Volume 14 | Issue 01 | March 2014

BUILDING A FORWARD- LOOKING BOARD

SLID TAKES GOVERNANCE TO JAFFNA

SUPREME COURT ON THE DUTIES OF DIRECTORS

Volume 14 | Issue 01 | March 2014

SUSTAINABILITY AND DIRECTORS’ OBLIGATIONS

THE MYTH OF PAY-FOR- PERFORMANCE

NEW MEMBERS

SLID NEWS

INSIGHTS FROM THE SLID CHAIRMEN FORUM

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p.09 Prof. Uditha Liyanage

SLID BOARD LEADERSHIP TRAINING PROGRAMME – “GOVERNANCE PAYS”

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INSIGHTS FROM THE SLID CHAIRMEN FORUM ON LEADING CONTEMPORARY BOARDS

Leaders are defined in many ways. In the corporate field or the national level, true

leadership is defined by confidence, perseverance, inspiration and preparation. It is a position people grow into by experience and lessons learned through time, as a pioneer of the contemporary field of Leadership studies, Warren Bennis once said, “the most dangerous leadership myth is that leaders are born - that there is a genetic factor to leadership. That’s nonsense; in fact, the opposite is true. Leaders are made rather than born.”

SLID once again brought together some of the country’s leaders for a panel discussion on pertinent issues relating to leadership with a particular interest in leading contemporary boards. The panel included some heavy weights in the likes of Messrs. Jayampathi Banadaranayake, Chairman of Central Finance Company PLC; Harry Jayawardena, Chairman of Aitken Spence PLC; Sunil Wijesinha, Chairman of United Motors Lanka PLC and Razik Zarook, former Chairman of the Bank of Ceylon PLC, with Commercial Bank Chairman Dinesh Weerakkody serving as the moderator.

The discussion initially revolved around the experiences of each panelist on the said topic and was then opened to the floor for a much awaited Q&A session during which a full house of participants grabbed the opportunity to ask each panelist their advice and insight on leadership as a whole.

Speaking first, Mr. Jayawardena attempted to define the various types of chairmen prior to

describing his own position as one. “When you say “Chairmen” there are different categories. Some are appointed by the share holders, some for friendships; for want of a chairman, some come by right, by acquisitions of shares. So I belong to the category of having an interest in my companies”.

Commenting on the acquisition of new companies he was clear on placing minimal attention to the status of its accounts, stating that what is required mostly is the ability to take a risk and deal with it rather than blindly following such reports. Also speaking on the topic of ‘rubber stamping’, he pointed out that after the initial matters on the viability of the project have been identified, the chairman’s decision was final on deciding the above. Further, he noted that on a board appointed by shareholders rubber stamping had no place, as the role of the shareholder becomes more vital and aggressive in its involvement.

Speaking on his experience in the multinational sector, Mr. Bandaranayake had a somewhat different experience to share. Speaking primarily on the challenges faced by chairmen in Sri Lanka, he related that the central theme was really to sort out who leads the company. Relating to his experience as a non-executive chairman, he pointed out that the primary challenge faced by such chairmen is that of chartering a path which will on one hand support the CEO and his team in the pursuance of the goals set by the board, i.e. endorse the decisions made by the management by way of checks and balances, and on the other hand ensure that the management team

will remain subordinate to the Board in regard to matters of governance whilst strictly conforming to the directions of the board.

A question then arose on whether the roles of the chairman and CEO should be separated for the betterment of the company. Bandaranayake replied that it ultimately depended on the type of the company, stating that in a small company in which the focus is on a single business it is usual for the owner to be the CEO as well and direct the business. But as organizations become substantially bigger, more capital and investors need to be brought in. Hence, separating the role of the CEO and the chairman will provide more confidence to the investors that the business is being run not only for the interest of a particular section who is the majority but in fact it is done in terms of the set rules and regulations.

Sunil Wijesinha speaking on the roles of the board as well as the chairman, referred to the board as the ‘brains on’ entity and the management as the ‘hands on’ entity. He went on to state that the board is expected to take a macro view or a ‘helicopter view’ of the business and guide the management and the CEO rather than get involved at the ‘ground level’. He too was of the view that the role of the chairman varies from place to place. A non-executive chairman however should not be ‘hands on’ and should allow the management and the CEO to handle the day to day affairs. Overall the board has two main functions. The primary, known as the ‘conformance dimension’ covers compliance to regulations and laws, and ensuring the integrity of the accounts which is done by way

Chairmen Forum

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of internal auditing, external auditing and whistle blowing. The other role, ‘performance dimension’ consists of the creation of value for the business which can be executed through the engagement of the entire board collectively, or individually, he noted.

Speaking candidly was Razik Zarook on the subject of leadership as well as managing boards and powerful shareholders. Although a chairman is regarded as the Primus inter pares or first amongst equals, it is advisable that one does not presume the role of an all knowing guru but instead ensure that there is free discussion amongst the Members of the Board. Likening the role of a chairman to that of a conductor of an orchestra he went on to state as follows; “You must allow free discussion amongst all the Directors and allow them the opportunity to express all their views. Sometimes you will find that the cords they strike would be in total disharmony, but as the conductor you should be able to listen to them and harmonise it all into a beautiful tune. It is at that point that you should strike and they would say ‘yes that is what we agree upon’.” This however he noted is an area that requires paramount tact and intelligence.

Commenting on stakeholders and instances where one’s biggest stakeholder is the government he explained that it was important to strike a balance between the needs of the government and the priorities of the company, concluding however that there is no single rule for the above and you may be required to innovate depending on the requirements and circumstances.

Answering a question on the challenges faced by chairmen of state institutions as opposed to private institutions, Zarook was critical on insulating one’s corporate management from any political pressure. Speaking from the perspective of a bank he pointed out to some of the key areas in which these challenges are faced, such as those

of the human resource and recoveries that deal in recruitment, rescheduling of loans with regard to parate execution and requests with regard to transfers. He reiterated on the mechanism to ensure that the management can perform its duty with no undue stress or demand. Answering a question on the remuneration of directors Wijesinha explained that although there is no standard method of determining this, it needs to be sufficient to make it worthwhile for the director to take an interest and study the board papers, prepare well and make a good contribution.

On handling a contemporary board, it was felt that apart from tact and patience, it was important to create a psychological profile of the Members of the Board. It is equally important to build mutual trust and confidence amongst the members and to never resort to an open conflict with a fellow Member. Commenting on the perfect balance to be maintained on the board, the panel felt that not only the different professions but also the characteristics of the individuals must be considered for this purpose. It was also pertinent to have a balance between the executive and non executive directors on the Board.

The other matters discussed included, succession planning and gender balance. Referring to the former, although the panel collectively felt that succession planning was an essential process of any company with regard to filling key positions, it was important to groom and develop the correct candidates at an early stage. The responsibility in this regard not only lies in human resources and the remuneration committee but also on the board which should play a dynamic role in indentifying and grooming the correct people from the level of middle management. It was also felt that a focus on academic skills alone was insufficient as what was essentially required was a collection of people with ‘proven practical ability’. However the panel cautioned against the drawing of a

succession plan which may result in creating certain expectations in individuals who may turn out to be incompetent to perform as expected. It was also agreed that year end evaluations of a director conducted by the board was indeed of great value for the betterment of each individual as well as the company as a whole.

Discussing the strategy planning of a company, it was noted that this was an area where the role of the Non Executive Directors’ contribution became vital. Focusing on other contemporary issues of maintaining a gender and cultural balance on the Board, Zarook pointed out the status of international rating organizations which pay close attention to this area with regard to funding as well as rating. Gender balance is usually maintained in lower levels of management and with regard to new recruitments, but unfortunately due to various reasons this balance declines considerably at higher levels. Whilst agreeing that each company should take necessary steps to counter this issue, it was determined however, that the ultimate decision on whether a Member should remain on the Board should not be decided on the basis of gender, but instead on one’s competence, skill and performance.

