Photo: iStockphoto
Photo: iStockphoto

Raising the bar on corporate governance standards

Structured process for board meetings and annual reviews critical to ensure maximum value creation,say firms

Mumbai: The significance of corporate governance is not lost on anyone. It is of paramount importance for companies of all shapes and sizes. Regulators in India have been constantly pushing for better governance norms and disclosure requirements. But, it is not just the push from outside. Several Indian companies have taken the initiative and have chased high governance standards. These companies have raised the bar of corporate governance standards and have inspired others to follow.

Boards That Lead, a report by Korn Ferry in association with the National Stock Exchange, highlights several such companies and the best practices adopted by them, which sets them apart. A major focus area for companies is board composition. Selecting the right independent directors is important to build a strong and capable board, which will be able to guide the company through good and bad times. Most companies believe that having a proper process with a clear selection criteria is extremely important to achieve this aim.

At Crompton Greaves Consumer Electricals Ltd, potential independent director candidates must demonstrate a strong understanding of the company’s business environment. Other aspects that are considered while evaluating potential candidates include sectoral knowledge, industry experience, fitment with other board members and professional values. The firm evaluates independent directors in line with the Securities and Exchange board of India (Sebi) mandated process.

Some firms believe a new independent director on the board should help the firm move ahead along a path of continuous improvement.

RPG Enterprises focuses on a continuous improvement ideology while evaluating independent directors. An innovative mind-set and progressive thinking are some of the key criteria for selecting directors in the group. “First, the chairman’s office prepares a list of potential candidates considering reputation and integrity, thought leadership, experience on other boards, cross industry experience and conflict of interest with businesses of RPG group. The narrowing down of this list factors aspects such as innovative mindset, progressive thinking and fitment with RPG’s governance values and culture," the report cites.

In many of the above areas, RPG group assesses a candidate’s attributes through the prism of his ability to out-perform current members.

Companies also like to regulate the transactions that their board members engage in with the firm, with a view to maintain the independence of each member. “The independence of individual board members is maintained by regulating the nature of transactions (such as consulting, investments) that board members can get involved in with the bank and is monitored rigorously through a strict adherence to transparency. Members are required to submit requests that are personal in nature. Other board members are empowered to approve or refuse requests," says the report about practices followed by HDFC Bank Ltd, India’s largest private sector bank.

Sure, firms can select the best board members, but the right outcomes can only be achieved if board interactions are well structured and a lot of time is devoted to preparations.

Hindustan Unilever Ltd believes in rigorous preparation for board meetings. “Unilever’s board plays an important role in crafting its strategy to navigate across multiple portfolios, products and geographies. To ensure effectiveness of the board, the firm has a structured plan and agenda for board meetings that are undertaken during the year. As a precursor to their quarterly board meetings, the members are sent reading material to prepare well ahead of the session," says the report.

The FMCG company also follows the practice of evaluating its board. “Board evaluation is a key part of corporate governance wherein each board member is evaluated for their skills and the future capability needs of the board are anticipated," the report says.

Besides, firm believe a structured process for conducting board meetings and annual reviews is also critical to ensure maximum value creation.

Dr. Reddy’s Laboratories Ltd credits its board effectiveness to the structured process of conducting meetings. It also believes in having informal sessions to allow members to be more comfortable in raising uncomfortable topics. “In the evening, the board departs from formal sessions to attend an informal dinner for board members only. This allows members to spend time in a casual setting and raise difficult topics," says the report about Dr.Reddy’s board meetings.

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