Institutional EYE

Commentary on Corporate Governance Issues

The Ides of March: a testing time for board members

March 21, 2017

 

India belongs to the small but growing group of countries which have made board evaluation and its disclosure mandatory. March is when most boards undertake this exercise.  

 

Being far removed from the minutiae, three items in the Companies Act 2013 agitated boards when this Act was rolled out: having a women director on the board, spend on corporate social responsibility (CSR), and board evaluation. India Inc can always do more, but it has progressed on all three fronts. I will visit CSR and women directors sometime in future, and focus on board evaluation for now.

 

First the need for board evaluation itself. The board and its functioning has always been a black box. While boards in India have had a self-imposed sense of responsibility, the largely unstructured performance feedback weakens the boards’ accountability. It will not be an exaggeration to say that often board members themselves were unclear about what is expected off them. Are they responsible for strategy or compliance or are they informal advisors to the patriarch on the division of the groups assets? If the directors are unsure about what their roles is, can the regulators and shareholders sitting outside the room looking in, be in a better position to judge their contribution and effectiveness? So, its best have the people inside the room evaluate themselves, and share this with a wider constituency.  Bringing in a mandatory board evaluation has ensured that there is a more comprehensive and structured manner of evaluating boards.

 

After an extended period of resistance, once it became apparent that they need to evaluate themselves, Boards have started taking this exercise seriously. Evaluation is now being undertaken at two levels - at individual director level and at an overall performance level of the board and board committees.

 

Indian companies are well-versed with valuation of individual performance – but most of the meaningful performance evaluations within an organization have been largely linear (by supervisors or reportees). Board evaluation, to that extent, is a peer group evaluation and between individuals some of who tend to hold considerable stature – therefore, board members are still hesitant to be ruthlessly objective about their evaluation of others.  Evaluating the performance of the board as a whole is a bigger challenge - because it involves not just individual performances, but an assessment of the performance of a group, which has several more dynamics to its functioning beyond individual competence.

 

Based on conversations and a recent survey of board evaluation practices and disclosures undertaken, the following items stand out. First that the focus should be on the qualitative feedback received and not on the quantitative. Do not expect a 65-year-old board member’s behavior will change just because s/he has been rated 6/10. At a recent conference, one of the board members shared that all directors decided to give each other 9/10. In this context reading the board evaluation data is a challenge. So, do not expect these marks to communicate much. The evaluation should focus on the qualitative aspects – assessing board processes, board dynamics, skill and knowledge enhancement, training requirements, and others. These will do more to strengthen the board practices and make them more effective – which is what investors want.

 

Two while for now evaluation may appear to be a ‘tick the box approach’ as boards start to using evaluation, expect the learnings to steadily go up and boards drawing valuable lessons. You can view the full report by following this link:http://www.iiasadvisory.com/single-post/2017/03/08/Board-Evaluation-in-India-Disclosure-and-Practices-2015-16. Expect the evaluation practices and disclosures to become more sophisticated with the passage of time.

 

A recent SEBI guidance note builds on this experience and answers the more frequently asked questions. It is what it says - a guidance note - and does not get very prescriptive. All board members should be encouraged to read this.   (http://www.sebi.gov.in/cms/sebi_data/attachdocs/1483607537807.pdf)

 

Three, the qualitative feedback helps identify not just the process gaps but also the skill gaps. A board member at an engineering company told me how other than management, none of the other board members understood engineering issues. This enabled the management to push through its agenda without a meaningful debate. The independent directors recognizing this limitation pushed for a person with engineering skills to join the board leading to a more informed discussion on the board.

 

Four, Public Sector Companies (PSU’s) are exempt from disclosing board evaluation even as the Ministry is supposed to undertake it. Even if that of individual directors is not shared, there is strong merit in the report regarding the performance of the board as a whole and how the board can be strengthened. 

 

Jeffery Sonnefeld from Yale said “I can’t think of a single work group whose performance gets assessed less rigorously than corporate Boards.” We are nowhere close to this expected rigor, but by being among the handful of countries that has made board evaluation and its disclosure mandatory, we no longer have an excuse.

 

A modified version of this column by Amit Tandon appeared in Business Standard on 21 March 2017. You can read to column by clicking this link or typing the following url: http://www.business-standard.com/article/opinion/amit-tandon-a-testing-time-for-board-members-117032001268_1.html

 

 

 

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