Companies cannot escape board evaluations

Image: Shutterstock

Starting from the Companies Act 2013, corporate India has seen the introduction of a slew of regulations which are focussed towards enhancing overall governance standards. The aftermath of the global financial crisis and the controversies surrounding the corporate landscape even after the evolution of landmark regulations such as the Sarbanes-Oxley Act (SOX) has brought the focus and attention on the performance of the board as never before. Today, corporate governance involves a web of relationships between a corporation’s management, its board, shareholders and other stakeholders.Evidently, effective stewardship by the board has been amplified as one of the important cornerstones in the various requirements specified under the Companies Act. The guidelines which are highly directive, provide a clear mandate to the directors:“A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.”The evolution that corporate India is going through mirrors what has already happened in other advanced economies. The global corporate world has seen similar regulations being specified by the regulators in response to multiple corporate scandals. (Like UK’s Combined Code, King’s Commission in South Africa, etc.)Critics of the new laws may argue if the board and its directors were not supposed to act in good faith and protect the wealth of the shareholders under the Companies Act in its previous avatar? Are these regulations good enough to prevent scandals? The answer lies in the manner in which the requirements are embraced by an organisation.Other than the stringent penalties and increased liabilities of the directors, the Act itself provides a solution of how these changes will be embraced - Board evaluations. Implementing a fair and transparent system wherein the board members are performing their duties, taking responsibility, speaking up and taking action will ensure that each board member imbibes his enhanced responsibilities. There may be a school of thought though which may adopt the route of creating mere documentation to evidence compliance rather than really embracing it.The path adopted to satisfy this requirement would determine how the organisation elects to embed the essence of various other requirements as specified by the revised regulations. (Corporate Social Responsibility, risk management, compliance, internal financial controls, constitution of committees, etc.)The exercise of evaluation is challenging though! It involves managing various sensitivities due to the involvement of senior members in the process. Some of the critical considerations would be:

• Are the boards and directors prepared for such evaluations? How will they embrace this change?
• Would biases and board room dynamics crop up in the evaluation process? Would it impact congeniality?
• Will this really be taken seriously? Is there a merit in doing so?
• How will confidentiality be ensured? What happens if the evaluation information is not adequately protected?

Unfortunately, there is no one solution that fits all.Each company has to reflect on the current functioning of its board and reflect the changes that would be required in light of the revised requirements. Typically, the broad steps would be as under:

• Understand the enhanced / additional responsibilities that have been entrusted
• Meet the stakeholders and understand their perspective on the enhanced requirements
• Determine what are the critical value adding areas for the organisation
• Customise the evaluation process towards enabling the board and its directors in meeting their enhanced responsibilities

In our future posts, we would first decode the enhanced responsibilities of the board and its directors and then move towards discussing how it integrates with the requirement of evaluation, such that it does not remain a mere form filling exercise.- By Rohit Mathur, Partner, Risk Advisory Services, EY and Vishal Ruia, Director, Risk Advisory Services, EY