India: Evaluation Of The Board Of Directors Of The Listed Company: The Need Of The Hour?

Last Updated: 2 February 2017
Article by Shashwat Sharma, Prithvi Vardhan and Simone Reis
  • Guidance has been provided by SEBI for the purposes of improving the evaluation process of the board of directors of listed entities.
  • Reiterates the position in relation to the evaluation process of board of directors under the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
  • Various aspects of board evaluation process such as the subject of evaluation, process of evaluation, feedback to persons being evaluated, action plan pursuant to evaluation process, frequency of board evaluation, responsibility of board evaluation and review of the entire evaluation process have been covered.

Introduction and Background

The Securities and Exchange Board of India ("SEBI") released a guidance note dated January 5, 2017 on the evaluation of the board of directors of a listed company ("Guidance Note") for the purposes of rendering guidance to listed entities in relation to the various aspects involved in an evaluation process of the board of directors and in improving the effectiveness of the board of directors while enhancing corporate governance standards.

In the recent years, India had moved from a regime which contemplated an evaluation of the board of directors of a listed company only at the option of such a listed company to a regime which now mandates listed companies to undertake the evaluation of its board of directors. With the advent of the Companies Act, 2013 ("CA 2013") and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("SEBI LODR Regulations"), listed companies were required to undertake mandatory evaluation of its board of directors and its various committees1.

However, given that the practice of board evaluation is still considered to be preliminary concept in India, majority of the listed entities merely ensured compliance with the law as laid down under the CA 2013 and the SEBI LODR Regulations to the extent mandated and failed to undertake active evaluation of the board of directors so as to improve the effectiveness of the board of directors. In line with the same, a study conducted by Ingovern revealed that although the Indian listed entities complied with the law as provided, such Indian listed entities did not give much attention to undertaking board evaluations in a manner so as to improve the overall performance of the board of directors.2 Additionally, the current ongoing battle of the Tatas and Cyrus Mistry required an urgent need to introspect the nature of compliances required to be undertaken by board of directors in terms of improving their effectiveness as well as analyzing the manner in which evaluation process of the board of directors are undertaken by listed entities.

In the present environment, SEBI undertook an analysis of the global practices in various jurisdictions in terms of regulatory requirements, best practices, internal versus external evaluations and disclosure requirements amongst other such relevant practices and accordingly, SEBI decided to issue the Guidance Note so as to assist in the evaluation process of the board of directors of listed entities and deriving best possible results in the effectiveness of the board of directors. These practices are merely recommendatory in nature and are not mandatory.

Current Regulatory Framework

In terms of evaluation, the CA 2013 and the SEBI LODR Regulations require for the boards of directors of listed companies to constitute a nomination and remuneration committee ("NRC") which is required to (a) formulate a criteria for evaluation of performance of independent directors and the board of directors; (b) carry out an evaluation of the performance of every director; and (c) determine whether to extend or continue the term of appointment of the independent director based on each of their evaluation reports. Evaluation of an independent director must be done by the board of directors of the listed entity excluding the director being evaluated. Additionally, independent directors are required to (a) review the performance of non-independent directors and the board of directors as a whole; (b) review the performance of the chairperson of the listed entity (while accounting the views of the executive and non-executive directors); and (c) assess the quality, quantity and timelines of flow of information between the management and the board of directors necessary for the performance of duties of the board of directors.3

Various disclosure requirements were also specified where the board of directors of listed companies would be required to provide a statement (placed in the form of a report at a general meeting) specifying the manner in which formal annual evaluation of the board of directors, committees and individual directors have been conducted and the performance evaluation criteria for independent directors in the corporate governance section of the annual report of the respective listed entity.4

Effectively, the aforementioned specifications provides that the evaluation of the board of directors is conducted at different levels, namely, at the board level, at the committees level and at an individual director level (including chairperson and chief executive officer)

Particulars of the Guidance Note

The Guidance Note stream lines the evaluation process as follows:

  1. pre-evaluation process;
  2. evaluation process; and
  3. post-evaluation process.

