committees operate under a structure and process similar to that of the Board Committees. Detailed minutes are recorded by each of the Committee Secretaries, which are then submitted to the relevant Board Committees after approval by the Managing Director/Group Chief Executive Officer. These Committees undertake extensive deliberations, co-operate across departments, and debate on matters considered critical for the Bank’s operations as described in the Figure 30.
Figure – 30: Executive Management committees
Roles, responsibilities, and powers of the Board (Principles A.1.2 and A.1.3)
The role of the Board of Directors and their responsibilities are set out in the Board Charter, which includes a schedule of powers reserved for the Board as detailed below:
Role of the Board
- To represent and serve interests of shareholders by overseeing and appraising the Bank’s strategies, policies, and performance
- To provide leadership and guidance to Management for the execution of strategies
- To optimise performance and build sustainable value for shareholders in accordance with the regulatory framework and internal policies
- To establish an appropriate governance framework
- To ensure regulators are apprised of the Bank’s performance and any major developments
- To review the performance of the business against the goals and objectives at regular intervals
- Selecting, appointing, and evaluating the performance of the Managing Director/Group Chief Executive Officer
- Setting strategic direction and monitoring its effective implementation
- Establishing systems of risk management, internal control, and compliance
- Ensuring the integrity of the financial reporting process
- Developing a suitable corporate governance structure, policies, and framework
- Strengthening the safety and soundness of the Bank
- Reviewing the performance of the Bank and the Group companies
- Appointing members to the Board of Directors to fill casual vacancies
- Appointing members of the Corporate Management of the Bank
- Appointing and overseeing the External Auditors’ Responsibilities
- Approving Interim and Annual Financial Statements for publication
Powers reserved for the Board
- Approving major capital expenditure, acquisitions, and divestitures, and monitoring capital management
- Appointing the Board Secretary in accordance with Section 43 of the Banking Act No. 30 of 1988
- Seeking professional advice in appropriate circumstances at the Bank’s expense
- Reviewing, amending, and approving governance structures and policies
Board’s role in risk management (Principle D.2)
Risk management is key to the long-term stability of the Bank, and this responsibility of implementing an effective risk management function in the Group falls on the shoulders of the Board, given their position as the highest decision-making authority in the Bank. With the support of the BIRMC, the Board has devised an effective risk management framework which sets the risk appetite and tolerance limits, and enables monitoring of the risk profile on a regular basis through risk reports submitted to the Board. Risk management has continued to be one of the key and regular agenda items of all Board and Committee deliberations. Clarifications were sought from Management for any deviations from the agreed risk profile and necessary guidance was given for taking mitigatory action, while risks related to the business strategies were carefully reviewed at a special Board meeting held to review the Budget for the year 2021 and deliberate on the strategic plan 2022-2026 Refer Risk Governance and Management for further details).
Figure – 31:
Board Highlights 2021
Segregation of roles of Chairman and Chief Executive Officer (Principle A.2 and A.3)
With a view to facilitate balance of power and authority and adhering to the best practice in Corporate Governance, the position of Chairman and Group Chief Executive Officer are separated. The Chairman is a Non-Executive Independent Director while the Group Chief Executive Officer is an Executive Director appointed by the Board. Their respective roles are clearly set out in an approved Board paper and in the Board Charter of the Bank.
Accordingly, as set out in the said Board paper and the Board Charter, clear and effective separation of accountability and responsibility has made the role of Chairman distinctive. Through providing leadership to the Board, preserving order, and facilitating the effective discharge of its duties, the Chairman promotes good corporate governance and the highest standards of integrity and probity throughout the Group. He ensures that the Board receives all information necessary for making informed decisions and discharging its responsibilities. He also ensures the effective participation of all Directors in Board deliberations and maintains open lines of communication with members of Corporate Management, acting as a sounding board on strategic and operational matters.
On the other hand, the role of the Group Chief Executive Officer - as set out in the Board Charter - is to conduct the management functions as directed by the Board. The corporate objectives and the boundaries of his authority as Group Chief Executive Officer are set by the Board, while his duties and responsibilities are jointly developed.
