Bring efficiency on Board

Key findings in a recent report by Deloitte on the Board practices of 200 global companies and the shape of things to come include:

CEO succession plans are reviewed by the entire Board at least once a year in 84 per cent of the companies surveyed.

Shareholder engagement has increased this year, and directors are meeting with shareholders more frequently. At more than half of the small- and large-cap companies, at least one Board member has had direct contact with a shareholder in the past year.

More than 80 per cent of the public-company respondents said women constitute at least one-quarter of the Board, but only 15 per cent report more women on their Board this year than last year.

Boards are meeting more often, and the meetings are longer.

With changing business dynamics and compliance pressures, board members are becoming more and more aware about their job and thinking beyond the meeting agenda. This is very relevant in the light of the responsibilities entrusted to board members by the new Companies Act.

Though the directors were not participating in the day-to-day operations of the company, they could be held responsible for significant governance lapses arising from them. The directors’ objective evaluation of the management’s integrity, control systems and overall financial reporting structure will enable them to discharge their professional duties effectively.

The key question is how to make Boards effective in discharging their professional duties. Is mere compliance with statutory requirements such as maintenance of registers and sign-offs sufficient or is more needed? Other findings of the report include:

Separate roles for CEO and Chairman in 51 per cent of the companies surveyed. This is generally true for companies which were initially family/ close-group controlled before going public. It is desirable to separate the roles where the Chairman is tasked with overseeing the group’s strategy, values and branding, and the CEO focuses on the achievement of the group’s objectives.

Compared to last year, there is a 10 per cent decline in the number of directors who receive information on board meetings five or fewer days in advance. Instead, more directors report getting the information six or more days in advance. This shows improved planning in Board procedures.

There is variation in the risk oversight practices of Boards. Only 7 per cent say they have a Board risk committee, and the remaining say that the responsibility is spread across all Board committees — to the audit committee and the full Board. The important aspect here is the Board’s awareness of the organisation’s risk appetite.

Board diversity — More than 80 per cent of the respondents said women and minorities constituted 25 per cent of their boards. The new Companies Act mandates certain companies to have women director/s on the Board.

Board diversity is a key criteria for successful Boards. The new Companies Act specifies that the independent director shall, in the opinion of the Board, be a person of integrity and possesses the relevant expertise and experience. Further, clause 49 of the listing agreement requires audit committee members to be financially literate.

Board diversity is not only about gender, ethnicity and professional background but also the personality of the Board member. Recommendations from Deloitte’s Business Chemistry model — which uses data to measure observable, business-relevant traits and behaviours — include:

Consider the impact of personality on the Board’s interactions, engagement with management, and overall effectiveness.

Decide which personalities may best support specific activities, such as oversight of strategy (‘pioneer’) or of risk (‘guardian’).

Recognise any resulting bias if the Board lacks diverse personalities and tends to recruit likeminded members.

Along with the personalities of Board members and their education, periodical assessments and a well-planned Board calendar go to support effective Board practices. Board educational programmes are an integral part of the enhancement of Board members. Current topics range from the regulatory landscape to sustainability, risk and strategy.

The NYSE Corporate Governance Rules require listed companies to publicly disclose their policy on the continuing education and orientation for directors. Currently there is no similar legislation in India, but corporate entities should certainly adopt some of these practices proactively.

The author is Partner, Deloitte Haskins & Sells