Over the last few years, there has been a concentrated effort across large Indian corporates to embrace good corporate governance. And, today, it can be safely said that there is ample evidence that it does pay in terms of value creation.
However, as best practices begin to be used more widely across the corporate world, the critical issue will be whether the market will start rewarding good corporate governance.
In India, the principles of good corporate governance need to be inculcated as much as the rules, and this requires education and propagation. Further, unless the chairman and promoters believe that good corporate governance leads to better performance and, thus, to value creation, progress on this issue will be slow.
The first challenge is the process of identifying board members, a task that should be taken up by the nominations committee—if one exists—with the support of specialist advisers, including executive search firms.
The nominations committee brings objectivity to the selection process and brings recommendations to the board that reflect the requirements of the business rather than the personal preferences of the chairman or the chief executive officer.
One painless way of broadening the candidate pool would be for Indian companies to permit their executives to take on at least one external directorship.
Many large companies seeking independent directors are themselves reluctant to let their executives take up the directorship of an external board. This unhelpful attitude is contributing to a skills shortage and imbalance on Indian boards, as well as limiting opportunities for senior executives to develop and learn as non-executive directors of other non-competitive companies. The current unhealthy situation could be alleviated to a large extent if these restrictions were lifted.
An increasing number of Indian companies are also seeking to improve the quality of discussion and broaden the perspective inside their boards by identifying appropriately qualified people from abroad, particularly from Europe and the US, who have the right strategic fit.
Foreign directors are used to asking questions and are likely to be moredisciplined and rigorous when it comes to preparation and making an active contribution during meetings. Thus, their impact on the culture of the board can be extremely positive.
Independent non-executive directors with relevant experience serve as valuable advisers to the board and the management about the company’s market, geographic and product directions. The practice of identifying and choosing such directors varies, but is currently undergoing a major change in India.
The nominations committee process should involve defining what kind of person the board needs, someone who will fit the profile of the company and the board. The more rigorous the process, the more likely it is that a board will be able to identify and select the best available talent—both from within and outside India.
A due diligence process between the board and prospective directors is also necessary. Board members should be keen to determine whether a candidate is suitable and likely to make a good contribution; candidates, likewise, need an opportunity to ask questions, learn more about the company and the role, and decide whether this is the right board for them.
Once a director has committed to joining a board, he or she should benefit from a well-planned orientation process that will bring him or her up to speed on what the company stands for, and the direction it is taking. This will make it more likely that a new independent director will attend the first board meeting on an equal footing with fellow directors, and be able to contribute from the start.
Freedom of expression
While board composition is important, equally, so is freedom of expression. It is critical for companies to realize that boards cannot function effectively unless constructive dissent is an accepted pattern of behaviour. However, many find it hard to accept that a director who disagrees with them is not trying to cast aspersions or cause harm.
Though it is healthy for a range of views to be aired around the boardroom, in the Indian context, this is still the exception rather than the rule. Many directors are afraid of looking unintelligent or, sometimes, they are just afraid to confront the management.
Moreover, unless the CEO and the management are receptive to outside opinion, it can be very hard to articulate, let alone enforce, one’s point of view without offending other people. As a board director in a promoter-owned or family owned company, one does not have the ultimate sanction available to boards outside India, such as firing the CEO if you don’t agree with what he is doing. This inevitably curtails debate.
Therefore, the more enlightened boards have followed the example of the US, and appointed a lead independent director to act as spokesperson for fellow non-executive directors and to run “executive sessions” at which only independent directors are present. Those who have sat through such sessions testify to their value and believe they should become a regular part of the board calendar. The right kind of lead director will also know how to put important points across to the board so that, over time, a chairman will start to brook more interference.
How is it possible to bring about this much-needed change of culture?
To a large extent, it is the chairman who will set the tone and shape the culture of the board. Independent directors will only overcome the cultural barrier and express their views freely if they are encouraged to do so by a chairman who is open to constructive debate. This—coupled with a discussion with fellow directors about how the board is going to work, what people’s roles are going to be, and what contribution can be expected of everyone, both individually and collectively—is likely to help in creating a positive and effective boardroom culture.
Anjali Bansal is managing director at Spencer Stuart India.
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