Stewardship

corporate governance

Chairman’s Statement

Dear Stakeholder,

Adopting the best governance practices is the cornerstone of the long term sustainable growth of the Commercial Bank. We, at Commercial Bank strive to satisfy the legitimate claims of all stakeholders and to fulfil the Bank’s environmental and social responsibilities in an accountable and transparent manner as a well-governed Bank. Your Board of Directors is committed to push the bar higher and higher to realise the strategy while nurturing the ethical behaviour and governance practices across the Bank.

This Report spells out Corporate Governance initiatives in place at your Bank demonstrating its adherence to the requirements of the Code of Best Practice on Corporate Governance issued jointly by The Institute of Chartered Accountants of Sri Lanka (ICASL) and the Securities and Exchange Commission of Sri Lanka (SEC) and the Banking Act Direction No. 11 of 2007 on Corporate Governance for Licensed Commercial Banks in Sri Lanka issued by the Central Bank of Sri Lanka and subsequent amendments thereto which became fully operational effective from January 1, 2009.

In this connection I wish to state that to the best of my knowledge, I am not aware of any material violations of any of the provisions of the said Codes issued jointly by the ICASL and SEC and the Direction of the Central Bank.

While assuring you that we take every effort to improve our Corporate Governance Philosophy, we hope that this Report will be useful in understanding how the requirements of the aforesaid regulations are practiced within your Bank. Your valuable feedback is most welcome to continue with our commitment to practice corporate governance at the highest levels at Commercial Bank.

Yours Sincerely,

 

M.J.C. Amarasuriya

Chairman

Colombo
February 15, 2011

 

Highlights

  • The Bank refreshed the Board with the appointment of two new Directors; Prof. U.P. Liyanage as an Independent Non-Executive Director and Mr. Ravi Dias, the Chief Operating Officer of the Bank as an Executive Director.
  • DFCC Bank PLC, the largest shareholder of the Bank reduced its holding in the ordinary voting shares of the Bank to 14.96% by end 2010 from 28.76% as at December 31, 2009.
  • Since the Bank is in compliance with the requirements of the Banking Act Direction No. 11 of 2007 of the Central Bank of Sri Lanka on ‘Corporate Governance for Licensed Commercial Banks in Sri Lanka’, the Colombo Stock Exchange exempted the Bank from complying with the requirements stipulated in Section 7.10 on ‘Corporate Governance’ of the Continuing Listing Requirements of the Colombo Stock Exchange.

 

Among many balancing acts that banks perform on a day-to-day basis such as managing liquidity vs profitability, risk vs return, capital vs growth, establishing and enacting a well-structured corporate governance regime too entails a balancing act. It involves balancing performance vs compliance. In other words, it requires an institution to achieve the right balance that enables it to make profits responsibly. Recent history is replete with examples of companies that have miserably failed due to poor governance.

The Bank conducts its business in accordance with the letter and spirit of the highest standards of corporate governance embracing the best practices as enumerated in various codes and guidelines applicable to the Bank. The annual Report contains a frank discussion and an accurate disclosure of information relating to the Bank’s current performance, its attempts to balance the economic, environmental and social aspects and the risks to the business. This Corporate Governance Report details the governance structure, applicable regulations, extent of Bank’s compliance with the Code of Best Practice on Corporate Governance issued jointly by The Institute of Chartered Accountants of Sri Lanka and the Securities and Exchange Commission of Sri Lanka and the requirements of the Banking Act Direction No. 11 of 2007 of the Central Bank.

Governance Structure of the Commercial Bank

For further information on -

 

Major External Regulations

 

Major Internal Regulations

 

Ownership Structure

According to the share register at year-end 2010, the Bank had a total of 8,140 voting shareholders. The ownership structure of the Bank changed during the year under review with DFCC Bank, the main shareholder of the Bank, selling a significant portion of voting shares of the Bank. SBI Ven Holdings Pte Ltd. became the second largest shareholder as at the end 2010, with substantial share purchases during the year.

For additional information regarding the ownership structure, please refer Note 3 of Investor Relations.

The information on ownership structure is updated quarterly on the Bank’s website, www.combank.net/newweb/interimfinancials

Performance Governance

‘Enterprise Governance – Creating the Right Balance’ - a publication of the International Federation of Accountants and the Chartered Institute of Management Accountants has identified the constituent elements of Performance Governance namely, Strategic Position, Strategic Options, Strategic Implementation and Strategic Risks.

“Performance governance is about creating the structure to whom responsibilities are allocated whilst working independently under the control of the Board”

Governance and Compliance Organisation, England

At Commercial Bank, Performance Governance stemmed from the Strategic Direction drilled down to Corporate Objectives which are more fully-described in the Section on ‘The Future’ in the Management Discussion and Analysis. By efficiently and methodically implanting the Performance Governance ethos, the Bank strives to develop a framework that delivers breakthrough corporate results while taking account of all stakeholders of the Bank.

The Chairman and the Managing Director together with their team review the strategic plan and budgets against the actual performance on a monthly basis and at more frequent intervals, as needed. Board Sub-Committees whose reports are given in assist the Board in this regard. Moreover, the strategy adopted by the Bank provides an integrated and dynamic approach to its strategic issues and ensures that the strategy is discussed at Board level on a regular basis. Alignment of the performance targets of the individuals to the Key Performance Indicators of the Bank has been highly successful over the years.

 

IT Governance

Information Technology Governance of the Bank ensures that IT objectives are aligned with business objectives by defining them in business terms. IT Governance which forms an integral part of the Bank’s Corporate Governance, deals primarily with optimising the linkage between Strategic Direction and Information Systems Management of the Bank. In this regard, implementation of the organisational structure with well-defined roles for those responsible for information, business processes, applications, infrastructure, etc., generates value for our stakeholders while mitigating the risks associated with incorrect deployment and use of Information Technology.

The Bank arguably has the best IT governance across the industry having achieved certifications for CMMI Level 3 for software development, and ISO/IEC 27001:2005 Information Security, the first Sri Lankan bank to do so in each case. This is reaffirmed with a Bronze award for Organisational IT Security and Compliance at The Information Systems Audit & Control Association (ISACA) Security Awards 2010.

Impacts of the strategic Information Technology Governance to the diverse functional areas of the Bank are driven by certain core objectivities which are set out below:

Objective Governance mechanism
Compliance
  • Investing in Licensed Software deployed in compliance with Intellectual Property Laws with a view to educate and mandate compliance to such laws throughout the Bank.
Operational Efficiency
  • Streamlining of payments process so that integrity is maintained across value chain through near real-time processing.
  • Business Continuity Plan for IT that supports all other key functions of the Bank to ensure uninterrupted service to customers.
Prudent Capital Expenditure
  • All major IT-related procurement to be reviewed by a Solutions Evaluation Committee prior to seeking approval from the Bank’s Procurement Committee.
  • Final approval of IT capital expenditure is sought from the Board of Directors of the Bank based on value and recommendations of Chief Information Officer, the Chief Operating Officer and the Managing Director.
Customer Convenience
  • A constant drive for improvement and a commitment to high quality uninterrupted service levels to ensure systems availability translating to customer convenience at each of our delivery channels.
  • Ensuring process efficiencies and disciplines through certification to increase the contribution to customer convenience.
‘Green’ IT
  • Protecting the environment by reducing print through migration to E-Statements, Document Workflow and Soft Copy.

 

Integrated Risk Management at Commercial Bank

The Bank’s Integrated Risk Management Team headed by the Chief Risk Officer is mandated by the Banking Act Direction No. 11 of 2007 on ‘Corporate Governance of the Licensed Commercial Banks of Sri Lanka’ to establish, co-ordinate and drive the risk management process throughout the Bank. It has established an Integrated Risk Management System to identify and manage significant risks including Credit, Market and Operational Risks. The Integrated Risk Management Team reports regularly on risks to the Board’s Integrated Risk Management Committee that plays an important role with regard to the risk management processes at the Bank and reporting on same to the Board.

A full report on The Bank’s Risk Management including the main focus areas in 2010, can be found on Managing Risk at Commercial Bank of this Report.

Internal Controls Mechanism

Commencing from 2010, the Board provides a report on the Bank’s internal control mechanism that confirms that the financial reporting system of the Bank has been designed to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of Financial Statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements. The Bank’s Internal Audit Reports and Board Audit Committee Reports, provide information on audits carried out by or on behalf of regulatory authorities whilst the External Auditors’ Reports provide the Board with the evidence that enables it to conclude whether the Bank’s Internal Control Mechanism is appropriately designed and operating effectively.

Further, the External Auditors’ Certification on the effectiveness of such internal control mechanism on Financial Reporting has also been obtained.

Please refer ‘Directors’ Statement on Internal Controls’.

Our Corporate Behaviour (The way we do Business)

In the broadest sense, Corporate Governance is concerned with maintaining the balance between economic and social goals and between individual and communal goals. Hence, the Bank being a responsible corporate citizen understands its commitment towards its stakeholders and society at large. Our strategies nurture and grow a sustainable business that reaches far beyond profit making or being the best, avowing that the Bank will engage in ethical business practices and thereby seek to create value for a variety of stakeholders, including shareholders, employees, customers, service providers, communities and the natural environment.

Our Code of Ethics

A secured, reliable and efficient banking system is one of the pillars of economic stability of any country. The rapid development of the banking sector has generated keen competition amongst banks. Hence, maintaining close customer relations becomes paramount which in turn could lead to ethical dilemmas and conflicts of interest. Globalisation, innovation, diversification and technological development have presented new industry-wide challenges and ethical issues on top of the traditional ones.

Hence, nurturing an ethical culture is of utmost importance for banks, like any other organisation.

The cornerstone of our Code of Ethics programme is our set of values. Our core ethical values include honesty, integrity, fairness, responsible citizenship and accountability. At the Bank, its officials are encouraged to follow the six steps of our ‘ETHICS PLUS Decision-Making Model’ as detailed below:


In short, in the Bank’s vernacular, Business ethics means, “Choosing the good over the bad, the right over the wrong, the fair over the unfair and the truth over the untruth”. Strict compliance, confidentiality, avoidance of conflicts of interest, encouraging the reporting by the Officers of the Bank on illegal and unethical behaviour are also amongst the guiding principles of the Bank’s Code of ethics.

