Over time, many Boards have moved away from being ornamental, to adding value. When a company is in the spotlight for negative reasons, the attention of all stakeholders immediately shifts to the company’s Corporate Governance practices, and its Board of Directors. Institutional investors, Regulators, media and other stakeholders are desirous of knowing the reasons that led to the company’s problems, and question the Board for the alleged lack of vigil.
The Board of Directors, as the apex body of the company, is tasked with superintendence, direction and control. The Board, together with the management, create and co-own strategy of the company. Also, the Board members, on behalf of all stakeholders, especially shareholders, have to hold management accountable for their actions. In some companies, where promoters also hold executive positions, the Board also has to ensure that the interests of other shareholders, institutional and minority, are safeguarded. Therefore, it is important for the Board to comprise the right mix of persons, with a proper balance in experience and expertise.
Before commencing the process of selecting Board members, it is for the promoter, management and/or the Nomination and Remuneration Committee (NRC) to first decide what kind of Directors are required on the Board. Do they want Directors who would truly add value or those who would have an ornamental presence in boardrooms? Other important aspects to be considered are what should be the size of the Board, how independent should the Board be, how diverse should the Board be, based on the company’s field of work, the skillsets required, and how experienced the Board members should be?
Optimum size – The Board should comprise an optimum number of Directors. It should neither be too large, nor too small. While a small Board could result in expression of limited views and opinions, a large Board could be very unwieldly, making decision-making difficult. The size of the Board should factor in the size and nature of the company and its business, the number of Independent Directors (IDs) required, and the number of Board level committees. It is felt that an ideal Board size should be between 7-10 Directors. This would also help in proper committee composition, wherein all Directors would be a member of at least 2 committees of the Board.
Diversity – There is a need for diversity of thought and opinion on the Board. Groupthink would prevent constructive discussions and deliberations in Board meetings. Diversity should include diversity of age, gender, skills, geography, experience and expertise. In India, most companies view diversity as having 1 woman Director. Studies have shown that women on Boards have a positive impact on innovation and growth. Many companies have global presence, or are planning to expand globally. The Board should consider including at least 1 Director who has exposure to the geography that the company plans to get into, or has experience in dealing with diverse geographies. Further, even though most companies feel that senior, more experienced persons, are better Directors, companies should consider having at least 1 younger person as a Director. They are likely to have a different and fresh perspective, especially in the current dynamic business environment. Also, in newer areas of specialization, such as AI, subject matter expertise would normally reside with younger persons. Diverse opinions, perceptions and outlook help improve discussions, and result in a more rounded strategy at the Board level.
Independent Directors – Corporate Governance Codes in most countries state that the Board of Directors should have a majority of IDs. The rationale behind this is that the Board is expected to bring an external, impartial and unbiased view to strategy, and to hold the management accountable, as also to protect the interests of majority shareholders. IDs on the Board can help fulfil these primary roles of the Board.
Executive Directors or Whole-time Directors (EDs/ WTDs) – In addition to IDs, the Board should also have EDs/ WTDs. They are Directors who are also senior executives in the company. Their presence on the Board will help since they would act as the link between the Board and the management. However, packing the Board with too many WTDs should be avoided.
Reputation – The reputation of the Directors, has a direct impact on the reputation of a company. Directors represent the company, and set the tone at the top. Even a single Director with a negative reputation, can adversely affect the reputation of the company and the other Board members.
Tenure – The tenure of a Director is very important. A short tenure is not good, since it would prevent the Director from adding value to the long-term plans of the company. Too long a tenure is equally bad. While independence is a state of mind, too long a tenure could often blunt the edge that a new Director is likely to have, and this could prevent him/her from asking some of the tougher questions in the boardroom. Also, with the business environment changing rapidly, it is prudent for the Board to decide whether a Director remains contextually relevant, especially when the proposal for his/her reappointment comes. This would help refresh the Board at regular intervals, and have a fresh perspective. Continuity, with change, too would be ensured at the Board level.
Shortlisting a Director – While selecting new Board members, the NRC and the management should spend sufficient time in selecting suitable persons, who have the ability to perform well as Directors. The source for new Directors should not be restricted to persons known to the Chair or management, but should include persons known to other Directors or to a search firm, who may be able to find a person with the expertise that the Board requires.
Stakeholders get the Board they deserve. The composition of the Board is the first step for improved Corporate Governance practices in the company, and the stakeholders should be vigilant when approving the appointment of Directors.