Future Proofing Your Board
Is your old-style board populated with retired professionals good enough to guide you through the digital age? It is time to bring new age directors with a digital mindset on board.
The CEO India article, “Future Proofing Your Board,” written by Russell Reynolds Associates Consultant Sanjay Kapoor analyzed the evolution of corporate governance in India. The article is excerpted below.
Corporate governance has become a very hot topic in India. As captains of industry, you may have embarked on India’s progressive corporate governance journey since 2013/2014. Let us take a step back to take stock if the Companies Act 2013 and the changes to the SEBI Listing Rules have impacted the governance fabric over the 3-4 years? What may have triggered the massive churn in Indian boards?
Against today’s backdrop of digital transformation, how can you strengthen your board composition, to be ready not just for today, but for tomorrow?
The Companies Act 2013 and the changes to the SEBI Listing Rules have laid the foundations to strengthen Corporate Governance in India, especially for listed companies. In the last 2-3 years, focus has naturally been on meeting the new (toughened) compliance requirements, with corporations and their advisors working rapidly on developing new systems and processes to ensure effective compliance.
In the past year, led by two major corporate scandals in India, where the board’s role was largely questioned by multiple stakeholders, the conversation has rapidly moved from focusing on the ‘spirit’ behind the new regulations rather than just the ‘letter’ in the law.
The intention of the regulations is to empower independent directors to ensure well-being of the organisation (and therefore all stakeholders). But in a country where, by most estimates, 95 per cent of the companies are ‘promoter’ controlled, it is difficult to bring about revolutionary change in governance. Larger than life (and proportion) influence of the founders is clearly visible to all and in the volatility of accusations and counter accusations, the independents’ voice is often muzzled. This is inevitable and as is now common in India, some judicial pronouncements will come about and restore the confidence of the independent directors to play out their role in full effect.
While these changes occur in the background and gradually strengthen the governance fabric, it is very important to continue to use this period to focus on aspects that are more controllable at the company level. Board composition is one such element.
THE EVOLUTION OF INDIAN BOARD COMPOSITION: SHIFTING THE MINDSET
The changes in 2013/14 triggered a massive churn in Indian boards. The requirement of 50 per cent or 33 per cent (if independent chairman) independent directors and the requirement for at least one woman director on each board, triggered a review of boards and we saw board churn (exits and additions) rise to over 33 per cent, way above the previous or subsequent average of around 21 per cent.
The trigger was of course compliance-led, but we did see the more evolved promoters using this as an opportunity to drive a clean-up of their boards and also induct new board members who added value to the business. We noticed that in the more evolved organisations, women directors were not only inducted because of the compliance requirement, but chosen amongst a suitable pool for the skills and expertise they brought to the board.
Our discussions with chairmen reveal that the experience with the new skills/directors, following some settling in teething issues, has been generally very good and changed the earlier mood of “got to do this to comply” to “I like the inputs I am getting.” The breaking away from the good old formula of lawyer/accountant NEDs has turned out to be beneficial for most the business we deal with. We are now beginning to have more regular conversations with board chairmen/promoters, where they want to discuss ideas about redesigning their boards.
Thus, the changes in 2013/14 have not only achieved the elusive goal of gender diversity and broadening the presence of independent directors, these have also triggered an unexpected bonanza of the overall dialogue moving to effective board composition.
To read the full article, click here.