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Understanding the Composition and Diversity of Boards in India

The Board of Directors plays a vital role in the overall functioning of a company. Hence the composition of the Board is crucial.

Board composition, including its size, its independence and diversity, are essential aspects while deciding the composition. The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) have mandated various requirements concerning Board composition.

Size: As per LODR, the Board should comprise a minimum of 6 Directors. Given that the Board has 5 mandatory Board level committees, it is important for a company to decide whether 6 Directors are sufficient.

Chairperson: The Board has a Chairperson, who is first among equals. He/ She could be an Executive Director (ED) or a Non-Executive Director (NED), whether Independent Director (ID) or Non-Independent Director (NID). A desirable option is to have an NED as a Chair. The Chairperson leads the Board, while the Managing Director heads the management. It is for the Chair to hold the Managing Director accountable, and hence it is desirable that the two positions are held by different persons.

Optimum combination of EDs and NEDs: The Board should comprise a mix of EDs and NEDs. Depending on whether the Chair is an ED or ID or NID, LODR has mandated a minimum percentage of IDs on a Board. However, nothing prevents companies from having more than the prescribed number of IDs on their Boards.

Diversity on Board: There is a need to have diverse Boards. Diversity should not be restricted to gender only, and should include diversity of skills, background, age, and geography. The advantage of having a diverse Board is that different Directors, based on their backgrounds, can contribute as per their expertise, express different points of views leading to more rounded discussions.

Presence of Woman ID: LODR prescribes having at least 1 woman ID on the Board of companies. This was an attempt to improve gender diversity on Boards. There is an urgent need to have more than the prescribed minimum woman IDs on Boards, so that gender diversity does not degenerate into tokenism. Also, companies should be encouraged to have more women as KMPs and in senior management positions, so that gender diversity is not restricted to the Board alone.

Skill diversity: LODR mandates that Boards should identify skillsets of Directors that are required on the Board, and to map the skills of existing Board members with the identified skillsets. This would help in identifying the missing skills on the Board, and enable the Nomination and Remuneration Committee to identify new Directors with the desired skills. Unfortunately, as per Annual Reports of companies, most companies do not seem to be identifying any missing skillset on the Board.

Age diversity: With new age companies, with newer products, it is important to have a few younger Board members on the Board since they may be able to contribute better. While some companies do have 1-2 younger Directors, Boards continue to mostly have IDs post their superannuation from an active working life.

Geographical diversity: With companies increasingly having a global presence, it is important to have at least 1 ID who brings an international perspective. Most Indian Boards do not have too many Directors with such experience.

Board composition is the starting point for a Board to be effective. Enough time should be spent by Nomination and Remuneration Committees and Boards in getting the right Directors.

Heeral Nichani