CMA Founder’s Day Oration

Assoc. Prof. Luckmika Perera, Director (Education) – Centre for Integrated Reporting, Faculty of Business and Law, Deakin University, Melbourne, Australia, delivered the CMA Sri Lanka Founder’s Day Oration recently.
He also announced the appointment of Prof Lakshman R Watawala Founder of CMA Sri Lanka as an Adjunct Professor of Deakin Business School. To explore the possible changes in the corporate governance space, the Institute of Certified Management Accountants of Sri Lanka (CMA), recently held a prolific webinar that provided fine insights in this area. In a session titled ‘Will there be a paradigm shift in corporate governance after
COVID-19 pandemic?’ delivered on the Founder’s Day Oration. Adding value to the discussion were also two leading experts, Dr. Harsha Cabral, President’s Counsel and Prof. Ho Yew Kee, Associate Provost (Skills Future and Staff Development) at Singapore Institute of Technology, Former Prof. in Accounting National University Singapore and Advisory Council Member CMA Sri Lanka together with CA Sri Lanka President/ CMA Council Member
Manil Jayasinghe.

The lack of a corporate governance structure in an entity is a recipe for disaster. Simply because the purpose of its existence is to increase the accountability of a company and avoid massive disasters before they occur.

In a nutshell, a well – executed corporate governance should be similar to a police department’s internal affairs unit, where the department weeds out and eliminates issues with extreme prejudice. The new world that is emerging from the global pandemic somewhat has brought about some element of change to this arena. While experts cross the world are still assessing the impacts the Coronavirus (Covid-19) pandemic across all businesses and its processes, the corporate governance space did have
some implications.

In Sri Lanka, just as in other countries, Annual General Meetings (AGMS) of companies were initially postponed until further notice. In an effort to step up efforts, the country saw companies adopt hybrid AGMs for what was the first time ever. The part physical and part virtual AGM paved the way for entities to make some progress, steering through the implications of the pandemic. This is only one impact.

Affects of COVID – 19 on Corporate Governance

At the dawn of 2020, no country in the world possibly thought they would live through a pandemic, but soon enough, one nation after the other saw its health care stretch beyond capacity and its economies come to a standstill. The challenges were profound globally to every aspect of the business since no one was ready for a hit of this nature.

While SMEs and large corporates were affected by COVID-19 to various degrees, not all were lucky to survive. All business, regardless of their size and the strength of their balance sheet, did weaken to some degree or the other. The affirmative hit was in the short, medium, and long term. According to Prof. Perera, the implications for Corporate Governance are based on five broad aspects: Resources, Governance, Business Models, External Environment, and Communication with stakeholders, both internally and externally.

Resource perspective

From the resource perspective, the issues are multi angled, he said. The issues that should be considered are financial considerations (Financial Capital), capital asset considerations (Manufactured Capital), Intellectual property considerations (Intellectual Capital), workforce considerations (Human Capital), affects on the environment (Natural Capital), and intra and Inter business relationships (Social & Relationships Capital).

Governance perspective

From the governance perspective, there is a potential affect of the vision and mission of an organisation. In terms of the governance structure, the questions that are difficult to answer are that if the board have any lack in expertise? and if there is even a succession planning in place which is adequate?

While companies are unsure of the executive and board compensation strategies are affected, it is unsure of what the future risk and opportunities might be and if the risk management plans are adequate.

The next big concern, Prof. Perera stressed, is the strategy and resource allocation, that is if the company is allocating resources in the best possible manner? Then comes the issue around current and future performance where the affects of performance are questioned whereas with regard to current and future outlook, it is unknown as to how would the performance affect the outlook and ongoing viability.

Biz model perspective

From a Business Model perspective, Prof. Perera stressed that the issues to consider are many. Some of the areas that should be explored are; how would the inputs of a business model change? Does the current business activities, such as off shoring and supply chain, suite the future? Outputs of
production and how this may be affected? And what are the outcomes intended? Do we now start catering for the internal markets as opposed to external? What are the affects?
“It is essential for businesses to ask themselves these questions to have a proper assessment of the implications,” Prof. Perera said during the online webinar that drew a large number of audience from across the world.

