India: Is Your Board A Perfect Ten? SEBI Issues Guidance To Evaluate Board Of Directors

Last Updated: 2 February 2017
Article by S.S. Rana & Co. Advocates

 The Securities Exchange Board of India (SEBI) on January 5, 2017 issued directions on evaluation of performance of their directors to safeguard independence and impartiality and amplify corporate governance in the company. Though the Circular1 issued by SEBI is intended to be treated as a guidance and does not constitute rules, this guidance has come forth in wake of the TATA-Mistry fiasco. The issue involving the Tata conglomerate, showed the defenselessness of independent directors in India when up against a dominant shareholder and for the first time, a chairman of several public listed companies was pursued to be evicted from a directorial position on grounds of no confidence.

Legal Scaffold vis a vis the Corporate Ambiance

The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 contain expansive provisions on evaluation of the performance of the board as a whole, individual directors (including independent directors and Chairperson) and various committees of the board. These provisions also specify responsibilities of various persons / committees for conduct of such evaluation and certain disclosure requirements as a part of the listed entity's corporate governance obligations. Pursuant to Section 149 (8)2 Clause VIII of Schedule-IV provides for performance evaluation of independent directors. As per this clause, performance evaluation of independent directors shall be done by the entire board of directors, excluding the director being evaluated. It is on the basis of this report that the furtherance of an independent director's term is decided. Therefore, keeping this in mind, small shareholders of three listed TATA Companies had approached the Bombay High Court seeking the removal provision in Section 1693 to apply only for a removal pursuant to a poor performance evaluation by the board of an non-independent director; the reason being that an Independent director represents the welfare and interests of minority shareholders and therefore their removal should not be voted upon by promoter/ dominant shareholders.4

SEBI wants companies to ensure that deliberations within the board are healthy and free-flowing, critical and dissenting submissions are also heard and conflicts of interest are monitored and dealt with appropriately. The Guidance focuses on:

  • The subject of evaluation that involves evaluation on multiple levels. Such as the Board of directors as a whole, committees of the Board, Individual Directors, or the chairperson (including chairperson, CEO, Independent Directors, non-independent directors).
  • Process of evaluation involves identifying the objectives of the evaluation including laying down of objectives that may be standard for all board evaluations or specific objectives privy to a particular evaluation. The criteria of the evaluation adopted would depend on the position held by the persons concerned. Further, it should be taken note of, if the board takes a review of high risk issues that impact the organization regularly. Another important aspect of evaluation of the board is to ascertain if the board monitors and manages potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions. Assessments should be carried out both internally, and externally as provided under the relevant provisions of the Companies Act, 2013.
  • Feedback to the persons being evaluated is imperative to conducting a free flowing evaluation procedure. Feedback to the individual directors, the Board and the Committees
  • is crucial for success of Board Evaluation. Such feedback can be given by the chairman either orally or in written to the members and other persons concerned.
  • An Action plan should be formulated by the board based on the results of the evaluation process. The action plan must focus on areas of improvement, including training and skill building g objectives. The action plan should also list the list of required actions. Further, these actions should be reviewed from time to time.
  • Disclosure to stakeholders on various aspects under SEBI LODR and Companies Act, 2013 requires disclosure of manner of formal annual evaluation of the Board, its committees and individual directors and of performance evaluation criteria for independent directors to the shareholders on an annual basis. Additionally, for more transparency, many entities worldwide voluntarily provide additional disclosures including the results of the Board evaluation, action taken on the basis of the evaluation, current status, etc. to various stakeholders. The same may be added to the list of disclosures prepared.
  • Frequency of board evaluation, the Board Evaluation is required to be done once a year. The entity, if it so desires, may also conduct such evaluation more frequently. Since Board evaluation is a continuous process, it is felt that feedback provided to the members during meetings and otherwise, whether oral or written, is more effective for continuous improvement and ideally complements the annual evaluation process.
  • Responsibility of board evaluation, the responsibility of Board evaluation lies on different persons depending on the subject of evaluation under relevant statutes. Globally, the role of directing the process of Board evaluation and of ensuring its usefulness in improving the Board efficiency lies on the Chairperson. Hence, to achieve maximum advantage of the course, the role and purpose of Chairperson in Board Evaluation necessitates to be laid out clearly in advance.
  • Review requirements highlight that Board evaluation requires periodical review for improvement. The responsibility of such review of the evaluation process lies with the Board of Directors under applicable laws.

Comment

The principal role of the board of directors is to oversee the function of the organization and ensure that it continues to operate in the best interests of all stakeholders. Given the complexity of today's organizations, that is no simple or straightforward task. Today, board effectiveness is a key performance driver of the Indian companies. Though the guidelines issued by the key regulator are not binding upon the listed companies to adhere to, but highlights that the thrust of SEBI is tiling towards board management and board well-being to ensure that the interests of the stakeholders are not thwarted by scuffles within the board or conflicting interests of directors.

Footnotes

 1 SEBI/HO/CFD/CMD/CIR/P/2017/004

2 This section highlights that The company and independent directors shall abide by the provisions specified in Schedule IV. 

3 This section mentions the right of shareholders to remove a director in the general meeting through ordinary resolution is a legal Right that cannot be damaged or taken away by MoA, AoA or any other documents or agreement.

4 K. Vijayraghavan & Reena Vacharia, Tata Shareholders Move High Court Against Rule on Removing Independent Directors, The Economic Times (December 14, 2016) http://economictimes.indiatimes.com/news/company/corporate-trends/tata-shareholders-move-high-court-against-rule-on-removing-independent-directors/articleshow/55969004.cms

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.

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