The first reaction, following the outbreak of any corporate scam, is to look for the scalp of directors of the company. Several recent instances mean that one doesn’t need to traverse too far down the memory lane. In not-too-distant past, role of the board came under scanner for a controversial related party transaction. The media& professional community raised eyebrows on the silence of Independent Directors. When a fire disaster happened in a hospital, even the non- executive Directors faced the heat and were not spared. While the role of the Board hogs limelight and comes under scrutiny whenever there is a scam or even a whiff of it, it is indeed an irony that until the enactment of Companies Act 2013, (CA 13 or the Act) there was no mechanism to systematically appraise or evaluate the board of directors.
One of the chief themes to emerge from the new company law is greater accountability, responsibility and liability of directors. An attempt has been made to make the board more accountable to shareholders, the ultimate owners of the company. Seen in this perspective, evaluation of board performance is a significant step towards making the accountability more transparent and visible.
Tone at the top is a cardinal principle for good governance and is recognised by global standards of governance including COSO 2013. An effective board ensures that there is a right tone at the top and the management works in the long-term interests of stakeholders. Regular and rigorous self-evaluations help a board to assess its performance and identify and address potential skill-gaps in the boardroom.
Boards are very complex structures confronted with formidable challenges. The fast changing business environment means that directors cannot sit back and rely on experience alone. ‘Oversight’ coupled with ‘foresight ‘is the need of the hour.
Board evaluation, was considered as a good corporate governance practice and it was effectively a voluntary initiative. The erstwhile Clause 49 of the Listing Agreement provided for performance evaluation of non-executive directors, as a non-mandatory requirement.
The Companies Act, 2013 mandates formal annual evaluation of the Board, its committees and individual directors. The new company law has followed the approach of UK corporate governance code in terms of disclosure and other aspects.
In case of a listed company and every other public company having paid-up share capital of 25 crores or more, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors, has to be made in the Board’ Report.
The Nomination and Remuneration Committee has been entrusted with the responsibility of identifying persons for Directorships and positions in senior management and carrying out performance evaluation of directors. In the entire review and evaluation exercise the NRC is mandated to play a crucial role of facilitating the entire process.
The code of conduct of independent directors as given in schedule IV of the Act, casts upon them a duty to review the performance of non-independent directors, chairperson and the board as a whole. Independent Directors can play an important role in assuaging the concerns & apprehensions of directors and spearheading the evaluation process.
The Board has an important role to play in setting up the whole framework and ensuring its effectiveness. Apart from the responsibility of the board to do an evaluation under CA 13, one of the key functions of the board under the SEBI Listing Regulations 2015 is to monitor and review the board evaluation framework.
Internationally, there are three prevalent modes of evaluation:
The UK code of corporate governance requires large companies to undergo an external evaluation at least once in 3 years. Irrespective of the mode of evaluation, whether internal or facilitated by an external agency, it is of utmost importance to develop trust and credibility around the process of evaluation.
The very purpose behind the introduction of performance s evaluation is to provide an opportunity for constructive feedback and meaningful introspection. Globally, the trend is to disclose the framework for evaluation along with emerging themes in the annual report. Global surveys indicate that the evaluation results are used for:
There is no uniform best practice which can be prescribed, the maturity of the board and individual directors will determine how best to deal with the outcome of evaluation process. The role of the Chairperson of the board becomes vital, and truly speaking, it is up to him / her to drive performance culture and derive maximum benefit out of this exercise. The essence of board evaluation is to improve the overall effectiveness of the ‘board of directors’ as an Institution. Evaluation of individual directors is a component of the entire process and should not be viewed in isolation.
Resistance to change is inevitable. Especially with the promoter directors dominating Indian Boards, the process is likely to encounter initial roadblocks in the form of reluctance in sharing fair views and concerns w.r.t. transparency and trust. Given the confidentiality and sensitivity associated, the corporates are treading with caution in the initial phase and taking measured steps to comply with the letter of law. However, down the line, in the next two-three years, while the process and concept matures, one expects a more robust and transparent approach.
The annual reports of listed companies for the year 2014-15 gives interesting perspectives. Some of the corporates have used structured questionnaires; there are others which have taken need based support from professional experts.
The philosophy and thought process behind performance evaluation is to help board optimize its performance, which in turn, should propel the overall growth of the organization. It provides an opportunity both for the individual directors as well the board as a whole, to do a genuine and impartial introspection. The starting point of this exercise is an honest self-evaluation, which should not be confused with a self- serving evaluation.
The government has given the flexibility to corporates by not being prescriptive about the evaluation modes, tools and techniques. The India Inc. would be squandering a golden opportunity if it were to follow a tick in the box approach and treat this purely as a compliance exercise. One hopes that the entire process would be used constructively as a developmental tool to bolster the governance quotient. The onus, clearly, is on the Corporates.
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