As a result of the corporate governance initiatives undertaken by Indian companies in the last few years and a greater focus on expansion across the world, directors on their boards have been called upon to be more engaged, more accountable and more effective than in the past. But what are the characteristics of an effective board and how do boards ensure that they are performing at their highest levels?
Spencer Stuart’s experience working with corporate boards around the world has shown that an effective board brings to the table a diversity of perspectives and necessary skills, focuses on strategic issues, is well informed about the internal and external factors that impact the organization, and provides candid and constructive feedback to the management. In addition, high-performing boards have committees with well-defined responsibilities, plan for board and management succession, and hold management accountable for performance. India stands at the beginning of the learning curve—companies may have the motivation but a scant implementation record, and for those who do, truly transparent board functioning can be a challenge.
As Indian boards put into place board governance practices, one of the tools that they could use to measure the effectiveness of their functioning is the annual board evaluation. Unlike the US and UK, where listed companies are required to undergo a board evaluation each year, board performance review in India is still in its infancy. Independent surveys have found that only one out of five companies appraises the board’s performance in India. The move towards board reviews has been relatively slow and there continues to be some resistance to the idea of individual director appraisals.
At the same time, there have been first movers. Colgate-Palmolive (India) Ltd introduced a formal board evaluation procedure in 1997. Its board committees conduct self-evaluations that are then reviewed by the board and the company complements this with evaluations for individual directors. The Infosys Technologies Ltd board evaluates the performance of non-executive/ independent directors through a peer evaluation process every year while at Wipro Ltd, the board governance and compensation committees oversee an annual performance evaluation where the performance of individuals is also evaluated and the chairman of the board communicates the results to each director.
If done effectively, board evaluations provide a forum for directors to review and reinforce appropriate board and management roles and ensure that issues brewing below the surface are addressed promptly. In short, evaluations give the board an opportunity to identify and remove obstacles to better performance and to highlight what works well.
The process can also uncover a variety of issues and obstacles to better board performance. These range from easily addressed operational complaints about meeting length or the composition of the agenda to larger, thornier issues concerning the board’s role in strategic decision-making, gaps in knowledge and competencies on the board, and executive and director succession planning.
The corrective actions range as well—from improving the timeliness of board materials and winnowing overly long agendas to making changes in the composition and occasionally, the leadership of the board.
(Illustration: Malay Karmakar / Mint)
While the concerns that surface through evaluations often focus on board procedures, they sometimes go to the basic relationship between the board and management. In fact, the relationship between the board and the CEO is so central to their performance that the CEO evaluation should be conducted at the same time as the board evaluation.
Board evaluations can also lead to tough discussions about the composition of the board itself and whether, as a whole, its experience and skill sets are appropriate. Board evaluations may identify a need for additional—or replacement—directors to provide expertise in specific areas.
Key to evaluation
Whatever the results, the key to a successful board evaluation—one that promotes positive change on the board—is a full discussion of issues that are raised and a commitment to address them.
An evaluation normally falls into two parts: The first reviews the board as a whole and the second, the performance of individual directors. A 12-member board may comprise seven independent directors and five executives, but what tends to happen is that independent directors get evaluated, whereas executive directors are evaluated on the basis of their functional executive role, but not on the basis of their performance as directors of the board.
This is an important distinction for a couple of reasons. First, all directors carry identical legal and fiduciary responsibilities and therefore, should be evaluated in a common way. Second, because they are in the presence of the CEO, executive directors tend not to speak unless invited to do so by the CEO. Clearly, it is important for the chairman to establish the freedom for each board member to speak out on important issues, but the board evaluation process may bring this issue and others out into the open in a helpful way.
Allied to the notion of board evaluation is the concept of independent directors mentoring executive directors, which enables a continuous cycle of feedback and a steady flow of communication among board members.
Furthermore, to make the exercise effective, boards could conduct a broad review of their organization, agendas, meetings, bylaws, committees, communication, board materials and their performance of responsibilities such as managing the CEO relationship, strategic planning, management and board succession, governance and financial oversight. Commonly heard issues include agendas that focus too narrowly on financials or are too long for the given meeting time, frustration at the quantity or timeliness of information they receive from management as also the need to become more involved through, for instance, periodic board strategy days, off-site meetings with line executives and ongoing training.
Raising the bar
Whether performance issues are best brought to the surface by an internally driven evaluation or with the aid of an external consultant depends on the specific needs of the board. The critical thing for directors to understand is that as companies go global, boards will be held more and more accountable legally for their actions and judgements on behalf of shareholders. Boards must raise the bar on their own performance in line with this heightened level of accountability and responsibility.
Boards that approach evaluations in compliance-oriented ways are likely to be unsatisfied by the process and will lose the opportunity to gain valuable shared insight into the operation of the board and ways to improve its composition, processes and relationships. It is the boards wanting to make a difference that will draw out the concerns of individual directors through one-on-one interviews, promote active, candid conversations about ways to improve the operation of the board and commit to addressing the issues raised through the process.
Send your comments to spencerstuart @livemint.com
Anjali Bansal is a consultant in Spencer Stuart’s Mumbai office, and leads the India practice for the firm. The article contains inputs from an in-house white paper by Spencer Stuart consultants Susan Boren and Carolyn Eadie.
(This is the first in a three-part series on the board evaluation process. The next column will focus on how companies can institutionalize an effective board evaluation process.)