An expert in the field, Weerakkody moderated the forum with a very casual air making everyone feel comfortable to clarify their areas of concerns. Many were the inquiries from the participants sent via written notes to the Moderator who deftly tossed them to the most suitable of the experts. The forum was indeed engaging and enlightening whilst being entertaining and ended on a very congenial note.

The Forum was sponsored by Dialog Enterprise and Diesel & Motor Engineering PLC and the Cinnamon Grand, Colombo was the Exclusive Hospitality Partner that evening.

Chairmen Forum

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The Sri Lanka Institute of Directors (SLID) in further pursuing its Chairman Pravir

Samarasinghe’s undertaking on the regional outreach program ventured to Jaffna last week to conduct a seminar on how to “Conduct Businesses Responsibly.” It was targeted at the SMEs in the Jaffna district who were unaware of their legal and regulatory requirements and the governance codes of ethics.

The Chamber of Commerce & Industries of Yarlpanam partnered SLID in this undertaking and together conducted a very successful event with over a 100 participants at the Green Grass Hotel in Jaffna. It was indeed refreshing to see the number of female participants who were very keen on getting to grips with the subject. The barrage of questions that were levied was ample evidence of the lack of availability of information on the areas addressed. The participants were mostly SMEs from a diversified group of businesses ranging from Information Technology, Education, small time hoteliers, energy and environmental solution etc.

The seminar was conducted in Tamil and was totally free of charge to the participants. The lecture on ‘The Company as a Legal Entity’ and the minimum requirements that have to be complied with was conducted by Mrs. Menaka

Ebenezer who is a visiting lecturer at the Faculty of Law at the University of Colombo and the lecture on ‘Minimum Finance and Tax Issues’ was delivered by Mr. Mylerumperumal Mayuran who is the Manager of the KPMG branch office in Jaffna.

SLID continuing with its initiative to educate the provinces has so far covered Kandy, Ratnapura, Trincomalee, Hambanthota, Gampaha, Killinochchi and now Jaffna. Further visits are scheduled to the other provinces, aiming at educating and raising the standards of SMEs throughout Sri Lanka.

Encouraged by the positive response received in the provinces so far covered, SLID firmly believes that the Institute could do so much more for the country’s economic, and social, progress. The dissemination of the message of Corporate Governance on a much broader and significantly intensified pace could be achieved with more benefactors who would be willing to fund this programme.

This seminar was sponsored solely by the Union Bank who supported SLID in the Gampaha district seminar as well.

SLID TAKES GOVERNANCE TO JAFFNA

Regional Outreach

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SLID Entrepreneur’s Forum

The Board Leadership Training, titled “Governance Pays”, conducted by the Sri

Lanka Institute of Directors (SLID), the premier forum for Company Directors, was a great success with forty eight enthusiastic Chairmen, Directors and CEOs participating. With demand exceeding the available capacity, SLID had to regretfully restrict the numbers.This programme was based on the globally proven training content developed by the International Finance Corporation (IFC) Global Corporate

Governance Forum, and was tailored to fit the Sri Lankan environment. It was also endorsed by the Securities and Exchange Commission, and was delivered by experienced practicing directors and trained trainers.There were many interactive sessions with case studies and role plays which proved as per the participant feed-back, to be more conducible and appropriate to the restricted smaller number.SLID will, be conducting a similar course shortly, to satisfy demand and SLID would also be available to

conducting bespoke training courses for companies who would want their Boards of Directors to be trained, in house, on Board Leadership. The participant’s ability to engage in more effective board discussions and display positive, value adding behaviour to the organisation’s performance was effectively accentuated, and strengthened, by the training. The participants also had an opportunity to network and discuss common issues with peers and this was identified by them as a very vital aspect of the training.

SLID BOARD LEADERSHIP TRAINING PROGRAMME – “GOVERNANCE PAYS” - WELL RECEIVED

SLID Training

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SLID CEO FORUM:

SLID SAYS “GOVERNANCE PAYS”Q. What is the necessity for such a program in Sri Lanka?

The Sri Lanka Institute of Directors (SLID) is the primary forum for Company Directors and is dedicated to serving the professional needs of Directors in Sri Lanka, and in the region, by promoting excellence in the board room through awareness of best practices, learning and development, regular literature, interactive sessions and workshops.

The key rationale for setting up the Sri Lanka Institute of Directors was to provide practicing Directors, and aspiring Directors, a vehicle to cater to their professional needs just like the other associations and institutes serving many other professions. Directors, similar to other professionals, are expected to serve the interest of their shareholders and other stakeholders. While we recognize that the bedrock of professionalism is the fiduciary relationship between a Director and his client, it is the actual behaviour of the Director which results in outcomes. In the last decade, there have been many instances where actual Director Behaviour fell short of the expected behaviour. The Institute is keen to close this “expectation gap” as effectively as possible by making Directors aware of their duties, role, responsibilities and accountabilities. SLID, no doubt, is best placed to enhance this awareness through this training.

Q.What is the Board Leadership training about? What is its objective?

The SLID Board Leadership Training Program is all about promoting good corporate governance practices in Sri Lankan entities.This bespoke Training Program will familiarise, and gird, the participants with what we believe is “Best Practice” irrespective of whether the organization is a Listed Company, a Private Company or a State Owned Enterprise. We are confident that they will become more effective through a greater understanding of their roles, duties and responsibilities as Directors.

An organisation with a good governance track record is able to attract capital at favoured rates. This aspect is often lost in the minds of corporate leaders. Good governance, inter-alia, includes the display of honesty, integrity, transparency and ethical values in addition to operational excellence and entrepreneurship. This Training Program will accentuate the importance of these characteristics.

The training also aims to improve the participant’s ability to engage in more effective board discussions and to display positive, value adding

behaviour to the organisation’s performance. It also gives the participants an opportunity to develop networks and discuss common issues with peers and find solutions to the often confronted director dilemmas.

Q.Whom are you targeting?

The target audience is current practicing directors, newly appointed directors, potential directors and aspiring directors.

Q.What will they learn?

The two day training covering four modules will handle the Board’s Role including Directors duties and responsibilities, The Effective Board: the composition and structure, the Board in practice and the Board in action. The first two modules will handle the theoretical introduction to the Board’s role etc and on the second day, they will gain an

insight in to the practical aspect of the behavioural facets of a Board and Board dynamics. In addition, they will take away key insights, valuable tools and frameworks that can be immediately applied to improve board performance and decision making in creating sustainable value to the organisations they serve.

Q.What makes it unique?

We believe that this 2 day program for Directors is unique in that globally proven training content developed by the International Finance Corporation (IFC), Global Corporate Governance Forum has been tailored to fit the prevailing, and emerging, Sri Lankan corporate and regulatory environment. The program consists of interactive work sessions, the use of relevant case studies and most importantly the employment of trained trainers backed by well exposed practicing Directors. The case studies will, in particular, give the participants every opportunity to reflect on, and discuss, their own experiences. This formal training will be followed by an open discussion with a very senior panel of practicing Directors, Board Chairmen and subject experts, who will share their views and answer questions.This training has been endorsed by the Securities and Exchange Commission of Sri Lanka.Participants will also receive a Certificate from the Sri Lanka Institute of Directors and this certificate will be recognized as an accomplishment towards a professional qualification hierarchy that the Institute is currently pursuing.

Q.Who are the resource persons facilitating the training session?