Please refer the link for additional information on the Bank’s Code of Ethics: http://www.combank.net/newweb/info/104?oid=57

Our Responsibility to Environment

Social Responsibility is regarded as a fundamental aspect of our strategy execution and decision-making process and is prominently placed in the Bank’s corporate priorities and core values. We at Commercial Bank are committed to minimising any adverse impact the conduct of our business may have on the environment. We indirectly manage the use of resources by our clients through the ‘Social and Environmental Management System’ of the Bank. This policy encourages our customers to ensure that their products, processes and businesses do not unnecessarily damage the environment.

We are proud to present in this Annual Report, the Sustainability Supplement based on the Global Reporting Initiative (GRI) Guidelines for the second time. The Bank’s ‘Social and Environmental Management System’ is more fully-described in the Sustainability Supplement.

Relationship and Communication with Stakeholders

The Bank has developed a Stakeholder Grid outlining the details of all stakeholders of the Bank, nature and methods of engagements with them including the topics covered during such engagement. Please refer ‘Stakeholder Engagement’ in Sustainability Supplement section.

Bank’s Adherence with The Code of Best Practice on Corporate Governance issued jointly by The Institute of Chartered Accountants of Sri Lanka and the Securities and Exchange Commission of Sri Lanka (‘Code’)

“Corporate Governance is concerned with ensuring the Firm is run in the interests of Shareholders” (Franklin Allen, 2005). Hence, a good Corporate Governance Code needs to address the needs of both the Company (the Bank) and its Shareholders. In this regard it is pertinent to mention that the Code of Best Practice on Corporate Governance issued jointly by The Institute of Chartered Accountants of Sri Lanka and the Securities and Exchange Commission of Sri Lanka focuses adequately on fulfilling the aspirations of both.

The extent of adherence by the Bank to the requirements of the six fundamental principles laid down in the aforesaid Code, which we have categorised into two Sections purely for the convenience of our stakeholders, namely Section 1 and Section 2 and the governance structures in place, are tabulated below:

Section 1 of the Code deals with the Company (the Bank) and it mainly covers the governance aspects in regard to company Directors, their Remuneration, Relations with Shareholders and Accountability and Audit.

Section 2 of the Code deals with the Shareholders and discusses how a good corporate citizen discharges its responsibilities towards both Institutional Investors and Other Investors.

Section 1: The Company (the Bank)

Corporate Governance Principle Reference to Code Compliance Details of Compliance
A Directors
A.1 The Board
The Bank is headed by an effective Board of Directors with professionals and business leaders drawn from different backgrounds inter alia banking, accounting, management, marketing, human resources, law and international experience whose profiles are given in Stewardship section. Their leadership skills, direction provided and controls put in place ensure the achievement of the objectives of the Bank set out in the Corporate Plan and the Budget which aims to satisfy the expectations of all stakeholders.
Board meetings A.1.1 Complied with Board meetings are held monthly mainly to review the Performance of the Bank and its subsidiaries and other routine matters referred to the Board by the Heads of respective divisions while Special Board meetings are convened whenever necessary. These meetings ensure that prompt actions are taken to align the business processes to achieve the expectations of all stakeholders.
Please refer ‘Number of Meetings Held and Attendance’ table given in Board Sub-committees.
Responsibilities of the Board A.1.2 Complied with The Board is responsible for the formulation and implementation of a clear business strategy which is well-understood by all stakeholders including staff, customers and investors. It is assisted in this task by the Corporate Management headed by the Managing Director.

The Board Nomination Committee helps the Board in setting the criteria and key attributes required for those aspiring for appointment or promotion to the post of Managing Director and the Key Management Personnel. It also ensures the succession arrangements for retiring Directors and Key Management Personnel. The Board takes necessary steps to fulfil the duties entrusted to it by securing the integrity of the information, managing risks and implementing an effective internal control system. In this process, compliance with all applicable laws and regulations and adherence to the Bank’s ethical standards and corporate values are of utmost importance in order to ensure that the interests of all stakeholders are taken into consideration in the corporate decision-making process.

Please refer ‘Directors’ Statement on Internal Control’.
Seeking independent professional advice A.1.3 Complied with The Directors are permitted to seek independent professional advice as and when required, at the Bank’s expense. The Company Secretary takes the initiative in this connection.

In addition, Board Sub-Committees advise the Board on various matters under their purview.
Advice and services of the Company Secretary A.1.4 Complied with All legal matters for which clarification is needed by the Board are referred to the Company Secretary who is an Attorney-at-Law. She provides such information after obtaining necessary professional advice, whenever required. All Board members have full access to the Company Secretary to ensure that proper Board procedures are followed and that all applicable rules and regulations are complied with.
Independent judgment of Directors A.1.5 Complied with All Directors are responsible for bringing independent judgment to the scrutiny of decisions taken by the Board on issues of strategy, performance, resources and standards of business conduct.
Dedicating adequate time
and effort by the Directors
A.1.6 Complied with All Directors of the Bank dedicate adequate time and effort to fulfil their duties as Directors of the Bank (both before and after the Board meetings), to ensure that the duties and responsibilities owed to the Bank are satisfactorily discharged. In addition, the Directors function as members of the Board Sub-Committees (details of which are found in the Board Committee Report in Stewardship Section) and ensure that they allocate adequate time for the fulfilment of their duties as members of such Board Sub-Committees.
Training for new and
existing Directors
A.1.7 Complied with Both new and existing Directors of the Bank are provided training on general aspects of directorships and industry specific matters. In this connection the Directors have recognised the need for continuous training and expansion of knowledge and take part in such professional development as they consider necessary in assisting them to carry out their duties as Directors.
A.2 Chairman and Chief Executive Officer (CEO)
There is a clear division of responsibilities between conducting the business of the Board and day-to-day operations of the Bank in order to ensure a balance of power and authority. The Chairman is responsible for leading the Board and for its effectiveness. The CEO’s role is primarily to conduct the business operations of the Bank with the help of the Corporate Management. Hence, the roles of the Chairman and CEO are clearly distinct from one another. The Chairman is also the ultimate point of contact for shareholders, particularly on matters related to Corporate Governance.
Separation of the roles of Chairman & MD/CEO A.2.1 Complied with As reported above the positions and functions of the Chairman and the CEO are separated, thereby preventing unfettered powers for decision making being invested with a single autonomous entity.
A.3 Chairman’s Role
Chairman is responsible for providing leadership and effectively managing the Board while preserving the order and facilitating effective discharge of Board functions. The Chairman also takes timely action to preserve good Corporate Governance by the Board.
Role of the Chairman A.3.1 Complied with The Chairman ensures proper conduct of Board proceedings to optimise the contribution from Board members through:
  • Securing effective participation by both Executive and Non-Executive Directors in the decision-making process
  • Providing leadership to all Directors to make effective contribution within their respective capabilities
  • Maintaining a balance of power between Executive and Non-Executive Directors and by ascertaining the views of the Directors on issues under consideration
  • Ensuring that the Board is in complete control of the Bank’s affairs
  • Ensuring that the Board is alert to its obligations to all shareholders and other stakeholders
  • Ensuring that all Board members receive appropriate induction, covering terms of appointment, duties and responsibilities
  • Ensuring that regular meetings are conducted at least once a month and the minutes of meetings are accurately recorded and adequately secured
  • Approving the agenda prepared by the Company Secretary
A.4 Financial Acumen
The Code requires that the Board comprises of members with sufficient financial acumen and knowledge to offer guidance on matters of finance. The Board of the Bank has met the above requirement as three Board members out of nine including the Managing Director are Qualified Accountants having professional qualifications and are equipped with sufficient financial acumen and knowledge to offer guidance on matters of finance.
Financial acumen and knowledge A.4 Complied with The MD/CEO is a Fellow of The Institute of Chartered Accountants, England & Wales and a Fellow of The Institute of Chartered Accountants, Sri Lanka. In addition, the Board includes a Fellow of The Institute of Chartered Accountants, Sri Lanka, and a Director who is a Fellow of the Chartered Institute of Management Accountants, UK. These members of the Board have the ability to offer guidance on matters of finance to the Board.
A.5 Board Balance
The Code requires that balance is maintained between the Executive and Non-Executive Directors (NEDs) so that no individual or a small group of individual Directors is able to dominate the Board’s decision making.
Presence of a strong team of NEDs A.5.1 Complied with Seven out of nine Directors on the Board are NEDs which is well-above the minimum prescribed by this Code which is two NEDs or NEDs equivalent to one-third of the total number of Directors, whichever is higher. This ensures that the views of Non-Executive Directors carry a significant weight in the decisions made by the Board.
Independence of NEDs A.5.2 & A.5.3 Complied with Three out of the seven NEDs are Independent which is well above the minimum prescribed by this Code which is two NEDs or NEDs equivalent to one third of the total number of NEDs, whichever is higher.
Annual Declaration of NEDs A.5.4 Complied with Every NED of the Bank has made written submissions as to their independence against the specified criteria set out by the Bank, which is in line with the requirements of Schedule H of this Code.
Annual Declaration by the Board on the independence of Directors A.5.5 Complied with The Board has determined the independence of Directors based on the declarations submitted by the NEDs, as to their independence, as a fair representation and will continue to evaluate their independence on this basis annually. No circumstances have arisen for the determination of independence by the Board, beyond the criteria set out in the Code. Independent Non-executive Directors are: Mr. M.J.C. Amarasuriya Dr. H.S. Wanasinghe Mr. R.M.S. Fernando
Requirement to appoint a ‘Senior Non-Executive Director’ and making himself available for confidential discussions A.5.6 & A.5.7 Not applicable This does not arise as the positions of the Chairman and the CEO are separated and the Chairman is an Independent Director.
Conducting meetings with
NEDs only
A.5.8 Complied with Chairman meets with the NEDs without the presence of Executive Directors, whenever necessary.
Recording of concerns in
Board minutes
A.5.9 Complied with Concerns raised by the Directors during the year, if any, are recorded in the minutes of Board meetings with adequate details by the Company Secretary.
A.6 Supply of Information
The Code requires the Bank’s management to submit timely information to the Board with sufficient information for making decisions which would enable it to discharge duties.
Obligation of the Management to provide appropriate and timely information to the Board A.6.1 Complied with The Bank ensures that the Directors receive adequate information in a timely manner. On urgent matters, every effort is made to provide the information, as early as possible. The Board Papers are prepared by the employees to provide adequate information to the Board enabling it to deliberate on all key issues concerning the Bank. Further, Directors are free to raise inquiries for additional information, where necessary. In addition, members of the Corporate Management made presentations on issues of importance. The Chairman ensured that all Directors were briefed adequately on issues arising at Board meetings.
Adequate time for Board meetings A.6.2 Complied with According to the Articles of Association of the Bank, all Board members are given a notice of at least 7 days before the dates of meetings and all minutes of previous meetings, agenda and board papers are normally dispatched within the aforesaid deadlines. Further, adequate notice is given to all Directors prior to emergency/special Board meetings. This ensures that the Board members have adequate time to study the related papers and prepare for a meaningful discussion at the meetings.
A.7 Appointment to the Board
The Code requires having a formal and transparent procedure in place for the appointment of new Directors to the Board. During the year one Executive Director and one Non-Executive Director was appointed to the Board.
Presence of a Nomination Committee and annual assessment of composition of the Board A.7.1 & A.7.2 Complied with New appointments and re-elections of Directors to the Board are considered and recommended by the Nomination Committee and based on such recommendations, final decisions are made by the Board, in a formal and transparent manner. Further, this Committee annually assesses the composition of the Board to ensure that the combined knowledge and experience of the Board matches the strategic demand facing the Bank.

Please refer ‘Board Nomination Committee Report, for the terms of Reference and the members of this Committee.
Disclosure of required details to Shareholders on new appointments to the Board A.7.3 Complied with When new Directors are appointed a brief resume of each such Director including the nature of his expertise, the names of companies in which the Director holds directorships, memberships in Board Sub-Committees etc., are informed to the Central Bank of Sri Lanka and the Colombo Stock Exchange in addition to disclosing this information in the Annual Report. Further, the required information is published in a few selected newspapers for the information of interested parties. Any changes in the details provided by the Directors are disseminated to the Colombo Stock Exchange without delay.
A.8 Re-election
The Code requires all Directors to submit themselves for re-election, on regular intervals and at least once in every three years.
Re-election of Non-Executive Directors including Chairman and Directors A.8.1 & A.8.2 Complied with According to the Articles of Association of the Bank, two directors who have been longest in office since their last selection or appointment are required to retire by rotation and are eligible for re-election at each Annual General Meeting. The proposed re-election of Directors is subject to prior review by the Board Nomination Committee.

All Directors of the Bank during 2010 had held their office for less than three years since the last re-election/appointment except as disclosed below.
  • As required by the Companies Act No. 07 of 2007, any director who has reached the age of 70 years offers himself for re-election on an annual basis. Accordingly, Mr. M.J.C. Amarasuriya and Dr. H.S. Wanasinghe, who reached the age of 70 and 84 respectively have offered themselves for re-election at the forthcoming Annual General Meeting of the Bank and the Board has recommended the re-elections.
  • Prof. U.P. Liyanage and Mr. W.M.R.S. Dias who joined the Board during the year are required to make themselves available for re-election at the forthcoming Annual General Meeting of the Bank and the Board has recommended their re-elections
  • Messrs B.R.L. Fernando and R.M.S. Fernando offer themselves to re-election by rotation.
A.9 Appraisal of Board Performance
The Code requires the Board to appraise its own performance periodically to ensure that its responsibilities are satisfactorily discharged.
Annual appraisal of the Board’s performance and the performance of its Sub-Committees A.9.1 & A.9.2 Complied with The performance of the Board is evaluated by the Chairman with the Board’s assistance. The Board Sub-Committees carry out a self-assessment process annually to ensure they function effectively and efficiently with the objective of facilitating continuous improvement.
Disclosure of criteria used for the performance evaluation A.9.3 Complied with Please refer Board Human Resources and Remuneration Committee Report for details of the criteria considered for performance evaluation of the Board.
A.10 Disclosure of Information in respect of Directors
The Code requires that details of the Directors be disclosed in the Annual Report for information of the shareholders.
Disclosures on Directors
in the Annual Report
A.10.1 Complied with The following details pertaining to each Director are disclosed:
Name, qualification and brief profile
Nature of expertise in relevant functional areas
Directors’ interest in contracts with the Company
Number of meetings (Main Board and Board Sub-Committees)held and attendance during 2010
Names of the Board Sub-Committees in which the Director serves as the Chairman or a member
A.11 Appraisal of Chief Executive Officer (CEO)
The Code requires the Board to assess the performance of the CEO at least annually to ascertain degree to which the CEO met the pre-set financial and non-financial targets.
Setting annual targets and
the appraisal of performance
of the CEO
A.11.1 & A.11.2 Complied with At the beginning of each financial year, the Board supported by the Human Resources and Remuneration Committee discusses with the CEO and sets long term, medium term and short term financial and non-financial goals for the Bank that are to be achieved by the CEO within the course of that year. Assessment of performance of the CEO is carried out by the Board at the end of each year to ensure that pre-agreed targets have been achieved or if not whether there are acceptable reasons for not achieving them.
B Directors’ Remuneration
B.1 Remuneration Procedure
This principle ensures that the Bank has a well-established, formal and transparent procedure in place for developing an effective remuneration policy for both Executive and Non-Executive Directors where no Director is involved in deciding his/her own remuneration to avoid potential conflict of interest.
Establishment of a Remuneration Committee B.1.1 Complied with The Bank has a Board Human Resources and Remuneration Committee which has power to evaluate, assess, decide and recommend to the Board of Directors on any matter that may affect the Human Resources Management of the Bank.

Please refer ‘Board Human Resources and Remuneration Committee Report’ for the Terms of Reference.
Composition of the Remuneration Committee B.1.2 Complied with As prescribed in this Code, all members of the Board Human Resources and Remuneration Committee are Non-Executive Directors and the Chairman of the Committee is appointed by the Board.
Chairman and the Members of the Committee B.1.3 Complied with Please refer ‘Board Human Resources and Remuneration Committee Report’ for details of the Chairman and the Members of the Board Human Resources and Remuneration Committee.
Determination of the remuneration of Non-Executive Directors B.1.4 Complied with The Board as a whole decides the remuneration of the Non-Executive Directors. The Non-Executive Directors receive a fee for being a Director of the Board and an additional fee for either chairing or being a member of a Committee, working on special Committees and/or serving on subsidiary Boards. They do not receive any performance/incentive payments.
Ability to consult the Chairman and/or CEO and to seek professional advice by the Committee B.1.5 Complied with The Committee has the authority to seek internal and external independent professional advice on matters falling within its purview, at the Bank’s expense. Views of the Chairman and/or CEO are obtained as they too are members of the said Board Sub-Committee.
 
B.2 Level and Make Up of Remuneration
The Bank ensures that the remuneration of Executive and Non-Executive Directors is at a satisfactory level to attract and retain the services of Directors. The proportion of remuneration of Executive Directors is linked to corporate and individual performance.
Remuneration packages of Executive Directors B.2.1 Complied with The Board Human Resources and Remuneration Committee and also the Board ensures that two Executive Directors namely, the Managing Director and the Chief Operating Officer who are on the Board are provided with an attractive remuneration package.
Competitiveness of levels of Remuneration B.2.2 Not applicable The Board Human Resources and Remuneration Committee reviews information relating to executive pay from time to time to ensure same is on par with the market/industry rates as well as is aligned to the strategic objectives of the Bank.
Comparison of Remuneration with other companies in the Group B.2.3 Complied with The size and scale of the Bank is not comparable with any other companies in the Commercial Bank Group.
Performance based remuneration of Executive Directors B.2.4 Complied with Objectives for two Executive Directors are set at the beginning of the year and the remuneration including the performance bonus is decided based upon the degree of achievement of such pre-set targets.
Executive share options B.2.5 Complied with Share options were offered to Executive Directors, the details of which are given in Notes 32 (b) and (c) of the Financial Statements.
Designing the remuneration of Executive Directors B.2.6 Complied with Please refer ‘Board Human Resources and Remuneration Committee Report
Early termination of Executive Directors B.2.7 & B.2.8 Not applicable Not applicable to the Board except for the MD/CEO and Chief Operating Officer who are employees of the Bank, and their terms of employment are governed by the contract of service/employment.
Levels of Remuneration of
Non-Executive Directors
B.2.9 Complied with Non-Executive Directors of the Bank are paid a nominal fee commensurate with their time and role in the Bank. They are not entitled to receive shares under the existing Employee Share Option Schemes of the Bank.
B.2 Disclosure of Remuneration
The Code requires the Bank to disclose in its Annual Report the details of the remuneration paid and the Remuneration Policy.
Disclosure of Remuneration B.2.9 Complied with Please refer ‘Board Human Resources and Remuneration Committee Report’ for disclosures on the names of the Remuneration Committee members and the Remuneration Policy of the Bank.

Please refer Note 7 to the Financial Statements for the aggregate remuneration paid to Executive and Non-Executive Directors.
C Relations with Shareholders
C.1 Constructive Use of Annual General Meeting (AGM) and Conduct of General Meetings
The Code requires the Board to use the Annual General Meeting (AGM) which is a major event in the Bank’s calendar to communicate with shareholders and encourage their active participation. In this regard, all shareholders of the Bank receive the Notice of meeting within the statutory due dates.
Use of Proxy Votes C.1.1 Complied with The Bank has in place an effective mechanism to count all proxy votes to indicate to the Chairman the level of proxies lodged on each resolution and the number of votes for and against the resolution.
Separate resolutions for substantially separate issues and adoption of Annual Report and Accounts C.1.2 Complied with Separate resolutions are proposed for all substantially separate issues to provide shareholders with the opportunity to deal with each significant matter separately. This mechanism promotes better stewardship while assuring the transparency in all activities of the Bank.

Further, adoption of the Annual Report of the Board of Directors on the affairs of the Company, Statement of Compliance and the Financial Statements together with the Report of the Auditors thereon are considered as a separate resolution.
Availability of Chairmen of Board Committees C.1.3 Complied with The Chairman of the Bank ensures that Chairmen of all Board Sub-Committees namely, Audit, Human Recourses and Remuneration, Nomination and Integrated Risk Management are present at the AGM to answer the questions under their purview.
Adequate Notice of AGM to shareholders together with summary of the procedure C.1.4 & C 1.5 Complied with A Form of Proxy and a copy of the Annual Report are dispatched to all shareholders of the Bank together with the Notice of Meeting detailing the summary of procedure as per legal requirements giving adequate notice to shareholders. This provides opportunity to all shareholders to attend the AGM irrespective of their voting status and obtain clarifications for the matters of interest to them.
C.2 Major Transactions
The Code requires the Directors to disclose to shareholders all proposed material transactions which would materially alter the net asset position of the Bank, if entered into.
Disclosures on proposed major transactions C.2.1 Not applicable There were no major transactions involving acquisition or disposal of greater than half of the net value of the Bank or its subsidiaries entered into by the Bank during the year. Transactions which materially affect the net assets base of the Bank, will be disclosed in the Quarterly/Annual Financial Statements, if any.
D Accountability and Audit
D.1 Financial Reporting
This Principle requires the Board of the Bank to present a balanced and understandable assessment of the Bank’s financial position, performance and prospects.
Board’s Responsibility for Statutory and Regulatory Reporting D.1.1 Complied with The Board is well aware of its responsibility to present regulatory and statutory reporting in a balanced and understandable manner and a statement to this effect is given in the Statement of Directors' Responsibility confirming this position.

The Bank had strictly complied with the requirements of the Companies Act No. 07 of 2007, the Banking Act No. 30 of 1988 and amendments thereto, in the preparation of Quarterly and Annual Financial Statements which are prepared and presented in conformity with Sri Lanka Accounting Standards. Further, the Bank has complied with the reporting requirements prescribed by the regulatory authorities such as the Central Bank of Sri Lanka and the Colombo Stock Exchange.
Declarations by Directors in the Directors’ Report D.1.2 Complied with The Directors have made all required declarations in the ‘Annual Report of the Board of Directors’. Please refer the ‘Annual Report of the Board of Directors’ for the required declarations.
Declaration
The Bank has not engaged in activities that contravene laws and regulations
Directors’ interests in contracts with the Company
Equitable treatment to shareholders
Going concern of the business
Review of Internal Controls and reasonable assurance on their effectiveness
Statements by Directors’ and Auditors’ on responsibility for financial reporting D.1.3 Complied with The “Statement of Directors’ Responsibility” is given in the Financial Report. Please refer “Auditors’ Report” for the reporting responsibility of Auditors.
Management Discussion
and Analysis
D.1.4 Complied with Please refer ‘Management Discussion and Analysis’.
Declaration by Board on the going concern of the Business D.1.5 Complied with Please refer “Annual Report of the Board of Directors” and the “Statement of Directors’ Responsibility” for the required declarations.
Requirement to Summon an Extraordinary General Meeting (EGM) to notify serious loss in
net assets (capital)
D.1.6 Not applicable Likelihood of such occurrence is remote. However, should the situation arise, an EGM will be called for and shareholders will be notified.
D.2 Internal Control
The Code requires the Bank’s Board to ensure that an effective system of internal controls, which safeguards the Bank’s assets to protect the interest of shareholders is in place.
Directors to conduct an annual review of internal controls D.2.1 Complied with The Bank obtained the External Auditor’s certification on the effectiveness of the internal control mechanism on financial reporting.
Need for an internal audit function for companies with no such function D.2.2 Not applicable This is not applicable as the Bank already has its own in-house Internal Audit Department, which is responsible for internal audit function.
D.3 Audit Committee
The Code requires the Board to have formal and transparent arrangements in selecting and applying the accounting policies, financial reporting and internal control principles and maintaining an appropriate relationship with the Bank’s External Auditor.
Composition of the
Audit Committee
D.3.1 Complied with All members of the Board Audit Committee including the Chairman are Independent Non-Executive Directors.

Details of the members, invitees and the Secretary of the Committee are found on the ‘Board Audit Committee Report’ under the heading ‘Composition of the Committee’.
Duties of the Audit Committee D.3.2 Complied with As stated in the Report of the Board Audit Committee of the Bank it regularly reviews scope, results and effectiveness of the audit. It also ensures the balance among objectivity, independence and value for money of the services provided by the Bank’s Auditors with special attention to provision of non-audit services by the Auditor.
Terms of Reference of the
Audit Committee
D.3.3 Complied with Terms of reference of the Board Audit Committee is clearly defined in the Charter of the Audit Committee approved by the Board of Directors, which was last revised in December 2010. This clearly explains the purpose of the Committee, its duties and responsibilities together with the scope and functions of the Committee. The Committee mainly deals with the matters pertaining to statutory and regulatory compliance in financial reporting, matters with regard to the External Auditors, internal audit and risk management procedures of the Bank.
Disclosure of names of the members of the Audit Committee D.3.4 Complied with Names of the members of the Audit Committee are given under the Section on ‘The Composition of the Committee’ and disclosure on the independence of the Auditors is found under the Section on ‘External Audit’ in the ‘Board Audit Committee Report’ this Report.
D.4 Code of Business Conduct and Ethics
The Code requires the Bank to adopt an Internal Code of Conduct and Ethics to be adhered to by all Directors and members of the senior management of the Bank.
Disclosures on presence of Code of Business Conduct and Ethics D.4.1 Complied with The Bank has an internally developed Code of Conduct for its Directors and all employees including the Corporate and Senior Management. This Code addresses conflict of interest, corporate opportunities, confidentiality of information, fair dealing, protecting and proper use of the Company’s assets, compliance with laws and regulations and encouraging the reporting of any illegal or unethical behaviour, etc. Details of the Bank’s Code of Ethics Programme including Governing Principles are found in the Corporate Governance of this Report.
Affirmative Statement by the Chairman D.4.2 Complied with Please refer the Letter from the Chairman for required details.
D.5 Corporate Governance Disclosures
Directors of the Bank disclose annually the Bank’s adherence to the Code of Best Practice on Corporate Governance issued jointly by The Institute of Chartered Accountants of Sri Lanka and the Securities and Exchange Commission of Sri Lanka and the Banking Act Direction No. 11 of 2007 of the Central Bank of Sri Lanka on Corporate Governance for Licensed Commercial Banks in Sri Lanka and subsequent Amendments thereto, in the ‘Corporate Governance Report’.
Annual Corporate Governance Report in the Annual Report D.5.1 Complied with Corporate Governance in Stewardship sector serves this requirement.

Section 2: Shareholders

E Institutional Investors
E.1 Shareholder Voting
The Code requires the Institutional shareholders to make considered use of their votes and encourage to ensure their voting intentions are translated into practice.
Communication with shareholders E.1.1 Complied with In order to avoid conflicts of interest by nurturing the mutual understanding, the Board carries out dialogues with its shareholders at general meetings. In this regard, the Annual General Meeting (AGM) of the Bank plays a critical role. Voting of the shareholders is crucial in carrying a resolution at the AGM. The Chairman who plays the role of the agent and communicates the views and queries of the shareholders to Board and the senior management in order to ensure that the views are properly communicated to the Bank.
E.2 Evaluation of Governance Disclosures
The Code requires the Bank to encourage institutional investors to give due weight to all relevant factors drawn to their attention.
Due weight by Institutional Investors E.2.1 Complied with The Institutional Investors are at liberty to give due weight on matters relating to the Board structure and composition, when they consider resolutions relating to Board structure and composition.
F Other Investors
F.1 Investing/Divesting Decision
Seek independent advice F.1.1 Complied with Individual shareholders are at liberty to carry out adequate analysis or seek independent advice before making investing or divesting decisions.
F.2 Shareholder Voting
Encourage voting by Individual Investors F.2.1 Complied with Individual shareholders are encouraged to participate in General Meetings of the Bank and exercise their voting rights. The Bank adequately communicates with all shareholders by ensuring that they are informed of this position by dispatching necessary notices in time.
       

Bank’s Compliance with Direction No. 11 of 2007, Issued by the Central Bank of Sri Lanka on The Subject ‘Corporate Governance for Licensed Commercial Banks in Sri Lanka’

With a view to enhancing the overall stability of the Banking sector, which is fundamental to the maintenance of stability of the financial system, the Monetary Board of the Central Bank of Sri Lanka, under powers vested in it, via Section 46 (1) of the Banking Act No. 30 of 1988, has issued the above Direction in order to improve and sustain the Corporate Governance structures, processes and practices in all Licensed Commercial Banks in Sri Lanka. Corporate Governance structures, processes and practices for the purpose of the Direction, are deemed to be the management framework that facilitates the conduct of the banking business in a responsible and accountable manner, so as to promote the safety and soundness of individual Banks, thereby leading to the stability of the overall Banking Sector.

The Direction consists of two distinct parts viz Direction 2 and Direction 3. Direction 2 consists of eight principles, which are only for purposes of explaining and clarifying rationale for the mandatory rules setout in Direction 3 that follows. The Direction clearly states that strict compliance shall only be in respect of the rules that are setout in Direction 3. The Bank is of the view, that all of these rules are extremely helpful in conducting the Bank’s business in an ethical, efficient and safe manner and has thus made every effort to comply with them fully. The following table captures the essence of these rules as well as the degree of compliance with them, by the Bank.

Relevant Section Rule Degree of Compliance
3 (1) - Responsibilities of the Board

3 (1) (i)

The Board shall strengthen the safety and soundness of the Bank by ensuring the implementation of the following:

 

(a) Approve and oversee the Bank’s strategic objectives and corporate values and ensure that these are communicated throughout the Bank; Complied with
Approving, overseeing, communicating and monitoring the strategic objectives, corporate values, overall business strategy and policy of communication with all stakeholders mainly via the monthly and special Board meetings conducted and discussions held with Key Management Personnel.

 

(b) Approve the overall business strategy of the Bank, including the overall risk policy and risk management procedures and mechanisms with measurable goals, for at least the next three years; Complied with
Procedure which is in practice is being documented for record purposes.

 

(c) Identify the principal risks and ensure implementation of appropriate systems to manage the risks prudently; Complied with
Identifying principal risks, approving overall risk policy and risk management procedures mainly through the Board Integrated Risk Management Committee.

 

(d) Approve implementation of a policy of communication with all stakeholders, including depositors, creditors, shareholders and borrowers; Complied with

 

(e) Review the adequacy and the integrity of the Bank’s internal control systems and management information systems; Reviewing the adequacy and the integrity of the Bank’s internal control systems and management information systems via the Board Audit Committee.

Procedure which is in practice is being documented for record purposes.

