The accounting scandals at renowned global conglomerates such as Enron, WorldComm and Xerox put a serious question mark over the role of corporate boards and brought to the fore the necessity for strict governance inside companies. Consequently, corporate governance has emerged as one of the most serious management issues for companies across the world. “One clear trend that has emerged in the last several years across the corporate world is the strict scrutiny of the performance of the governing board,” says David Kidd, head of global board practice at Egon Zehnder International, a firm that specializes in board consulting and building leadership teams. Till recently, he adds, “it was awkward to ask board members questions about the way they functioned but now, it is almost a given that if executives are evaluated, so should be a company board.”
Kidd should know. At Egon Zehnder, he advises the boards of many large global companies to strive for transparency and professionalism. “This is the only way good boards can become better,” he says.
After leading Egon Zehnder’s talent management practice for seven years, Kidd now focuses on board searches, board reviews and senior-level executive searches. Most of his executive search assignments concern the energy, resources and industrial sectors, while he consults boards across sectors such as consumer goods, retail and financial services.
Kidd, 53, was in India recently to participate in a session on corporate governance organized by the Wharton School and Egon Zehnder. In an interview with Mint, he talks about corporate governance trends in the developed and developing economies and the imperative of having a good board.
What are the trends in board practices globally and in India?
The one clear trend that has emerged in the last several years across the world is evaluation of board performance and taking board appointments more seriously. Even five-six years ago, it was awkward to ask board members questions about the way they functioned but now, it is almost a given that if executives are evaluated, so should be a company board.
Board reviews are either done internally—by the chairman, company secretary and legal officer—or by an external agency such as our firm.
Increasingly, companies are hiring a service provider to evaluate their boards, although many companies in the UK still conduct it internally. We (Egon Zehnder) have conducted around 200 board reviews in the last two years. Most review projects have been driven by public companies and also some privately held and family owned firms that are looking at globalizing their businesses.
Another trend that has gained significance is the appointment process for board directors. There is a shift towards what is required from a board director and, thus, there are clearer candidate specifications being delineated by companies.
In addition, companies are taking a long-term view on appointments of board directors and board succession planning. Companies are appointing candidates two-three years in advance if they find a candidate possessing the required skills and experience to work towards the company’s hopes and aspirations. What is happening in boards is no different from executive succession planning.
Indian boards are still at an early stage of these changes and, barring a few companies—including Infosys Technologies Ltd, Wipro Ltd, and old guards such as the Tata group—are not taking such a strategic approach to their boards.
Why is corporate governance so important? Could you share some instances where active interest from board members has led to positive changes in governance?
It is important for two reasons: By conforming to statutory requirements through corporate governance, boards ensure that companies meet the legal requirements and guidelines set out by the stock exchange they are listed on.
Secondly, good corporate governance is the foundation on which stakeholders’ and investors’ trust is built, and adds value to the company through better performance.
Yes, I can cite this example where a board director stood up saying that the chairman could improve his performance and, ultimately, should be replaced if he did not do so in a stipulated period of time.
In another instance, a board director expressed his unhappiness with the quality of information, and firmly told the chairman that the board did not have good intelligence on the competition and how it could impact the ability of the board to fulfil its duties properly.
By playing an active role, boards help companies perform better.
Good boards have a good chairman and directors with the right skills. They hold the crucial link between the management and stakeholders and steer the company in the right direction. Companies should see having a good board as a basic requirement because analysts and global investors place a premium on companies which have good boards.
Why do boards fail? In what way can a company’s board be made effective?
Boards can fail when corrupt executives mislead the board or where the executive management is not up to the task of running the company. It is up to the board to find out if it is in the right direction. But it is very hard for a director with limited time to avoid being tricked by some top executive who wilfully wants to mislead. That is why the most important decision a board makes is appointing the chief executive. Because, if the selection of the CEO is right, the next level of people, which is the CEO’s responsibility, will generally be well chosen. Also, the board should have serious involvement in succession planning and managing the bench strength of the firm.
Some of the widely accepted practices to make boards more effective include setting out clearly the decisions, issues and authorities reserved for the board; agreeing on a board calendar so that important topics are reviewed with appropriate timing and frequency; creating a climate of collegiality, respect and trust; ensuring clear individual accountability; allowing full and open debate on critical issues and ensuring consensus is achieved; balancing power appropriately between the CEO and the directors; encouraging directors to play a variety of roles and not become rigid; and routinely evaluating the board’s performance.
The Indian market regulator, the Securities and Exchange Board of India (Sebi), has mandated that in companies where the chairman is a non-executive director, one-third of board members should be independent, and companies in which the chairman is an executive director, half the board should be constituted of independent directors. How crucial is the role played by independent directors in a board?
There are varying concepts about the definition of independence in various countries. In the US, the criteria for independence are very prescriptive. Even the standards determining independence in the UK are very stringent. The definition of independence is relatively broader in countries such as Italy and India.
But, at the end of the day, independence is more about a state of mind. It is a behavioural thing. For instance, a director can have previous association with the company and yet be very independent in terms of functioning as board director, while someone with no previous association may lose independence very easily.
Photographs by Ashesh Shah/Mint
In principle, I am of the view that a high percentage of independent directors makes a board stronger. There is no academic research on this subject but, instinctively and anecdotally, we can say that independent board members make a board more effective.
Independent directors are a group of people who are open and transparent and are there to guide and steer the company. The key to an independent director’s effectiveness lies in challenging the management in a way that it does not feel hounded—because that may prove counterproductive.
Is legislation enough to ensure that a company has a good board?
No. You need legislation to set the standards by which companies will be governed. But that is not sufficient to have a good board, which is about selecting right board members for the company’s requirement. It depends heavily on the chairman—who is generally the head of the governance or nominations committee in most public companies. If the position of chairman and CEO is separate, then the chairman usually heads the nominations committee. In cases where the same person is CEO and chairman, as in most American companies, it is one of the senior directors of the firm who is normally chairman of the committee. The most important job of a chairman is to oversee the selection of the CEO and then the selection of the other directors.
In my view, it is important to separate the role of chairman and CEO. The skills required for a chief executive are very different from a chairman, whose role is to steer the company without directly getting involved in its day-to-day activities. It is not always possible for an individual to possess both skills sets.
Also, putting so much power in one person is not a good idea, in my opinion.
What should a chairman be looking for while appointing a director?
It is about getting a good combination of the right business experience, personal characteristics (such as someone with high analytical, intuitive and emotional quotient), motivation, integrity and independence.
A good board needs a mix of directors with diverse skills and background, including at least one strong finance person who understands the market dynamics, a board member who has sound legal expertise, or someone with strong interpersonal (skills), courage and inquisitiveness.
The right kind of chairman will be good at doing this job. In fact, a respectful and good chairman can attract good board members.
What are the challenges facing boards in India?
One of the biggest challenges facing Indian boards is talent crunch. The problem is, how do you find so many people with local and international exposure to have them as board directors when the economy is growing at such a phenomenal pace?
One of the most important factors for success among Indian businesses competing on a global scale is corporate governance, and Indian boards should aim at benchmarking their corporate governance practices against those of the world’s best organizations.
Selection of independent board directors is another hurdle that boards in India ought to address to increase their effectiveness. Just being non-executive is not a test of independence. If you look at board members in India, they are mostly people who are in some way or the other obligated to, related to or friends of the promoters of the company. To make boards truly effective, you don’t need yes-men or -women, but constructive dissent—independent minds, which can add value to the organization.
Also, by and large, Indian companies are yet to buy into the fact that there’s value to be created by good corporate governance and investors place a premium on companies with good governance.