The panel of lecturers and resource persons comprise senior practicing Chairmen and Directors including professional Trainers.The Board’s Role: Director’s Duties and Responsibilities will be handled by Mr. Sudarshan Senaratne who is a trained “Trainer” on Board Leadership Training developed by the International Finance Corporation, and has held several board positions in the public and private sector. He will be supported by Mr. Rasakantha Rasiah who is currently the Chairman of Atlas Pencils and a Director on many boards and a Lecturer at the Post Graduate Institute of Management (PIM).The Module in Effective Board: the Composition and Structure will be handled by Mr. Anthony Jayaranjan who is a Consultant in training and development, and was a Lecturer and Examiner at the University of Colombo and has served on many Boards. He will be supported by the SLID Chairman Mr. Pravir Samarasinghe, who has served as a Director of a number of publicly Listed and unlisted Companies. The Board in Practice will be conducted by Mr. Lasantha Salgado an Attorney at Law, Fellow of the

Pravir SamarasingheSLID Chairman

Shabiya Ali interviews SLID Chairman

Pravir SamarasingheWith the kind courtesy of

Daily FT/www.ft.lk

Governance Pays


Institute of Training and Development and a Fellow Member of the Association of HR Professionals having years of experience Consultancy and professional training. He has served on many Boards and will be ably supported by the SLID Council Member Miss Nilanthi Sivapragasam who is presently the Group CFO at Aitken Spence PLC and is also a Director of several subsidiary companies in the Group.The Board in Action will be handled by Mr. Ronnie Peiris who is currently an Executive Director and the Group Director Finance of John Keells Holdings PLC. He is the former Chairman of Nations Trust Bank PLC, and is a Director in several other companies. He has over 40 years of Finance and General Management experience both in Sri Lanka and abroad and is the immediate past Chairman of The Sri Lanka Institute of Directors. He will be supported by another senior practicing Director.In addition to the persons mentioned above, the 2-day training programme will end with a panel discussion among 4 senior Directors, being Dr. Harsha Cabraal, Mr. Reyaz Mihular, Mr. Ranjith Fernando and Mr. Ronnie Peiris.

Q. How many participants will be accommodated?

We wish to limit the numbers to a maximum of 40 to enable the delivery of a closer personalized service and the facilitation of interaction and discussion.

Q.When is the closing date for applications?Although the training programme is scheduled for the 27th/28th of February, we wish to close registration by the 21st to enable us to give the participants the course material and case studies upfront. We believe that this would significantly improve the quality of their participation and interaction. This willno doubt, result in improved learning.

Q.What are SLID’s plans for the future? Similar to other International Institutes’ of Directors, SLID plans to introduce a curriculum and qualification leading to a hierarchical professional membership; Fellow, Associate and Affiliate of the Sri Lanka Institute of Directors. These qualifications with related level of skills will be granted based on examinations and practical experience. The Institute is currently developing such curricula.In terms of our special activities, SLID wil l continue with its crusade of taking the message of good corporate governance and stewardship to the provinces in the country. It is noteworthy that we have already covered Kandy, Rathnapura, Trinco, Hambantota, Gampaha and Kilinochchi. We will be covering Jaffna next week.Yes we do have many other plans in the pipeline. They are at a nascent stage and discussions on them and/or disclosure are too premature.

Organisations today - whether large, medium or small - face a world of growing complexity,

uncertaintyand scrutiny. In the present era – ‘era of sustainability’ the CEO and board of directors are facing the new opportunities and challenges thrown out by the stakeholders and the growing expectations of responsibility, transparency and accountability. The stakeholders are increasingly demanding the CEO and board to respond to environmental, social and governance (ESG) challenges thru changes in strategies, bringing in sustainable business practices, innovative to meet stakeholder demand for sustainable products and services, sustainable supply chain etc..To meet these expectations, the CEO and board mustincreasingly demonstrate to multiple stakeholders that they are managing a wide range of corporate and business risks and they have embarked on the journey of aligning their business strategy, systems and stakeholder relationships toachieve long-term value for both shareholders and broader stakeholders.

There are many definitions and meanings of sustainability; however when we look thru the lens of directors’obligation, sustainability means driving the organisation with strategic focus by the CEO and the board into the long term financial sustainability to the providers of capital and shareholders vis a vis recognising and realising the environmental and social responsibility to ensure long term social licence to operate.The CEO and board today are called upon to create and demonstrate the long term value to all stakeholders’, hence the expectation is ever increasing and the directors especially independent director’s obligation are increasing to demonstrate they are morally responsible to

the externalities created by their organisation.Retaining the accountability, transparency and compliance as key issues, the wide range of stakeholder look forward to how the organisations intangible values are preserved and enhanced on the short medium and long term. In the changing landscape the director’s obligation includes enhancing the organisational intangible value drivers to enhance the overall organisational values as part of corporate responsibility i.e.:• Improve the organisations Brand and Repute thru effective management of social and environmental responsibilities to ensure reputational risk are assessed and managed;• Enhance the Human capital thru strategic focus on employee’s andworkers’ rights including Human rights;• Optimise the Operational efficiency thru resource conservation and bringing in innovative waste management practices;• Innovation capital – motivating the team and engaging relevant stakeholders with bringing to market the sustainable products and services;• Beyond compliance i.e. proactively setting higher and higher standards and surpassing them.Hence to deliver the stakeholder the tangible and intangible values beyond the financial survival on constant basis the CEO and the directors need to move beyond the defined roles and responsibilities and expectations of corporate governance and apply the collective wisdom, mind-set, logic and long term approach and perspective to handle collectively the environmental, social and governance issue coupled with stakeholder dynamics related to trust in the changing context of business in the globalised market.

SUSTAINABILITY AND DIRECTORS’ OBLIGATIONSVadakepatth Nandkumar, Head – Sustainability and Climate change, DNV GL

Sustainability


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It is with much regret that we announce the departure of Rochelle Alahakone who has been the Secretary to the CEO at the SLID Secretariat over the past 4 years. She has been an integral part of the SLID Secretariat and was conversant

with all aspects of the Secretariat functions which she handled meticulously. Having completed her LLB and her Law College exams she is moving on to join a legal firm for her apprenticeship. We wish her the very best in her profession and thank her for her unstinted support in all our endeavors.

SLID News


SLID DINNER THEATRE

We warmly welcome the following new members who joined the SLID in the 1st quarter of 2014. We look forward to your participation at our monthly events.