The Group Chief Executive Officer leads the Management team in the day-to-day operations and ensures implementation of strategies, plans, and budgets approved by the Board. The Group Chief Executive Officer conducts the affairs of the Group, upholding good corporate governance and the highest standards of integrity and probity as established by the Board.
While they have separate functions, the Chairman and the Group Chief Executive Officer meet regularly to set the Board agenda, deliberate on current and future developments, and discuss any material issues impacting the Bank, thereby working together towards the Bank’s overall progress.
Role of Independent Non-Executive Directors
The Bank has a strong element of independence on the Board, with ten of the twelve Directors as at December 31, 2021 being independent NEDs. The only connection of the independent Directors with the Bank and with other Companies in the Group is their Directorships, thereby ensuring that their judgement is unlikely to be influenced by external considerations. The presence of independent NEDs is expected to complement the skills and experience of the other Board members through the independent NED’s conveying an objective and independent view on matters, using their expertise to challenge the Board and the Management constructively, and by assisting in providing guidance on strategy.
Role of the Company Secretary (Principle A.1.4)
The Company Secretary plays a vital role in facilitating good Corporate Governance. His responsibilities encompass activities relating to Board meetings, general meetings, Articles of Association, reports, accounts and documentation, Corporate Governance, and Stock Exchange requirements. Primary responsibilities include:
- Assisting the Chairman in conducting the Board Meetings, AGMs, and EGMs in accordance with the Articles of Association, the Board Charter, and relevant legislation
- Maintaining minutes of meetings and statutory registers, and filing statutory returns in time
- Monitoring all Board Committees to ensure they are properly constituted and have clearly defined Terms of Reference
- Facilitating best practice of Corporate Governance including assisting the Directors with their duties and responsibilities
- Facilitating access to legal and independent professional advice in consultation with the Board, where necessary
- Ensuring that the Bank complies with its Articles of Association with required amendments being incorporated in it following proper procedure
- Coordinating the publication and distribution of the Bank’s Annual Reports and Accounts and interim financial statements, and preparing the Directors’ Report
- Monitoring and ensuring compliance with Listing Rules including required disclosure on related parties and related party transactions, and maintaining cordial relationships with the Colombo Stock Exchange, share and debenture holders
- Communicating promptly with the regulators
The appointment and removal of the Company Secretary is a matter for the Board as a whole.
Appointments/retirements and resignations of Directors (Principle A.7)
At the point of retirement or resignation of Directors, the nomination of candidates for appointment as Directors takes place under a formal and transparent procedure formulated by the BNC. The resumés of potential candidates are carefully evaluated by the BNC prior to these being recommended to the Board for their consideration as Non-Executive Directors. Such nominations may also include an interview with the candidate. The appointment of new Directors is based on an annual assessment of the combined knowledge, experience, and diversity of the Board, with new Directors chosen on their ability to bring added perspective and ensure the continued effectiveness of the Bank’s strategic plans.
A similar process is followed when appointing Executive Directors, with the exception that candidates are selected from the Corporate Management of the Bank.
As required by the Listing Rules, appointments of new Directors to the Board are promptly communicated to the CSE through announcements, subsequent to obtaining approval from the CBSL for their Fitness and Propriety. The announcements typically include a brief resumé of new Directors, relevant expertise, key appointments, shareholdings, and status of independence.
This year, there were two new additions to the composition of the Board of Directors, the details of which are given in Figure 28 titled Composition of the Board and attendance.
