Best Companies 2018

India Inc's directors face first appraisal

The Companies Act requires the BoD's report to indicate the manner in which the formal annual evaluation by the board of its own performance.

The Companies Act requires the BoD's report to indicate the manner in which the formal annual evaluation by the board of its own performance. 
MUMBAI: Performance appraisals are an annual feature for most employees. However, for the first time, in the recently concluded financial year (2014-15), all directors (including independent directors) of listed companies were subjected to a formal appraisal.

This was a requirement pursuant to the Companies Act, 2013 and the amendments to the Listing Agreement - the latter came into effect last October. The main objective is to provide a constructive feedback to individual directors, identify areas of improvement for the board of directors (BoD) as a whole and usher in better corporate governance.

If you as a shareholder want to know whether your favourite chairperson got a triple-A rating, you will be disappointed. Only the manner of evaluation is required to be detailed in the annual reports and not individual results. A similar disclosure norm exists in many countries, including the UK and Australia.

"The relationship between shareholders and its BoD is fiduciary. Directors have a heightened sense of responsibility, given the rapidly advancing quality and depth of governance in India. It is wrong to think that the results of self-appraisal of the board and peer appraisal of individual directors must be shared with shareholders. Performance evaluation requirements are salutatory provisions which will rapidly enhance engaged governance," says Shailesh Haribhakti, chartered accountant and independent director on the board of several companies such as ACC and Mahindra Lifespaces.

The Companies Act requires the BoD's report to indicate the manner in which the formal annual evaluation by the board of its own performance, that of its various committees and of individual directors, was carried out. The Listing Agreement requires a company's annual report to disclose the evaluation criteria as set by the company's Nominations & Remuneration Committee (NRC).

A greater onus has been placed on independent directors who have to review the performance of the non-independent directors, the chairperson and the board as a whole (see table on the evaluation responsibilities).
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"This is a start of board evaluation in Indian listed companies. However, shareholders' interests will not be served by such an academic exercise. Institutional investors need to ensure that company boards are populated with truly independent directors and decisions by the promoters are not blindly endorsed by the board members," says Shriram Subramanian, founder and MD, InGovern Research Services, a corporate governance advisory firm.

Countries such as the UK, Singapore and South Africa, in addition to an evaluation conducted in-house, also call for an externally facilitated evaluation carried out by independent experts. In the UK, an external evaluation of the board of FTSE 350 companies is required at least once in three years.

"In India, companies have the flexibility to choose the evaluation modes, tools and techniques that suit them best. This being the first year of mandatory requirement, companies have largely opted for internal evaluations. However, they have taken assistance from external professional services firms in facilitating the process, such as laying down the criteria for evaluation, or designing of questionnaires," says Sumit Seth, partner, PwC.

Reliance Industries (RIL), in its annual report for 2014-15 states: "The company had engaged two consultants for looking at the best practices prevalent in the industry and advising with respect to evaluation of board members."
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M L Bhakta, senior partner at Kanga & Co and an independent director of RIL, says, "One view is that an external evaluation is more likely to be frank and independent. The other view is that such an agency would necessarily have to depend on the reports received from others. Personally, I do not see any reason to have an evaluation done by an outsider."

Haribhakti says that an external evaluation shouldn't be considered in the initial phase, but could be contemplated perhaps five years later.
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Seth admits: "Board evaluation is a new concept and India Inc is on a learning curve. The process involves its own complexities, such as determining the right evaluation criteria."

Annual reports for 2014-15 of a few leading listed companies provide interesting insights. Infosys made use of a questionnaire for conducting effectiveness surveys. Each board member was requested to evaluate the effectiveness of the board dynamics and relationships inflow, decision-making by the directors, company performance and strategy and effectiveness of the whole board and its various committees on a scale of 1 to 5.

For independent directors, whose key roles are governance, control and guidance, some of the evaluation criteria were their ability to contribute to and monitor the company's corporate governance practices and to introduce international best practices to address top management issues.

At Tata Consultancy Services (TCS), self-appraisal by the board was done on criteria such as board composition, effectiveness of board processes, information and functioning. For evaluating independent directors, the NRC adopted criteria like preparedness on the issues to be discussed and constructive contribution and inputs in meetings.

It's up to India Inc to ensure that evaluation is not relegated to a mere compliance exercise, but is used as a tool for better governance, say experts.

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