Board of Directors is a group of individuals responsible inter alia for taking strategic decisions for a company. Since the future of any company depends on the decisions of the Board, it is imperative that the Board is effective.
An effective Board is one which has role clarity, and one which works collectively for the betterment of the company. An effective Board also has a constructive relationship with the management, wherein while empowering the management, it also holds the latter accountable. Such a Board also keeps the interest of all stakeholders in its mind.
Effectiveness of a Board cannot be measured in quantitative terms. However, in order for it to deliver value, the Board should be conscious of whether it is working towards creating value for the company.
How fit are the Directors for the future? Are they really effective for the respective industry? Are they able to understand their roles and responsibilities?
The following five factors enable Boards to deliver value, and to be effective:
- Proper composition of the Board and Board level committees
One of the factors that significantly influences the performance and effectiveness of a Board is its composition, both numerically and qualitatively. Without an optimum composition, the Board will not get the benefit of insights of an adequate number of Directors. The composition should factor in the number of Directors, the types of Directors, and diversity of age, gender and expertise. Before inducting new Directors, the Nomination and Remuneration Committee must ensure that the incoming Director has the expertise that is either required or is missing on the Board. With an increase in the responsibilities of the Board, Board level committees play a very important role, since they can do a deep dive into matters. It is important to ensure that the composition of committees is well rounded, with each Director being a member of at least 2-3 committees of the Board. This would help extract value from Directors, as also prevent asymmetry of information among them.
- Role clarity
Role clarity is the most important factor which enables a Board to contribute to its performance. While law and regulations provide for the role that a Board/ Director has to perform, there is still some lack of clarity with regard to the role. To address this, law has mandated the requirement of issuing a letter of appointment to the Directors, setting out of the expectations. This would help in clarifying any doubts that might exist in the mind of a Director. Further, there is also a need for role clarity, so that Board does not stray into management’s domain. A proper induction programme is also helpful.
- Proper Board processes
It is important that the Board, and its committees, have proper processes, so that their functioning is effective. This would include setting up of an annual calendar for meetings, processes to ensure agenda notes, complete in all respects, are received by Directors in advance of the meeting, a proper action taken report, and proper and complete reporting on compliance.
- Board cohesiveness and Board-management interface:
Board cohesiveness reflects the ability of the Directors to work together in a constructive fashion to further the goals of the company. Along with cohesion, there is also a need for a proper Board-management interface. Proper communication between the Board and management is a non-negotiable requirement, and the recognition must exist that they have to work together to further the objectives of the company. The relationship between the Board and the management should be one of constructive tension, and not of peaceful coexistence, with no questions asked, and no answers given.
- Performance Review:
One of the key elements for enhancing the effectiveness of a Board is for it to review its performance periodically. The performance review should assess what the Board is getting right, and what it needs to improve. It should also review the unproductive activities that it might be undertaking. There should also be a proper feedback mechanism, and an action plan, with timelines. In evaluating itself, the Board should also be conscious of whether it is future ready.
Boards that are weak in any one of the foregoing five drivers of effectiveness will endanger the long-term success of the companies. It is time for Boards to sit up and take notice.
Kritika Goswami