Re-election/election of Directors (Principle A.8)
The Articles of Association of the Bank states that the two longest serving NEDs must offer themselves for re-election at each AGM in rotation, with the period of service being considered from the last date of re-election or appointment. If two or more Directors qualify for re-election in a particular year, the Directors may decide amongst themselves, either by considering the affidavits and declarations submitted by them and all other relevant issues, or by drawing lots to determine which Directors will offer themselves for re-election. Accordingly, Prof A K W Jayawardane and Mr L D Niyangoda, the two longest serving Directors since last re-election will be seeking re-election at the forthcoming AGM to be held on March 30, 2022. In addition to the above clauses, if a Director has been appointed as a result of a casual vacancy that has arisen since the previous AGM, that Director will also offer himself/herself for election at the immediately succeeding AGM. Accordingly, Mrs D L T S Wijewardena - who was appointed to the Board during the year 2021 to fill a casual vacancy - will offer herself for re-election at the forthcoming AGM. It is pertinent to mention that Mr S Muhseen who was appointed to the Board on February 15, 2021 to fill a casual vacancy, offered himself for re-election at the AGM held on March 30, 2021 and his appointment was duly approved by the shareholders at the aforesaid AGM.
Induction and training of Directors (Principle A.1.8)
On appointment, Directors are provided with an induction pack which outlines the main areas that require familiarisation. As such, the pack includes the Articles of Association, the Banking Act Directions, the Corporate Directors’ Handbook published by the Sri Lanka Institute of Directors, the Code of Best Practice on Corporate Governance issued by CA Sri Lanka, the Bank’s organisational structure, the Board Charter, a copy of the Board Related Party Transactions Policy and the most recent Annual Report of the Bank. They are also given access to the electronic support system which has archived minutes of meetings held over the past nine years. All Directors are encouraged to obtain membership of the Sri Lanka Institute of Directors which conducts useful programmes to support Directors. Further, it is mandatory for Directors to attend Director Forums organised by the CBSL. As an additional support, members of Corporate Management and external experts make regular presentations on the business environment in relation to the operations of the Bank, which enables newly appointed directors to familiarise themselves with the banking operations.
Remuneration and Benefits Policy
The Remuneration and Benefits Policy seeks to provide a distinctive value proposition to current and prospective employees with the aim of attracting and retaining employees with the skills and values that are in line with the business needs of the Bank. The policy also provides a framework for the Bank to design, administer, and evaluate effective reward programmes, thereby inspiring and motivating desired behaviours, and enabling proper alignment of remuneration with the long-term success of the Bank.
Directors’ and Executive remuneration (Principles A.10, B.1 and B.3)
The Bank has a number of processes in place to ensure that no individual Director is involved in determining his or her own remuneration but is instead part of a larger deciding process that makes final decisions. Primarily, the BHRRC- which consists entirely of NEDs who also meet the criteria for independence as set out in the relevant regulations on corporate governance- is responsible for making recommendations to the Board regarding the remuneration of the Directors and executives.
The BHRRC in consultation with the Group Chief Executive Officer and after obtaining professional advice, where necessary, makes such recommendations. Remuneration for Directors and executives is further set out with reference to the Remuneration and Benefit Policy. The remuneration for NEDs is set by the Board as a whole. In order to provide fair judgements when discharging their duties on remuneration, the Board and the BHRRC engage the services of HR professionals on a regular basis as well.
Details of the Remuneration paid to Directors is given in Note 21 to the Financial Statements.
The level and make up of remuneration (Principle B.2)
It is the responsibility of the BHRRC to ensure that the remuneration of both EDs and NEDs is sufficient to attract eminent professionals to the Board and retain them for driving the performance of the Bank. As such, the Bank has remuneration policies that are attractive, motivating, and capable of retaining high performing, qualified, and experienced employees.
With the assistance of professionals, the BHRRC structures the remuneration packages and benchmarks it with the market on a regular basis to ensure that total remuneration levels remain competitive to attract and retain key talent whilst balancing the interests of the shareholders. The total remuneration of EDs and other members of the Corporate Management includes three components – guaranteed remuneration (the fixed component), annual performance bonus (a variable component), and the ESOP (a variable component). Special emphasis is paid to make the basis of granting ESOPs and their features transparent, prior to seeking approval from the shareholders.
