Introduction In a typical public
company, the ownership and control are separated and the shareholders
extensively rely on the Board of Directors to represent their interests.
Whilst the Board of Directors is not running the company on a day-today
basis, which is the responsibility of the management, its involvement
in the form of timely decisions, guidance, direction and oversight plays
a key role in the effective functioning of the company. The way in
which the Board discharges its duties would go a long way in defining
the governance model of the company. These aspects underscore the fact
that the Board must, in addition to reviewing the performance of the
organisation and the management, also review its own performance to make
sure they are doing their duty diligently and effectively. Behavioural
psychologists and organisational learning experts agree that people and
organisations cannot learn without feedback. No matter how good a Board
is, it is bound to get better if it is reviewed intelligently. In view
of the importance attached to the Board, the Indian Companies Act, 2013
requires the evaluation of the performance of the board to add value to
the stakeholders and corporates.
Legal Requirement
The
Companies Act, 2013 has recognised the long felt need for having a
structured process for evaluation of the performance of the Board of
Directors. Section 178(2) of the Companies Act, 2013 mandates that the
Nomination and Remuneration Committee constituted by the Board shall
carry out an evaluation of the performance of every Director. In
addition, the Code for Independent Directors mandates that the
Independent Directors of a Company shall hold at least one meeting, in
which the performance of the non-independent directors and the Board as a
whole, shall be reviewed. Further, the quality, quantity and timeliness
of the flow of information between the Management and the Board shall
be evaluated. The performance of the independent directors shall also be
done by the entire Board excluding the director being evaluated. Based
on such evaluation, the Board’s report shall contain a statement
indicating the manner of evaluation and the conclusions thereof.
Evaluation Process
Typically,
the performance evaluation of the Board would be on the basis of a
benchmark which could be decided upfront and used for the purpose of
this exercise. The evaluation can also be carried out on specific
matters relating to each committee and those which would apply only at a
Board level as well.
With respect to the evaluation of the
individual directors, the performance evaluation could be done on the
basis of the following macro aspects:
-Allocated Roles and Responsibilities
-Strategic Thinking
-Risk Management
-Core Governance and Compliance Management
-Independence & Ethics
-Corporate Culture
-Compliance with the Code of Conduct of Directors
-Industry/Entity Knowledge
-Talent Management
-Leadership Style
-Unbiased Approach
-Effectiveness of Decision Making
-Entity Performance
In addition, the following specific aspects could also be considered for performance evaluation:
-Attendance and contribution to the meetings
-Application of financial/technical/legal/treasury/other expertise on specific matters
-Quality of debate
-Extent of communications with executive management
-Relationship with other Board members
-Personal eminence and the reputation
-Quality of the feedback provided to the management
The
Act does not stipulate the timing or the period for evaluation of the
Board. Hence, a company could either decide to do the evaluation on an
annual basis similar to the policy followed for its employees or deal
with it by having any other review period on a systematic basis. Each
company needs to assess the specific aspects applicable to it and then
consider the frequency/ periodicity of the evaluation. The review could
be done at a pre-determined frequency or could be performed on an “as
needed” basis. The “as needed” approach may work in situations where the
Board has a clear policy on the triggers that would prompt an
evaluation. However, in situations where such guidelines are not
available, then it is possible that the need for performance evaluation
may be overlooked. Performing the evaluation on an annual basis is the
most common frequency as this in line with the annual planning cycle
and, therefore, useful in adapting the performance expectations with the
strategic needs of the organisation. However, a predictable frequency
could result in the evaluation becoming mundane and routine.
On
an overall level, the performance evaluation should be an ongoing
process and not just an annual event. One of the best practices is to
devise other mechanisms in addition to the annual review to ensure
ongoing performance improvement. Irrespective of the period chosen, the
same may be followed in letter and spirit and on a consistent basis.
