::..:: ARCHIVES ::..::

1. In post-Satyam India, what are the key steps that enterprises must take while forming their board?
The first challenge is to identify the board members, a task that should be taken up by the nominations committee — if one exists. Armed with a clear remit and a carefully articulated specification, the task of the committee is to bring objectivity to the selection process, to seek external counsel as necessary, and bring recommendations to the board that reflect the requirements of the business, rather than personal preferences of the chairman or CEO.

The nominations committee process should involve defining what kind of person the board needs. The more rigorous the process, the more likely it is that a board will be able to identify the best available talent. Every board should have at least one independent director with a strong understanding of the business sector who can get inside some of the more technical issues that may be beyond the comprehension of fellow directors. Without such expertise around the table the right questions will never be asked.

Companies can also improve the quality of discussion and broaden the perspective inside boardrooms by identifying qualified people from abroad, particularly from Europe and the US, who have the right strategic fit. Foreign directors are used to asking questions and are likely to be more disciplined and rigorous when it comes to preparation and making an active contribution during meetings.

Once a director has committed to join a board, he or she should benefit from a carefully designed educational process that will update him or her on what the company stands for and the direction it is taking.

Some boards and prospective directors conduct a due diligence on each other to decide whether the marriage will work. Board members should be keen to determine whether a candidate is likely to make a good contribution; likewise, candidates also need an opportunity to ask questions, learn more about the company and the role, and decide whether this is the right board for them.

Indian companies should start allowing their executives to take on at least one external directorship – that is one painless way of broadening the candidate pool. Most big companies seeking independent directors are themselves reluctant to let their own executives take up a similar role for an external board. This is contributing to skills shortage and an imbalance on Indian boards, as well as limiting the opportunity for senior executives to develop and learn as non-executive directors of other non-competitive companies. The current unhealthy situation, where a few directors sit on a large number of Indian boards, could be corrected to a large extent if these restrictions were lifted.

2. How should management balance its desire for independent decision-making with the board’s watchfulness?
Spencer Stuart’s research in the US involving non-executive chairmen, many of whom are retired CEOs, shows that perspectives on boardroom leadership have evolved dramatically. According to these leaders, 10 to 15 years ago they would never have contemplated not being both the CEO and chair. Now, however, they see the value in having a non-executive chair; allowing the CEO to focus on running the company and freeing him or her from potentially sensitive board leadership tasks such as evaluating board directors.

It is also critical for companies to realise that boards cannot function effectively unless constructive dissent is an accepted pattern of behaviour. However, many find it hard to accept that a director who disagrees with them is not trying to cast aspersions or cause harm. Although it is healthy for a range of views to be aired in the boardroom, in the Indian context, this is still an exception than a rule. Many directors are afraid of looking unintelligent or sometimes they are just afraid to confront the management.

Moreover, unless the CEO and management are receptive to outside opinion, it can be very hard to articulate, let alone enforce, one’s point of view without offending other people. As a board director in a promoter-owned or family-owned company, one does not have the ultimate sanction available to boards outside India, such as firing the CEO if you don’t agree with what he is doing. Inevitably this curtails debate.

Therefore, the more enlightened boards have followed the example of the US and appointed a lead independent director to act as a spokesperson for fellow non-executive directors and to run “executive sessions” at which only independent directors are present. Those who have sat through such sessions testify to their value and believe they should become a regular part of the board calendar. The right kind of lead director will also know how to put important points across to the board so that, over time, a chairman will start to brook more interference.

3. Are there any best practices you can share with reference to running a board on an ongoing basis - issues like how often should members retire or when should new members be inducted, etc.

- Despite the existence of remuneration committees, Indian companies don’t publish the criteria for evaluating the CEO or executive directors and indeed their level of compensation, something that is required in the US and the UK. There needs to be greater transparency here.

- We need to set mandatory term limits, which would create a more effective boardroom culture and increase effectiveness in functioning. As of now, the term limit for independent directors is nine years, beyond which they lose their “independent” title. However, this is only a recommendation and compliance is non-obligatory.

- As Indian boards put into place board governance practices, one of the tools they could use to measure the effectiveness of their functioning is the annual board evaluation. Unlike the US and the UK where listed companies are required to undergo a board evaluation each year, board performance review in India is still in its infancy. Independent surveys have found that one out of every five Indian companies appraises their board's performance. The move towards board reviews has been relatively slow and there continues to be some resistance to the idea of individual director appraisals.