A. Pre-Evaluation

The Guidance Note prescribes the following:

  1. Identifying the objectives of evaluation: Such objectives may be general (standard objectives in terms of board evaluations) and specific (objectives specific to the board evaluation based on issues of concern, recent events etc).
  2. Criteria of evaluation: Developing the criteria for evaluation at every level within the board of directors depending on the functions, responsibilities, competencies required, nature of business etc. Here SEBI has also prescribed the specific issues that would require focus in terms of evaluation under each criteria. The criteria for different directors/groups are as follows:
    1. Board of directors (as a whole): SEBI has identified certain criteria in terms of evaluating the board of directors in certain core areas such as
    1. structure of the board of directors: touch points being competency, qualification and experience of directors, diversity.
    2. meetings of the board of directors; touch points being regularity and frequency of the meetings, quality of the agenda and the manner of discussion undertaken, participation of the members attending the meeting and the overall functioning of the board of directors as a team
    3. functions of the board of directors;
    4. board of directors and management; and
    5. professional development.

      In addition to the functions of the board of directors described in the SEBI LODR Regulations,5 the Guidance Note suggests the following additional functions to be undertaken by the board:

    1. documentation of the role and responsibilities of the board of directors (including the bifurcation of the roles of chairman and chief executive officer, if any);
    2. performance and strategy evaluation (in terms of strategic issues plans of actions and risks in relation to the listed entity along with the implementation process of the same);
    3. governance and compliance of the boards (in relation to disclosures, reporting requirements and the governance practices of the board of directors);
    4. evaluation of risk (review of high risk issues and recognition and assessment of risks);
    5. grievance redressal for investors;
    6. monitoring of conflicts of interests in relation to the management, board of directors and shareholders, stakeholder values, corporate culture; and
    7. facilitation of role efficiency of independent directors.

      Additionally, SEBI has also contemplated the following:

    1. evaluation of the performance of the management by the board of directors along with the independence of the management from the board;
    2. access of the management to the board and vice versa;
    3. secretarial support rendered for board meetings;
    4. fund availability for conducting meeting and seeking expert advice; and
    5. succession plan for management.
  1. Committees of the Board: SEBI specifies the mandate and composition of the committees, effectiveness of the committees, structure and independence of committees and contribution of the committees to decision making by the board as core criterion in terms of evaluation the committees.
  2. Individual directors and chairperson: SEBI has provided three specifications in terms of evaluation of individual directors. Firstly, SEBI specifies that the evaluation of individual directors must be done on a general basis while taking into consideration the qualifications, experience, knowledge and competency, fulfillment of functions assigned to or prescribed under law, ability to function as a team, initiatives taken by individual directors, availability, commitment, contribution and integrity. SEBI has also prescribed additional criteria for independent directors and chairpersons.

However, the aforementioned criteria is not exhaustive and SEBI has provided that different criteria may be assigned depending on the requirements of the listed entity, circumstance, outcomes of previous assessments and maturity of the board.

B. Evaluation process

The Guidance Note prescribes two methods of evaluation of the board of directors: (a) internal assessment; and (b) external assessment.

  1. Internal assessment: Assessment may be undertaken either through a detailed questionnaire to be circulated to individual directors, committees, board of directors etc., or through oral assessments provided by the person on interviews. If required, the questionnaire may enable written answers to be provided on confidential basis. Views of the members may also be taken on a confidential basis by the chairperson if the members are not willing to disclose their inputs in writing.

Additionally, SEBI has also suggested that the questionnaire should be modeled in a form where the format provides scope for grading, additional comments, suggestions etc., as against a form which merely contemplates a yes/no format.

  1. Assessment by external experts: SEBI has suggested the use of external experts with the view that independence is imparted to the evaluation process. SEBI further specifies that the external assessment may be done based on questionnaires/interviews or a combination of the two on a regular basis. Moreover, SEBI has provided that caution should be exercised to ensure that the external assessor is not a related party or conflicted due to closeness of the board of directors so as to ensure impartiality.

