We expect that the Rajya Sabha will pass the Companies Bill 2012 in the Budget Session, in February 2013, and we shall get a modern Companies Act. With the new Companies Act in place, the corporate governance and corporate regulation will usher into a new era. We, who have interest in corporate affairs, are waiting for exciting and challenging days ahead.
Board appraisal is one of the new requirements in the Companies Bill 2012. The Code For Independent Directors included in the Bill (schedule IV) requires separate meeting of independent directors, at least once in a year, without the attendance of non-independent directors and members of management. The meeting, among other things, shall review the performance of non-independent directors and the board as a whole; review the performance of the chairperson; and assess the quality, quantity and timeliness of flow of information between the company management and the board. The Bill also requires that listed companies should disclose, in the board report, the manner in which formal evaluation has been made by the board of its own performance and that of its committees and individual directors.
Evaluation of the board has been accepted as one of the best practices to improve effectiveness of the board. Evaluation helps identifying gaps in the knowledge, skills and experience in the board, bringing diversity, improving the balance of power between the management and the board, assessing the quality, quantity and timing of information flow and identifying individual directors who could not contribute to the board’s performance due to paucity of time or otherwise. It helps to avoid animosity between the management and the board. None can deny the fact that board appraisal is an important toll to improve board effectiveness. But it is difficult to effectively enforce the practice by mandating it under law.
Board appraisal is not a practice in India, although it finds mention in various documents, such as Voluntary Guidelines on Corporate Governance issued by MCA in 2009. Companies are not ready to adopt the system. The first requirement for introducing such a system is that the management should take hands-off approach in the appointment of directors, particularly, non-executive and independent directors. In absence of such an approach board appraisal will remain on paper only. The Companies Bill 2012 requires listed companies to set up a Nomination and Remuneration Committee. I am not sure that the management, except in a few companies, will allow the committee to function independently. In companies with concentrated ownership, the management has no motivation to dissociate itself from appointing directors. I will be surprised if the government allows the committee in listed PSEs to function independently.
It is likely that the current process of appointing directors will continue. Similarly, it is unlikely that the Committee, in a private sector listed company that is managed by the controlling shareholder group, will nominate someone without the tacit approval of the management. Today, defacto, directors are appointed by the incumbent management. The practice is unlikely to change in the near future.
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Some may argue that we should not take the extreme position that board appraisal will be a farce if the Nomination Committee does not function as independently as expected. Even in a company where independent and other directors are appointed by the management, an effective process of board appraisal will benefit the management in constituting a balanced board with diversity in skills, knowledge, experience and gender and to get rid of a non-contributing director. It is true that the management will benefit from the process provided it has the motivation to extract the best from the board. Unfortunately, the management of only a few companies appreciates that the board’s primary function is monitoring the executive management and advisory role comes as an outcome of the monitoring role. Most companies take directors as friends, philosopher and guide and that dilutes the oversight function of the board. It is seldom that the management is transparent before the board except, perhaps, in a crisis situation.
Only if the management recognises that a board that is strong in its oversight function, can contribute effectively in improving the enterprise performance, it will benefit from board appraisal.
I believe the idea of board appraisal is welcome, even though it may be ahead of its time for now. Like any new idea, this idea will also evolve and we can look forward to the day when the culture of ‘managing the board’ by the CEO will be a thing of the past.
Email: asish.bhattacharyya@gmail.com
Affiliation : Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), The Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited