Abstract:
Vanik Incorporation Ltd. in 1998 and Pramuka Savings and Development Bank Ltd. in 2002 in Sri Lanka
were collapsed suddenly under the background of mismanagement, unsound, improper, and imprudent
practices at so called banks. These failures called for introducing best practices on corporate governance
and, as a result of that, Institute of Chartered Accountants of Sri Lanka and Security and exchange
Commission jointly introduced the “Code of Best Practices on Corporate Governance in 2008. The purpose
of this study is to measure the level of compliance of Sri Lankan Listed Companies with best practices of
corporate governance and its impact on the financial performance of the corporates. After excluding number
of companies under several industries due to some specific reasons, a sample of 60 Companies for the study
was selected randomly based on the probability proportionate sampling technique from the listed companies
registered in the Colombo Stock Exchange as at 31st of August 2010 for the period of two years: 2008/09
and 2009/10. The secondary data on board structure (independent variables) were collected from the annual
reports through a composite index which was constructed being based on the code of best practices on
corporate governance (2008). Financial impact, the dependent variables were measured through Return on
Assets (ROA) and Return on Equity (ROE) which were collected from the audited financial statements of
each company. The level of compliance with the Code was measured and analysed being based on the
descriptive statistics of Mean, Maximum and Minimum values and it was found out that the level of
compliance was around 58% and 70% in 2008/09 & 2009/10 respectively. Further, correlation and
regression analysis were performed to identify the impact of the compliance towards performance and all
the governance variables showed significant positive associations with the performance variables in 2009/10
whereas none of the governance variable demonstrated a significant positive relationship with ROA and
ROE in the financial year of 2008/09. Thus, it is concluded that when corporates improve their level of
compliance with best practices on corporate governance, it leads to improve the financial performance of
listed companies in Sri Lanka.
