India's evaluation of its boards of directors has come a long way over the years, yet needs to change and be customized to account for specific company contexts, not just check boxes on regulatory forms, said Harsh Mariwala, founder and chairman consumer products major Marico Ltd.
The spotlight on board evaluations comes on the back of the resignation of software services company Coforge Ltd's non-executive independent director and chairperson, O. P. Bhatt, on Wednesday.
The company had stated in a regulatory filing that “... certain material information contained in or relating to the Board Evaluation Report and the performance of the Chairman had not been fully disclosed to the Board when the BER was presented…”—drawing into focus the importance of a report card that boards get every year and whether India has a robust mechanism to spot gaps on its company boards. BER stands for Board Evaluation Report.
"Today, on a scale of five with five being the highest rank, Indian boards will rate around 2-2.5 in terms of board effectiveness," Mariwala told Mint. The “board evaluation process today is a Sebi-suggested form that is filled up and submitted.” Sebi is short for markets regulator Securities and Exchange Board of India.
That existing practice needs to change and has to be customized to the business that a company is in, Mariwala emphasized. “A board is a source of competitive advantage that the company has and there has to be discussion around how the meetings were conducted, did someone dominate the meeting, are some members not participating enough, the agenda, chemistry and openness in board meetings etc.”
Mariwala, who is a non-executive, lead independent director at Thermax Ltd, is a past-president of business lobby group the Federation of Indian Chambers of Commerce and Industry.
To be sure, Mariwala agreed board evaluations today are an "improvement" from the earlier days when boards in India were “dominated by family and friends”.
What is a board evaluation?
Born out of a set of guidelines that came under the Companies Act, 2013, followed by rules issued by Sebi, a company's nomination and remuneration committee (NRC) evaluates the firm's board or appoints an external agency for the task.
The annual exercise looks into effective structure and constitution of the board and committees, the effectiveness of the board processes, the quality of conversation and debate in the board, and how it support the firm, among other parameters. Individual directors are evaluated on factors including quality and consistency of participation and independence of thought process. Typically, the members are asked to fill out a rating form while some do insist on more detailed feedback.
The BER is then submitted to the chairperson and the NRC chair.
Anandorup Ghose, partner at consulting firm Deloitte India, who advises on rewards and compensation structures at companies, noted that while BER guidelines are in line with global standards, the "quality of implementation would vary across organizations".
The evaluation process, however, is more under focus now even with inherent weaknesses. "This entire process is broadly a self evaluation format and like all self evaluation processes as well as peer evaluation processes, many individuals choose not to rock the boat and keep their responses and observations fairly standard," said Ghose.
Increased, intense assessment
Among executive search firms who hunt for CXOs, Russell Reynolds Associates also offers a service called 'board effectiveness'. Unlike the yearly evaluation exercise, this can be done by the firm once in three years.
"It is an intense exercise in which the more progressive companies allow us to observe a board meeting, followed by one-on-one interviews with board members/select management team members. The focus is on a holistic review of board leadership, culture, risk alignment, composition etc. The chair of the board and NRC chair are typically the sponsors of this exercise," said Sanjay Kapoor, who leads Russell Reynolds' board & CEO advisory partners in India.
Mid-tier companies are also keen to test out new ways of checking the functioning of their boards and effectiveness with an intent to move up the value chain and attract a set of more well-known directors and advisors, said an external evaluator, who did not want to be named.
Navnit Singh, chairman and regional managing director of Korn Ferry, India, told Mint that the executive search firm conducts about 15 board evaluations a year and companies increasingly want a more robust process. "They are asking for an assessment of each member and that requires couple of weeks of engagement with the board."
Coforge, in a regulatory filing late Thursday evening, said the relevant reports were available only to the chairperson of the board and the chair of the nomination and remuneration committee (NRC), and were not shared with other board members, including independent directors.
Coforge, in a regulatory filing late Thursday evening, said the relevant reports were available only to the chairperson of the board and the chair of the nomination and remuneration committee (NRC), and were not shared with other board members, including independent directors.
The company’s internal auditor further observed: “In particular, while the Chairman’s category received the lowest rating in the Reports, this finding was not disclosed or discussed before the NRC or the Board by the NRC Chair and the Chairman of the Board.”