In the face of a number of corporate governance failures, Indian companies need to demonstrate a relentless focus on governance as they grow. Evaluating the effectiveness of the board should be central to this, rather than merely a tick-box exercise.
The Companies Act 2013 of India mandates that boards need to be evaluated regularly. This is a welcome and necessary requirement for governance purposes. In early 2017, the Securities Exchange Board of India (SEBI) issued useful new guidelines covering the methodology, scope and parameters of board evaluation (see Table 1). SEBI could soon make some of these guidelines mandatory1, if it believes that boards are not being evaluated appropriately.
More often than not, board evaluation is currently carried out largely to meet compliance requirements. However, with wider shareholding and growing activism from institutional investors, and with many corporates going global, the increasing importance of corporate governance and professionalisation of boards means that evaluation in India should evolve into a more robust process, rather than simply a compliance exercise.
The SEBI guidelines offer a useful guide for boards that want to conduct evaluations not just in the letter, but in the spirit of the law.
Table 1. Summary of SEBI board evaluation guidelines
|Coverage||Criteria for evaluation|
|Evaluation of board as a whole, committees of the board, individual directors and chairperson||Board to be evaluated as a whole on competency, diversity, qualifications and experience|
|Frequency, objectives and criteria for evaluation||Quality of board meetings - frequency, notice, agenda circulation, time and quality of discussions|
|Feedback to evaluated persons||Evaluation of the performance of management|
|Action plan based on the results of the evaluation||Delineation and clarity on the functions of the board and its committees|
|Disclosure to stakeholders||Adequacy of focus on strategy, risk management, governance, company culture, succession plan, etc.|
|Responsibility for board evaluation||Evaluation committee’s composition, effectiveness and independence from the board|
|Periodic review of the evaluation process||Individual directors to be evaluated on qualification, experience, competency, people skills, contribution, commitment, integrity and independence|
We look below at some of the main areas of evaluation suggested by the SEBI guidelines and the key issues for boards to consider to ensure an effective review.
SEBI has not made specific recommendations on the nature and extent of board diversity. While most boards acknowledge that diversity is important, 88% of the 2,500 senior executives of mid to large businesses in 36 countries interviewed for the Grant Thornton International Survey2 said that boards need to do more to encourage diversity.
One crucial dimension to this debate in the current environment is whether boards have adequate digital diversity. With technology playing such a disruptive role to traditional business models, it is critical that all boards include individuals who can help them be digitally prepared and guide the company towards its future digital strategy.
Setting corporate culture and values at the top
Corporate culture is the bedrock of good corporate governance. A combination of best-in-class compliance and purpose-driven culture will be critical to good governance in the future. The Grant Thornton International Business Report (IBR)3 highlights the importance of establishing internal controls that address employee behaviour as the first step that boards should take to strengthen organisational culture.
Mentoring the next generation board
To attract the best available talent, boards should cast their net wide to identify potential candidates as early as possible, both within and outside the organisation. Indian companies could also perhaps learn from the experience of other countries in mentoring future board members, for example emulating the New Zealand Institute of Director’s Mentoring for Diversityscheme4 model of mandatory mentoring programmes, which encourages cross-fertilisation of ideas across industries and borders.
Impact of evaluation on board composition
It is important for companies to consider what the ultimate impact of an evaluation of the board might be. For example, can it be used to add or remove directors? Do directors have the power to add or remove directors or is this the right of shareholders?
Companies also need to think about how they evaluate the performance of a chairman or managing director if he or she is part of the owner group or is a significant shareholder.
A further key question is the appropriate level of disclosure to shareholders about the evaluation. Can shareholders use it to make decisions on the appointment of directors?
We believe it is more appropriate for boards to be evaluated by external experts than internally, to ensure independence and objectivity. Unlike the SEBI in India, the Financial Reporting Council (FRC) in the UK has mandated evaluation by an external party once every three years.
Putting good governance into practice
Considering the issues above as part of developing their board evaluation frameworks can help Indian companies find the right solutions. Putting them into practice will ensure that the benefits of regular evaluation translate into action, good governance and performance.
The views expressed in this article are those of the authors: Harish H V, Partner and Bhanu Prakash Kalmath S J, Partner, Grant Thornton India LLP.
- SEBI, Guidance note on board evaluation, January 2017 (PDF)
- Grant Thornton International Ltd, Grant Thornton International Business Report (IBR), August 2015
- Grant Thornton International Ltd, Grant Thornton International Business Report (IBR), February 2016
- New Zealand Institute of Directors, Mentoring for diversity, 2017