Saturday, January 21, 2017

SEBI Elaborates on Board Evaluation

Along with the considerable enhancement in the duties and responsibilities of boards of directors of Indian companies that was occasioned due to the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, there has been a considerable emphasis on board evaluation as a measure of not only enhancing corporate governance in general, but also as a means of making boards more accountable to various corporate constituencies. Although the legislation and regulation mentioned above carried references to the requirement for board evaluation, they do not contain much details thereof, and it is left to individual companies to implement the same in the manner that is most suitable to them. While some of the leading companies did carry out stringent board evaluations even in the absence of a legal requirement, there tends to be considerable lack of uniformity in the standards and processes for board evaluation across all listed companies, thereby depriving investors and other stakeholders of the ability to compare amongst companies. Moreover, the issues of board responsibility and the performance of directors have been called into question in a recent high-profile episode, which may have had some role in reigniting the discussion surrounding board evaluation.

In this background, the issue by SEBI of what is termed as a “Guidance Note on Board Evaluation" assumes importance. In a lengthy set of parameters and processes, SEBI lays down detailed guidance on how companies may carry out board evaluation. This includes the evaluation of the board as a whole, that of various committees of the board, and also that of individual directors, including inside directors as well as independent directors. Companies that are required to carry out board evaluation may do well to rely upon the guidance note, given its comprehensive nature.

The use of a guidance note approach is interesting, in that it is not intended to operate as a mandatory regulation, but rather “to educate the listed entities and their board of directors about various aspects involved in the board evaluation process and improve their overall performance as well as corporate governance standards to benefit all stakeholders". Hence, it is merely exhortatory in nature. Nevertheless, it signifies the importance of board evaluation from the regulator's perspective, which has also received the attention of SEBI's international advisory board at its recent meeting.

While the above guidance note is an important step in enhancing corporate governance in general and board responsibility in particular, it remains to be seen how seriously Indian listed companies take this guidance. As observed in this quarterly briefing, there continue to be several challenges that befall boarding evaluation in the Indian context. Hopefully, the elaborateness of SEBI's guidance note will help address at least some of those.

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