 

(f) Identify and designate Key Management Personnel, as defined in the International Accounting Standards, who are in a position to: (i) significantly influence policy; (ii) direct activities; and (iii) exercise control over business activities, operations and risk management; Complied with

 

(g) Define the areas of authority and key responsibilities for the Board Directors themselves and for the Key Management Personnel; Complied with

 

(h) Ensure that there is appropriate oversight of the affairs of the Bank by Key Management Personnel, that is consistent with Board policy; Complied with
Procedure which is in practice is being documented for record purposes.

 

(i) Periodically assess the effectiveness of the Board Directors’ own governance practices, including: (i) the selection, nomination and election of Directors and Key Management Personnel; (ii) the management of conflicts of interests; and (iii) the determination of weaknesses and implementation of changes where necessary; Complied with
Periodically assessing the effectiveness of the Board Directors’ own governance practices. Procedure on ‘management of conflicts of interest’, which is in practice, is being documented for record purposes.
With regard to KMPs, procedure is in practice and is being documented for record purposes.

 

(j) Ensure that the Bank has an appropriate succession plan for
Key Management Personnel;
Complied with
Identifying and designate Key Management Personnel (KMP), to ensure an appropriate succession plan and defining the authority and key responsibilities for the Board and the KMPs via Nomination Committee.

 

(k) Meet regularly, on a needs basis, with the Key Management Personnel to review policies, establish communication lines and monitor progress towards corporate objectives; Complied with
Executive Management Committee of the Bank meet once a month for this purpose.

 

(l) Understand the regulatory environment and ensure that the Bank maintains an effective relationship with regulators; Complied with

 

(m) Exercise due diligence in the hiring and oversight of External Auditors. Complied with

3 (1) (ii)

The Board shall appoint the Chairman and the Chief Executive Officer and define and approve the functions and responsibilities of the Chairman and the Chief Executive Officer in line with Direction 3 (5) of these Directions. Complied with
Positions of the Chairman and the Managing Director (MD)/Chief Executive Officer (CEO) are separated. Further, functions and responsibilities of the Chairman and the CEO are properly defined and approved in line with Direction 3 (5) of these Directions.

Please refer Direction 3 (5) on Corporate Governance of this Report for details.

3 (1) (iii)

The Board shall meet regularly and Board meetings shall be held at least twelve times a year at approximately monthly intervals. Such regular Board meetings shall normally involve active participation in person of a majority of Directors entitled to be present. Obtaining the Board’s consent through the circulation of written resolutions/papers shall be avoided as far as possible. Complied with
Board meets regularly at least on monthly intervals. Please refer ‘Item A. 1.1’ of the ICASL and SEC Code table on Corporate Governance for further details.

Obtaining Board’s consent through circulation of written resolutions/papers is minimal.

3 (1) (iv)

The Board shall ensure that arrangements are in place to enable all Directors to include matters and proposals in the agenda for regular Board meetings where such matters and proposals relate to the promotion of business and the management of risks of the Bank. Complied with
All Board members are given equal opportunity in this regard where such proposals relate to the promotion of business and the management of risks of the Bank. Procedure which is in practice is being documented for record purposes.

3 (1) (v)

The Board procedures shall ensure that notice of at least 7 days is given of a regular Board meeting to provide all Directors an opportunity to attend. For all other Board meetings, reasonable notice may be given. Complied with
As the Bank’s practice, Directors are given a notice of at least 7 days for regular Board meetings. In addition, adequate notice is given for Special Board meetings. The Bank has commenced to indicate the date of despatch in the agenda for monitoring of this requirement.

3 (1) (vi)

The Board procedures shall ensure that a Director who has not attended at least two-thirds of the meetings in the period of 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a Director. Participation at the Directors’ meetings through an alternate Director shall, however, be acceptable as attendance. Complied with
No such situation has arisen.

3 (1) (vii)

The Board shall appoint a Company Secretary who satisfies the provisions of Section 43 of the Banking Act No. 30 of 1988, whose primary responsibilities shall be to handle the secretariat services to the Board and shareholder meetings and to carry out other functions specified in the statutes and other regulations. Complied with
An Attorney-at-Law/Chartered Secretary with adequate experience functions as the Secretary of the Board and she has taken steps to duly comply with the requirements under the Banking Act No. 30 of 1988 and the Companies Act No. 07 of 2007. She has also ensured that proper Board procedures are followed and that applicable rules and regulations are adhered to. Procedure which is in practice is being documented for record purposes.

3 (1) (viii)

All Directors shall have access to advice and services of the Company Secretary with a view to ensuring that Board procedures and all applicable rules and regulations are followed. Complied with
Please refer ‘Item A.1.4’ of the ICASL and SEC Code table in Corporate Governance for further details.

Procedure which is in practice is being documented for record purposes.

3 (1) (ix)

The Company Secretary shall maintain the minutes of Board meetings and such minutes shall be open for inspection at any reasonable time, on reasonable notice by any Director. Complied with
The Company Secretary maintains the minutes of Board meetings with sufficient details and keep open for inspection by any Director.

Procedure which is in practice is being documented for record purposes.

3 (1) (x)

Minutes of Board meetings shall be recorded in sufficient detail so that it is possible to gather from the minutes, as to whether the Board acted with due care and prudence in performing its duties. The minutes shall also serve as a reference for regulatory and supervisory authorities to assess the depth of deliberations at the Board meetings. Therefore, the minutes of a Board meeting shall clearly contain or refer to the following: (a) a summary of data and information used by the Board in its deliberations; (b) the matters considered by the Board; (c) the fact-finding discussions and the issues of contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence; (d) the testimonies and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations; (e) the Board’s knowledge and understanding of the risks to which the Bank is exposed and an overview of the risk management measures adopted; and (f) the decisions and Board resolutions. Complied with
The Company Secretary maintains the minutes of Board meetings with sufficient details and keep open for inspection by any Director.

Procedure which is in practice is being documented for record purposes.

3 (1) (xi)

There shall be a procedure agreed by the Board to enable Directors, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the Bank’s expense. The Board shall resolve to provide separate independent professional advice to Directors to assist the relevant Director or Directors to discharge his/her/their duties to the Bank. Complied with
The Directors are permitted to seek independent professional advice at the Bank’s expense. Please refer ‘Item A.1.3’ of the ICASL and SEC Code table in Corporate Governance for further details.

3 (1) (xii)

Directors shall avoid conflicts of interests, or the appearance of conflicts of interest, in their activities with, and commitments to, other organisations or related parties. If a Director has a conflict of interest in a matter to be considered by the Board, which the Board has determined to be material, the matter should be dealt with at a Board meeting, where Independent Non-Executive Directors [refer to Direction 3 (2) (iv) of these Directions] who have no material interest in the transaction, are present. Further, a Director shall abstain from voting on any Board resolution in relation to which he/she or any of his/her close relation or a concern in which a Director has substantial interest, is interested and he/she shall not be counted in the quorum for the relevant agenda item at the Board meeting. Complied with
Directors do not participate in making decisions on matters, in which they have an interest and avoid conflicts of interests with the activities of the Bank. Such Directors’ presence is disregarded in counting the quorum for agenda involving such issues. Procedure which is in practice is being documented for record purposes.

3 (1) (xiii)

The Board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the Bank is firmly under its authority. Complied with
The Board has put in place systems and controls to facilitate the effective discharge of Board functions.
Pre-set agenda of meeting ensures the direction and control of the bank is firmly under Board’s control and authority.

3 (1) (xiv)

The Board shall, if it considers that the Bank is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to depositors and other creditors, forthwith inform the Director of Bank Supervision of the situation of the Bank prior to taking any decision or action. Complied with
No such situation has arisen. Procedure which is in practice is being documented for record purposes.

3 (1) (xv)

The Board shall ensure that the Bank is capitalised at levels as required by the Monetary Board in terms of the capital adequacy ratio and other prudential grounds. Complied with
The Bank has duly complied with Capital Adequacy requirements and requirements under other prudential grounds.

3 (1) (xvi)

The Board shall publish in the Bank’s Annual Report, an Annual Corporate Governance Report setting out the compliance with Direction 3 of these Directions. Complied with
This Report serves the above purpose.

3 (1) (xvii)

The Board shall adopt a scheme of self-assessment to be undertaken by each Director annually, and maintain records of such assessments. Complied with
The Bank adopted a system of self-assessment, to be undertaken by each Director, annually.
3 (2) - The Board’s Composition

3 (2) (i)

The number of Directors on the Board shall not be less than 7 and not more than 13. Complied with
The Board comprised of 9 Directors which is within statutory range of 7 to 13 Directors.

3 (2) (ii)

(A) The total period of service of a Director other than a Director who holds the position of Chief Executive Officer shall not exceed nine years, and such period in office shall be inclusive of the total period of service served by such Director up to January 1, 2008. Complied with
The service period of Directors is within the maximum period permitted by this Direction and amendments thereto.
(B) In this context, the following transitional provisions shall apply: A Director who has completed 9 years as at January 1, 2008, or who completes such term at any time prior to December 31, 2008, may continue for a further maximum period of 3 years commencing January 1, 2009.

3 (2) (iii)

An employee of a bank may be appointed, elected or nominated as a Director of the Bank (hereinafter referred to as an ‘Executive Director’) provided that the number of Executive Directors shall not exceed one-third of the number of Directors of the Board. In such an event, one of the Executive Directors shall be the Chief Executive Officer of the Bank. Complied with
There are two Executive Directors on the Board,
the MD/CEO and the Chief Operating Officer who was appointed as an ‘Executive Director’ during the year.

This number does not exceed one-third of the number of Directors of the Board.

3 (2) (iv)

The Board shall have at least three Independent Non-Executive Directors or one-third of the total number of Directors, whichever is higher. This sub-direction shall be applicable from January 1, 2010 onwards. A Non-Executive Director shall not be considered independent if he/she: Complied with
The Board has three Independent Non-Executive Directors which is in line with the statutory minimum of having three or one-third of the total number of Directors, whichever is higher.

No Director has personally had any transaction with the Bank exceeding 10% of the regulatory capital of the Bank. Further, Bank has not had any transaction with a concern, in which any of the Directors has/had a substantial interest, exceeding 10% of the Bank’s regulatory capital. In addition, the Bank has obtained legal advice, to this effect.