External Environment perspective

From the external environment perspective, companies should take into account how the external environment changed? “Starting from social distancing, the way we do business, way we travel, the way physical businesses need to be restructured, these need to be explored,” he said. Prof. Perera added that companies should also take note on how the inter country relationships are changing. Following the pandemic, the world is already seeing relationship affects between countries, such as China, US, and New Zealand, amongst others, he said.
Meanwhile, undergoing changes are intra country relationships changes where relationships between states within a country and also councils within states are witnessing alterations. Share market and the price of the company stock and also overall indices is another area, Prof. Perera
stressed, where due to the volatility, there are potential additional threats from external environments such as take-overs etc, he cautioned.

Communication perspective with stakeholders

A prime area that requires immense focus are the issues from the communication perspective with stakeholders are many.
Firstly, companies would need to recognise as to know that are going to get about communicating with its key stakeholders in terms of corporate reporting. On AGMs and other statutory meetings virtually, some legislations may not allow this and governments would have to consider the other options as corporate rules may not facilitate AGMs to be hosted online within their constitution. Continuous disclosure due to covid-19 is a challenge so entities would have to take a look if the disclosure requirements of the company change due to the above. Furthermore, it is imperative to look at how the company would communicate with internal stakeholders on a day to day basis.

Integrated Thinking

According to Prof. Perera, the key to managing everything is integrated thinking. Integrated thinking is the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects. It essentially leads to integrated decision making and actions that consider the creation of value over the short, medium and long term.

Quoting text from ‘Doing Business in the 21st Century’, as stated by Mervyn King and Leigh Roberts, he said that integrated thinking is when there is no longer separation between nonfinancial and financial performance on the companywide acceptance that each affects each other; When all functions and divisions share in the company’s strategy and work together to achieve it; When decision making is carried out with a longer-term view on value creation and how the decisions impact on the company’s resources and relationships.

The Lankan scenario

Sharing some thoughts specific thoughts, Prof. Perera said that it is essential to consider the resources available and also the value chains which may be affected in situations such as COVID-19. “Some considerations would be to boost internal production and manufacturing of both goods and services,” he said. Needed is to also take into account governance structures to incorporate lessons learnt from COVID- 19, particularly in the regulatory side of this; such as submission of paper based reports etc. and move towards an online system. Furthermore, he stressed the need to consider IT security, given the remote and online working environments. Also need to consider is the existing IT infrastructure within the country which may be
required to support a governance shift. Prof. Perera pointed out that the pandemic showed some of the most vulnerable groups – the Day wage workers. For this, both Corporates and Governments may need to consider for future, how the governance structures can be changes for these groups to be productive during times of lockdown. “Shift in mindset is also needed for Sri Lankans in terms of remove and cloud based workplaces. Also, efficiency in working from home needs to be further thought through in terms of public education,” shared Prof. Perera while stressing that vvarious professional bodies in Sri Lanka has a role to play in this regard.

Broader implications

While the post COVID-19 Pandemic world will not be the one we left behind prior to COVID-19, things will change forever in every aspect of our lives, in everything we do. To get about the new normal, Prof. Perera said it is necessary to reconsider how companies would do act within their own
place of employment and consider some of the perspectives explored above. “See the relevance of integrated reporting in the current context and see how useful integrated reporting would be in addressing not only Corporate Governance, but the entire eco-system of an organisation,” he said while pointing out the need to consider going down the path of integrated reporting for organisations. Acknowledging that mental health and wellbeing another significant post-covid implication, particularly for the SME sector, he stressed the need to work as a collective in facing this pandemic together as a society and community.

Integrity with numbers

The pandemic did not only bring about stagnation but also financial losses. This means that investors and other stakeholders need high-quality financial information more than ever. According to Singapore Institute of Technology Prof. Kee, this year there will be issues in financial reporting, in the interim financial reports, where it is highly likely the greater use of accounting estimates.

Prof. Kee stressed that the information must be reliable and all material financial information relevant to an understanding of the financial position or performance of the company should be appropriately disclosed. And the responsibility of this lies with the board of directors.

Be ever ready

Commending the government’s efforts in containing the pandemic, President’s Counsel Dr. Cabral said those who were ready successfully steered through the crisis and is continuing to do so. According to him, if they companies have a level playing field, have transparent management and have is a good corporate citizen, they need to be ready for anything.

Meanwhile, CA Sri Lanka President Manil Jayasinghe stressed the need to ensure that the fundamentals of corporate governance are properly practiced. “We are in difficult times but this does not require you let your guard down and give up what is learnt”.