Guaranteed remuneration comprises the monthly salary and allowances determined with due reference to the qualifications, experience, levels of competencies, skills, roles, and responsibilities of each employee. These are reviewed annually and adjusted for factors such as promotions, performance, and inflation. The annual performance bonus is based on the degree of achievement on a multi-layered performance criteria matrix which is clearly communicated to the relevant category of employees at the beginning of each year. The Bank’s two employee associations – the Association of Commercial Bank Executives and the Ceylon Bank Employees’ Union (CBEU) with whom a regular dialogue is maintained – are also consulted when necessary. After extensive deliberation, the Bank signed the Collective Agreement with the CBEU which covers a three-year period from 2021 -2023 in early January 2021.
With a view to motivate employees to commit to long term value creation, improve overall performance, and increase staff retention while raising equity funding, the Bank has structured many Employee Share Option Plans (ESOPs) since 1997. This entitles the eligible employees to buy a fixed number of shares at a price to be determined based on pre-agreed formula over the vesting period. The Bank has duly obtained the approval of shareholders for all these ESOPs at the Extraordinary General Meetings (EGMs). The EDs, being employees of the Bank, are also eligible for these ESOPs. Approval for the ESOP vested during the year was obtained from the Board after obtaining recommendation for same from the BAC.
Details of the ESOPs and the eligibility criteria are given in Note 53 to the Financial Statements on “Share-based Payment”.
While employment contracts do not contain any commitments for compensation or early terminations, there were no instances of early termination during the year that required compensation.
Board and Board Committee evaluations (Principle A.9)
As set out in the Direction, Code, and the other applicable regulations, the Board and the Board Committees annually appraise their own performance to ensure that they are discharging their responsibilities satisfactorily in accordance with the Board Charter. This process requires each Director to fill a Board Performance Evaluation Form which incorporates all criteria specified in the Board Performance Evaluation Checklist of the Governance Code. The responses are then collated by the Company Secretary and submitted to the BNC for consideration. These are subsequently discussed at a Board meeting. Board evaluations for 2020 and 2021 were taken up at the Board Meetings held in February 2021 and February 2022 respectively.
Appraisal of the Chief Executive Officer (Principle A.11)
With the assistance of the BHRRC, the Board assesses the performance of the Group Chief Executive Officer annually. This assessment is based on criteria agreed at the beginning of each year and consists of short, medium, and long-term objectives with financial and non-financial targets whilst also considering the changes in the operating environment. The Chairman discusses the evaluation with the Group Chief Executive Officer and provides him with formal feedback. The Group Chief Executive Officer’s responses to the appraisal are given due consideration prior to it being approved. This exercise is finalised within three months from the financial year end.
Shareholder engagement and voting (Principles C.1, C.2, E and F)
The Bank actively engages with shareholders and potential investors as part and partial of good corporate governance and has put in place a structured process to facilitate the same. The Board approved Shareholder Communication Policy is in place to ensure that there is effective and timely communication of material matters to shareholders. The Bank maintains several communication channels with the shareholders which includes the Annual Report, AGMs and EGMs, Interim Financial Statements, Announcements to the CSE, press releases, the Bank’s website, shareholder surveys on need basis, and the Investor Feedback form in the Annual Report. Refer Table 03 on “How we connect with our stakeholders” for more details in this regard).
During the year, shareholders were notified- either through announcements made to the CSE or via media- of quarterly results, dividend declaration for 2020, annual financial statements for 2020, interim financial statements for 2021, disclosure on Fitch Ratings Preview, appointments of two new Directors, listing of shares issued as a part of the final dividend for 2020 as well as new shares listed consequent to the exercising of options under employee share option schemes, date of the annual general meeting 2022, dealings in shares of the Bank by Directors and related entities, Basel III compliant convertible debenture issue, and the extra-ordinary general meeting for the Basel III compliant convertible debenture issue. The Bank’s website was revamped during the year, is trilingual, and has a dedicated area – Investor Relations - for investors which includes Interim Financial Statements and Annual Reports. The most recent Report was offered in both PDF and interactive format, providing readers with a choice for viewing. The Interactive Report also features a tab for investor feedback. The Board is fully committed to treating all shareholders equitably while recognising, protecting, and facilitating their rights through open communication. The Bank arranged to publish Interim and Annual Financial Statements in Newspapers in all three mediums within statutory deadlines as per the Directions issued by the CBSL, and also submitted Interim and Annual Financial Statements to the CSE within the stipulated timeframes in terms of the Listing Rule 7.4 of the CSE, all amidst the challenges faced during the pandemic.
