Corporate Board Evaluation is a new concept in India. SEBI Committee on Corporate Governance in 2003 recommended it as a non-mandatory provision for listed companies. However, it is only with the advent of the Companies Act, 2013 that it became mandatory for all listed companies and all public companies with paid-up share capital of Rs.25 crores or more, for it to be practiced in India.
Board Evaluation conducted with the aim of self-introspection and a desire to identify improvement areas is a valuable tool in any corporate arsenal as it displays a culture of excellence at the very top as an ideal to be emulated by others in the organization. Further, transparent and action oriented disclosures emanating from the outcome of Board Evaluation sets the right tone for corporate governance practices. Though this benefit is unanimously conceded, in practice it is yet to be realized by majority of firms as many companies are complying only with the letter of law and missing out on the intrinsic desire to conduct a free and frank Board Evaluation. This is true not just in India where it is in a nascent stage but also in other countries where it is mandated.
Looking at the global practices on Board Evaluation, we found the most mature practices in the UK. Even in the UK, the practice is not uniform and the range of compliance is wide. Looking at the top-end of best practices, we see corporates use Board Evaluation not as an end in itself but as a means to constantly improve board effectiveness. Further disclosures to their shareholders were not only transparent but also self-critical and constructive by identifying areas for improvement and defining action plans to remedy the deficiencies.
Given the early stage of Board Evaluation in India and the potential for it to evolve, we have outlined a 5-star rating system for Board Evaluation with the objective of defining a roadmap for corporate practices to evolve and realize their potential. At the base level is compliance with the letter of law that ensures immunity from penal action, and at its peak, a board that is focussed on striving for excellence in its own functioning and effectiveness.
We have evaluated the disclosures on Board Evaluation made by the top 100 companies in India by rating them on our 5-star scale. The result reconfirms the nascent state of Board Evaluation practices in India with the highest ranked company getting only 3-stars and more important it reveals the potential that can be realized by these companies.
This study is undertaken by CimplyFive Corporate Secretarial Services Private Limited, a company with the vision to ‘leverage research and technology to eliminate procedural non-compliance for entities incorporated under the Companies Act, 2013’ and InGovern Research Services, India’s first proxy advisory and a premier corporate governance research and consulting firm. We look forward to your feedback to enrich this study.