Home >Companies >Indian board evaluation practices fail to match global standards

At British bank Barclays, the board members wanted more time for “blue-sky discussion" on major risks the company could face. Similarly, at Anglo-Australian mining company BHP Billiton Ltd, board members agreed that they should focus on the willingness of board members to speak up, and develop effective working relationships, according to their 2015 annual reports.

These suggestions came from the evaluation board to identify performance-improvement areas. And the ministry of corporate affairs was aiming for just this, when it included a section in the Companies Act of 2013 that mandated board evaluations and said companies must also disclose how they carried out the evaluation.

At first blush, most of the top 100 companies complied with this requirement in FY2015, but it ends with that.

CimplyFive Corporate Secretarial Services, a tech solution provider for compliance, and InGovern Research Services, a proxy advisory firm, studied the board evaluation practices of the top 100 and found that while most companies have complied and conducted an evaluation, no company in India has disclosed what they learnt from the exercise, which though not mandated, is a global best practice.

In most countries such as the UK, the US, Australia among others where board evaluation is mandated, top companies have not only disclosed how companies were evaluated, but also on critical areas of importance and how they will act on it.

“In mature companies, good governance is when companies do more than what is expected of them. The purpose of doing this exercise is to identify critical areas and act on it. It is much like a health check. We need to know the results of the test to know the health of the board," said Shankar Jaganathan, founder of CimplyFive, adding that board evaluation’s potential is largely untapped in India.

The research also rates the companies based on their disclosures on board evaluation and the results show that out of a possible score of five, the best firms could score only a three.

Fifty-two firms got a 2-star rating for disclosing the evaluation criteria and the evaluation process. Ambuja Cements Ltd, Federal Bank Ltd, Container Corporation of India Ltd, HDFC Ltd and Hero MotoCorp Ltd were the only five firms to get a three-star rating because they spelt out the positive results of their evaluation in addition to the evaluation criteria and process.

Eicher Motors Ltd, Kotak Mahindra Bank were the two that did not conduct a board evaluation in fiscal 2015 despite the mandate.

“Developing an evaluation framework is quite critical and complex. The criteria for performance evaluation has to be formulated, the tools finalized and a proper process had to be set up," said a spokesperson for Kotak Mahindra Bank. “Also, the independent directors advised the management to appoint an external agency to finalize the criteria for evaluation of the board. The company carried out an evaluation in FY16."

An Eicher Motors spokesperson also said the company carried out an evaluation in FY2016.

Eighteen companies were exempt from reporting on board evaluation as they were government-owned companies.

Of those required to do the evaluation, about 89% carried out the evaluation in-house, while only nine companies, including Reliance Industries Ltd, Ashok Leyland Ltd, Bharti Airtel Ltd, among others, hired an external agency to do it.

“It is better to let an external agency do the evaluations as this practice is still in its nascent stage and external agencies bring a more nuanced perspective into the process," said Shriram Subramanian, founder and MD, InGovern Research.

Even if evaluations are carried out in-house, the question is more about how it is carried out, say experts. If firms just circulate questionnaires with a range of numerical rating responses, you end up getting results that are far removed from reality.

“Such an exercise is self-defeating, to say the least," says former Securities and Exchange Board of India chairman, M. Damodaran, who is also the founder of Excellence Enablers, a corporate governance consultancy that carries out board evaluation. In his view, if the board is undertaking a self-evaluation, the process should be led by the lead independent director or the chairman of the Nominations and Remuneration Committee (NRC), since their role is most proximate to the evaluation process.

“Responses to questionnaires should be followed up with individual conversations with directors and key managerial personnel so that areas for improvement can be identified," said Damodaran, who serves on the boards of companies such as Larsen & Toubro, Tech Mahindra, Hero MotoCorp and CRISIL.

Other experts said there are some practical difficulties in carrying out the evaluation.

“It is one thing to review the performance of someone who is reporting to you, but on the board there is no reporting requirement. So, how do you review and criticize the performance of a colleague on the board?" asked Pradip Kumar Khaitan, managing partner of law firm Khaitan & Co. and board member on nine companies, including Dalmia Bharat Ltd. He added that the process should be done with a great deal of sensitivity.

The one good thing that has already emerged from board evaluations is that board members are cautious about whom they want to bring on board.

“Now, the NRC is very careful about board appointments as they don’t want to bring someone incompetent only to make the difficult decision of asking them to go later," said Khaitan.

While boards have shortcomings specific to themselves, experts say the general areas of weakness are in board composition, board processes and boardroom dynamics.

While the report suggests that it is a best practice to disclose the outcomes of the evaluation, Damodaran does not believe it is essential. “Evaluation is a process for self-correction and improvement. It is adequate for companies to state that the process has been gone through and the findings have been or are being acted upon," he said.

An earlier version of the story said Castrol Ltd did not carry out an evaluation in FY15, but the company spokesperson clarified that it did carry out an evaluation in 2015.

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