Board Refreshment: Finding the Right Balance for your Board!
17 Mar 2021
“Heterogeneous BoDs with independent thinking enforce governance, and diversity strengthens creativity.”
- Pearl Zhu
Today the primary concern of investors and all the key stakeholders is that of stale Boards. It means that the Board which has not added new members for many years, may become complacent, whereby a lack of independence,new perspectives, and diversity could pose significant risks in relation to long-term performance and effective oversight of management. Therefore, finding the right balance for the Board is extremely crucial.
These days evolution of Board of Directors is often referred to as ‘Board Refreshment’. In these evolving times, businesses are bringing in innovative practices for the long-term sustainability and certainly, this evolution must begin at the top with the Board of Directors. Very interestingly, Board directorship is still considered to be a lifetime engagement for the directors on Board. In fact, we could say that we live in a corporate culture that still assumes that there is some problem when a director’s tenure is anything less than a perennial. However, this nowhere means that the seniority, wisdom and knowledge of such directors are not important for the growth of the company. Yet, it is extremely critical for the Board to evolve with the ever-changing business environment and hence their ‘Independence’ and ‘Performance’ play a vital role in creating a strategic Board. It is very important that the composition of Board must reflect company’s current strategies and plans.
Studies reveal that key stakeholders of countries like UK and US are very much aware of the concept of Board Refreshment, however, in India, we are still living in a culture where the Board follows an old school of thought where seniority in terms of ‘tenure’ is taken with deep seriousness. Emphasis on aforementioned terms like ‘Independence’ and ‘Performance’ seems to be gone for a toss while creating right Boards and nurturing their thought process for better decisions. Considering today’s scenario of Indian corporates, we realize that because of the incorrect composition of Boards and their irrelevant thought process, many companies have faced corporate governance failures. It is not always about having financial scams amounting to failures for companies, but if we check the data, unfortunately in most of the companies, governance failures have taken place due to improper systems in place. Certainly, composition of the right Board is the topmost in the list that can either make or break company’s vision. It is observed that very few companies in India know about the concept of succession planning and if at all they are conceptually aware, no plans in this regard have been implemented to ensure business sustainability.
Taking Indian corporates into consideration and how they could find the right balance for their Boards, lets list down some ways that can help companies to move towards the concept of ‘Board Refreshment’:
a. Conduct annual individual director’s evaluation
It is rightly said that a robust Board and the Board evaluation process followed by the Company can help in measuring both the group and individual performances. Such assessments if conducted on regular basis can help companies to determine the commitment, mindset and performance of directors’ basis their skillsets, independence and rational thinking, ability to take strategic decisions, engagement with stakeholders, style of communication and leadership and more.
Having a right mix of people at the top is a blessing. However, to attain such a combination is one of the most difficult tasks that companies face in practicality. It is very important that focus on the skillsets of directors must be taken as one of the topmost parameters for assessing the performance because with the ever-changing market conditions, it becomes extremely relevant to have upgraded skills for director or senior management personnel to take decisions with greater efficiency. Therefore, a regular review and assessment would not only help companies to have the right choices of directors at the top but also a great professional mix with varied skillsets and backgrounds would be a boon.
c. Establish Board renewal and succession programs with short term milestones
A Board renewal program with short term milestones creates a framework that allows the Board to plan and target its refreshment and tenure balance to specific objectives, while offering greater flexibility compared to term limits or mandatory retirement age policies. For example, companies can set a target of nominating a minimum of one new director to the Board every three years, or they can annually benchmark progress against an optimal Board tenure composition. This will give companies a broader mindset to shape up their future plans in a more strategic manner.
Many companies in India follow the process of ensuring Board governance from time to time. However, mere training of the Board of Directors is not at all the solution to get right Boards in place. Having same contents in the Board training will only lead towards tick the box approach and make the procedure mundane rather than giving benefits in the ling-run. Therefore, introduction of relevant topics to the Board considering the market conditions is extremely important especially in order to make them think big towards the future of the Company and make right decisions at the right time.
Therefore, having renewed Board with fresh and innovative thinking is the need of the hour. A refreshed Board is an asset to every company and it must be highlighted that the lack of Board refreshment poses significant risks to Board performance and effective oversight of the Company.
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