1. Mr. Senaka Darshan Abeygoonasekera, Sri Lanka Foreign Employment Agency2. Mrs. Marion Elizabeth Abeywardene, Commercial Bank of Ceylon PLC3. Mr. Ahintha Amarasinghe, Worldlike Travels (Pvt) Ltd4. Mr. Danukh Amerasinghe, Amaar Sky Hotel5. Mr. Neil Bogahalande, Royal Ceramics Lanka PLC6. Mr. Nandika Buddhipala, Commercial Bank of Ceylon PLC7. Mr. Don Gemunu Corea, H.P.S. Lanka (Pvt) Ltd8. Mr. Sajith Heshara Priyawadan De Mel, Advent Global Management (Pvt) Ltd9. Mr. Chandana De Silva, Sea-Change Partners (Pvt) Ltd10. Mrs. Manisha Ajanthi De Silva, GroupM Media (Pvt) Ltd11. Mr. Ravi Dias, Commercial Bank of Ceylon PLC12. Mr. Roshan William Dissanayake, Navigation Maritime Colombo (Pvt) Ltd13. Mr. Thomas Rukshan Dissanayake, ABC Freight Services (Pvt) Ltd14. Mr. Jagatheesan Durairatnam, Commercial Bank of Ceylon PLC15. Mr. Imtiaz Abidhussain Hassanally Esufally, Hemas Holdings PLC16. Mr. A. Peter Lasantha Fernando, Hatton National Bank PLC17. Mrs. Mary Indrani Fernando, New Philip Hospitals (Pvt) Ltd18. Mr. Joseph Alvin Gomesz, GroupM Media (Pvt) Ltd19. Mr. Ruwan Goonewardena, AEN Palm Oil Processing (Pvt) Ltd20. Mr. Mohamed Sabry Haniz, GroupM Media (Pvt) Ltd21. Mrs. Nadika Namalie Herath, GroupM Media (Pvt) Ltd22. Mr. Vinod Kishore Hirdaramani, Hirdaramani International Exports (Pvt) Ltd23. Mr. Nalin Anthony Neil Jayasundera, Aitken Spence Travels (Pvt) Ltd.24. Mr. Bernard Malcolm Joseph, Swiss Biogenics Ltd.25. Mr. K. D. Nimal Luxshman, Commercial Bank of Ceylon PLC26. Prof. Uditha Liyanage, Commercial Bank of Ceylon PLC27. Mr. William Simon Morris, H P S Lanka (Pvt) Ltd28. Mr. Ainsley Rohan Muttiah, Commercial Bank of Ceylon PLC29. Mr. Jagath Kumara Pathirane, Expolanka Freight (Pvt) Ltd30. Mr. Lalith Jude Perera, National Construction Association of Sri Lanka31. Mr. Periyasamy Saravanan, Wycherley International School32. Mr. Jehan Anthony Peruma, Plastech (Pvt) Ltd33. Ms. Suenesha Rosemary Peruma, Plastech (Pvt) Ltd34. Mr. Sujeewa Rajapakse, BDO Partners35. Mr. James Henry Paul Ratnayeke, Paul Ratnayeke Associates36. Mr. Sivakrishnarajah Renganathan, Commercial Bank of Ceylon PLC37. Mr. Mohamed Shafeek Samad, Farm's Pride (Pvt) Ltd38. Mr. Thiru Sayandhan, Delmege Forsyth & Co. Ltd.39. Mr. Bimal Iroshan Silva, Hayleys Consumer Products Ltd40. Mr. Haresh Somashantha, Royal Ceramics Lanka PLC41. Mr. Eugen Duliksha Prartharp Soosaipillai, Commercial Credit & Finance PLC42. Mr. Nadija Wijendri Tambiah, John Keells Holdings PLC43. Mr. T.M. Prabath Manjula Thawalampitiya, Prime Coats International (Pvt) Ltd44. Mr. Lalith Withana, Bank of Ceylon

Welcome to our new Members

SLI

D M

EMB

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SLID New Members


Prof. Uditha Liyanage

Pay-for-performance and similar “if then” rewards are effective only in a few, limited situations. In other situations, they are dangerous, and very often, counter-productive. Indeed, it seems that business does not know what science knows!

The puzzleOver the years, I have witnessed the effects of incentive schemes offered to employees at different levels in specific contexts. For instance, many sales people typically work on a low fixed income and a relatively higher variable income based on their level of performance. I have observed in many organizations that when salespeople are offered incentives on the achievement of sales targets, they, typically achieve the set targets but rarely go beyond them. Conversely, when the performance of salespeople forms the basis of a competition to select, say, the organization’s best salespeople of the year, they, go well beyond the set targets. This has puzzled me. There is an interesting distinction to be noted here. In the former case, goals and sales targets are set by others, and in the latter case, goals and targets are set by the salespeople themselves. This vital distinction will be revisited later in this paper. The larger question is about the nature and effectiveness of the “carrot and stick” reward schemes which are widely employed in many organizations, over the years and across industries and nations. “Carrot and stick” rewards are essentially “if-then” rewards. If you do this, then you will get that, is the principle here. Monetary rewards are typically associated with “if then” incentive schemes. They are classified in the literature as extrinsic motivators. The critical question that is addressed in this paper is the effectiveness of extrinsic, “if then” motivators and the contexts in which they are effective and those that render such rewards ineffective and, on occasion, counter-productive.Importantly, it should be noted that as one moves up the organizational ladderand hold jobs of greater authority and responsibility, the place for cognitive skills will become more important than tasks that are mechanical and rule-based. Hence, in the light of the available evidence, the effectiveness of “if then” reward schemes for senior management is indeed doubtful.

Rewards & behaviourPay-for-performance rewards schemes are considered by many as a cure-all for performance related problems in organizations. Achieve a desired and pre-determined level of performance and then you receive a pay, a monetary reward for the performance achieved. This is a typical “if then”, “carrot and stick” reward. The rationale here is that if you want more of a desirable behaviour, then reward that behaviour. Conversely, if you

want less of an undesirable behaviour or none of it, then punish that behaviour. It has also been argued that human beings are hard-wired to respond to “carrot and stick” reward mechanisms. It is reckoned to be a function of our old-brain, conditioned over millennia. Importantly, recent research from behavioural economics and psycho-sociology is compelling. The findings of such research projects reveal the surprising truth about what motivates us. The evidence seems compelling, and directly challenges our deep-seated notions and assumptions about extrinsic motivators – the “if then,” or “carrot and stick” rewards.Organizations that claim the effectiveness of their “if then”, pay-for-performance reward schemes should re-examine whether the apparent effectiveness of the rewards is due to extraneous factors rather than the rewards themselves .The Hawthorne Effect may well have been at work!

Evidence is compellingA quartet of economists from leading universities in the USA and North America set up shop in Madurai, India, to gauge the effects of extrinsic incentives on performance. Because the cost of living in India is much lower than in North America, the researchers could offer large and attractive rewards. They recruited 87 participants and asked them to play several games – for example, tossing tennis balls at a target, unscrambling anagrams, recalling a string of digits that required motor skills, and creativity. To test the power of incentives, the researchers offered three types of rewards for reaching certain performance levels.One-third of the participants could earn a small reward – rupees 4 for reaching their (low) level of performance targets. One-third could earn a medium reward of rupees 40 for reaching their (medium) level of performance and one-third could earn a very large reward of rupees 400 for their (high) level of performance (Pink, 2009).What happened? Did the size of the reward predict the quality of the performance? Yes, but not in the way one might expect. As it turned out, the people who were offered the medium-sized rewards, did not perform any better than those who were offered the small one. And those in 400 rupee super-incentivized group? They fared worst of all! By nearly every measure, they lagged behind both the low-reward and medium-reward participants. The researchers concluded, “In eight of the nine tasks we examined across the three experiments, higher incentives led to worse performance.

Four economists-two from MIT, one from Carnegie Mellon, and one from the University of Chicago who undertook extensive research for the Federal Reserve System-instead of affirming the widely accepted simple business principle of higher rewards lead to higher performance, in fact refuted it. Importantly, in 2009, scholars of the London School of Economics analyzed 51 studies of corporate pay-for-performance plans and concluded: “We find that financial incentives … can result in a negative impact on overall performance” (Pink, 2009). Ariely et. al. (2008) wrote after extensive research that “our results suggest that one cannot assume that introducing or raising incentives always improve performance … Indeed, in many instances, contingent incentives that cornerstone of how business attempts to motivate employees may be a losing proposition.”

