Why the best managed boards are really the best
A critical aspect of any study is to identify a set of practices and policies that other organizations can learn from and replicate. The Aon Hewitt-Mint Best Managed Boards Study had the same express objective of identifying the organizations that reflect the best practices in board governance and through it manage sustainable value generating companies. However, as we went through this exercise, we realized the inherent challenges in identifying any real “best practices” that organizations could emulate. It was a gradual discovery (or, may be, the confirmation of a suspicion) that processes and practices have no way of driving good governance and, at best, can be enablers. Good governance naturally lay in the intent of the individuals and organizations. However, we did discover a pattern in the way the best-managed boards approach the whole aspect of governance as opposed to the rest.
While independence truly lies in the minds of the individuals concerned, the best-managed boards display a focus on ensuring that the constitution and structure of the board as well as the associated process provide a strong framework for ensuring independence. At the very outset, these organizations ensured that the process of selection of independent members to the board was driven by board committees that were constituted primarily of independent directors. The chairman/promoter was consulted, but the decision making was driven largely by this committee. We found our best-managed boards give a lot of importance to the role of a lead independent director. This individual had a clearly defined role of consolidating opinions and reflections of the other independent members of the board and putting forward, at all times, an unbiased point of view to the management/promoter group. These organizations provided their lead independent director with formal opportunities to convene meetings with only the independent members of the board, and also allowed them to interact with the management team directly without the presence of the executive directors. There was also a clearly articulated focus on the rotation of the board members, not only to infuse fresh thinking, but also to consciously uphold the independence of the individuals.
The best-managed boards seem to actively drive diversity through the nature of skill sets that are represented on the board. Traditionally, a lot of Indian organizations have had three kinds of skill profiles constitute the majority of the independent directors—accounting professionals, lawyers and retired government officials. While there are obvious reasons for why this was so, we found our crop of best-managed boards structure their boards based on the nature of the business and, consequently, the kind of skill sets that the business would derive value from. We found these organizations have at least five different kinds of professional backgrounds represented on the board—and, in most cases, no skill set was found in two individuals. The other aspect about diversity in thinking within the board was driven by these organizations through a defined process for director rotation. Unfortunately, gender diversity still remains an issue across most boards, and not many of our best-managed boards had any gender diversity.
Focusing on minority stakeholders
In the Indian context, where a bulk of the market capitalization is managed by promoter-driven organizations, a structured focus on the minority shareholder perspective becomes an important aspect of ensuring good governance. This is naturally an intangible dimension in the governance structure. However, we found the best-managed boards drive this through a set of very tangible means—while some had a stated policy of evaluating all the decisions from the perspective of the minority shareholders, at its most basic level this was implemented through the nature of templates that the board required the management to provide information/data on for taking decisions.
The active role of these boards in stepping out and talking to the management and the shareholders at formal or informal gatherings was also prominently seen as a way of ensuring stakeholder views were reflected. Most board members in these organizations actively participated in annual general meetings (AGMs). Finally, we found our list of best-managed boards had the lowest average turnaround time for addressing investor complaints and, quite surprisingly, the highest attendance levels across the entire study set in shareholder grievance committee meetings!
Focus on managing risk and sustainability
Risk management was a stated policy across almost all the organizations we studied, but the best-managed boards displayed a few unique characteristics in their approach towards managing risk. Like many others, they had a risk-management committee or had a clearly defined risk-management charter as a part of the audit committee. This committee met at least twice during the course of the year, and the attendance at these meetings was greater than 90% for all members. Finally, there was a clear policy towards evaluating and disclosing related party transactions.
The board members in these organizations were intimately involved in significant strategic decisions and were instrumental in ensuring that sufficient and high quality information was shared with the board by the management team. The board members also actively involved themselves in interacting directly with external advisers, suppliers, etc. to understand the real implications of decisions or events.
In spite of this, most board members we spoke admitted to the fact that it was enormously difficult to actively understand the nature of risk that might be hidden within the businesses and, eventually, the role of the board had to be limited to ensuring that the processes for reporting of data was efficient enough for risks to surface.
Evaluation of board effectiveness
The ability of the board to step back and evaluate its own performance is a critical reflection on the board’s confidence in the value it is providing to the organization. We found most organizations in India did not have a structured process for board performance evaluation and, as a matter of fact in many cases, did not even feel the need for any such performance evaluation.
However, we found most of our best-managed boards took a formal approach towards the evaluation of performance of the board and its members. This evaluation process was driven, in most cases, by external agencies that reported the performance to the chair of the board or to the chairperson of the nominating and governance committee.
We sought two data-based validations of the effectiveness of the boards that were finally adjudged as the best managed—their overall attendance record and their ability to drive performance of the business in the long run. We found the best-managed boards had an average board attendance record of greater than 85% across all board and committee meetings. We also found these organizations seemed to consistently deliver positive shareholder returns over five- and 10-year cycles.
The best-managed boards effectively were the best managed for three simple things—the board members had the capability and the willingness to contribute to the business; the management/promoters respected and were open to feedback from the board and, finally, the processes were laid out to not inhibit the independent members of the board but to actively contribute. While it is difficult for organizations to go about learning about the first two aspects of what makes best-managed boards, we hope that the diligence in the design and implementation of board processes is emulated by a larger section of organizations in India.