07 September 2023: On 05 September 2023, Institutional Investor Advisory Services (IiAS) released the third edition of its study on board composition and structure of the NIFTY500 companies at Vahura OnBoard’s roundtable ‘The Great Board Refresh 2024’.
Our study assesses companies on their readiness to meet the 2024 regulation thresholds – in 2024, boards will be required to refresh their slate of Independent Directors. On 31 March 2023, the NIFTY 500 had 4,724 board seats, of which 2,441 seats were filled by Independent Directors – and of these, 375 board seats were filled by Independent Directors with a tenure of 10 years or more (tenured Independent Directors). The grandfathering of previous tenures of Independent Directors comes to an end in 2024 and these tenured Independent Directors will have to cease their positions.
Corporate India has already begun a steady refreshment of boards and board independence has increased over the past three years. Of the NIFTY 500, 198 companies had at least one tenured Independent Director on their board on 31 March 2023, down from 253 on 31 March 2021. IiAS considers those with a tenure of 10 years or more as non-independent – factoring that in, 253 of the NIFTY 500 companies have independent directors comprise 50% or more of board size on 31 March 2023, up from 174 on 31 March 2021.
In the run up to 2024, tenured independent directors will exit the board and a fresh set of appointments is likely to bring better objectivity. While several companies have had a steady path to rotating their independent directors, there are several others that are likely to have to make material changes in one fell swoop. For such companies, ensuring board stability and maintaining institutional memory will be key. In such circumstances, companies may consider continuing their tenured Independent Directors in a non-executive capacity for a year or two, to handhold the new board.
“Independent Directors are the pillars of strong governance and for safeguarding the rights of minority shareholders. Hence, there's a growing emphasis on the selection and reappointment of Independent Directors, with a keen eye on their skill sets.”, said Ms. Shweta Rao, Head, Vahura OnBoard.
As tenured Independent Directors are required to cease their positions, boards must use the vacancies to build greater diversity and board independence.
Diversity on boards has been an agenda for almost all markets; for India, the regulation has built in a simple yet narrow measure of diversity – gender. Despite the improvement in women representation on boards, at 18.2% women representation on NIFTY 500 boards, India lags behind several markets. Most of corporate India continues to focus on the number of women rather than thinking of diversity as a function of board size. Diversity brings in a balance in decision-making, and therefore, boards must consider targeting at least 30% of the composition as women.
Because a dominant proportion of Indian companies are controlled by families, independent directors will typically aggregate about 50% of all directorships. But composition in terms of statistics is not sufficient – boards must evaluate if they have the necessary skills required for the next decade. With changing environments, technology, geopolitical landscapes, and stakeholder expectations, boards will navigate a different world than before. To this extent, boards must find the right mix of the traditional skill sets (like finance, law, and human resources) and newer skill requirements (technology, sustainability).
“As regulations get more prescriptive, businesses become more complex and investors more demanding, building a board that is fit-for-purpose is going to be more challenging”, said Ms. Hetal Dalal, President and COO, IiAS.
Stakeholders’ expectations of boards have increased manifold, as have the expectations of regulators. Directors now have greater scrutiny and accountability for governance failures. The next decade will only intensify the responsibilities for board members. Therefore, ensuring stronger oversight on the management and building strong governance structures must be focus for boards from 2024.
Read the full report here.