March 14, 2017

Sebi wants an overhaul in the way boards of listed companies to discharge their duties that include the appointment and removal of directors. This makes sense to raise corporate governance and reinforce director’s responsibility.

Recent developments such as the boardroom putsch at Tata Sons and the differences between some promoters and the management at Infosys underscore the need for a rigorous evaluation of the board including the chairperson and independent directors.

Sebi’s guidance note, last month, on board evaluation — a report card that a company holds to itself to see how it fares — is welcome, but needs to be more pointed.

Domain knowledge and expertise of a board member alone will not suffice. What counts is whether she can think independently, and challenge the management. Board discussions must be frank, accommodate criticism.

The regulator’s criteria for assessment of board and management performance are proper: whether remuneration is aligned with performance, industry peers and the company’s long-term interests, whether the board selects, compensates, monitors and, when necessary, replaces key managerial personnel based on such evaluation; whether the board independently assesses the assumptions underlying strategy and the company’s risk appetite.

Checks must be in place to allow independent directors to perform their roles effectively, as Indian companies take on the turbulence of global uncertainty. Globally, many entities rope in external experts to the evaluation process.

Bringing in independence makes sense for Indian companies, too. Sebi’s guidance note should have the force of law to protect the interest of shareholders. And corporate governance should move beyond a check-the-box exercise.

[The Economic Times]