C. Post Evaluation

Post the evaluation processes undertaken, SEBI specifies that feedback must be accorded in one or more of the following ways:

  1. Orally given by chairman/external assessor or any other suitable person to each member, committees and board of directors; or
  2. Written assessment to every member, board of directors and committees.

SEBI has laid down that an active role is required of the chairperson in providing feedback. If the individual members are not comfortable to open individual assessments, provision for confidentiality may be made where possible. SEBI has provided that feedback must be provided honestly and without bias.

D. Action Plan

Based on the analysis of the responses, an action plan may be prepared by the board of directors on the following:

  1. Areas of improvement including training, skill building, etc., as may be required for the board of directors;
  2. List of actions required detailing nature of actions, timeline, persons responsible for implementation and resources required.
  3. Review of actions within a specific time period.

The action plan should be prepared comprehensively while taking suggestions under the assessment processes as detailed above.

E. Disclosure Requirements

In addition to the statutory requirements, SEBI suggests that listed entities voluntarily provide additional disclosures including results of evaluation, action taken on the basis of evaluation, current status of the outcomes requiring actions to the various stakeholders.

F. Frequency of evaluation of board of directors

Although board evaluation is required to be mandatorily conducted once a year 6, SEBI has suggested that the listed entity may conduct board evaluations more frequently so as to be more effective in continuous improvement of the board through continual feedbacks and assessments.

G. Responsibility

While the NRC and independent directors have been provided with major roles in terms of evaluating the board of directors, based on global situations, SEBI has concluded that the primary role of steering the whole process of evaluation of boards and ensuring its effectiveness in improving the efficiency of the board of directors lies with the chairperson. Hence, it would be important to highlight the function of the chairperson in a board evaluation.

H. Review

SEBI has suggested a periodical review to be undertaken for improvement of the effectiveness of the board of directors considering that the evaluation of the board of directors is not a static process. Such responsibility lies with the board of directors and should be done based on feedback from the concerned parties.

Analysis

In the present environment, where the role of a board of directors is garnering more and more importance with the various issues ranging from the Satyam scam to the Mallya-Diageo fiasco and finally, the Tata-Mistry war, this Guidance Note is seen as SEBI's way to enhance and provide additional value to the listed entities at large by emphasizing the need to ensure proper evaluation of the board of directors. Over the recent years, corporate governance has developed in a manner wherein the focus has been purely on establishing procedures to be followed by a board of directors, composition of board of directors and the rising role of independent directors and chairman. However, through issuance of the Guidance Note, SEBI has exhibited a transition to move from mere corporate governance towards inculcating a corporate culture that distinguishes a board of directors as individuals developing moral obligations towards their stakeholders.

Ordinarily, any listed entity would generally ensure compliance with the letter of law so as to ensure that the entity is allowed to function smoothly without any penalties or actions by regulators. However, the Guidance Note is intended to emphasize on the spirit of law so as to demonstrate that board of directors do not merely have a legal obligation to be structurally and statutorily compliant but also have a moral obligation towards the listed entity and its shareholders towards ensuring better functioning of the board of directors and aligning itself with the long term strategy of the listed entity.

These guidelines are not mandatory or all-encompassing, however, it would be difficult for a company to ignore this guidance and yet proclaim adherence to good corporate governance principles. SEBI acknowledges that evaluation processes can vary from entity to entity and evaluation processes cannot be standard for all listed entities given the different structures, business and issues of such listed entities. To a certain extent, the evaluation processes would require customization so as to suit the listed entities accordingly.

Footnotes

1 Section 178(2) of CA 2013 read with Regulation 19 of SEBI LODR Regulations

2 2016, Board Evaluation Practices in India, A Study of the Top 100 Companies, CimplyFive & InGovern available at http://www.ingovern.com/wp-content/uploads/2016/05/Board-Evaluation-Practices-in-India-26-05-2016.pdf, last visited January 20, 2017.

3 Section 178 of CA 2013 read with Part D of Schedule II of SEBI LODR Regulations.

4 Section 134(p) of CA 2013.

5 Chapter II of SEBI LODR Regulations.

6 Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Shashwat Sharma
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.