How board evaluation can go beyond the checkbox activity, and become a powerful force to drive excellence in governance.
Ask any board whether it has conducted a board evaluation exercise. The response would be predictably affirmative. In many cases, the response would be untrue. The board would have gone through a mechanical mindless exercise of box ticking, with all Directors getting maximum marks and/or superlative comments, as if they are God’s gift to humankind. This is not a robust honest evaluation process.
Board evaluation is considered one of the basic building blocks of corporate governance. It is expected by the Regulators and demanded by stakeholders. Boards are therefore aware of the importance it carries. For a long time, Board evaluation was considered only a compliance activity by most Boards. While the Companies Act, 2013 and SEBI LODR Regulations, 2015 made it mandatory, in order to strengthen accountability and ensure Board effectiveness, in many Boards, it has been a tick box activity.
Unfortunately, even today, a number of listed companies do not look at it as an exercise for improving board effectiveness. In practice, many evaluations remain process-driven, rather than insight-driven, limiting their true impact.
Some of the common mistakes that Boards make are as under:
- Viewing Evaluation as a year-end Compliance Obligation
Board evaluation is often viewed only as a statutory requirement to be fulfilled every year, while completely ignoring the impact it can have on Board effectiveness. It is done merely as a tick-box exercise, without any value-adding discussions. It has been noticed that a number of companies treat this as a March activity (FY end). They rush through the entire process of distributing the questions, recording the answers and then creating a summary, just to get done with the statutory requirement.
- Absence of a Structured Evaluation Framework
In a number of companies, very little effort is made to conduct a comprehensive Board evaluation exercise. Hence the entire exercise ends up looking like a post-mortem of the year that was, and not of a value-adding initiative. Set questions, which are sometimes not even updated annually, are gone through. Providing feedback, and preparing action plans, are therefore not a part of such exercises.
- Limited Focus on Individual Director Effectiveness
In the name of sensitivity, the poor performance by any Director(s) often gets overlooked. A well-defined framework to carry out individual evaluations is important. The parameters for individual Director assessment should lay emphasis on participation, preparedness, and value addition by the person concerned.
- Underutilization of Nomination and Remuneration Committee (NRC)
NRCs should play a strategic role in Board evaluation. As has been noticed, NRCs often end up relying majorly on management personnel (from CS department or HR department) to prepare questionnaires, administer them and collate the responses received. There is therefore limited focus on linking evaluation outcomes to Board composition, succession planning, or strengthening Board processes.
- Inadequate Engagement in separate meeting of Independent Directors (IDs)
The separate meetings of IDs end up becoming a year-end formality, for discussing Board evaluation. There are also instances, where the discussions remain shallow, without discussing the actual important and sensitive issues.
- Lack of Confidentiality and Candid Feedback
If management persons are involved in the exercise, confidentiality is compromised. Evaluation then loses its essence. If Directors are unsure of how their responses will be kept/ archived, and who will have access to them, they will always be hesitant to respond, especially in a written format. As a result, the feedback is usually non-controversial and safe. To ensure the effectiveness of the evaluation exercise, Boards must establish confidentiality protocols, with the Chair of NRC taking a lead.
- Not Leveraging External Expertise
The unwillingness to consult and engage with external experts stems from the fear of perceived sensitivity or cost considerations. The entire exercise, in turn, ends up impacting adversely on the independence of the evaluation process.
- External expertise, without the right experience
Most Boards choose consultants based on cost considerations, without looking at the practical boardroom experience of the consultant. To hire a consultant, who has no firsthand experience of how boardrooms function, will be counterproductive since solutions will be bookish.
- Failure to Translate Insights into Action
The desired growth of the company becomes difficult to achieve if the results of the evaluation are merely documented, with no feedback given to the Board or the Directors. Further, if no action plan is drawn up, this exercise results in empty compliance.
- Superficial Disclosures in Annual Reports
Not all disclosures reflect the intensity and severity of the Board evaluation process. Many companies may simply state that the evaluation process was conducted, without actually disclosing the depth of the exercise. Such disclosures do not add enough credibility, and may invite questions from the investors and Regulators on governance maturity.
The aim of the Board evaluation is not just limited to confirm the existence of governance structures, but to check whether they are effective. The Board evaluation process should not be made up of only questionnaires or reports, but should result in value-addition. Improvement in Board processes, leading to better boardroom productivity, ought to be the objective. Sooner, rather than later, Board evaluation outcomes will hopefully be used to decide the compensation of Directors, so that the truly value-adding Directors get adequately compensated for their efforts.
