The road to enhanced board efficiency is far from a regulatory or compliance exercise. It requires not just structural changes in the board composition, but an overarching acceptance that other stakeholders have rights that must be asserted. Therefore, companies need to institute balanced boards with the intent of objectivity, diversity and efficiency, rather than spend their energy in merely complying with regulations.

It is in this context that many Indian companies fall short of expectations. A study by IiAS of the board composition of S&P BSE 500 companies (top 500 listed companies by market capitalisation) released today at the Directors Conclave on Corporate Governance organized by Vahura, reveals that most Indian boards follow the regulations in letter, but not in spirit. This is evident from the prolonged tenure of independent directors, low attendance levels, poor gender diversity, and the unwillingness to professionalize the management. Companies clearly need to do more – and those that do, will build trust and comfort with their stakeholders.

IiAS’ evaluated the board composition on its objectivity and independence, its experience, the quality of board oversight on its CEO, the level of involvement of directors, and the appropriateness of its size. Our summary findings presented below:

Objectivity: In order to ensure objectivity, companies must have adequate representation of independent directors. However, Indian companies fare poorly in this regard. 139 companies in the S&P BSE 500 have less than 50% independent directors. Further, 21% independent directors have had a tenure of more than 10 years, which impedes their ability to be neutral and unbiased. Currently, 17% of the boards are non-compliant with board composition norms. If all these vintage directors (tenure>10 years) are considered non-independent, the non-compliant boards increase to 54%. Companies need to address this issue in order to improve investor perception about the quality and objectivity of the board processes.

Experience: A strong board requires members who possess the adequate experience, expertise and credentials to serve as an effective sounding board for the management. While all companies in the S&P BSE 500 comply with the prescribed minimum age for directors (21 years), 57 companies have directors aged less than 35 years on the board. By virtue of their young age, most of them have limited experience in scaling up large businesses, which may constrain them from effectively discharging their advisory and oversight functions. Of these directors, a large proportion (75%) belong to the promoter families. Companies, and especially their independent directors, need to be more discerning in appointing family members on the board, and ensure that such directors have sufficient expertise to shoulder their responsibilities.

Level of Involvement: Being present on too many boards can reduce the directors’ effectiveness in monitoring and advising senior management. In India, the average director has 3.1 outside affiliations, which is reasonable and within regulatory limits. Companies are now required to conduct mandatory board evaluation, which will compel directors to be more mindful of their role as a fiduciary. But despite the regulatory directive, the study finds that 16% of directors attended less than three-fourth of board meetings in the last financial year. This indicates poor commitment levels. Companies must push absentee directors to improve their attendance levels or ask them to step down from the board if they are unable to do so.

Board oversight: The ability of the board to maintain an objective oversight on the company’s actions is critical to the success of any corporate governance structure. If the same individual serves as the company’s CEO as well as its Chairperson on the board, the objectivity might be hindered as the board agenda will be driven by a single individual. In India however, a large number of companies (47%) have chairpersons in executive capacity. Only 16% of the chairpersons are independent. Further, in family run businesses, 83% chairpersons are members of the promoter family. This deprives the board of an impartial and unbiased perspective on the company’s operations. Companies are also unwilling to professionalize the management to mitigate some of these risks: the study finds that only 71 of the 333 (21%) family owned businesses in the S&P BSE 500 have professional managements. Diversity: In terms of gender diversity, Indian companies have done well in the last one year. During this period, 296 (59%) companies have appointed a woman director on their boards. It would have been ideal if they were all also independent (even though there is no such regulatory requirement). However, more than one-fifth of the women directors belong to promoter families - which may not significantly add to board diversity or reduce the risk of group-think. 37 companies are yet to appoint a woman director. Such companies clearly need to do more. Promoting women to leadership positions within the board will send a clear message that they value diversity of thought and expertise.

Board Size: The optimal board size for any organization will depend on the depth and complexity of issues it is faced with. A lean board tends to be more adaptive and agile, but reduces the scope for divergent viewpoints. On the other hand, consensus on critical issues may be difficult to achieve if the board size becomes excessively large. By and large, companies in the S&P BSE 500 have board sizes of between 6 to 10 directors, which is in the optimal range and can contribute to effective decision making. But some companies tend to have an inflated board size in order to accommodate family members. This skews the board size and is not in the best interest of the company and its stakeholders.

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