The Bank always encourages shareholders to participate at the AGMs and the EGMs and exercise their votes. To this end, the Bank circulates clear instructions on procedures governing voting along with every notice of AGMs/EGMs. Shareholders play a key role in the re-election of Directors and the External Auditor, and vote on all matters for which Notice is given including the adoption of the Annual Report and Accounts. Although the Bank could not conduct the AGM with the physical presence of its shareholders due to the outbreak of COVID-19 (as per the Notice of Meeting published in the Annual Report 2020), after giving due Notice and publicity, it successfully conducted the Fifty Second AGM as a virtual meeting. The meeting fully adhered to the guidelines issued by the Government health authorities and regulators while ensuring maximum shareholder participation, providing every opportunity for shareholders to clarify matters of interest to them. A total of 69 Voting and 11 Non-Voting shareholders participated in the Fifty Second AGM held virtually on March 30, 2021, while a further 137 Voting shareholders and 08 Non-Voting shareholders exercised their right to vote through proxy. The 08 Non-Voting shareholders exercised their right to vote through proxy strictly in relation to matters designated for their vote.
Shareholder approval was received at a virtual EGM held on August 9, 2021 for issuing Basel III compliant convertible debentures for augmenting Tier II capital and to support future lending growth of the Bank, raising Rs. 8.595 Bn. in Tier II capital consequently.
A summary of the details of shareholder attendance at AGMs during the past five years is given in the Table below:
Table - 44: Attendance at AGMs – 2017 to 2021
Voting shareholders (including proxies)
Non-voting shareholders (including proxies)
|Number of attendees||Shareholding||% of total shareholding||Number of Attendees||Shareholding||% of total shareholding|
The Bank has adopted a Whistleblowers’ Charter in order to deter, detect, and address any genuine concerns of malpractices and unethical behaviour, with the Group’s Chief Compliance Officer being appointed to manage the Bank’s Whistleblowing processes.
In addition, measures have been put in place to protect whistleblowers who act in good faith in the interest of the Bank. The Bank undertakes to maintain the utmost confidentiality of staff who raise concerns or make serious specific allegations of malpractices or unethical behaviour. In this way, the Bank aims to promote a healthy workplace that practices good governance from the lowest to the highest tiers.
Anti-Bribery and Anti-Corruption
The Bank adopted a Board approved Anti-Bribery and Anti-Corruption Policy during the year, clearly setting out principles for countering bribery and corruption in the Bank. The principles also set out the management of bribery and corruption risk by requiring the Bank, Bank personnel, and defined third parties to commit to countering bribery and corruption in all forms in relation to transactions routed through or involving the Bank.
The Bank has zero tolerance for any form of bribery and corruption and will treat potential instances of bribery or corrupt behaviour as a threat to its integrity and reputation as a business. The Bank developed the Policy in accordance with these commitments as well as in adherence to the applicable laws and regulations, with a view to promote a culture of compliance. As set out in this Policy, all employees are responsible for the prevention and mitigation of bribery and corruption within their own roles and responsibilities.
In addition, every single employee of the Bank has been issued with a Code of Ethics containing guidelines that encompass a wide range of aspects, which, inter-alia, include the prevention of insider dealing in securities, outlines the internal rules on the purchase/sale of the Bank’s shares, notes down the Gift Policy, highlights how to manage conflicts of interest, provides information on combating financial crimes, and discusses the importance of respecting communities and the environment etc.
A detailed discussion is given in the section on “Prudent Growth ”.
1. Principles referred to in this section are the principles in the Code of Best Practice on Corporate Governance – 2017 issued by CA Sri Lanka.