1. An effective company board should not be a comfortable place; here’s why

An effective company board should not be a comfortable place; here’s why

In a sign of changing tides, a couple of years ago, a general meeting of a major listed company saw several of the resolutions rejected outright by the shareholders.

Updated: October 4, 2016 8:39 AM
This increase in activism and ever more stringent regulations have forced boards to enhance their performance by concentrating on getting their composition, culture and focus right. (Reuters) This increase in activism and ever more stringent regulations have forced boards to enhance their performance by concentrating on getting their composition, culture and focus right. (Reuters)

In a sign of changing tides, a couple of years ago, a general meeting of a major listed company saw several of the resolutions rejected outright by the shareholders. Off late, we have seen quite a few such instances where shareholders have rejected resolutions—pertaining to related-party transactions, executive compensation, mergers and acquisitions, etc—which they think are not in their favour. Growing awareness among investors, safeguards provided in the Companies Act 2013, convenience of e-voting and the regulator’s gentle nudging has succeeded at enhancing shareholder activism in India in the last couple of years.

This increase in activism and ever more stringent regulations have forced boards to enhance their performance by concentrating on getting their composition, culture and focus right. Some progressive boards are already addressing these issues.

These boards follow an independent, structured and bottom-up approach towards director appointments. Recommendations on suitable candidates do not come from the board chairman or promoter director/s, but from the independent nomination and remuneration committee. The committee makes these recommendations after carefully considering current skill sets and mapping future requirements to the company’s strategic priorities. It also focuses on diversity—in terms of gender, skill set, age, nationality, etc—and cultural fit.

Along with diversity, the boardroom culture is also of great importance. It starts with the directors that have most of the voice-share in the boardroom—the board chairman and promoter director/s. They set the right tone that fosters a climate of trust and candour. They welcome different opinions, perspectives and encourage directors to debate and challenge ideas put forth for discussions in the boardroom. Other directors, on their part, leverage this opportunity to stress test the ideas, thereby contributing to better decisions. This ‘open culture’ also encourages independent directors, especially committee chairs, to meet with auditors and other senior management personnel without the presence of promoter/ executive directors. Such boards leverage the collective intellect and experience of the board members.

Another aspect that these progressive boards get right is that they apportion more time in their agenda for evaluating the companies’ strategies. A 2016 KPMG in India survey, Calibrating strategy and risk, highlighted that a majority (80%) of the boards are attempting to deepen their involvement in strategy. This is quite challenging given that the cycle of quarterly (or sometimes more frequent) board meetings leave little time for the management to prepare well-thought-out strategy papers for the board. More importantly, the information supplied to the board is usually focused on past performance and other historic information and compliance requirements. Without inputs from the management on future trends and risks, it might be difficult for the board to contribute meaningfully to the company’s strategy.

Some progressive boards overcome these challenges by earmarking a day or two for a strategy off-site. The time thus set aside is quite useful for the management to present their views on the external environment, contours of its strategy, assumptions behind the strategy and still spare time for the board to question and probe these. Breakout sessions could be organised to help subject matter experts on the board to focus on specific aspects of the strategy. The dialogues at these meetings could be captured in the form of a strategy blueprint—a 4-8 page document—that outlines the roadmap for the company. The idea is to give information to the directors that they could mull upon outside the boardroom in an ongoing effort to reach a consensus on the strategy. It could also outline the strategic metrics that the board could periodically visit to monitor the implementation of the agreed strategy.

Another important imperative of high-performing boards is effective communication and engagement with key stakeholders. Such boards connect with stakeholders early in the lifecycle and thereafter on a regular basis, not only in crisis times, which helps build trust.

These boards also have a formal succession planning structure in place to deal with exigencies at the board and senior management level. As many as 77% of the respondents of a 2016 KPMG in India survey—Building great boards—highlighted succession-planning as one of the most effective mechanisms to achieve the right board composition.

The UK Financial Reporting Council, in its guidance on board effectiveness, sums up quite nicely how an effective/high-performing board should be. According to the regulator, “an effective board develops and promotes its collective vision of the company’s purpose, its culture, its values and the behaviours it wishes to promote in conducting its business. It should not necessarily be a comfortable place. Challenge, as well as teamwork, is an essential feature.”

Pankaj Arora

The author is partner, KPMG in India. Views are personal

Please Wait while comments are loading...

Go to Top