The Rs. 13.2 Billion Wake-Up Call: Is "Director Over-boarding" Sinking Sri Lankan Banks?
The recent revelation of a Rs. 13.2 billion fraud at National Development Bank (NDB) has sent shockwaves through Sri Lanka’s financial heart. While the immediate focus is on the "how"—the collusion and the operational lapses—the more critical question for investors and regulators is "Who was watching?" When a fraud of this magnitude goes undetected, it isn’t just a failure of a software script or a branch manager; it is a failure of the Board of Directors. Specifically, it highlights a quiet crisis in our corporate culture: Director Interlocking and Over-boarding.
The "Full-Time" Responsibility of a "Part-Time" Role
In Sri Lanka, the corporate world is a small circle. A single high-profile individual often sits on the boards of five, eight, or even ten different companies. We call this "Over-boarding." While these directors bring immense experience, they have a finite amount of time. A banking director isn’t just there to attend a monthly lunch; they are responsible for:
- Interrogating complex risk reports.
- Challenging the CEO on internal audit findings.
- Spotting red flags in "too-good-to-be-true" operational units.
When a director is stretched across ten boards, their oversight becomes a "checkbox exercise." They lose the capacity for deep-dive skepticism, leaving the door wide open for sophisticated internal fraud.
Global Benchmarks: How the World Limits "Busy" Directors
Other countries have realized that a "busy" board is a dangerous board. They have moved from "suggested guidelines" to hard legal limits.
| Country | Regulation / Law | Key Limits on Directorships |
|---|---|---|
| India | SEBI (LODR) & Companies Act | A person cannot serve as a director in more than 7 listed entities. If serving as a Whole-Time Director in one company, they can only be an Independent Director in 3 others. |
| United Kingdom | UK Corporate Governance Code | Operates on "Comply or Explain." Directors must demonstrate they have sufficient time. Institutional investors (like BlackRock) often vote against directors holding more than 5 mandates. |
| European Union | CRD VI (Capital Requirements Directive) | Specifically for Banks: Directors are generally limited to one executive role with two non-executive roles, or four non-executive roles in total. |
| USA | SEC & Proxy Advisor Rules | While federal law is less rigid, proxy advisors like ISS and Glass Lewis recommend voting against "over-boarded" directors—usually defined as those sitting on more than 5 public boards. |
Learning from History: When Boards Stayed Silent
We have seen this movie before. In almost every major global scandal, "busy" boards were a recurring theme:
- Enron (USA): The board was filled with prestigious names who met infrequently and failed to understand the complex "Special Purpose Entities" used to hide debt.
- Satyam (India): The "Father of Indian IT" fraud happened under the noses of a board that included legendary professors and executives who were simply too hands-off.
- Wirecard (Germany): A more recent example where the board failed to verify the existence of €1.9 billion in cash—similar to the scale of oversight failure we see today in Colombo.
Who Else is to Blame?
The blame for the NDB incident doesn't stop at the boardroom door. It is a systemic collapse of the Three Lines of Defense:
- Internal Audit: Why did the "red flags" not trigger an alarm sooner?
- External Auditors: For a fraud to reach Rs. 13.2 billion, it likely spanned multiple audit cycles. Why was it missed?
- The Regulator (CBSL): While the Central Bank has now stepped in to freeze dividends, the question remains: is the current "Fit and Proper" assessment for directors too focused on qualifications and not enough on capacity?
The Solution: A Legislative Ceiling
Sri Lanka can no longer rely on the "goodwill" of busy directors. To safeguard the 13.2 billion reasons why our system failed, we need:
- Hard Limits: Follow the Indian (SEBI) model. Limit directorships to a maximum of 5 listed companies.
- Time Audits: Require directors of systemic banks to disclose exactly how many hours they dedicate to board committees.
- Forensic Accountability: If a board fails in its fiduciary duty to detect gross negligence, there must be personal financial or legal consequences.
The NDB fraud isn't just an "unfortunate event." It is a symptom of a governance model that prioritizes prestige over protection. It's time to clear the boardrooms of those who are too busy to lead. In corporate governance, we call this the "Busy Boardroom Paradox"—where the prestige of a director's CV actually becomes a liability to the company's safety.