“If then” rewards and creativity Again, research tells us that tasks that involve cognitive skills, such as creative and conceptual ability do not yield to “if then” rewards. Such rewards narrow people’s focus and blinker the wide view that is required to produce “out of the box” solutions. Pink (2009) reports that Teresa Amabile, the Harvard Business School professor and one of the world’s leading researchers on creativity, has frequently tested the effects of “if then” or contingent rewards on the creative process. In one study, she and two colleagues recruited 23 professional artists from the United States who had produced both commissioned and non-commissioned works of art. They asked the artists to randomly select 10 commissioned works and 10 non-commissioned works. Then Amabile and her team gave the works to a panel of accomplished artists and curators, who knew nothing about the study, and asked the expert panel to rate the work on creativity and technical skills. The researchers concluded: “Our results were quite startling. The commissioned works were rated as significantly less creative than non-commissioned works, yet they were not rated as different in technical quality.” When the artists were working for themselves, it was “play and joy”, whereas when the artists were working for someone else, it was “work and labour”. A study of the School of the Art Institute of Chicago produced very similar results.

“If then” rewards and good behaviourPink (2009) reports that Swedish economists decided to find out whether blood donors should be incentivized in order to promote their good

THE MYTH OF PAY-FOR-PERFORMANCEPay for Performance


SLID DINNER THEATRE

intent and behaviour of donating blood. They found 153 women who were interested in giving blood. Then they divided the women into three groups. Researchers told the first group that blood donation was voluntary. The second group was told that if they gave blood, they would receive a small incentive (50 Swedish Kroner or about $ 7). The third group, a variation on the second offer: a 50 Kroner payment with an immediate option to donate the amount to a children’s cancer charity.Of the first group, 52 percent of the women decided to go ahead and donate blood. They were willing to donate blood in the absence of any compensation. The second group? “If then” extrinsic motivation would suggest that this group might be a bit more motivated to donate blood. However, only 30 percent of the women decided to give blood – the number decreased by nearly half!The third group responded much the same as the first group – 53 percent of blood donors. Interestingly, adding a monetary reward did not lead to more of the desired behaviour. In fact, it led to less. Pink (2009) argues that the monetary reward “crowded out” the intrinsic desire to do something good. It is clear that the gap between what science is learning and what business is doing is indeed, wide.When money worksIt must be noted that in the Swedish example of blood donors, the reward itself was not inherently destructive. It is not that all rewards at all times are bad. For instance, when the Italian government gave blood donors paid time off work, donations increased. The law removed an obstacle to altruism. It must be noted that extrinsic rewards work sometimes, and work very well. Research is clear and compelling that extrinsic rewards work well for mechanistic, algorithmic routine and rule-based tasks. What is also true is that mixing rewards with inherently (i) interesting, (ii) creative, and (iii) noble tasks – deploying them without understanding the peculiar science of motivation is dangerous. In these situations, “if then” rewards usually do more harm than good.

Unintended effects of “if then” rewardsResearch also suggests that when used in the wrong context, for the wrong task, extrinsic motivations can have unintended collateral consequences. Pink (2009) lists these consequences. They are, extrinsic motivators (i) tend to promote unethical behaviour. (ii) create addiction (you need more and more of them to work) and (iii) encourage short-term thinking. The research suggests that when goals are set by others, -sales/profit targets, quarterly returns and so on - extrinsic rewards offered to achieve them can have dangerous side effects. Like all extrinsic motivators, goals narrow our focus. That is also one reason why they can be effective in certain contexts and for certain tasks. They concentrate our minds. But the same motivators can, and usually, narrow and blinker the wide-ranging thinking necessary for cognitive tasks that entail innovative and creative skills.

Conversely, goals that people set for themselves and are devoted to attaining mastery are usually healthy. The prescription is to be carefully noted: Goals may cause systemic problems for organizations due to narrowed focus, unethical behaviour, increased risk taking, decreased cooperation, and decreased intrinsic motivation. Exercise great care in applying goals in your organizations (Pink, 2009).

Triple intrinsic motivators Beyond “if then”, carrot and stick extrinsic rewards which work well for certain tasks, we need to understand that intrinsic motivators work especially for tasks that are cognitive in nature-innovative, creative and conceptual tasks.Pink (2009) identifies three compelling intrinsic rewards. They are (i) Autonomy, (ii) Mastery and, (iii) Purpose.Autonomy is self-regulation. Employees appreciate freedom, and the possibility of self-regulating their actions. This, importantly, leads to employee engagement that modern organizations increasingly seek and value. But management, as it is often practised and, in fact, preached is about compliance, which is the very anti-thesis of self regulation and engagement. Mastery is an intrinsic motivator. Maslow (1954) identified many decades ago that self-actualization, realizing one’s innate potential and giving expression to it is a strong motivator. Mastery is this drive to perform and excel.Purpose is the organization’s raison d’etre, which goes beyond making money. This is the larger, noble purpose for which the organization was, perhaps, set up in the first place. Purpose is the anti-thesis of alignment. Goal setting and management-by-objectives are not only commonplace in organizations but are considered to be sacrosanct. To get to point B, you need to know where you are - point A- and then map out a direct path to get from A to B. Alignment at work! It is argued that goals are best achieved indirectly and here is a quote from Victor Frankel, (1959), the famous holocaust survivor, which exemplifies this principle of obliquity. “Don’t aim at success. The more you aim at it, and make it a target, the more you are going to miss it. Success, like happiness cannot be pursued. It must ensue, and it only does so as the unintended side-effect of one’s personal dedication to a task, greater than oneself.”The corporate mission and purpose of the Tata Corporation is illustrative of such a purpose. “We

are committed to improving the quality of life of the communities we serve. Our practice of returning to society what we earn evokes trust among our customers, employees and other stakeholders. We are committed to protecting this heritage of leadership with trust through the manner in which we conduct our business.” These intrinsic motivators raise the perspective and performance of employees, leading them to be cooperative, engaged, and innovative. They go the extra mile and excel in their performance. They identify themselves with the organization. They are deeply loyal to their organizations.ConclusionThe research is clear and compelling. Extrinsic, “if then”, carrot and stick, pay-for- performance rewards work when the task at hand is mechanical, sequential, rule-based and algorithmic. But when it comes to heuristic, creative and cognitive tasks, extrinsic motivators are terrible. In fact, they can backfire. Extrinsic rewards also don’t work when the task to be performed is interesting, creative and noble. In fact, they become counter-productive. Intrinsic motivators, particularly, Autonomy, Mastery and Purpose work best when the task at hand demands cognitive skills. The research from multiple sources confirms these facts. Indeed, we can ignore them at our peril. It is necessary that business comes to know what science knows!

Ariely et al (2008), “Large Stakes and big mistakes”, New York Times, USA.Frankl Victor (1959), Man’s Search for

Meaning, Simon and Schuster, New York.

Maslow, Abraham (1954), Motivation and Personality, Harper and Row,

New York.Pink Daniel (2009), Drive, The

Surprising truth about what motivates us, Penguin Group, USA.

Prof. Uditha Liyanage is a Senior Marketer, Professor of Management at the Postgraduate Institute of Manage-ment (PIM) and Adjunct Professor of the University of Canberra, Australia. He is on the Boards of Directors of a

number of leading companies.

References:References:

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Pay for Performance


Debate over the role of company boards invariably intensifies when things go

wrong on a grand scale, as has happened in recent years. Many of the companies whose corpses litter the industrial and financial landscape were undermined by negligent, overoptimistic, or ill-informed boards prior to the financial crisis and the ensuing deep recession. Not surprisingly, there’s been a renewed focus on improved corporate governance: better structures, more rigorous checks and balances, and greater independence by nonexecutives,for example. Governance arguably suffers most, though, when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead. We have experienced this reality all too often in our work with companies over several decades. It has also come through loud and clear during recent conversations with 25 chairmen of large public and privately held companies in Europe and Asia. Today’s board agendas, indeed, are surprisingly similar to those of a century ago, when the second Industrial Revolution was at its peak. Directors still spend the bulk of their time on quarterly reports, audit reviews, budgets, and compliance—70 percent is not atypical— instead of on matters crucial to the futureprosperity and direction of the business. The alternative is to develop a dynamic board agenda that explicitly highlights these forward-looking activities and ensures that they get sufficient time over a 12-month period. The exhibit illustrates how boards could devote more of their time to the strategic and forward-looking aspects of the agenda. This article discusses ways to achieve the right balance.

