Board evaluation: A gateway to stakeholders' trust

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The quality of performance of the board of directors of Indian corporations is under greater scrutiny now than ever before. Volatile market conditions, fluctuating global economies, and rise in the demands and expectations of the stakeholders are a few of the factors that have made board evaluation a necessity. This growing recognition has resulted in board evaluations becoming widely established internationally in rules-based as well as in principles-based jurisdictions, as a critical structural tool for assessing board effectiveness and efficiency. In India, board evaluation was a non-mandatory requirement under Clause 49 of the Listing Agreement, prior to the revision in the Clause 49 by Sebi in April and September 2014, but a few progressive companies, however, were conducting board evaluation voluntarily.

The listed Indian companies carried out a formal annual performance evaluation of the board, its committees, and individual directors and reviewed the performance of the chairperson in FY 2015 as mandated under the Companies Act, 2013 (the Act). While section 134 (3) (p) of the Act requires the report of the board of directors to incorporate a statement indicating the manner in which a formal annual evaluation has been made by the board of its own performance and that of its committees and individual directors, the process and the methodology of evaluation has been left to the discretion of the board and the responsibility for the evaluation assigned to the Nomination and Remuneration Committee.

Deloitte studied the annual reports of the 100 listed Indian companies with the objective of identifying the trends in the disclosures across five areas: Board evaluation, Internal Financial Controls (‘IFC’), Enterprise Risk Management (‘ERM’), Related Party Transactions (‘RPT’), and Compliance with applicable laws and regulations. The companies in the sample were selected from the major stock exchange indices such as the BSE Sensex, Nifty 50, S&P BSE 100, and S&P BSE 200 while ensuring proportionate representation from different industries and geographies. The reporting practices on the mandatory disclosures required under the Act and the additional disclosures made voluntarily by the companies bring forth some interesting insights. These insights are especially relevant in context of the recently released guidance note on board evaluation by Sebi. Let’s study these evident trends in board evaluation that emerge from the research-

Not only in India but also worldwide, board evaluation is approached with a certain amount of caution and restraint. Most nations which lead the governance changes have only introduced board evaluation in the past 12 years. Globally, board evaluation practice is still at a nascent stage and it may take some time before its long-term benefits are well comprehended. Conflicts of interest, legal and procedural concerns, and perceived business risks could be some of the key challenges faced while undertaking performance evaluations of the boards, directors and the committees.

Nonetheless the barriers and resistance to the process of board evaluation, there is no denying the fact that such periodic evaluations are significant parameters considered by institutional investors for rating the governance of companies. The time when investors start asking for board evaluation reports, including the manner, methodology, results and the corresponding curative actions in the annual report is impending.