 

(a) has direct and indirect shareholdings of more than 1% of the Bank;

 

(b) currently has or had during the period of two years immediately preceding his/her appointment as Director, any business transactions with the Bank as described in Direction 3 (7) hereof, exceeding 10% of the regulatory capital of the Bank;

 

(c) has been employed by the Bank during the two year period immediately preceding the appointment as Director;

 

(d) has a close relation who is a Director or Chief Executive Officer or a member of Key Management Personnel or a material shareholder of the Bank or another Bank. For this purpose, a ‘close relation’ shall mean the spouse or a financially dependant child;

 

(e) represents a specific stakeholder of the Bank;

 

(f) is an employee or a Director or a material shareholder in a company or business organisation:

 

I. which currently has a transaction with the Bank as defined in Direction 3 (7) of these Directions, exceeding 10% of the regulatory capital of the Bank, or

 

II. in which any of the other Directors of the Bank are employed or are Directors or are material shareholders; or

 

III. in which any of the other Directors of the Bank have a transaction as defined in Direction 3 (7) of these Directions, exceeding 10% of regulatory capital in the Bank.

3 (2) (v)

In the event an alternate Director is appointed to represent an Independent Director, the person so appointed shall also meet the criteria that applies to the Independent Director. Complied with
This situation has not arisen.

3 (2) (vi)

Non-Executive Directors shall be persons with credible track records and/or have necessary skills and experience to bring an independent judgment to bear on issues of strategy, performance and resources. Complied with
All Non-Executive Directors of the Board are persons with credible track records and posses required skills and experience to bring an independent judgment to bear on issues of strategy, performance and resources. Their profiles are found in Stewardship section.

3 (2) (vii)

A meeting of the Board shall not be duly constituted, although the number of Directors required to constitute the quorum at such meeting is present, unless more than one-half of the number of Directors present at such meeting are Non-Executive Directors. This sub-direction shall be applicable from January 1, 2010 onwards. Complied with
All Board meetings held during 2010 were duly constituted with more than one-half of the number of Directors present at such meetings being consist of Non-Executive Directors.

Please refer ‘Number of Meetings Held and Attendance’ given on table in Board Sub-Committees.

3 (2) (viii)

The Independent Non-Executive Directors shall be expressly identified as such in all corporate communications that disclose the names of Directors of the Bank. The Bank shall disclose the composition of the Board, by category of Directors, including the names of the Chairman, Executive Directors, Non-Executive Directors and Independent Non-Executive Directors in the Annual Corporate Governance Report. Complied with
Details on the profiles of the Non-Executive of Directors is given in the Stewardship section.

3 (2) (ix)

There shall be a formal, considered and transparent procedure for the appointment of new Directors to the Board. There shall also be procedures in place for the orderly succession of appointments to the Board. Complied with
New appointments and re-elections of Directors to the Board are based on the recommendations of the Board Nomination Committee.

There is a procedure in place for the orderly succession of appointments to the Board.

Please refer ‘Board Nomination Committee Report’.

3 (2) (x)

All Directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment. Complied with
All Directors appointed to the Board, other than the Nominee Directors are subject to re-election by shareholders at the first general meeting after their appointment.

3 (2) (xi)

If a Director resigns or is removed from office, the Board shall: (a) announce the Director’s resignation or removal and the reasons for such removal or resignation including but not limited to information relating to the relevant Director’s disagreement with the Bank, if any; and (b) issue a statement confirming whether or not there are any matters that need to be brought to the attention of shareholders. Complied with
During the year Mrs. S.N. Wickramasinghe and
Ms. J. Kuruppu resigned from the Board of Directors of the Bank. The Company Secretary duly informed the Central Bank of Sri Lanka and the Colombo Stock Exchange of these resignations together with the reasons for their resignations.

3 (2) (xii)

A Director or an employee of a Bank shall not be appointed, elected or nominated as a Director of another Bank except where such Bank is a Subsidiary Company or an Associate Company of the first mentioned Bank. Complied with
None of the present Directors of the Bank acts as Director of another Bank, unless provided otherwise in the directions applicable.

Procedure which is in practice is being documented for record purposes.
3 (3) - Criteria to Assess the Fitness and Propriety of Directors

 

In addition to provisions of Section 42 of the Banking Act No. 30 of 1988, the criteria set out below shall apply to determine the fitness and propriety of a person who serves or wishes to serve as a Director of a Bank. Non-compliance with any one of the criteria as set out herein shall disqualify a person to be appointed, elected or nominated as a Director or to continue as a Director.

3 (3) (i)

The age of a person who serves as Director shall not exceed 70 years.

(A) In this connection the following general exemption shall apply: A Director who has reached the age of 70 years as at January 1, 2008 or who would reach the age of 70 years prior to December 31, 2008 may continue in office for a further maximum period of 3 years commencing January 1, 2009.
Complied with
The age limit of Directors is within the maximum period permitted by this Direction and amendments thereto.

3 (3) (ii)

A person shall not hold office as a Director of more than 20 companies/entities/institutions inclusive of Subsidiaries or Associate Companies of the Bank. Of such 20 companies/entities/ institutions, not more than 10 companies shall be those classified as Specified Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995. Will be complied before the end of the exemption period.

3 (3) (ii) (A)

In this context, the following general exemption shall apply: If any person holds posts in excess of the limitation as above, such person shall within a maximum period of 3 years from January 1, 2009 comply with the above-mentioned limitation and notify the Monetary Board accordingly.
3 (4) - Management Functions Delegated by the Board

3 (4) (i)

The Directors shall carefully study and clearly understand the delegation arrangements in place. Complied with
The Board is empowered by the Articles of Association to delegate to the MD/CEO any of the powers vested with the Board, upon such terms and conditions and with such restrictions as the Board may think fit.

3 (4) (ii)

The Board shall not delegate any matters to a Board Committee, Chief Executive Officer, Executive Directors or Key Management Personnel, to an extent that such delegation would significantly hinder or reduce the ability of the Board as a whole to discharge its functions. Complied with
The delegation of powers of the Board is subject to the general laws, regulations and directions applicable to the Bank, to ensure that the delegation of authority would not in any way hinder the Board’s ability to discharge its functions fully and effectively.

3 (4) (iii)

The Board shall review the delegation processes in place on a periodic basis to ensure that they remain relevant to the needs of the Bank. Complied with
The delegated powers are reviewed periodically to ensure that they remain relevant to the needs of the Bank.
3 (5) - The Chairman and Chief Executive Officer

3 (5) (i)

The roles of Chairman and Chief Executive Officer shall be separate and shall not be performed by the same individual. Complied with
Positions of the Chairman and the CEO are separated, thereby preventing unfettered powers for decision-making in one person.

3 (5) (ii)

The Chairman shall be a Non-Executive Director and preferably an Independent Director as well. In the case where the Chairman is not an Independent Director, the Board shall designate an Independent Director as the Senior Director with suitably documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the Bank’s Annual Report. Complied with
Chairman is an Independent Non-Executive Director.

3 (5) (iii)

The Board shall disclose in its Corporate Governance Report, which shall be an integral part of its Annual Report, the identity of the Chairman and the Chief Executive Officer and the nature of any relationship [including financial, business, family or other material/relevant relationship(s)], if any, between the Chairman and the Chief Executive Officer and the relationships among members of the Board. Complied with
The Board is aware that there are no relationships whatsoever, including financial, business, family, any other material/relevant relationship between the Chairman and the CEO. Similarly, no relationships prevail among the other members of the Board, other than being common Directors of certain companies. Procedure which is in place, is being documented for record purposes.

3 (5) (iv)

The Chairman shall: (a) provide leadership to the Board; (b) ensure that the Board works effectively and discharges its responsibilities; and (c) ensure that all key and appropriate issues are discussed by the Board in a timely manner. Complied with
The Chairman provides leadership to the Board by ensuring that the Board functions effectively and facilitates the effective discharge of Board functions. The Board consistently follows proper procedure to deliberate key issues substantially and in a timely manner and ensures that all Directors make an effective contribution, within their respective capabilities, for the benefit of the Bank.

3 (5) (v)

The Chairman shall be primarily responsible for drawing up and approving the agenda for each Board meeting, taking into account where appropriate, any matters proposed by the other Directors for inclusion in the agenda. The Chairman may delegate the drawing up of the agenda to the Company Secretary. Complied with
The Agenda for each Board meeting is finalised by the Company Secretary after consulting the other Directors, depending on the matters to be taken up at the meeting, under supervision of the CEO and finally, the Chairman.

3 (5) (vi)

The Chairman shall ensure that all Directors are properly briefed on issues arising at Board meetings and also ensure that Directors receive adequate information in a timely manner. Complied with
The Chairman ensures that all Directors are properly briefed on issues arising at Board Meetings and all Directors receive adequate information in a timely manner.

Please refer ‘Item A.6.1’ of the ICASL and SEC Code Table on Corporate Governance for further details.

3 (5) (vii)

The Chairman shall encourage all Directors to make a full and active contribution to the Board’s affairs and take the lead to ensure that the Board acts in the best interests of the Bank. Complied with
The Chairman takes all possible steps to ensure that the Board acts in the best interests of the Bank.

3 (5) (viii)

The Chairman shall facilitate the effective contribution of Non-Executive Directors in particular and ensure constructive relations between executive and Non-Executive Directors. Complied with
The Chairman facilitates that all Directors both Executive and Non-Executive, bring independent judgment to bear on issues of strategy, conduct of Bank operations and performance.

3 (5) (ix)

The Chairman, shall not engage in activities involving direct supervision of Key Management Personnel or any other executive duties whatsoever. Complied with
The Chairman does not engage in activities involving direct supervision of Key Management Personnel or any other executive duties whatsoever.

3 (5) (x)

The Chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of shareholders are communicated to the Board. Complied with
At general meetings, the shareholders are given the opportunity to take up matters for which clarification is needed. Further, matters are adequately clarified by the Chairman or CEO or any other officer. In addition, all the correspondence addressed to the Board of Directors by the shareholders or any other party is referred to the Board and necessary action is taken to address the issues in a timely manner.

3 (5) (xi)

The Chief Executive Officer shall function as the apex executive-in-charge of the day-to-day-management of the Bank’s operations and business. Complied with
The CEO is supported by the members of the Corporate Management to manage the day-to-day-management of the Bank’s operations and business.
3 (6) - Board Appointed Committees

3 (6) (i)

Each bank shall have at least four Board Committees as set out in Directions 3 (6) (ii), 3 (6) (iii), 3 (6) (iv) and 3 (6) (v) of these Directions. Each Committee shall report directly to the Board. All Committees shall appoint a Secretary to arrange the meetings and maintain minutes, records, etc., under the supervision of the Chairman of the Committee. The Board shall present a report of the performance on each Committee, on their duties and roles at the Annual General Meeting. Complied with
The following Board Sub-Committees have been appointed by the Board requiring each such committee to report to the Board:
1. Board Audit Committee
2. Board Human Resources and Remuneration Committee
3. Board Nomination Committee
4. Board Integrated Risk Management Committee
5. Board Credit Committee The Board has appointed Secretaries for each Committee who arrange the meetings and maintain minutes, records, etc., under the supervision of the Chairman of the respective Committee. Please refer Board Committees for the Reports of the
first four Committees.

3 (6) (ii)

The following rules shall apply in relation to the Audit Committee: Please refer Sections of Composition, Charter, Meetings and the Methodology of the Board Audit Committee Report.
(a) The Chairman of the Committee shall be an Independent Non-Executive Director who possesses qualifications and experience in accountancy and/or audit. Complied with
(b) All members of the Committee shall be Non-Executive Directors. Complied with
(c) The Committee shall make recommendations on matters in connection with: (i) The appointment of the External Auditor for audit services to be provided in compliance with the relevant statutes; (ii) the implementation of the Central Bank guidelines issued to Auditors from time to time; (iii) the application of the relevant accounting standards; and (iv) the service period, audit fee and any resignation or dismissal of the Auditor; provided that the engagement of the Audit Partner shall not exceed five years, and that the particular Audit Partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term. Complied with
(d) The committee shall review and monitor the External Auditor’s independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices. Complied with
(e) The Committee shall develop and implement a policy on the engagement of an External Auditor to provide non-audit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the Committee shall ensure that the provision by an External Auditor of non-audit services does not impair the External Auditor’s independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision of non-audit services, the Committee shall consider:
I. whether the skills and experience of the audit firm make it a suitable provider of the non-audit services;
II. whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the External Auditor; and
III. whether the nature of the non-audit services, the related fee levels and the fee levels individually and in aggregate relative to the audit firm, pose any threat to the objectivity and/or independence of the External Auditor.
Complied with
(f) The Committee shall, before the audit commences, discuss and finalise with the External Auditors the nature and scope of the audit, including: (i) an assessment of the Bank’s compliance with the relevant Directions in relation to corporate governance and the management’s internal controls over financial reporting; (ii) the preparation of financial statements for external purposes in accordance with relevant accounting principles and reporting obligations; and (iii) the co-ordination between firms where more than one audit firm is involved. Complied with
(g) The Committee shall review the financial information of the Bank, in order to monitor the integrity of the financial statements of the Bank, its Annual Report, accounts and quarterly reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the Bank’s Annual Report and accounts and quarterly reports before submission to the Board, the Committee shall focus particularly on: (i) major judgmental areas; (ii) any changes in accounting policies and practices; (iii) significant adjustments arising from the audit; (iv) the going concern assumption; and (v) the compliance with relevant accounting standards and other legal requirements. Complied with
(h) The Committee shall discuss issues, problems and reservations arising from the interim and final audits, and any matters the Auditor may wish to discuss including those matters that may need to be discussed in the absence of Key Management Personnel, if necessary. Complied with
(i) The Committee shall review the External Auditor’s management letter and the management’s response thereto. Complied with
(j) The Committee shall take the following steps with regard to the internal audit function of the Bank:
i. Review the adequacy of the scope, functions and resources of the Internal Audit Department, and satisfy itself that the department has the necessary authority to carry out its work;
ii. Review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the Internal Audit Department;
iii. Review any appraisal or assessment of the performance of the head and senior staff members of the Internal Audit Department;
iv. Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function;
Complied with
v. Ensure that the Committee is appraised of resignations of senior staff members of the Internal Audit Department including the Chief Internal Auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning; Complied with except for requirements applicable to senior staff members. Steps will be taken to comply fully with this requirement.
vi. Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care; Complied with
The procedure which is in practice is being documented for record purposes.
(k) The Committee shall consider the major findings of internal investigations and management’s responses thereto; Complied with
(l) The Chief Finance Officer, the Chief Internal Auditor and a representative of the External Auditors may normally attend meetings. Other Board Members and the Chief Executive Officer may also attend meetings upon the invitation of the Committee. However, at least twice a year, the committee shall meet with the External Auditors without the Executive Directors being present. Complied with
(m) The Committee shall have: (i) explicit authority to investigate into any matter within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and (iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary. Complied with
(n) The Committee shall meet regularly, with due notice of issues to be discussed and shall record its conclusions in discharging its duties and responsibilities. Complied with
(o) The Board shall disclose in an informative way; (i) details of the activities of the Audit Committee; (ii) the number of Audit Committee meetings held in the year; and (iii) details of attendance of each individual Director at such meetings. Complied with
(p) The Secretary of the Committee (who may be the Company Secretary or the head of the internal audit function) shall record and keep detailed minutes of the committee meetings. Complied with
(q) The Committee shall review arrangements by which employees of the Bank may, in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the Committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the Bank’s relations with the External Auditor. Complied with

3 (6) (iii)

The following rules shall apply in relation to the Human Resources and Remuneration Committee: Please refer Sections of Composition, Charter, Meetings and the Methodology of the Board Human Resources and Remuneration Committee Report.

 

(a) The Committee shall determine the remuneration policy (salaries, allowances and other financial payments) relating to Directors, Chief Executive Officer (CEO) and Key Management Personnel of the Bank Complied with
Procedure which is in practice is being documented for record purposes.

 

(b) The Committee shall set goals and targets for the Directors, CEO and the Key Management Personnel. Complied with
Procedure which is in practice is being documented for record purposes.

 

(c) The Committee shall evaluate the performance of the CEO and Key Management Personnel against the set targets and goals periodically and determine the basis for revising remuneration, benefits and other payments of performance-based incentives. Complied with

 

(d) The CEO shall be present at all meetings of the Committee, except when matters relating to the CEO are being discussed. Complied with

3 (6) (iv)

The following rules shall apply in relation to the Board Nomination Committee: Please refer Sections of Composition, Charter, Meetings and the Methodology of the Board Nomination Committee Report.

 

(a) The Committee shall implement a procedure to select/appoint new Directors, CEO and Key Management Personnel. Complied with
Procedure documented for Directors. For KMPs the procedure is in practice and is being documented for record purposes.

 

(b) The Committee shall consider and recommend (or not recommend) the re-election of current Directors, taking into account the performance and contribution made by the Director concerned towards the overall discharge of the Board’s responsibilities. Complied with

 

(c) The Committee shall set the criteria such as qualifications, experience and key attributes required for eligibility to be considered for appointment or promotion to the post of CEO and the Key Management positions. Complied with
Procedure which is in practice is being documented for record purposes.

 

(d) The Committee shall ensure that Directors, CEO and Key Management Personnel are fit and proper persons to hold office as specified in the criteria given in Direction 3 (3) and as set out in the Statutes. Complied with
(e) The Committee shall consider and recommend from time to time, the requirements of additional/new expertise and the succession arrangements for retiring Directors and Key Management Personnel. Complied with
(f) The Committee shall be chaired by an Independent Director and preferably be constituted with a majority of Independent Directors. The CEO may be present at meetings by invitation. Complied with

3 (6) (v)

The following rules shall apply in relation to the Integrated Risk Management Committee: Please refer Sections of Composition, Charter, Meetings and the Methodology of the Board Integrated Risk Management Committee Report.
(a) The Committee shall consist of at least three Non-Executive Directors, Chief Executive Officer and Key Management Personnel supervising broad risk categories, i.e., credit, market, liquidity, operational and strategic risks. The Committee shall work with Key Management Personnel very closely and make decisions on behalf of the Board within the framework of the authority and responsibility assigned to the Committee. Complied with
(b) The Committee shall assess all risks, i.e., credit, market, liquidity, operational and strategic risks to the Bank on a monthly basis through appropriate risk indicators and management information. In the case of Subsidiary Companies and Associate Companies, risk management shall be done, both on a Bank basis and group basis. Complied with
for Bank. Steps are being taken to comply with this requirement for Subsidiary Companies.
(c) The Committee shall review the adequacy and effectiveness of all management level Committees such as the Credit Committee and the Asset-Liability Committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the Committee. Complied with
(d) The Committee shall take prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels decided by the Committee on the basis of the Bank’s policies and regulatory and supervisory requirements. Complied with
(e) The Committee shall meet at least quarterly to assess all aspects of risk management including updated business continuity plans. Complied with
(f) The Committee shall take appropriate actions against the officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the Committee, and/or as directed by the Director of Bank Supervision. Complied with
(g) The Committee shall submit a risk assessment report within a week of each meeting to the Board seeking the Board’s views, concurrence and/or specific directions. Currently this Report is submitted to the next Board Meeting held immediately after the Committee Meeting and steps will be taken to comply with the requirement in future.
(h) The Committee shall establish a compliance function to assess the Bank’s compliance with laws, regulations, regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from Key Management Personnel shall carry out the compliance function and report to the Committee periodically. Complied with
3 (7) - Related Party Transactions

3 (7) (i)

The Board shall take the necessary steps to avoid any conflicts of interest that may arise from any transaction of the Bank with any person, and particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction:
(a) Any of the Bank’s subsidiary companies;
(b) Any of the Bank’s associate companies;
(c) Any of the Directors of the Bank;
(d) Any of the Bank’s Key Management Personnel;
(e) A close relation of any of the Bank’s Directors or Key Management Personnel;
(f) A shareholder owning a material interest in the Bank;
(g) A concern in which any of the Bank’s Directors or a close relation of any of the Bank’s Directors or any of its material shareholders has a substantial interest.
Complied with
The Board takes necessary steps to avoid any conflicts of interest that may arise from any transaction of the Bank with its related parties.

Procedure which is in practice is being documented for record purposes.

Transactions are carried out with Related Parties in the normal course of business as disclosed in Notes to the Financial Statements.

3 (7) (ii)

The type of transactions with related parties that shall be covered by this Direction shall include the following:
(a) The grant of any type of accommodation, as defined in the Monetary Board’s Directions on maximum amount of accommodation,
(b) The creation of any liabilities of the Bank in the form of deposits, borrowings and investments,
(c) The provision of any services of a financial or non-financial nature provided to the Bank or received from the Bank,
(d) The creation or maintenance of reporting lines and information flows between the Bank and any related parties which may lead to the sharing of potentially proprietary, confidential or otherwise sensitive information that may give benefits to such related parties.
Complied with
The Board takes necessary steps to avoid any conflicts of interest that may arise from any transaction of the Bank with its related parties. Procedure which is in practice is being documented for record purposes. Transactions are carried out with Related Parties in the normal course of business as disclosed.

