INDIA UPDATE – The India Board Report 2011: Board Composition, Effectiveness and Best Practices
- Along with the global economic and financial crisis, a string of frauds resulted in the introduction of stricter corporate governance mechanisms in India, with additional requirements, including in the pending Companies Bill, under consideration. While these changes were expected to plug new holes found in the existing regulations, there was also growing realization that the biggest challenge was effective implementation, and therefore most changes introduced at the time of this edition of the India Board Report had been voluntary. The survey findings highlight some of the limitations of regulatory compliance and the existing gaps in implementation.
- Risk management is increasingly seen as a key governance agenda at Indian companies, but needs more attention at the board level. 31% of companies do not have their board’s involvement in systematically addressing corporate risk management. 61% of the directors felt that linking director compensation to risk and responsibility will have a high impact on improving board effectiveness.
- A limited talent pool perceived as biggest impediment in changing board structure. The most desired change in board structure is increased diversity.
- In the 2009 survey, 57% of the independent directors thought that SEBI corporate governance regulation Clause 49 was extremely useful and enhanced shareholder value. However, the percentage has reduced significantly in 2011 with only 38% of the respondents rating Clause 49 as extremely useful.
- The top three board priorities indicated are ensuring overall corporate and statutory compliance (90%), monitoring business and operating performance (87%), and establishing and monitoring financial standards and internal controls (82%). Leadership development, succession planning, CSR and risk management continue to be low on the board priority list. Two-thirds of the independent directors believe that the roles and responsibilities of non-executive directors are not defined clearly.
- More than 50% of the directors surveyed said that their boards hardly ever evaluate their own effectiveness. Among the boards that do conduct evaluations, the majority opt for self-assessment.
- The survey reveals a wide divergence in compensation patterns.
Corporate governance is a subject that attracts a lot of media attention, especially just after a scandal. This usually prompts governments and regulators to appoint committees to review and change laws. After a while, the hype fades and it’s back to business as usual.
Regulation only ensures compliance. Unfortunately, compliance does not equal commitment to corporate governance. This has been one of the key findings of the third edition of our biennial India Board report – 2011. Clause 49 of SEBI’s listing agreement has been widely praised, in terms of the standards of corporate governance that it sets. However, only 38% of the respondents felt that it significantly contributed to improving governance!
There are other indications as well. More than half the respondents pointed out that their boards did not have a formal process to evaluate their effectiveness. Two-thirds of the independent directors surveyed said that the roles and responsibilities of non-executive directors were not defined clearly. Around 50% of them felt that the time spent by the board in completing the agenda of the meeting was inadequate.
This brings to mind several questions: How can there be improvement without measurement? Are independent directors appointed only to comply with regulations? do companies even define what is expected of the board, and the role of directors? Little wonder then, that companies complain about the lack of talented individuals to fill these positions.
The best governed companies have a real commitment to corporate governance, and not just paper compliance. This implies a proactive, voluntary approach to make best practices integral to their functioning. Companies need to clearly define performance metrics for boards and directors, and evaluate this on an ongoing basis. The role of independent directors needs to be clearly spelt out. If this clarity is achieved, then the competencies or qualifications of directors can be better defined, making the selection process more focused.
The third edition of the India Board report continues its focus on the functioning of corporate boards in India. As always, we seek to identify and compare trends in governance practices pursued by Indian companies. The report also highlights the implementation challenges faced The third edition of the India Board report continues its focus on the functioning of corporate boards in India. As always, we seek to identify and compare trends in governance practices pursued by Indian companies. The report also highlights the implementation challenges faced and presents the views of independent directors on ways to improve board performance and effectiveness.