Board of Directors is the governing body, entrusted with providing strategic direction to the company, and acting in its best interest. The decisions taken by the Board determine the future of the company, making Board effectiveness vital.
Understanding Board’s effectiveness
A Board becomes effective when Directors have clarity of their role, and when they contribute meaningfully as a group, while fulfilling their individual responsibilities. An effective Board should also have a constructive relationship with the management, wherein while empowering the management, it also holds the latter accountable. Such a Board is also known to promote stakeholders’ interest.
Effectiveness of a Board cannot be measured in quantitative terms. In order for it to deliver value, the Board should be conscious of creating value for the company.
Some questions that an effective Board must ask itself include: Are the Directors adequately prepared for future challenges? Do they possess industry relevant expertise? Are they clear about their roles and responsibilities? Do they have the skillset required to guide the company?
Recognising the importance of an effective Board, the following are key five factors that enable Boards to deliver value, and to be effective:
- Proper Board and committee composition
The composition of a Board is the foundation for its effectiveness. Composition both numerically and qualitatively is important. Inadequate composition will not only result in regulatory non-compliance and penalties, but also deprive the Board of diverse perspectives. The composition of Board and its Committees should not only meet the minimum compliance standards, but should be adequately and properly constituted, with appropriate mix of executive and non-executive directors. Diversity in terms of background, experience, age, gender and geography should also be considered. Board-level committees play an integral role in ensuring that the Board performs effectively, making their composition equally critical. Before inducting new Directors, the Nomination and Remuneration Committee must ensure that it identifies the experience required from the incoming Director. It must also ensure that each Director is a member of at least 2-3 committees of the Board, to ensure equitable workload.
- Role clarity
Role clarity is essential to ensure that the Board is effective, and it does not stray into management domain. Although, statutory and regulatory frameworks outline the role to be performed by the Board/ Director, there continues to be some lack of clarity. To address this, law has mandated the requirement of issuing a letter of appointment to each Director, setting out the clear expectations from him/her. Additionally, it is important for each company to organise a proper induction programme for a new Director, to help him/her gain clarity about the role.
- Proper and robust Board processes
Effective Boards are supported by the presence of proper and robust Board processes. These include setting up of an annual calendar for meetings, timely circulation of agenda, along with the necessary agenda notes, a proper and complete action taken report, and accurate reporting on compliance.
- Board cohesiveness and Board-management interface
Board cohesiveness reflects the ability of Directors to work together as a team, in a constructive manner, to further the goals of the company. Proper communication between the Board and the management is a non-negotiable requirement, as they work together to further the objectives of the company. Constructive tension, and not of peaceful coexistence, with no questions asked, and no answers given, should be the nature of relationship between the Board and the management.
- Performance evaluation and review
A robust process of Board evaluation is considered key to improving Board performance. The performance review should assess what the Board is getting right, and what it needs to improve. It should also focus on reducing or eliminating the unproductive activities that the Board might be undertaking. The exercise should result in a proper feedback mechanism, and an action plan being drawn, with timelines attached to actionables. Focus should not be lost of future needs of the company while assessing the Board.
A Board focussed on the long-term success of the company should ensure that the five drivers mentioned hereinabove are functioning at all times.
Nidhi Kapoor