3 (7) (iii)

The Board shall ensure that the Bank does not engage in transactions with related parties as defined in Direction 3(7)(i) above, in a manner that would grant such parties “more favourable treatment” than that accorded to other constituents of the Bank carrying on the same business. In this context, “more favourable treatment” shall mean and include treatment, including the:
(a) Granting of “total net accommodation” to related parties, exceeding a prudent percentage of the Bank’s regulatory capital, as determined by the Board. For purposes of this sub-direction:
I. “Accommodation” shall mean accommodation as defined in the Banking Act Directions No. 07 of 2007 on Maximum Amount of Accommodation.
II. The “total net accommodation” shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related parties in the Bank’s share capital and debt instruments with a maturity of 5 years or more.
Complied with
The Bank does not engage any transactions with its related parties in the manner that would result in “more favourable treatment” including granting loans exceeding a prudent percentage of the Bank’s regulatory capital, more favourable terms, etc.
(b) Charging of a lower rate of interest than the Bank’s best lending rate or paying more than the Bank’s deposit rate for a comparable transaction with an unrelated comparable counterparty;
(c) Providing of preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/commissions, that extend beyond the terms granted in the normal course of business undertaken with unrelated parties;
(d) Providing services to or receiving services from a related-party without an evaluation procedure;
(e) Maintaining reporting lines and information flows that may lead to sharing potentially proprietary, confidential or otherwise sensitive information with related parties, except as required for the performance of legitimate duties and functions.

3 (7) (iv)

A Bank shall not grant any accommodation to any of its Directors or to a close relation of such Director unless such accommodation is sanctioned at a meeting of its Board of Directors, with not less than two-thirds of the number of Directors other than the Director concerned, voting in favour of such accommodation. This accommodation shall be secured by such security as may from time to time be determined by the Monetary Board as well. Complied with
All accommodations granted to Directors and their close relations were sanctioned at Board Meetings with not less than two-thirds of the number of Directors present other than the Director concerned, voting in favour of such accommodation.

3 (7) (v)

(a) Where any accommodation has been granted by a Bank to a person or a close relation of a person or to any concern in which the person has a substantial interest, and such person is subsequently appointed as a Director of the Bank, steps shall be taken by the Bank to obtain the necessary security as may be approved for that purpose by the Monetary Board, within one year from the date of appointment of the person as a Director. Not applicable
The Bank did not encounter this situation during the year.
(b) Where such security is not provided by the period as provided in Direction 3 (7)(v) (a) above, the Bank shall take steps to recover any amount due on account of any accommodation, together with interest, if any, within the period specified at the time of the grant of accommodation or at the expiry of a period of eighteen months from the date of appointment of such Director, whichever is earlier.
(c) Any Director who fails to comply with the above sub-directions shall be deemed to have vacated the office of Director and the Bank shall disclose such fact to the public.
(d) This sub-direction, however, shall not apply to a Director who at the time of the grant of the accommodation was an employee of the Bank and the accommodation was granted under a scheme applicable to all employees of such Bank.

3 (7) (vi)

A Bank shall not grant any accommodation or “more favourable treatment” relating to the waiver of fees and/or commissions to any employee or a close relation of such employee or to any concern in which the employee or close relation has a substantial interest other than on the basis of a scheme applicable to the employees of such Bank or when secured by security as may be approved by the Monetary Board in respect of accommodation granted as per Direction 3 (7) (v) above. Complied with
No accommodation has been given to employees on a favourable basis other than the general schemes applicable to all employees of the Bank, such as staff loans facilities.

3 (7) (vii)

No accommodation granted by a Bank under Direction 3 (7) (v) and 3 (7) (vi) above, nor any part of such accommodation, nor any interest due thereon shall be remitted without the prior approval of the Monetary Board and any remission without such approval shall be void and of no effect. Not applicable
due to the reasons mentioned above.
3 (8) - Disclosures

3 (8) (i)

The Board shall ensure that: (a) Annual Audited Financial Statements and Quarterly Financial Statements are prepared and published in acccordence with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and that (b) such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English. Complied with
Annual Audited Financial Statements and Interim Financial Statements of the Bank were prepared and published in the newspapers (in Sinhala, Tamil and English) in accordance with the formats prescribed by the Supervisory and Regulatory Authorities and applicable accounting standards. In addition a copy of the Annual Report is sent to each shareholder either in the hard copy form or in a CD. Further Interim Financial Statements are sent to the Colombo Stock Exchange in addition to hosting them in the official website of the Bank for the information of interested stakeholders.

3 (8) (ii)

The Board shall ensure that the following minimum disclosures are made in the Annual Report:
(a) A statement to the effect that the Annual Audited Financial Statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures. Complied with
Disclosures on the compliance with the applicable accounting standards and regulatory requirements in preparation of the annual Audited Financial Statements have been made in the ‘Annual Report of the Board of Directors’, ‘Managing Director’s and Chief Financial Officer’s Responsibility Statement and the Note D on Statement of Compliance in ‘Notes to the Financial Statements’.
(b) A report by the Board on the Bank’s internal control mechanism that confirms that the financial reporting system has been designed to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of Financial Statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements. Complied with
Report by the Board on the effectiveness of the Bank’s internal control mechanism to ensure that the financial reporting system has been designed to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of Financial Statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements is given on “Statement of Directors’ Responsibility” of this Annual Report. In addition, all Directors have signed the “Annual Report of Board of Directors”, wherein all Directors have collectively taken the responsibility for the above requirement.
(c) The External Auditor’s certification on the effectiveness of the internal control mechanism referred to in Direction 3 (8) (ii) (b) above, in respect of any statements prepared or published after December 31, 2008. Complied with
The Bank obtained the External Auditor’s certification on the effectiveness of the internal control mechanism referred to in Direction 3 (8 )(ii) (b) above.
(d) Details of Directors, including names, fitness and propriety, transactions with the Bank and the total of fees/remuneration paid by the Bank. Complied with
Profiles of Directors are given in Stewardship Section, transactions of the Directors with the Bank are given in the ‘Directors Interest in Contracts with the Company’ and the total of fees/remuneration paid to the Directors by the Bank is given in Note 7 to the Financial Statements.
(e) Total net accommodation as defined in 3 (7) (iii) granted to each category of related parties. The net accommodation granted to each category of related parties shall also be disclosed as a percentage of the Bank’s regulatory capital. Complied with
Total net accommodations granted to each category of related parties are given in Note 40 to the Financial Statements. The net accommodations granted to each category of related parties as a percentage of the Bank’s regulatory capital are given below: Direct and indirect accommodation to related parties:
Category of Related Party
Transactions
% of the
Regulatory Capital
2010 2009
Key Management Personnel 0.19 0.19
Subsidiaries 0.82 0.97
Associates 0.10 0.13
(f) The aggregate values of remuneration paid by the Bank to its Key Management Personnel and the aggregate values of the transactions of the Bank with its Key Management Personnel, set out by Broad categories such as remuneration paid, accommodation granted and deposits or investments made in the Bank. Complied with
The aggregate values of remuneration paid by the Bank to its Key Management Personnel are given in Note 40.2.1 to the Financial Statements and the aggregate values of the transactions of the Bank with its Key Management Personnel are set out in Note 40.2.2 to the Financial Statements.
(g) The External Auditor’s Certification of the compliance with these Directions in the Annual Corporate Governance Reports published after January 1, 2010. Complied with
The External Auditor’s Certification of the compliance with the requirements of these Directions was obtained and it does not contain any significant deviations.
(h) A report setting out details of the compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any material non-compliances. Complied with
Please refer the ‘Statement of Directors’ Responsibility’ for details of the compliance with prudential requirements, regulations, laws and internal controls. There were no material non-compliance to prudential requirements, regulations, laws and internal controls affecting the Bank.
(i) A statement of the regulatory and supervisory concerns on lapses in the Bank’s risk management, or non-compliance with these Directions that have been pointed out by the Director of Bank Supervision, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the Bank to address such concerns. Complied with
There were no significant supervisory concerns on lapses in the Bank’s risk management or non-compliance with this Direction that have been pointed out by the Director of Bank Supervision of Central Bank of Sri Lanka and requested by the Monetary Board to be disclosed to the public.
3 (9) - Transitional and Other General Provisions

3 (9) (i)

Compliance with this Direction shall commence from January 01, 2008 onwards and all Licensed Commercial Banks shall fully comply with the provisions of this Direction by or before January 1, 2009 except where extended compliance dates have been specifically provided for in this Direction. Position reported in 2008 & 2009 Annual Reports. Position applicable to the year 2010 as reported in this Annual Report.

3 (9) (ii)

In respect of the Banks that have been incorporated by specific statutes in Sri Lanka, the Boards as specified in such statutes shall continue to function in terms of the provisions of the respective statutes, provided they take steps to comply with all provisions of this Direction that are not inconsistent with the provisions of the respective statutes. Not Applicable

3 (9) (iii)

This Direction shall apply to the branches of the foreign Banks operating in Sri Lanka to the extent that it is not inconsistent with the regulations and laws applicable in such Bank’s country of incorporation. The branch of a foreign Bank shall also publish its parent Bank’s Annual Corporate Governance Report together with its Annual Report and accounts of the branch operations in Sri Lanka. Not Applicable

3 (9) (iv)

In the event of a conflict between any of the provisions of this Direction and the Articles of Association (or Internal Rules) pertaining to any Bank, the provisions of this Direction shall prevail. However, if the Articles of Association of an individual Bank set a more stringent standard than that specified in this Direction, such provisions in the Articles of Association may be followed. Not Applicable

3 (9) (v)

If for any reason such as ill health or any incapacity as provided in the Banking Act, the Monetary Board considers that exemptions referred to in Directions 3 (2) (ii) B, 3 (3) (i) A and 3 (3) (ii) A should not be availed of, such ground may be notified to the person by the Monetary Board, and after a hearing, the Monetary Board may limit the period of exemption. Not Applicable

 

© All rights reserved. Commercial Bank of Ceylon PLC. www.combank.lk