When Sebi Chairman M Damodaran said recently that some people get on company boards and become permanent entities - more permanent than the furniture in the boardrooms - he raised a fundamental question that every company should ask frequently: Is your board of directors competent enough or are the board slots being filled up with those who have made it a profession of becoming directors?
Tom Neff, chairman of Spencer Stuart in the US, says the answer lies in having a proper evaluation process to rate the performance of the board members.
Sitting in the sprawling Mumbai office of Spencer Stuart, which is one of the world's leading executive search consulting firms, Neff says his interactions with some of the industry captains here show that India Inc is well on its way to follow the evaluation process adopted by US companies in the last few years.
Neff should know as he founded the Board Services Practices in the US more than 20 years ago. According to him, unlike five years ago, there are much better checks and balances in today's boardrooms in the US.
Boards are far more independent, with around 80 per cent of directors for S&P 500 companies completely independent of management. There are new mechanisms in place to strengthen boardroom independence.
Boards, he says, now use an improved process for selecting new board members that is normally led by the nominations committee. They regularly hold executive sessions during each board meeting without the CEO present.
These sessions allow independent directors to discuss the effectiveness of management, the quality of board meetings and other issues or concerns. In spite of initial resistance, boards have found the practice so helpful that many hold an executive session after every
board meeting rather than the suggested once or twice a year, Neff says.
India Inc would do well to listen to Neff. For, independent surveys have found that only one out of five companies appraises the board's performance in India. The move towards board reviews has been relatively slow and there continues to be some resistance by older or more senior directors, in particular, to the idea of individual director appraisals.
The encouraging sign, however, is companies like Infosys, Wipro, Hewlett Packard and so on - longtime leaders in corporate governance - are finding that thoughtfully planned and executed evaluations benefit them in large and small ways, ensuring that issues brewing below the surface are addressed promptly.
At Infosys, for example, the board evaluates the performance of non-executive/independent directors through a peer-evaluation process every year. Each external board member has to present before the entire board on how they have performed/added value to the company. Every board member evaluates each external board member on a scale of 1 to 10 based on the performance indicators.
Some of the performance indicators on which the independent directors are evaluated are their ability to contribute to and monitor the company's corporate governance practices, active participation in long-term strategic planning, and commitment to the fulfillment of a director's obligations and fiduciary responsibilities - this includes participation and attendance.
At Wipro too, evaluation of board members is rigorous. The board governance and compensation committee oversees an annual performance evaluation to determine whether it is functioning effectively. The performance of individuals is also evaluated annually, and the chairman of the board communicates the results to each director.
In an annual peer appraisal done by a leading company, each director rates the other's performance based on a variety of criteria, such as preparing diligently for meetings, contributing meaningfully to board discussions, questioning conclusions presented by management, raising tough questions, understanding strategy, demonstrating high ethical
standards and so on.
Carolyn Eadie, Spencer Stuart's member of the European Board Services Practice, says the answer to whether these issues are better dealt with by an internally driven evaluation or with the aid of an external consultant depends on the specific needs of the board.
Some directors believe that an outside consultant's independence ensures that the process is more transparent and that issues are aired more freely. In addition, when there are problems on a board, the anonymity provided by working with an outsider not only encourages directors to speak more freely, but also ensures that comments by individual directors are shared with the whole board and don't get lost in the process.
One of Spencer Stuart's clients found that internally managed evaluations often lack independence and sometimes are constrained by a desire to avoid ruffling feathers. Strong views have a tendency to disappear from the final consolidated report that is shared with the full board.
By contrast, external facilitators have helped boards to air difficult issues, enabling them to discuss the concerns fully and come to a consensus on how to address them.