OWNERSHIP PATTERNS AND RISK PROFILES IN SRI LANKAN PUBLICLY TRADED COMPANIES

Abstract

Corporate governance has emerged as a critical concern in the wake of numerous corporate scandals and global financial crises. A series of major corporations across the United States, Europe, and Asia faced unprecedented challenges during these crises, leading to widespread repercussions. In the context of Sri Lanka, a country with its own share of business catastrophes, particularly in the Banking and Finance Industry from the late 1980s through to 2008, the importance of corporate governance has been underscored by scholars and experts. Researchers have attributed corporate collapses and financial crises to the inadequate implementation of corporate risk governance measures. Drawing on the foundational work of Jensen and Meckling (1976), it is evident that corporate governance, encompassing elements such as board structure, compensation structure, and ownership structure, plays a pivotal role in determining various aspects of a firm, including its risk profile, cash flows, size, and regulatory compliance. The interplay between these variables significantly influences a firm's overall risk and performance. Moreover, it has been highlighted that different ownership structures have varying implications, with the potential to either mitigate or exacerbate agency conflicts within organizations. In response to the far-reaching impacts of crises and corporate collapses, regulatory frameworks have been established in countries like the United Kingdom and the United States. These frameworks prioritize the roles of corporate governance and risk management in enhancing financial stability. For instance, the Financial Reporting Council (FRC) in the UK released guidelines in 2011 under "Boards and Risk," emphasizing the importance of corporate governance and risk management. Similarly, the Sarbanes–Oxley Act of 2002 in the USA introduced corporate governance reforms that provide explicit guidance on internal control mechanisms and board attributes aimed at improving corporate accountability and reducing the risk of firm insolvency. However, in the context of Asian countries, including Sri Lanka, there has been a notable absence of regulatory frameworks that address the role of corporate governance and risk management, particularly within the purview of Boards and Risk. Ownership structures, encompassing various types of shareholders, including individual, family, state, professional, government, foreign, and public investors, are integral to the corporate landscape. Ownership structures are intrinsically linked to firm risk-taking behavior, with significant implications for a company's risk profile and strategy. This research seeks to delve deeper into the relationship between corporate governance, ownership structures, and corporate risk-taking, providing insights that can inform future regulatory frameworks and corporate practices in Sri Lanka and other Asian countries. By understanding the intricate dynamics at play, organizations can better navigate the evolving landscape of corporate governance and risk management.