The duties of directors were first time codified in the Companies Act, 2013 under Section 166 which specifies that, company’s director shall act in accordance with articles of the company along with mandates to the directors as specified in the Act. It is required under section 178 (1) of Company Act, 2013 read with Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014 and Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 for board of directors, to constitute of Nomination and Renumeration Committee in every listed company.
In chapter II, under rule 9 of section 4(2)(f)(ii) of the Regulation mentions “Monitoring and reviewing board of director’s evaluation framework” as a key function of board of directors. Chapter IV provides for “obligations for listed entity which has listed its specified securities” under which section 17(10) provides that the performance evaluation of independent directors shall be conducted via the entire board (excluding the participants of such evaluation. Schedule D(A) of the SEBI (LODR) Regulation, 2015 defines the role of the committee under which subrule (2) defines the role of committee to formulate criteria for evaluation of performance of independent directors and the board of directors and whether to extend/continue the term of appointment of independent directors, based on their performance evaluation report.
Regulation 19(4) determines the criteria determining the qualification, positive attributes and independence of a directors and recommend a policy for renumeration of the directors, key managerial personals and other employees. Aforementioned regulation also determines the criteria for performance evaluation and the extension or continuation of the term of employment of independent directors on the basis of the performance evaluation report. Regulation 25 (4) sub-regulation (3), directs independent directors to evaluate the performance of chairperson and non-independent directors and take into account the views of executive directors and non-executive directors.
Keeping in mind the fact that Nomination and Renumeration Committee is a mandatory committee for corporate governance of a company under Regulation 19, Kailash Mount ltd. (herein after Mount) needs to constitute the concerned committee in accordance with Regulation 19(1). To adhere to the constitution of Nomination and Renumeration Committee, regulation 19 (1) of SEBI Listing Regulations, 2015 which provides that,
“The board of directors shall constitute the nomination and remuneration committee as follows:
- the committee shall comprise of at least three directors;
- all directors of the committee shall be non-executive directors; and
- at least fifty percent of the directors shall be independent directors.”
When read with Schedule II Part D(A), aforementioned regulation defines the role of Nomination and Renumeration Committee as;
- Formulate criteria for determining qualifications, positive attributes, independence of directors, criteria for performance evaluation of independent directors.
- Recommend policies concerning renumeration of directors, key managerial personnel & other employees and maintaining diversity in board.
Along with the constitution of Nomination and Renumeration Committee, Schedule V C (d) requires the company to disclose the ‘performance evaluation criteria for independent directors’ in the corporate governance of annual report under the head of Nomination and Renumeration Committee.
Whilst concerning the internal evaluation, the due process or same Is to constitute the aforementioned committee as the HR questionnaires, though stands as a sane initiative, however is not obligatory due to lack of power and authority. Internal evaluation even via the committee has drawbacks as directors can be reluctant to share issues with the company, moreover the stakeholders lose faith as they can question the rigour of the process. Whereas, external evaluation can serve as a good facilitator via bringing in the external perspective which can be comparative in nature, resulting in growth of the board as well as the company. Challenges via agency problem may serve as a drawback of external evaluation as well, however the company is shielded from major internal feuds.
Section 178 (1) of the Company Act, 2013 provides an option of external agency or constitution of the committee for performance evaluation of directors however, SEBI (LODR) stands silent on external agency evaluation process, it is therefore necessitated by the regulation to constitute the committee.
Let us consider a listed company, therefore it shall have a nomination and renumeration committee which shall be responsible for the performance evaluation of the board, formulated as per the aforementioned Rule 19(1), SEBI LODR. It was brought up by market participants to the notice of SEBI regarding clarity on process of board guidance which resulted in the release of ‘guidance note’, to improve the effectiveness of board of directors to enhance corporate governance standards. The process of Evaluation generally requires to identify the objective of evaluation which can be general or specific objectives, followed by formation of a valid criteria of evaluation for which the methods should be devised as well. While concerning ourselves with external and internal performance evaluation agencies, there are drawback and advantages to both.
Internal committee that being the Nomination and Remuneration Committees is constituted of board members who can misuse their benefits of power position and misappropriate such power in their self-gains. They can also hold biases, leading to not so honest performance evaluation. External agencies however lack all these privileges as they have no business other than evaluation in the company. Company’s gain is their gain and therefore they might prove more honest that the internal committee. While external agencies can harm you via data misuse and competitive sell outs, internal committee will always have company benefit on its agenda. Now the Board can make an informed decision by themselves or via vote of the word, how-may-ever they like to proceed.
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