What Makes Great Boards Great! Performance Evaluation by Boards and Role of Independent Directors

CS Divija Dave-MentorMyBoard Team

11 Feb 2021

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Board Governance is frequently discussed but often misunderstood. To my belief information asymmetry is the root of board challenges. Independence of Independent Directors is one of the major discussion stakeholders are now having before investing or being a part of any organization. When the directors are truly independent, somehow, they lack domain knowledge and ability to adopt as well as understand the senior counterparts and business environment they are stepping into. The typical engagement of Independent Directors with the rest of the Board completely lies in alignment with the meetings planned during the year i.e. somewhere around not more than 8 times a year. How can we expect that merely by meeting eight times in a year, Independent Directors will have more knowledge about the Company than the rest of the Board? Are they taking special interest to be an inclusive part of the Board or are they lacking their independence to share their viewpoints as rest of the Board has overpowered them? There are multiple questions that are triggering our mind when we try to decode how independent our Independent Directors are and what is their exact role in today’s day and age.

Talking about typical Indian Boardroom scenarios, public at large is extremely overwhelmed to get on to the position of directorship without even analyzing the consequences of accepting such position. The name ‘Director’ itself seems so fascinating that people are ready to be a part of any Board. And probably this is exactly where the problem of understanding to role of Directorship or Independent Directors starts. Therefore, choosing right Boards with right people is one of the basic steps that every Company should consider. I always say that Company is an artificial person by law, however, Board of Directors are the living human beings representing the Company. Their right attitude, right behavior, ability to take timely decisions help stakeholders to take better investment decisions and be a part of the Company. In simple words, Board of Directors are the ‘Value Creators’ of the Company. Let us discuss about few aspects that would help us realize strengths of our existing Boards.

It is important to note that Independent Directors should be the torchbearers, advocates and enforcers of sound governance principles in the Company especially during the challenging times. The real test of Board of Directors especially, Independent Directors comes when the Company is in crisis. At that point, the accumulated judgement and wisdom of Independent Directors are crucial to make sound decisions under pressure. Taking examples of COVID times when Boards especially Independent Directors adopted an entrepreneurial mindset to reassess their business and take measures to make it sustainable during these unforeseen times. All these steps and decisions were well applauded by the rest of the Board. All it takes is a good chemistry amongst the Board members and encouragement to move forward as a team.

Another important aspect to have great boards in place is to have regular performance evaluation. Boards perform their important roles in the Company, starting from providing director and advice to the Company, they initiate controls to monitor risks and growth attached to a Company. Board Evaluation as a concept typically examines these roles and responsibilities of Boards to assess whether they are functioning effectively. Since Board Evaluation comes as a mandate for listed companies, it is extremely crucial to understand that the effectiveness of Boards can never be assessed by merely following this as tick the box exercise. It is important for companies and its internal stakeholders to consider a 360 degree check on overall aspects related to the functioning of Boards. Specifically considering three major aspects i.e. Understanding of the Board about the Company, its People and Processes is vital to give a tangible shape to the entire procedure of Board Evaluation. Further, in order to fine tune the procedure, here are some of the basics that should always form a part like:

·        Assessment of Board Structure

·        Composition and Diversity

·        Board Dynamics

·        Corporate Governance aspects

·        Understanding on Business Strategies

·        Financial Reporting Mechanism & Internal Controls

·        Supporting & Advisory Roles of the Board.

Considering Performance Evaluation of Boards as one of the best practices to be followed by companies, the evaluation methodology and the process must have some degree of flexibility and international variance as well. The process should be tailored to the requirement of the company, the specific situation it is in, the stage of the company’s lifecycle, the corporate structure, the Board culture and the embedded processes. These few pre-designed criteria by Companies would help in setting wonderful boards in the long-run and certainly the desired outcome would also form a part.

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Director's roles and responsibilities are also consistently demanding and changing drastically in the National and International landscape. The demand for a dynamic, visionary Directors and futuristic Boards is emerging substantially due to increased responsibilities imposed under Companies Act 2013.

In such a scenario Director should engage in -

·        Self-Assessment of Boardroom mechanics

·        Evaluating hard-wired practices and reforming

·        Understanding changing Board dynamics and staying updated.

·        Abiding by prescribed industry norms and critical responsibilities.

·        Building futuristic boards and Success Planning

·        Setting agile Board cultures

·        Building Board diversity

Click Here to Read Re-examination of Purpose by the Boards in Post - Pandemic Era