Our conversations with successful chairmen showed a strong continuing bias toward fiduciary tasks but also adesire and willingness to shift focus. “Boards need to look further out than anyone else in the company,” commented the chairman of

a leading energy company. “There are timeswhen CEOs are the last ones to see changes coming. “This forward-looking imperative comes in part from the way long-term economic, technological, and demographic trends are radically reshaping the global economy, making it more complex to oversee a successful multinational business. As executive teams grapple with the immediate challenge of volatile and unpredictable markets, it’s more vital than ever for directors to remain abreast of what’s on (or coming over) the horizon. Second, and compounding the short-termexecutive mind-set, the length of CEO tenures remains relatively low—just five to six years now. That inevitably encourages incumbents to focus unduly on the here and now in order to meet performance expectations. Many rational management groups will be tempted to adopt a short-term view; in a lot of cases, only the board can consistently take the longer-term perspective. Distracted by the details of complianceand new regulations, however, many directors we meet simply don’t know enough about the fundamentals andlong-term strategies of their companies to add value and avoid trouble. It doesn’t have to be this way. A select handful of banks and other multinational corporations with prudent, farsighted, and independent-minded boards not only survived the financial crisis largely intact but also continue to thrive. Rather than seeing the job as supporting the CEO at all times, the directors of these companies engage in strategic discussions, form independent opinions, and work closely with the executive team to make sure long-term goals are well formulated and subsequently met. How can a board better focus on the long term and avoid becoming a prisoner of the past?

Board chairmen and fellow directors will quickly grasp the point by studying the exhibit.

The light-purple part of the annual schedule depicts how a board preoccupied with its fiduciary responsibilities typically spends its time. The dark-purple agenda items, by contrast, show what the calendar focus of a predominantly forward-looking board might look like. It’s impossible to effect this change without a solid foundation: the right directors, knowledgeable about their roles and able to commit sufficient time.Roll back the future to access topboard members Too often, vacancies on a board are filled under pressure, without an explicit review of its overall composition. An incoming chairman should try to imagine what his or her board might look like, ideally, three years from now. What kinds of skills and experience not currently in place will help fulfill the company’s longterm strategy? What, in other words, is the winning team? A willingness to look ahead expands the number of candidates with appropriate skills and heightens the likelihood that they will sign up if and when they become available. One of the world’s leading food companies used this approach to introduce a range of expertise clearly reflecting its strategic direction and requirements. Of course, its board has high-profile (former) executives and topprofessionals with a profound finance, risk, or general-management background and diverse geographicexperience. But now it also includes people with successful track records in health, nutrition, the public sector, and welfare. Other companies need specific kinds of expertise to help them adapt to cutting-edge technologies or market disruptions. Here, advisory boards without formal governance authority are especially useful.Define the board’s role clearlyThe familiar roles of a well-functioning board—such as setting strategy, monitoring risks, planning the succession, and weighing in on the talent pipeline—are easy to list. But in practice, things are never simple. CEOs and their top teams, for example, are

BUILDING A FORWARD-LOOKING BOARDChristian Casals and Christian Caspar

Directors should spend a greater share of their time shaping an agenda for the future.

The case for change

Foundations of a forward-lookingboard

Forward Looking Board


CORPORATE REPUTATION

Traditional board agenda Additional, forward-looking activities

How forward-looking boards should spend their time

Details on selected activities (all others are self-explanatory, as labeled)

StrategySet framework for the yearDefine broad optionsOutline/select optionsApprove final strategy approach Review strategic and competitive position, key performance indicators

7

8

910

11

Fiduciary

Annual accountsAnnual budget directivesNext year’s budgetAuditors’ reportAudit-planning approachAudit-committee reviews

123

4

5

6

TalentSet talent-review objectives for the yearReview top 30 –50 people

Board reinventionConduct board 360˚

evaluationDetermine approach for board-process enhancement

14

16

17

18

13

15RiskDetermine risk-review objectives for the yearConduct annual risk review, including mitigation approaches

InvestmentEngage in ongoing review of investment proposals

12

Board educationTravel with sales staff, customer visitsVisit R&D facilitiesVisit new geographiesInspect production sitesAttend customer conference

20

21

22

23

24

DecisionsEngage in decision making —eg, on budgets, investments, M&A, and key nominations

19

Exhibit

Jan – Feb Mar – April May – June July – Aug Sept– Oct Nov – Dec

1

4

6 6 6

5

2

6

3

7 88 9

11 11

12 12 12 12 12

10

12

13 14

15 16

19 19 19 19 19 19

17 18

Corporate Control, fiduciary

Review of last meeting’s protocol

Performance reports

Annual general meetingAnnual accounts

Auditors’ review

Legal, regulatory, Compliance, and risk

Shaping

Reinvent board

Decisions

Board education/team building

Strategy

Market and Competitive - landscape review

Investment proposal

Talent - quality review

Risk management

22 23 242120



often touchy about what they see as board interference. Equally, weighty boards with years of experience and members used to getting their own way are frequently frustratedbecause they can’t intervene more actively or their advice is ignored. It’s critical to defuse these tensions at the outset by clearly defining the board’s role and establishing well-understood boundaries. Unless roles are clear, the relationship between the CEO and management, on the one hand, and the board, on the other, risks devolving into misunderstandings, loss of trust, and ineffectiveness. An annual discussion between the board and management, perhaps including a written letter of understanding setting out the roles of each party, is always a productive exercise. For instance, a large Nordic investment company creates work and role descriptions, for the board and management, that are reviewed and approved every year. This process always generates valuable discussions and makes roles more clear.Get your board to work harderMost board members we know are hard working. The old caricature of long lunches and big stipends is just that— a caricature. Yet the 10 or 12 days a year many board members spend on the job isn’t enough, given the importance of their responsibilities. Several well-performing boards prescribe a commitment of up to25 days of engagement for nonexecutive board members. Some of that extra time should be spent in the field. Boards seeking to play a constructive, forward-looking role must have real knowledge of their companies’ operations, markets, and competitors. One big international industrial companywe know requires all its board members to travel with salesmen on customer visits at some point each year. Other companies ask their directors to visit production and R&D facilities. The chairman of a manufacturing company we interviewed adds that “You can’t fully understand the business, analyze the competition, review succession plans, visit a company’s facilities, travel with salespeople, and set strategic goals byworking a handful of days.” How can companies achieve the right degree of commitment? Higher pay willnot be the answer, even if there were no governance watchdogs who would doubtless conclude that directors are already well paid or at least rarely need the extra money. The question of pay has never been an issue at a major oil company that requires its board members to set aside 30 days a year, forexample. What does actually help (as in this case) is a board environment that encourages

participation and allows board members to derive meaning, inspiration, and satisfaction from their work. The reward for individuals will be an opportunity to enhance their reputation for good boardroom oversight, to strengthen their personal networks, and to influence decisions.The best boards act as effective coaches and sparring partners for the top team. The challenge is to build processes that help

companies tap the accumulated expertise of the board as they chart theway ahead. Here are four ways to encourage a forward-looking mind-set.Require the board to study the externallandscapeAs a starting point, says the chairman of a finance company, “We invite renowned experts and professionals in various fields—such as technology, regulatory matters, and economics—to board meetings, who talk about specific topics.” Board meetings also may be held in overseas locations where directors can be exposed to new technologies and market developments relevant to a company’s strategy.To be able to challenge management with critical questions, a company’s directors should regularly compare internal performance data with those of their competitors across a range of keyindicators. The chairman of one Telecommunications Company says his board “regularly develops an outside–in view of the industry and business from public information. And from time to time,we seek outside advice to get an independent view on the firm’s strategy and new potential development areas.”Make strategy part of the board’s DNA

The central role of the board is to concrete and ultimately agree on the company’s strategy. In many corporations, however, CEOs present their strategic vision once a year, the directors discuss and tweak it at a single meeting, and the plan is then adopted. The board’s input is minimal, and there’s not enough time for debate or enough in-depth information to underpin proper consideration of the alternatives. What’s required is a much more fluid strategy-development process: management should prepare a menu of options that commit varying levels of resources and risks. In this way, board and management jointly define a broadstrategic framework, and management defines options for board review. Finally, during a special strategy day, the board and

management ought to debate, refine, and agree on a final plan. “At theBeginning of the annual planning process, the board’s role is to help management broaden the number ofstrategy options,” says the chairman of a large transportation company. “Atmidyear, it is to discuss strategic alternatives and help select the preferred route, and at end of year, it is to make the final decision to implement.” Strategy should always provide thecontext for proposed acquisitions or stand-alone investments. “Without reference to long-term objectives, standalone investment proposals do not make much sense—but they are not unusual, “says the chairman of a bank. Strategy and policy go hand in hand. Policy is not only among the most powerful tools acompany can use to propel its culture and employee behavior in new directions but can also contribute significantly to the effective implementation of strategy. Yet most boards are aware of neither the full set of company policies northeir content.Unleash the full power of your peopleForward-looking boards are powerfully positioned to focus on long-term talent development efforts because theyUnderstand the strategy and can override some of the personal ties that cloud decision making over appointments. Divisional managers, say, might be tempted to hang on to high performers even if the company’s interest would be to reallocate their skills and experience to a business with morepotential. For example, a large media company, prompted by its board, recently reassigned its strategic planning director to lead digital development projects on the US West Coast. The move was remarkably successful: working in close cooperation with some of the most accomplished digital giants in the United States, the business quickly got up to speed on the newest technological trends. Many forward-looking boards hold annual reviews of the top 30 to 50 talents, always with an eye on those who mighteventually be suitable for key executive roles. Here’s how the process works in one manufacturing company. Each executive director selects, for presentation to the board, three to five promising managers. The board gets a photograph, information on their educational background, and performance reviews over the last threeyears. The presenter organizes the information on an evaluation grid showing categories such as performance,leadership, teamwork, and personal

Putting the board’s bestfoot forward



GROWTH STRATEGIES

development. The directors then spend 10 to 30 minutes on each person,discussing key questions. How can the company coach and develop talented people? What personal and professional development opportunities, such as an international posting, might help broaden an individual’s experience? What are the potential next career steps? In addition, during corporate projects, client gatherings, and trade shows, directors should take any opportunity to meet— and assess—upcoming executives and fast trackers informally. The key is that the board must agree with management on a sensible approach to reviewing executive talent. Appointing a board member with a successful people leadership track record to lead the effort is one way of boosting its impact.

Anticipate the existential risks

Every company has to take significant risks. But while it has long been understood that overall responsibility forrisk management lies with boards, they often overlook existential risks. These are harder to grasp—all the more so for executives focused on the here and now—yet harm companies to a far greater extent than more readily identifiable business risks. “Instead of only discussing competitive risks, boards should put in place a well-functioning crisis-management system” for cybercrime, insider trading, or corruption, says a consumer-

goodscompany chairman conscious of the dangers of corporate secrets falling into the wrong hands. “We want to be ready for existential risks if they occur.” The best-managed companies in safety sensitivesectors such as oil or autos— where a rig explosion or product recall could have significant consequences forlarge numbers of people or cost a year’s profits—are already vigilant in this area. The board of one oil-exploration company we know regularly receives reports on the safety record of its on platformactivities. The reports trigger intense discussions about the rootcauses of problems and remedial action where there is any deviation from norms. The boards of other businesses should also demand that management supply quarterly reports (probably to the audit committee) on the observance of safety, quality, and ethical standards and hold management to account. Directors of a media company, for instance, could regularly ask its news executives to lead reviews of editorial standards.Yet even the best systems will not identify all the risks, and boards and

management must somehow try to grasp the unthinkable. The best way may be to tap into the concerns and observations of middle management, the group most likely to be aware of bad practices or rogue behavior in any company. Boards have a duty to ensure

that management teams pursue bottom-up investigations (through confidential questionnaires, for instance), identify key risk areas, and acton the results.

The authors would like to acknowledge the contributions of Martina Bender and Nina Spellman to the development of this article. Christian Casals is a director in McKinsey’s Zurich office. ChristianCaspar is a director emeritus in the Zurich office and serves on the boards of several large European companies.

Forward-looking boards must remain vigilant and energetic, always wary of bad habits. An objective 360-degree

review, built on personal interviews, is generally a much better option than

the box-ticking self-evaluation alternative. Winning boards will be

those that work in the spirit of continuous improvement at

every meeting, while always keeping long-term strategies top of mind. Only

by creating more forward-looking boards can companies avoid the sort of

failures witnessed during the last financial meltdown the next time one

strikes.

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GROWTH STRATEGIES

(1) SC (CHC) Appeal No. 55/2006 decided on 30 July 2013

The question arose whether directors of a Company who signed a Guarantee in favour of a Bank which loaned certain sums of money on the security of a Mortgage Bond and a joint and several guarantee of the Directors could take up the position that the guarantee is not a personal guarantee but a guarantee qua a director.The Supreme Court held that the directors in question could not argue that it is not a personal guarantee as it is a loan to the Company and as such the Company need not once again guarantee its own loan, as they would “then be guaranteeing itself. “The Supreme Court stated the “Directors are responsible for reading all the terms of any agreement pertaining to the business of their Company in fulfillment of their fiduciary duty as Directors to act for the benefit of the Company. The Court referred to section 189(a) of the Companies Act No. 7 of 2007 which states that a director should not act in a manner which is reckless or grossly negligent and should exercise

the level of skill and care that may be reasonably be expected of a person of his knowledge and expertise. The Supreme Court also held that a Director signing a document on behalf of a company is expected to “read the document thoroughly and ensure that it is in the company’s best interests, prior to signing it” and “it would be deemed a breach of their duties as Directors if they had failed to read the terms of the Guarantee Bond.”

(2) Leave to Proceed was refused by the Supreme Court(S. C. Minutes of 6 September 2013 in Case No. SC HC LA 116A/2011)from an Order made by the Commercial High Court of Colombo under Section 375 and 376 of the Companies Act.

An application was made for the winding up of a company under section 270 of the Companies Act on the ground that: it is unable to pay its debts; and it was just and equitable to have the company wound up due to continuing losses. On commencement of the winding up proceedings

many creditors objected to the winding up. The liquidator reported to court that the company is not in possession of realizable assets to settle the creditors. In the meantime two creditors moved court against the ex-directors of the company under sections 375 and 376 of the Companies Act alleging that a mere 2 months prior to presenting the application to court to wind up the company the directors had illegally and fraudulently sold all its assets and used the sale proceeds in a fraudulent manner resulting in the creditors being deprived of the assets. Having found that the alleged facts were true and accurate the High Court Judge held that those transactions are voidable under the Companies Act and held that the directors are jointly and severally personally responsible and liable for the liabilities of the Company relying on sections 375 and 376 of the Companies Act.The aggrieved Directors filed a Petition seeking Special Leave to Appeal from the order of the High Court. However the Supreme Court refused Leave. No reasons for the said refusal have been recorded.

