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May 2007 Rating SummaryThe rating of Diesel & Motor Engineering PLC (Dimo or ‘the Company’) reflects the thinking of the Sri Lankan markets as they strive to implement formal governance requirements for companies. As such, the methodology takes into account both international best practice and the direction of Sri Lankan governance regulations. This is evidenced by the consultation that occurred between The Institute of Chartered Accountants of Sri Lanka (ICASL) and the Securities and Exchange Commission in consultation with the Colombo Stock Exchange (CSE). This spearheaded the joint initiative to formulate standards on corporate governance for mandatory compliance by companies listed on the Colombo Stock Exchange. These standards have been incorporated into the listing Rules of the Colombo Stock Exchange.Dimo has earned an overall rating of 6, which reflects its proactive approach to implementing sound corporate governance practices within the Company. There is a well balanced board with a good mix of internal professionals, non-executive and independent Directors to drive the Company forward and efficient management processes to ensure internal control. Dimo has two significant shareholders, the Pandithage family which own approximately 27% of the Company and the Hayleys Group who have a similar shareholding. In Dimo’s case, the two major shareholders have provided stability, strength and depth to the Board as well as enhancing both business and governance processes. The Company Chairman/Managing Director/ Chief Executive Officer (Chairman/MD/CEO), Mr. A.R. Pandithage has successfully managed the complex issues associated with the aspirations of the founding family members and those related to ensuring the long-term commercial viability of what was essentially a family owned and run business through the introduction of external professional management. In our opinion, the present ownership structure has had a positive benefit to the Company’s minority shareholders. Dimo has a sound understanding of good governance practice, is committed to open an ethical business, and is striving to improve its governance practices to further embed these into the organisation. The Chairman/MD/CEO has been pragmatic in his approach to raising governance at Board level to ensure that all parties can be successfully accommodated. The Company needs to develop a transparent ethical policy and code of conduct that is accompanied by descriptions of how policies are communicated and what compliance monitoring instruments are in place. Equally, strong risk management policies and systems need to be put in place and embedded throughout the Company’s operations. In the rating we looked carefully at those areas where a dominant shareholder can exert undue influence. The combined role of Company Chairman and Managing Director does raise concerns in this regard. While the Company had sound reasons at the time to pursue this structure, it needed to provide a transparent justification for doing so including the provision of some time frame by which it would return to a more usual management structure. However, no evidence could be found to suggest that the Company is acting against the interests of the public minority shareholders in this matter. The overall assessment of the Board of Directors is high but additional formal, written policies, procedure would increase clarity allowing for even greater confidence in the way the Board operates. The Company’s minority shareholders are generally well catered for. The Articles of Association define basic shareholder rights and timely and sufficient information in order to attend and actively participate in the AGM is provided. The Audit Committee responsibly carries out its role of ensuring that the interests of shareholders are properly protected in relation to financial reporting and internal control. Overall financial disclosure is considered sound and governance disclosure is generally good.  Det Norske Veritas 21st May 2007 |
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