The
Companies Act 2013 and the Securities and Exchange Board of India’s (SEBI)
(Listing Obligation and Disclosure Requirements) Regulation 2015 mandate Board evaluation,
which is the evaluation of the functioning of the board of directors (hereafter
Board), evaluation of the chairman, individual directors and the board process.
Companies Act requires that every listed company and every other public company
having a paid up share capital of twenty five crore rupees or more at the end
of the preceding financial year shall include in Board report a statement
indicating the manner in which annual Board evaluation has been made.
Board
evaluation is an effective tool for improving Board performance. It is a kind
of self-evaluation. Like any other knowledge group, the Board evaluates its
performance periodically to identify areas for improvement and develop an
action plan to improve the performance. Another objective of evaluating
individual directors is to identify under-performing directors and to weed them
out. A weak chairperson should also be removed.
In
January 2017 SEBI has issued Guidance Note on Board Evaluation. The preamble
says that the objective of the Guidance Note is to provide guidance to those
listed companies, which do not have much clarity on the process of Board
evaluation. Board evaluation is new in India, but it is decades old in USA,
Europe and some other parts of the world. Literature on Board evaluation is
easily available. Any company that is serious about Board evaluation can
develop and implement the process by going through the available literature.
Moreover, there are professionals who advise companies in developing and
implementing the process of board evaluation. Therefore, the lack of clarity cannot
be a reason for not implementing Board evaluation in the right spirit. Those
companies that have not implemented Board evaluation in true spirit are not
serious about it.
Board
evaluation is meaningful only if the Board is empowered for doing what it is
expected to do – to guide and advise the executive management (the CEO and
his/her team), monitor it in order to protect the interest of non-controlling shareholders
(also called minority shareholders) and facilitate net working with external
resources. Board evaluation improves the performance of even those Boards,
which focus on the advisory role rather than the monitoring role.
It
is wrong to assume that every public company is motivated to develop and
implement an effective Board evaluation process.
In
family-managed companies the dominant shareholder monitors the executive
management closely and does not require the Board to monitor it. In most of
those companies, the dominant shareholder appoints and if necessary, removes
the CEO, Key Management Personnel (KMP) and the members of the senior
management team. The Nomination and Remuneration Committee (NRC) does not play
any significant role in this regard, although the Companies Act has made NRC
responsible for the same. Similarly, the NRC does not play any significant role
in the appointment and removal of directors and in succession planning. NRC approves
the decisions of the dominant shareholder. In those companies, the dominant
shareholder takes strategic decisions, as he/she understands the business and
its environment much better than independent directors and relies on his/her
entrepreneurial spirit and business acumen, rather than on the collective
wisdom of the Board. Minority shareholders expect the Board (read independent
directors) to protect their interest from the opportunistic behaviour (e.g.,
tunneling of funds for self-enrichment) of the dominant shareholder. But in
those companies, independent directors are not independent, as they are selected
by the dominant shareholder and enjoy the office at his/her pleasure. The
dominant shareholder does not want an effective monitoring by the Board.
In
most family-managed businesses, the Board is an ornamental Board. The dominant
shareholder selects independent directors from professionals drawn from diverse
fields to add to the ornamental value of the Board. The Board discusses routine
matters (e.g., performance evaluation) at great length, spends less time on
important issues (e.g., strategic issues) and ultimately approves whatever
proposal is presented before it. Ornamental Boards do not have an urge to
improve performance. The dominant shareholder does not see any value in Board
evaluation. The focus is on family governance and family values.
Some
family businesses, which operate in a volatile, uncertain, complex and ambiguous
(VUCA) business environment, or want to attract institutional investors and
foreign capital, are motivated to adopt good corporate governance practices and
build an effective Board. SEBI Guidance will help them to improve the Board evaluation
process. Others will use it as a reference point just for preparing the
disclosure in the Board report without implementing Board evaluation seriously.
