Implementing the Mandatory Code of Corporate Governance for Licensed Commercial Banks in Sri Lanka

Corporate governance standards have evolved over the past three decades in response to numerous corporate scandals. Many fragilities in financial institutions observed across the world could be traced back to failures in corporate governance practices. In Sri Lanka, several domestic financial institutions barely demonstrated resilience to sever corporate governance malpractices during 2007-08. As such, the Central Bank of Sri Lanka (Central Bank) introduced mandatory corporate governance code for Licensed Commercial Banks (LCBs) in December 2007, to enhance overall stability in the banking sector. The objective of the study is to examine the level of compliance demonstrated by LCBs with the provisions of the Central Banks’s mandatory code of corporate governance during the first year of its implementation. This study sheds light on the readiness, preparedness and willingness of banks in implementing these directions in the first year of adoption and attempts to enrich the literature on corporate governance practices of domestic LCBs. The study has been confined to domestic LCBs and is based on secondary data gathered through their annual reports. These reports were analysed using a checklist which was developed based on five assessment criteria identified in the conceptual model of the study. This model further conceptualises the principal-agent relationship between key stakeholders of an LCB and its directors. A score has been assigned to each principle and a composite score has been devised to assess the overall level of compliance. The findings reveal that domestic LCBs on average reported a commendable level of compliance in the first year of implementation. The study also reveals the challenges that prevailed during the first year of implementing the mandatory code of corporate governance.