It has been 6 years since performance evaluation of the Board, its committees, the Chairperson of the Board and individual Directors was mandated in India through the Companies Act, 2013 (which came into effect on April 1, 2014). Post coming into effect of this provision, the immediate reaction of a number of Directors was – “Why evaluate us? We were invited to the Board”.
Having reluctantly accepted the fact that evaluation had to be carried out, Directors and managements had several questions. Some of the common ones were – First, should the evaluation exercise be conducted internally or with external help? If internally, by whom? If with external help, by what kind of consultancy firm? Second, what should be the process for conducting the evaluation? Should it be strictly as law had envisaged? Third, should the process involve a questionnaire approach or discussions, or some combination of both? Fourth, once responses were received, who should collate them, if the process was conducted internally? Fifth, should feedback be a part of the exercise? And if so, who should give it, especially given the sensitivity involved? Sixth, who should be the custodian of the response sheets? Handing them over to any management person would make him/her privy to extremely sensitive information. Seventh, should the meeting of Independent Directors (IDs) discuss only evaluation?
Almost no thought was given to the timing for conducting this exercise, with most companies undertaking it in the last quarter of the financial year.
Over the years, annual report disclosures, relating to evaluation reveal that all companies are conducting evaluation exercises every year. They also indicate that “at least” one meeting of IDs took place for the purpose of evaluation. While the disclosure in annual reports meets the requirement of law, in most reports the text does not convey anything substantial. A number of companies do not even clearly provide the mode used for the evaluation exercise (questionnaire/ discussion, or some combination thereof). Further, most companies continue to copy the exact language of law when it comes to disclosures relating to the separate meeting of IDs. Law had envisaged this process to conclude with a decision on whether or not a Director should continue on the Board of the company. This has been rightly questioned by most persons, in different fora, with the common argument being that an evaluation exercise should lead to improvement, and not to removal, should a person be found wanting. It has also been long believed that feedback is the correct way to conclude this annual exercise. However, very few companies seem to be doing so, rendering the exercise pointless.
Increasingly, the better governed companies, who have started seeing value in this exercise, have started discussing/ presenting the result of the exercise at the Board/ committee level. Some of these companies have also started providing feedback to individual Directors. This process is usually led by the Chairperson of the Board or of the NRC. A few companies have further raised the bar. These companies, in addition to giving feedback to Directors, also decide on an action plan for the Board and its committees, to make this exercise truly meaningful. Not only do these companies disclose this aspect in their annual reports, but they also mention specific findings/ action plan for the future, to promote a spirit of transparency. Some of these companies have also started disclosing the progress made on specific action points decided on in the previous year’s exercise.
It is clearly time to move beyond ticking the box as far as evaluation is concerned. Feedback, is an essential element, but to truly derive value, companies must draw up an action plan, disclose it in the annual report, and ensure that the actionables are addressed before it is time for the next annual exercise.