Making Boards accountable
Partner - People & Organization, Advisory Services
Senior Professional, People & Organization, Advisory Services
The Companies Act, 2013, is expected to usher in a new era of corporate governance in India. The legislation focuses on improving transparency in the working of the Board by establishing its accountability in various company related reporting matters. It also provides guidelines on linking remuneration of Board members to performance. The Securities and Exchange Board of India (Sebi) has recently proposed changes to the listing agreement, largely in alignment with the provisions of the Companies Act to strengthen the corporate governance framework for listed companies in India.
Most of the recommended provisions are in line with practices and corporate governance codes prevalent in developed countries. Some of the key modifications that have been brought about in the Companies Act 2013 related to Board governance are as follows:
- Mandatory constitution of certain Board-level committees for listed companies and prescribed class of companies including audit committee, nomination and remuneration committee, stakeholder relationship committee and CSR committee
- Mandatory appointment of independent directors on the Board for listed companies and prescribed class of companies; clear guidelines around who can be an independent director and for selection of independent directors
- Clear guidelines for assessing effectiveness of Boards. Evaluation of performance of Board members; deciding remuneration of members; guidelines for selection, appointment and removal of Board members
- Mandatory appointment of one woman director on the Board; outlining of process for on-boarding of members
The Companies Act, 2013, also mandates the constitution of a nomination and remuneration committee (NRC), which would comprise of non-executive directors and would suggest guidelines for recruitment, selection, remuneration and removal of Board members. The NRC would evaluate the Board and its members on the identified success factors and hence, make the entire Board and its members accountable for Board performance. HR practitioners could play a role in supporting Board-level committees while developing and implementing these processes.
Since, the Act has limited the tenure of an independent director to two consecutive terms of five years (second term on a special resolution; and cooling off period of three years after two consecutive appointments), it is imperative to have a clearly outlined program for on-boarding of independent directors. Since there are restrictions on who could qualify as an independent director, an enhanced liability of independent directors and a wider coverage of the kind of companies that need to have independent directors on their Board, there is bound to be a demand supply gap of qualified independent directors. Hence it is critical for organizations to articulate the desired skills, talents for independent directors. A clear strategy for attracting high quality independent directors to the Board is also needed. Globally organizations use practices such as assigning a Board buddy, providing a Board manual and implementing a detailed induction program for new directors that is similar to that offered to any senior management employee joining the organization.
Although it is the responsibility of the NRC to issue guidelines and carry out the performance evaluation of the Board, there may be an opportunity for HR practitioners to provide functional expertise from a performance management perspective. The Act as well as the Sebi guidelines outline the need for a process for evaluation of performance of the Board, the independent directors as well as the non-independent directors. A Board's effectiveness will not only include evaluating it on the identified success factors, but will also focus on the working relationships among members, working ways of the Board, among others.
The NRC is expected to identify appropriate remuneration and incentive mechanisms for the Board members. Since the Act as well as Sebi guidelines restrict the use of equity-based stock option plans, especially in case of independent directors, there is a need to identify an appropriate mix of short-term/long-term incentive plans for Board members. The NRC will also have to take into account the difference in responsibilities of executive/non-executive and independent directors while designing remuneration packages for them.
The Act mandates at-least one woman director on the Board of listed companies and prescribed class of companies. The HR will need to focus on capability building for women in the senior management so that they become ready to take up Board-level positions. The Board is also expected to furnish a report covering the assessment of the knowledge and skills of newly appointed independent directors.
While the act does not clearly articulate the expectations in the area of succession planning of key managerial personnel (KMP), it is essential that HR function ensures a talent pipeline at the senior management level. Sebi guidelines will make it mandatory for listed companies to have a succession planning and development process for senior management. In developed countries, a committee of the Board, typically referred to as the succession planning or nominations committee, is expected to develop a list of eligible Board candidates, interview potential candidates, recommend candidates to the Board and ensure that each new member gets the necessary induction and training.