Saturday, April 11, 2015

Board's Responsibilities - Reserve Bank of India's prescription

The Reserve Bank of India (RBI) in its First Bi-Monthly Monetary Policy Statement, 2015-16 has emhasised that the board of directors should focus on strategic issues. It observes that Boards spend time on routine matters and do not focus on strategic issues.

It has mandated that Board's of banks should focus on the following seven critical themes: business strategy, financial reports and their integrity, risk, compliance, customer protection, financial inclusion and human resources. Banks' Boards shall determine other list of items that they would deliberate.

What is true for Board of banks is also true for Boards of non-banking, non-finance companies. All the themes, other than financial inclusion, are important for all the companies. However, meaningful deliberation on all those themes requires Board's independence and competence. Unfortunately, most Indian Boards lack both. Therefore, they prefer avoiding discussion on those themes and spend time on trivial issues. Promoters of private companies are happy with the situation. They prefer to have a 'rubber stamp board'.

The situation has to change. Will it change? I am hopeful.

Promoters and CEOs will have to take initiatives. The first step is to invest in the training of directors. The return on that investment will be much higher than the cost of capital. The Board will start contributing in creating value. The second step is to empower the Nomination and Remuneration Committee. Empowering the Committee in no way will take away the discretion of the promoter and management. It is unlikely that the Committee will not consult the promoter and management in recommending appointment of directors, Key Managerial Personnel and senior management. Empowering the Committee will ensure that collectively the Board is independent and competent.

In days to come, some promoters and management will see the benefits of empowered Board. Those who will continue to work  with a dumb Board will miss the opportunity to understand how empowered Boards create value. 

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