RECENT DECISIONS OF THE SUPREME COURT PRONOUNCING ON THE DUTIES OF DIRECTORS

Duties of Directors


HARVARD MANAGEMENT TIPS

Identify Discrete Tasks to Get Through Your Email Faster

It can be tricky to distinguish between processing your email and doing your work. You’re just checking your email, and the next thing you know, you’re deep in an Excel file, calculating the latest budget figures so that you can reply to a message - while new messages pile up. The more you can separate the job of reading and replying to email from the tasks that are sometimes embedded in your correspondence, the faster you’ll be able to get through your inbox and actually get on to those tasks. A good rule: stay within your email program during email time. Anything that requires you to open a browser or Word document, pick up the phone, or walk over to a colleague’s desk is by definition a discrete task. Get Tough Subjects Out in the Open

It’s easy to be critical of leaders who can’t face the facts, but in truth, most of us engage in denial at one time or another, usually without knowing it. To encourage better examination of tough topics, find ways to encourage dialogue when complex issues are on the table. Denial is less likely to occur

when teams look at the situation from multiple angles, challenge underlying assumptions, and construct a better picture of what’s really going on. Also, don’t assume that everyone sees the world through the same lens as you. Facts and data are usually open to interpretation, and people have different underlying criteria for how they analyze them. We all emphasize some things and discount others, based on past experiences, personality, and tolerance for discomfort.How to Encourage Trustworthiness

Success in business requires some willingness to trust people. When your company’s money and resources are on the line, how can you do a better job of gauging trustworthiness and thereby improve your likelihood of success? Try these tips to prompt trustworthiness in new or potential partner’s behavior: • Be generous. Feelings of gratitude foster trustworthy behavior. Giving new partners a reason to feel grateful to you is a win-win: They benefit in the short term from your generosity, and you reap the rewards of their loyalty.• Find commonality. Emphasizing common ground

increases the likelihood that your counterpart will see you as someone with whom it’s possible to build a lasting and beneficial relationship.

• Don’t punish. Threats of punishment can prevent untrustworthy behavior in the moment but can be counterproductive in the long term: new partners may be less likely to take risks to support one another.Improve Your Board’s Dynamics The quality of board-level team interactions is highly correlated with your organization’s success and profitability. Improve your board’s performance with these steps: • Rethink your recruiting criteria. Recruiting strangers to boards, members who didn’t know each other before joining, tends to generate higher levels of governance quality. Boards should screen directors cultural intelligence to ensure that the director has the skill and motivation to work well with the existing board.• Get team coaching. Transforming a weak board into a strong board is not investment-intensive, and the benefits are significant.

Managment Tips


Maintain Motivation in a Troubled Organization

No company’s future is completely secure. When your business is facing declining sales, a potential buy-out, or even certain closure, how do you manage people who are likely panicking about their future? Even if it’s clear that your organization is in trouble, you can still help team members stay focused and deliver results.

• Be as honest as you possibly can. Whatever you know, share it with your employees. Don’t try to protect people from the truth or ignore what’s happening. In tough situations, people are on high alert for lies and inauthentic messages.

• Give your team a larger purpose. People want to believe their work matters in any situation. When the company’s success is no longer the goal, you might identify something that employees value personally, like leaving a legacy or proving critics wrong.Spread Digital Expertise With Smart Rewards

The days of the webmaster holding the keys to digital kingdom are long gone; today, most of your people need digital knowledge. Actively reward people who promote others digital learning by hiring people with the ability to explain the tools, value, and methods of digital strategy to people who otherwise may not use or fully understand them. And find ways to reward those behaviors, like spot bonuses, high profile projects, or formal recognition programs. You can also identify a knowledge-sharing goal as a key performance indicator of project success by asking, “How did people working on this project advance their digital capability?” Finally, remind the entire team that successful enablement is its own reward; the more digital skills are distributed, the more the digital team can focus on higher-value work.Create Human Connections Within Virtual Teams

More and more people are working in remote teams, but few find virtual communication as productive as face-to-face interaction. Fortunately, there are new technologies and behavioral strategies that can help dispersed teams communicate better. • Do a personal and professional check-in. While it’s common for employees who are co-located to share a recent work success or personal story before a meeting, such conversation is rare within virtual teams. Personal sharing helps to forge connections, which is especially important when staff work remotely.• Ban multitasking during conference calls. For productive collaboration, it’s crucial that everyone be mentally present and engaged during meetings, not working on other projects or checking email. Make this clear and call on people often to share their thoughts. Chances are good they will.

Rely on Routines to Free Your Mental Energy

Every time you make a decision, which candidate to hire, whether to delegate a task, even what to eat for lunch, you create mental tension. Our energy to make decisions is limited; stress and fatigue can keep us from making good ones. Use routines to reduce the number of decisions you have to make: If there’s something you need to do daily, try doing it at the same time every day. For example, establish a ritual for preparing for work in the morning. That might begin with checking e-mails and voice mails and responding to the urgent ones first to make it easier to move more quickly to important projects. Set up a similar routine for packing up to go home at night. Once you’ve put less-important decisions on autopilot, you’ll free up your energy for things that matter more.Don’t Close the Door on “Boomerang” Employees

Former employees who leave and then return, so-called “boomerang employees” are an increasingly valuable source of talent. Among their advantages: they’re familiar with your operations and culture, know many of your current employees and clients, and may require little or no training to start making contributions.

How do you recruit boomerang employees back to your company? Make it clear that you are offering interesting and challenging work, coupled with fair arrangements, while it is available. A variety of work arrangements can help people reconnect with your organization: individualized work schedules, mobile work and telecommuting, leave-of-absence programs, and cyclic or project-based work. Structure the exit process to facilitate re-entry and build a flexible network of talent possibilities.

Keep Learning from Your Protégés

The value of a mentorship isn’t just for your protégé; answering questions that younger people ask can help you clarify your own thinking. As you talk about what it means to be an executive, you’ll get a second chance to learn why you do things the way you do and what assumptions drive your actions. Your answers will force you to

be explicit about the embedded rules and mental models you’ve been using to make decisions, reinforcing what you now know. This second-time-around learning turns good managers into great ones. While you impart new knowledge and perspectives to your mentees, you will also gain deeper insight into your own work.Three Ways to Listen More Actively

Active listening, combined with trying to understand others’ perspectives and points of view, is the most effective form of listening. It can help you get the best from your employees’ and propel you to a class of your own as a leader. To listen more actively:

• Recognize verbal and nonverbal cues, such as tone, facial expressions, and other body language. Pay attention to what others are not saying, and probe a bit deeper: You seem excited (happy, upset), and I’d like to hear more about your perspective.• Assure others that you’ve heard what they have to say, and encourage ongoing communication with appropriate replies such as verbal acknowledgements, clarifying questions, or paraphrasing, as well as non-verbal behaviors such as facial expressions, eye contact, and head nods. • To show others that you’ll remember what they said, summarize key messages at the end of your conversation.How Couples Can Cope with Professional Stress

Work stress can cause us to be impatient with our partners or to neglect our duties at home, creating a cycle of anxiety outside the office that makes work pressures even harder to face. To cope with work stress as a couple: • Recognize that you and your partner may have different ways of dealing with stress. Neither way is right, so find ways to accommodate one another. For example, let a partner who needs downtime after work have 30 minutes alone, but ask that partner to engage more later - over dinner or out on an evening stroll.• Resist the urge to compare stress levels with your partner. Learn to simply listen and offer help. Try to solicit your partner’s help and empathy in your own stress, without drawing direct comparisons or judging. Each partner is an equal, and all stressors are valid and important.

Managment Tips


Managment Tips


Documents

Volume 14 | Issue 01 | March 2014