Company boards set for rejig, ESG, AI skills in demand, Deloitte's Goradia says

In an interview, Goradia said that companies are increasingly reaching out to head hunters for identifying candidates with skills in areas like artificial intelligence and environment, sustainability and governance (ESG), shifting from the past trend of going for internally-referred candidates. The churn also opens up opportunities for more women as businesses are keen to make their boards more diverse.

The board rejig is triggered by a provision in the Companies Act which became effective from 1 April 2014 mandating rotation of independent directors, who can serve on a board for a maximum term of 10 years in one go—that is, two consecutive terms of five years each. After that, a cooling-off period is required before one can get hired in the same company, but they are free to join the boards of other companies.

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“Therefore, in 2024, we see many experienced independent directors who have been serving on company boards for many years now completing their terms. This is the year of transition, which has already started. Some independent directors moved on last year, some are moving on this year, and some are still in the process of moving. There is a lot of activity on company boards because of this, and nomination and remuneration committees of many listed companies are tasked with helping identify the right candidate for their board," said Goradia.

She said that companies are effectively leveraging independent director rotation as an opportunity to modernise their boards and address existing skill gaps. “Businesses are actively looking for directors who bring the complementary skill sets on the board, in terms of technology, digital transformations, artificial intelligence or cybersecurity. This churn in independent director positions is infusing new blood into boardrooms," said Goradia.

According to one estimate, close to 30% of the directors on board of public limited companies are undergoing this shift, she said. “It is expected that approximately 2,000 independent directors’ term will come to an end by December 2024 and this process is expected to continue in 2025 as well, as some of the directors would be completing their term next year," said Goradia.

Experts said the world has undergone changes in the last several years and that board rooms are required to operate with greater transparency, trust and quality in decision-making. “Board members should be equipped to deal with the challenges of our times. Boards have to be tech-savvy, have a diverse set of minds and should prioritise inclusion in their approach," said Manoj Raut, chief executive officer and secretary general of Institute of Directors, an apex professional association for directors in India.

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Companies Act mandates that every listed company should have at least a third of their directorships reserved for independent directors while certain classes of unlisted public companies must have at least two directors as independent directors. In addition to the Companies Act requirement of listed companies having to reserve a third of their boards for independent directors, Securities and Exchange Board of India (Sebi) has mandated an additional requirement that if the board is led by an executive chairperson, then half of the board must be constituted by independent directors.  Unlisted public limited companies that meet specified thresholds of sales, paid-up capital and outstanding loans and deposits have to have at least two independent directors on the board. These directors, who are independent of the management of the company, are mandated to protect the interests of minority shareholders, ensure good governance and offer an unbiased perspective to the board of directors.

Goradia said that those hitting the two-term limit in the companies they have served can join boards of other companies and that there is requirement in the market for directors with professional background, whether they are accountants, lawyers, or management graduates. “Traditionally, as we see it, these professionals were the primary candidates companies would appoint as independent directors. However, businesses are now increasingly mindful of the need for expertise in areas such as technology, digital transformation, risk management, cybersecurity, and ESG," she said.

With this, the composition of many companies' boards will change, as some directors will be new while others remain. “This means companies must prioritise getting the new directors up to speed and implementing focused induction processes. A significant amount of training and familiarisation time will have to be carved out to ensure smooth induction and onboarding of the new directors. Boards' dynamics may also undergo readjustments as the board members develop comfort and understanding before they start functioning more effectively."
 

‘Professional head-hunters getting hired to identify candidates’

Traditionally, Goradia said, independent directors were selected from the networks of major shareholders. But that is changing now, and professional head-hunters are getting hired to identify candidates, especially when boards are looking for specific skill sets for which there is a limited pool in the market, she said.

Also, companies are focusing on the annual board performance evaluation exercise for assessing the skills and strengths of their existing board. This provides a good tool for the boards to help identify the gaps in their compositions, Goradia said.

“Now companies are recognising the value of having more diverse boards, which means that they are not only looking for the experience, but they are also looking for diverse skill sets and even gender and age diversity. Many companies are actively seeking more women directors on the board," said Goradia.