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Performance Evaluation of Board of Directors

April 21, 2017[2017] 80 taxmann.com 226 (Article)
172 Views

Rajesh Karunakaran

CS

Background

1. Board Evaluation provides the board with an opportunity to review the skills, experience and diversity and openly discuss whether the plans in place are adequate for the long-term success of the company. Investors are increasingly concerned about board quality and review mechanisms in accordance with best Industry practices. Board evaluation is increasingly acknowledged as a vital process for improving board performance and dynamics.

The Regulatory Requirement

2. The Companies Act, 2013 and the SEBI LODR provide for several mandatory provisions for Board Evaluation on who is to be evaluated, who is to evaluate such persons, disclosure requirements, etc.

Main provisions under the Companies Act with respect to Board Evaluation

3. Section 134(3), Section 178(2), Schedule IV: Code for Independent Directors and Rule 8(4) of the Companies (Accounts) Rules, 2014.

Main provisions under SEBI LODR with respect to Board Evaluation

3.1 Chapter II- Regulation 4(2)(f)(ii), Chapter IV - Regulation 17(10), Regulation 25: (3) and Schedule II (Part D) (A) Role of Nomination and Remuneration Committee)

Rationale behind board evaluation

3.2 Even though meeting regulatory and legal requirements may be the basis for undertaking this exercise, the primary driver should be a desire to build a high performing board equipped to anticipate and overcome the challenges ahead. Evaluations also provide an opportunity to survey directors about the issues that they believe should receive more attention in the board and committee meetings and in board materials. The areas of consideration for board and committee effectiveness provide the basic framework for evaluation.

However, it will be unfair to talk about Board Evaluation unless the Board as a whole and Independent Directors individually and collectively have had a reasonable opportunity to perform, given the inherent limitations in the current corporate board platform.

4. Performance enhancing steroids

4.1 Induction Programme for new Directors

The Companies Act 2013 requires Independent directors to exercise due care and diligence in discharging their responsibilities. Nevertheless, an area which is constantly ignored by the Board is the setting-up of a tailor made induction programme to enable new directors to exercise their duty of care and participate fully in board activities at the earliest opportunity. Fact that director's induction is an overlooked board process is often due to the assumption that new board members who have already been on a board of other companies will already "know the duties and responsibilities", while those without any previous experience can "pick up the threads while on the job".

Of those organizations that do induct their directors, many believe that induction can be achieved in a single short session explaining everything that the organization has done, is doing and is going to do in the future along with a tour of the head office and its manufacturing facilities. While such an overview of the organization is vital, much of this information should have been provided before the new member joined the board, as part of the director's due diligence.

Rather than being seen as a one-off event, the induction process should be spread over a longer period of time. To help new board members hit the ground running, the process can, in fact, take from a few months to as long as six months for a more complex organization with multiple business units or overseas operations. The process should, at the very least, involve getting acquainted with the vision, business, strategic direction, financial matters, values, code of ethics and conduct, as well as best Corporate Governance practices and other key policies and practices of the company ;Meeting with the Chairperson; Meeting with fellow directors; Meeting the CEOs and other key executives; Visits to operational sites, if practicable; Product/service familiarization; Industry/competitor information, etc. .

By way of an introduction, every newly inducted Director should be presented with a corporate dossier which traces the Company's history from its inception and gives a glimpse of key events as it has unfolded.

Ongoing Familiarization Programme

4.2 Even though an Induction Programme is essential for an incumbent Director, yet equally important is a ongoing familiarisation programme . As part of board discussions, presentations on business units should be made to the directors from time-to-time. Company should arrange quarterly presentations on business performance, operations, market share, financial parameters, working capital management, fund flows, senior management change, major litigation, compliances, subsidiary information, regulatory scenario, etc. Site visits to various plant locations, if required, should be organized for the Directors to enable them to understand the change in operations of the Company. Each director of the Company should have complete access to any information relating to the Company. Independent Directors also should have the freedom to interact with the Company's management. They should be given all the documents sought for by them for enabling a good understanding of the Company, its various operations and the industrial segments of which it is a part. Further, the separate meeting of Independent Directors should be held once in a Financial Year to discuss matters pertaining to the Company's affairs and put forth their combined views to the Chairman. At every Board meeting besides reporting on compliance with applicable laws, a regulatory update on significant changes in laws applicable to the Company should be provided to the Directors.

The Role of the Chair

4.3 Director's induction is the responsibility of the Chairperson assisted by the Company Secretary. The Chairperson's close involvement in Director's induction and ongoing director's development can do much to build directors' knowledge and ensure than the board has an appropriate mix of skills and experience.

It is up to the Chairperson to create an atmosphere conducive to effective decision making process. Therefore, the Chair should communicate what he or she expects of new directors during meetings as well as outside the boardroom. Setting a climate of respect and civility in the boardroom is vital for conducting of meetings and there should always be a shared expectation among directors that they will behave fearlessly and openly express then views to management. Clearly articulating the board's expectations of a new director's behaviour in the boardroom from the outset will allow the director to fit into the boardroom and fit into organizational culture more easily.

Mentoring by Lead Independent Director

4.4 A new director may not feel comfortable voicing has confusion to the chair. So, to further enhance the induction process, it is recommended that a new board member be mentored by an incumbent director or directors. While the new director can listen attentively to management's presentations and read all the information they are given such things as meeting procedures and processes, there are also unwritten board norms and behaviours that can best be communicated by a fellow director. The mentor can fill in any information gaps and be available to answer questions a new director may hesitate to ask the Chairperson or to raise in a board meeting. Mentoring can also help new director get to know other board members more quickly.

The mentor can then provide feedback to the Chairperson on the board's induction process to address any information gaps or other areas that may have been overlooked, which will be of benefit to future board members.

Board evaluation should be a stimulating process:

5. Board evaluation should not be a mere function of compliance with the regulations; instead it should be a stimulating process for the board to acknowledge and reflect on its current framework, its strong and weak points, on opportunities to improve its functioning and performance. Boards will effectively address any limitations or weaknesses only when they acknowledge what these exist. An effective and well-governed board is willing to proactively consider the findings of the evaluation, holding open discussion of the findings, identifying issues for improvement and trying to enact improvements. Communicating the outcome of the board assessment process is an important means for the follow-up implementation and for enhancing dialogue with the stakeholders on board matters.

Benefits of board evaluation

6. Unless the Board is made the owner of the process and see evaluation as a constructive exercise, the success of this process is doubtful. It should be a forward-looking endeavour with an effective follow up system. It should not be used for playing blame games or as a validation of the existing practices in the company. Going through the motions or treating it as a tick box exercise will not help.

It has long been established that markets reward well governed companies. Hence, a good board with a learning attitude, is important. A meaningful and productive Board evaluation process gives us good returns for a modest investment of time and money. In addition to identifying strengths and areas of improvements at the top, it helps in improving the effectiveness of the Board as a collective entity.

Conclusion

7. Board evaluations, if conducted properly, can contribute significantly to performance improvements on three levels - the organizational level, board level and at individual director's level. Boards who commit to a regular evaluation process find benefits across these levels in terms of improved leadership, greater clarity of roles and responsibilities, improved teamwork, greater accountability, better decision making, process improved communication and more efficient board operations.

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