Attributes
of a Successful Governance Oversight Model Identifying an appropriate
governance oversight model is the basic starting point for having a
robust evaluation platform. All the subsequent activities will be driven
by this. In general, a successful governance oversight model should
encompass the following attributes:
-Competence – skills required for the Board to effectively execute its responsibilities
-Understands corporate governance and its application to Board structure, operations, processes, and procedures
-Understands the organisation, its businesses, and underlying drivers
-Has relevant, recent experience in the industry, adjacent industries and markets, or competitors
-Has knowledge of the interests and priorities of stakeholders
-Process – processes required for the Board to both understand and properly oversee the activities of the entity
-Understands the risks inherent in the organization’s governance programmes
-Selects qualified, independent Board members, aligning overall Board composition with the organization’s strategy
-Establishes and periodically reaffirms Board leadership
-Establishes and ensures compliance with Board operating principles and governance policies
-Designs and implements a committee structure that complements and enhances the work of the Board
-Assesses and continually improves the Board, its leaders, and committees
-Engages with stakeholders
-Oversees public disclosures related to Board operations
-Information – information required by the Board adequate to support effective oversight and decision making
-Receives verbal and/or written feedback and development plans resulting from periodic assessments
-Receives Board governance documents and related tools (e.g., Board calendars, planning tools) for review and improvement
-Receives thought leadership or continuing education related to Board governance developments
-Behaviour – Board’s behaviour to support and reinforce strong oversight
-Displays ownership and commitment to governance excellence and continuous improvement
-Creates a culture of collaboration, engagement, and healthy tension among Board members
-Holds Board members accountable for their behaviour.
Techniques of Evaluation
The
evaluation can be done by using qualitative techniques such as
interviews, feedbacks, etc. or through quantitative techniques such as
surveys, scorecards, questionnaires etc. A typical questionnaire/
scorecard would cover the aspects indicated under “what will be
evaluated?” and in particular the following aspects:
–
Composition and Quality
-Understanding the business and risks
-Process and procedures
– Oversight of the financial reporting process and internal controls
– assessing related party transactions
– understanding competitive landscape
– understanding risks relating to management override, including significant judgements, assumptions and estimates.
– fair compensation.
– Communication with employees, vendors and customers
– adequacy and effectiveness of Board initiated/ monitored mechanisms such as Code of Conduct, Whistle Blower Policy, PTR, CSR Policy, etc.
– oversight of the audit function
– ethics and compliance
– monitoring activities
– Strategy effectiveness
– management relationship
– Succession Planning & training.
Further, this could be done through face to face discussions, telephonic conversations, e-mails, web based scoring modules etc. Irrespective of the evaluation technique used, due care should be taken in documenting the process and the conclusions reached.
The next step in the process is to decide who will perform the evaluation – whether internally (by the nomination and remuneration Committee) or using specialist consultants or external experts. the decision regarding the same will need to be taken after considering the following factors:
– autonomy of the Board
– Board Culture and dynamics
– Confidentiality
– Perception of Bias
– need for transparency and objectivity
– Skills and experience of Performing evaluations
– time and Cost.
The general process to be followed could be to obtain the self-evaluation from the individual directors about the individual and also about the Board which forms the basis for an independent evaluation by the designated person/ committee/authority.
Evaluation Feedback
The feedback to the Board could be provided not only by the members of the Board, but to make it more transparent and comprehensive, the participant base could be extended to cover the internal and external stakeholders as well. Typically, the internal participants who could be consulted for obtaining the feedback on the performance of the Board could be the CEO and other key managerial personnel who interact with the Board on various matters. Similarly, the external participants could range from the shareholders, key customers & suppliers, internal & external auditors. Whilst the internal participant could provide a more specific feedback, the external participants could provide a general feedback about the company/culture which would reflect the performance of the Board.
The Board should agree upfront the required actions that it can take to improve governance. the performance assessment of the Board would typically be discussed by the Board collectively. With respect to the performance assessment of the individual director, generally the same will be discussed by the Chairman of the Board with the concerned member/director. The practice of releasing the summary of the results of the Board’s performance to the entire organisation is also considered as one of the best practices in connection with the Board evaluation process worldwide.
Whilst section 134 (3)(o) of the Companies act, 2013 requires only a statement indicating the manner in which the formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors and the results of the individual evaluation, distribution of the results of the evaluation to stakeholders would be decided by each company based on various factors including the governance model followed, expectations, complexities, culture etc. Irrespective of the method adopted and the regulatory provisions, the Board should keep in mind that the process of performance evaluation, providing the required feedback and the extent of sharing such feedback with others would reflect its commitment to the entire governance process!
Conclusion
Performance evaluation is very important for the Board for not only in meeting the regulatory requirement but also in setting the right tone at the top. This is one of the key mechanisms for the Board to demonstrate its commitment to continuing improvement. It would be a great value multiplier tool for the company, directors and all those stakeholders who will be impacted by the functioning of the company.
When the Board recognises the importance of this process and attributes sanctity and importance to this process, and implements it with all vigour, this would help in building a sound corporate structure which can avert governance failures. Whilst the process is new to india, the experience gained in implementation would help Indian corporates in fine-tuning it on a continuous basis.
