Board Performance Evaluation

A JOURNEY FROM ‘GOOD' TO 'GREAT' BOARDS

In today's evolving global landscape, company boards must engage in deep introspection to navigate changing geopolitical environments, new compliance requirements, shifting regulatory frameworks, and increased stakeholder expectations. To address these challenges effectively, corporate governance codes worldwide are increasingly recommending third-party board performance evaluations. These evaluations are vital as they help boards utilise director skills more effectively, identify key and emerging risks, and assess the need for strategic changes in an unbiased way. Regular performance evaluations are essential for preventing corporate failures and are considered an effective method to avert company collapse.

BOARD EVALUATION - REGULATORY REQUIREMENT IN INDIA

In simple words, YES. Indian regulations have a mandatory requirement to conduct Board Evaluations of certain class of companies, stated below:

1. All Listed companies;
2. Every other public company having Paid-up capital of INR 25 crore or more (except for government companies)

The provision mentions annual Board Evaluation, which can be either conducted by:

1. The Nomination & Remuneration Committee of the company; OR
2. An external agency

If we delve deeper into the Indian regulatory provisions, our observations highlight:

As per the Companies Act, 2013:

1. The listed companies are required to report the yearly evaluation procedure for the board, its committees, and its individual directors.
2. The Nomination and Remuneration Committee (NRC) is in charge of evaluating each director's performance. However, it does not specify the procedure and technique for evaluating boards and independent directors.
3. The method of evaluation has been left to the boards because it is the board that must decide the scope of evaluation and the extent of its disclosure.

As per the SEBI Listing Obligations and Disclosure Requirements Regulations (LODR), 2015:

1. The performance of the board's individual directors, including the independent directors and chairman, as well as the board's several committees, be evaluated.
2. Except for the director being evaluated, the whole board must participate in the evaluation of each Independent Director.
3. The Nomination and Remuneration Committee (NRC) must specify, and publish, the form, procedure, and assessment criteria.
4. The entire board is obligated to monitor and assess the evaluation system.

Even though board assessments in India are still in their buoyant stage, mandated laws and regulations have resulted in a number of developments in the review and disclosure practises of listed companies in India.

Here are some recent statistics:

BOARD EVALUATION: THE GLOBAL TREND & REGULATORY PROVISIONS

In many countries, board evaluations are becoming increasingly prevalent, even without specific regulatory requirements. For example:

• In Israel, consultancy firms are advising companies to prioritize board effectiveness in their corporate governance agendas.

• In contrast, countries like Poland and Turkey have implicit board evaluation requirements,

• While Japan and the UK have incorporated these principles into their corporate governance codes. The UK's Corporate Governance Code of 2016, for instance, stipulates both internal and external evaluations, particularly recommending external evaluations for FTSE 350 companies at least once every three years, along with regular evaluations of board committees. It also emphasizes the role of senior independent directors in evaluating the board chairman and advocates for transparency by disclosing the evaluation process in the annual report.

• Similarly, in Singapore, the Singapore Code of Corporate Governance, 2018 mandates an annual assessment of board effectiveness and individual director contributions, requiring disclosure of the assessment process.

• Countries like India, Spain, and the USA have incorporated board evaluation mandates directly into their rules and regulations, with the USA requiring annual performance evaluations of boards as per the NYSE Corporate Governance Guidelines.

Most countries adopt a "comply-or-explain" approach, allowing deviations from these recommendations if they are properly explained. Globally, the stance on board evaluation is not uniform and is quite varied. The below table outlines the different approaches:

The primary issues that hinder board performance evaluation often involve interpersonal dynamics and the overall culture of the boardroom. Common problems include disruptive behaviour, lack of trust, divisions among members, and ineffective decision-making processes.

To address these issues, performance evaluations are crucial, yet they require considerable time, dedication, especially from the Chairperson, and sensitive handling due to their complexity.

Effective performance evaluations demand extensive preparation and include the use of well-crafted self-assessment tools like questionnaires and deepen interactions with all the Board members.

Evaluations should be conducted by experienced evaluators and the process should be kept confidential to protect both the organisation and its directors. Results should be discussed constructively without causing confrontation or infringing on collegiality among board members. It is important that the board and every relevant party involved in board evaluations support and actively participate in the process.

India's strong corporate governance should take a step forward by requiring an External and Independent Agency to assess how company boards are performing. This change will help make sure companies are being run well and fairly. It's like having an impartial referee to check the game is played right. This move will build more trust among investors and make companies even better. It shows India is a leader in making sure businesses are responsible and transparent.

Several businesses, however, appear to regard annual performance assessments as just another 'tick-the-box' exercise. This practice does not resonate well, with the good governance practices boards, boast of today.