Ironically, the processes in and around the boardroom generally focus on literal compliance and box-ticking in all matters — be it selection and appointment of directors, or boardroom governance. The directors, in most of the cases, often look and act distant and detached, and are unable to play a proactive and strategic role or act firmly.
The role of the boards has been under severe criticism for failing to ensure quality of corporate governance in general, and to prevent corporate frauds in particular. The boards of corporates which failed in recent times — like Satyam, ILFS, DHFL, PMC, Yes Bank — were star-studded and yet failed to detect brewing frauds by their promoters. The boards of these companies could not identify and check diversion of funds through circuitous routes, dubious related-party transactions and lending, financial indiscipline through webs of group companies, the use of financial reporting to hide frauds and business failures, continuing deterioration in financial and operational viability, etc.
The issues and questions that emerge in the context of board effectiveness are these:
— What was the role of the board and of individual directors?
— Did they understand their roles, and were they well-positioned to perform them?
— What was the composition of these boards like?
— What was the nature and level of engagement of the directors?
— What was the extent of diversity in the boards – in terms of demographic, age, gender, skills and experience?
— What was the quality of board processes and board papers?
— Were the boardroom culture and the quality of leadership conducive to corporate governance and fraud detection?
The board of directors of a company has the responsibility to provide strategic direction and exercise overall superintendence and control over the affairs of the company. As a gatekeeper of stakeholders’ interest, it has to ensure transparency and fairness in governance too, as well as compliance with the legal framework.
The Companies Act 2013 and SEBI regulations have constantly endeavoured to provide a legal framework for enabling the company boards to discharge their responsibilities. The law stipulates things such as optimum size of a board, its composition and diversity, quality, independent directors with onerous responsibilities, and the like, in sufficient detail. In case a board and its members fail to perform, they are subjected — collectively and individually — to criminal and civil liability.
Ironically, the processes in and around the boardroom generally focus on literal compliance and box-ticking in all matters — be it selection and appointment of directors or board room governance. The directors, in most of the cases, often look and act distant and detached, and are unable to play a proactive and strategic role or act firmly in protecting and balancing stakeholders’ interest. Board composition lacks wisdom, vision and skills to contribute to the enterprise value, or command respect from or counter dominating promoters.
Corporates are becoming larger, more global and highly complex with ever rising stakeholders’ expectation and regulatory oversight. Today’s boards need to be adequately diversified to provide strategic input across the enterprise value chain — focusing on longer-term and forward-looking issues having bearing on technology, product development, succession planning, talent development, cyber security, market positioning, and enhancing value for stakeholders.
What determines the effectiveness of the board is the ability of the directors to understand complexities of the business, deliver effective governance, and ensure sustainable long-term performance. Apart from diversity in terms of abilities and competencies, they also need to have independence of mind and action. They need to engage themselves in all aspects of board responsibilities, ask the right questions, and challenge the management with a demonstrated ability to make sound business decisions. Independent directors should organise themselves and act like any other profession, and not treat independent directorship as a pastime. They should be closely knowing and tracking the business. They should also remain well-informed of competitive trends, regulatory environment and technological advancement.
The responsibility for effective governance within the boardroom lies with the chairman. He should enable the board members to work effectively as a group and encourage them in order to keep the board motivated. Ensuring high-quality board papers, drawing attention of the directors to relevant issues, encouraging independence and freedom of expression are all hallmarks of a high-quality board, and the onus to ensure these is on the chairman. Diversity of the board is meaningless unless the chairman facilitates the proper use of the directors’ talents in the board and its processes.
It is also the responsibility of the board to ensure that its committees effectively discharge their roles and responsibilities. For instance, the board cannot abdicate itself from the requirement of independence of audit and auditor in case the audit committee fails to ensure that, or in case the nomination & remuneration committee does not prioritise succession planning. Effective boards use self-evaluation mechanisms as a tool for enhancing the efficacy of the board, its committees and its directors.
In order to ensure effective governance in family- or promoter-owned companies, it is high time that the Companies Act was amended to provide for a two-tier board: a management board and a supervisory board, a practice followed by many countries in Europe and elsewhere. The management board comprising only the managing director and employee directors may be responsible for formulating a shared vision and strategy, and for management of the company. The supervisory board comprising independent and other external directors appointed by the shareholders, is made responsible for providing strategic direction to and overseeing the performance of the management board.
The contributors is former MD and CEO ,PTC India Financial Services Ltd and Secretary ICAI.