The role of the board of directors has undergone rapid transformation over the past decade. The stakeholders and investors are interested to know whether the members of the Board are effectively functioning individually and collectively. The Board at many times also requires new skills for promptly responding to the dynamic changing business environment.

The fact that performance evaluation is the best tool for enhancing the board’s effectiveness is recognised globally. A properly conducted board evaluation can contribute significantly to performance improvements of organizations; at the board and individual member levels.  An effective performance evaluation exercise helps the board, committees and individual directors perform to their optimum capabilities. It improves leadership/performance culture, clarifies differing directors’ roles, streamlines board communication and facilitates board teamwork, simplifies decision-making processes and efficiency of board operations, etc. To be effective, boardroom appraisals need to have specific, clearly defined steps and practices, and a special commitment from the Board.  Annual Board Evaluation is a powerful tool to convert good boards into great boards.

Need for Board Evaluation

Evaluation provides the board and its committees with the opportunity to consider how group culture, cohesiveness, composition, leadership, meetings, information processes and governance policies influence performance. Board Evaluation helps to identify areas for potential adjustment and provides an opportunity to remind directors of the importance of group dynamics and effective board and committee processes in fulfilling board and committee responsibilities.

Evaluation of individual directors is important since the engagement and efforts of each individual director forms the foundation for effective group decision making. Individual evaluation also encourages self-reflection and can help directors identify and address individual behaviours that may improve group dynamics and performance. In addition, formal evaluation of individual directors can also support the re-appointment decision process.

Board evaluation in India, until recently, was recognised as a good corporate governance practice and largely undertaken voluntarily.

The Companies Act 2013, followed by the SEBI (Securities and Exchange Board of India) Listing Obligations and Disclosure Requirements (SEBI LODR), 2015 mandates evaluation of the Boards of listed companies and public companies with a paid-up capital of Rs 25 crore and above. Both the statutes provide for several mandatory provisions for Board Evaluation on who is to be evaluated, who is to evaluate such persons, public disclosure requirements, etc.

The question is, are companies able to derive the intended benefits or improve board effectiveness through a board evaluation exercise?

Unfortunately in most companies, board evaluation exercises are carried out in-house as a “ticking-the-boxes” activity to comply with the statutory requirements. During Internal board evaluations, board members are often seen shying away from expressing their honest feedback, fearing lack of confidentiality since the evaluation process is initiated by the company management.

On the other hand, an independent and unbiased evaluation by a good external facilitator can bring in fresh perspectives and approaches, encourage candid feedback, and ensure that the confidentiality of the evaluation process and results is upheld. Furthermore, external evaluation can bring objectivity to the entire evaluation process which is recognised by stakeholders as a sign of commitment to excellence in corporate governance from the Board.

According to a Corporate Board Evaluation study conducted on Nifty 50 companies, 14 of them used external consultants for their board evaluation needs in the year 2021. One of the top five learnings from the study also showed that the increased use of external consultants is a positive trend that helped companies fare significantly better in Board evaluation disclosures.

The recent trend that the companies are willing to go much and more beyond regular compliance when it comes to Board Evaluation is a positive sign.

We at Beyond compliance guide companies through our structured process helping boards become progressive Boards, evaluate Board performances not just on preceding years’ performance and contributions but also on the alignment of the Board, its committees and Directors with the strategic objectives of the organization, its values, culture, mission and vision.

At Beyond Compliance, we staunchly stand by Peter Drucker’s idea of “what gets measured gets managed, and among senior leaders, what gets acknowledged and valued gets done even better”.

Our evaluation process is tailored to the specific needs and objectives of a company. Throughout the entire process of evaluation, we work closely with the companies leading them to achieve their board objectives pertaining to board culture, board governance, management practices, board functioning in compliance with the law, keeping in mind the best practices. The subjects are identified and once the criteria is approved, the evaluation process is carried out through forced choice questionnaires. The criteria and questions for evaluation are approved by the company’s Nomination and Remuneration Committee (NRC). After completion of online evaluation, assessment reports are generated and in some cases followed by one-on-one discussions with the Board members. We also engage closely with the companies to work on the outcome of evaluation and handhold them in filling the gaps identified as a separate post-evaluation assignment.