The Securities and Exchange Board of India (SEBI) released a guidance note dated 5 January on the evaluation of the board of directors of a listed company. The note aims to help companies evaluate their board, improve its effectiveness and enhance corporate governance standards.
The guidance note divides the evaluation process into three parts: pre-evaluation, evaluation and post-evaluation.
The guidance note prescribes the following: (1) identifying the objectives of evaluation, which may be general (standard objectives in terms of board evaluations) and specific (objectives specific to the board evaluation based on issues of concern, recent events, etc.); and (2) developing criteria for evaluation at every level of the board of directors depending on the functions of the board in terms of responsibilities, competencies required, nature of business, etc.
The criteria for different directors/groups are as follows:
Board of directors (as a whole): A board of directors should be evaluated in core areas such as structure, board meetings, functions, management and professional development.
The guidance note also suggests that the board take on the additional functions below:
- Documentation of the role and responsibilities of the board of directors (including the bifurcation of the roles of chairman and CEO, if any);
- Performance and strategy evaluation (in terms of strategic issues, plans of action and risks relating to the listed entity and the implementation process);
- Governance and compliance of the board (in relation to disclosures, reporting requirements and the governance practices of the board);
- Evaluation of risk (review of high-risk issues, recognition and assessment of risks);
- Grievance redressal for investors;
- Monitoring of conflicts of interests in relation to the management, board of directors and shareholders, stakeholder values, corporate culture; and
- Facilitating of the efficiency of independent directors.
SEBI has also considered the following:
- Evaluating the performance of the management by the board of directors along with the independence of the management from the board;
- Access of the management to the board and vice versa;
- Secretarial support for board meetings;
- Fund availability for meetings and seeking expert advice; and
- Succession planning for management.
Committees of the board: The mandate and composition of the committees, their effectiveness, structure and independence and their contribution to decision-making by the board are specified as core criteria in terms of evaluating the committees.
Individual directors and chairperson: The qualifications, experience, knowledge and competency, fulfilment of functions assigned to or prescribed under law, ability to function as a team, initiatives taken by individual directors, availability, commitment, contribution and integrity are to be taken into consideration for the purposes of evaluation.
These criteria are not exhaustive. SEBI has provided that different criteria may be assigned depending on the needs of the listed entity, circumstances, outcomes of previous assessments and maturity of the board.
Two methods of evaluating the board of directors have been prescribed: (a) internal assessment and (b) external assessment.
Internal assessment: Assessment may be undertaken either through a detailed questionnaire to be circulated to individual directors, committees, board of directors, etc., or through oral assessments provided by the person in an interview. If required, the questionnaire may allow for written answers to be provided on a confidential basis. Members’ views may also be taken on a confidential basis by the chairperson if the members are not willing to disclose them in writing.
Assessment by external experts: SEBI has suggested the use of external experts to impart independence to the evaluation process. The external assessment may be carried out through questionnaires, interviews or a combination of the two on a regular basis.
Following the evaluation process, SEBI specifies that feedback must be given either orally or in writing by the chairperson/external assessor or any other suitable person to each member, committees and the board of directors. The chairperson must have an active role in providing feedback.
Action plan: Based on the analysis of the responses, the board of directors may prepare an action plan that includes: (a) areas for improvement such as training, skill building, etc.; (b) a list of actions required, detailing nature of actions, timeline, persons responsible for implementation and resources required; and (c) a review of actions within a specified time period.
Disclosure requirements: Disclosure requirements have been prescribed in terms of evaluating the board of directors.
Frequency of evaluation: SEBI has suggested that listed entities may conduct board evaluations more frequently to continually improve board effectiveness through feedback and assessments.
Responsibility: SEBI has specified that the chairperson is primarily responsible for steering the whole process of board evaluation and ensuring its effectiveness.
Review: SEBI has recommended that listed companies undertake a periodic review to improve the effectiveness of the board of directors since evaluation is not a static process.
The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.