Performance Evaluation of the Board – Laws and Processes

As per the Guidance Note on Board Evaluation issued by SEBI on January 5, 2017, the process of evaluation involves; 

  • Identifying the objectives of evaluation 
  • Criteria of evaluation 
  • Method of evaluation 

Identifying the objectives of evaluation 

It helps in streamlining evaluation process, analyzing results and taking actions appropriate actions. Objectives can be;

  • General objectives – standard objectives for all board evaluations 
  • Specific objectives – targeting specifically the current board evaluations based on recent events, news issues of concern etc. 

Criteria of evaluation

The criteria are subjective to designation and the work entailed under such designations. As directed, in case of board as a whole, the criteria could be divided as;

  • Structure of Board- Testing the competencies of director, whether the board has a diversity of competencies; experience held by directors, enough to execute the affairs effectively; and whether appointment of directors is clear and transparent and considers the aforementioned essentials. 
  • Meeting of Board- It has to be checked whether the meetings are held regularly enough for effective functioning of the board; check on the logistics of meetings; the agendas properly are to be defined and available to all, free discussions and dissent should be addressed and ensured, minutes to be recorded; and all information pertaining to the meeting must be disseminated.
  • Functions of the Board as specified under chapter II of SEBI LODR must be adhered to. Role of directors to be fulfilled; strategy and performance must be evaluated, governance and compliance issues to be addressed, plausible risks to be evaluated, mechanism for grievance redressal of investors should be established, plausible conflict of interest must be addressed, stakeholder value and responsibility checked and balanced, corporate culture and values to be established and board evaluation process reviewed. 
  • Board and management individual’s management. 
  • Profession development programs. 

There are two ways of evaluation;

  • Internal assessment- the evaluation conducted via committees, board members in forms of interviews or questionnaire.  
  • External assessment- external agencies are hired to assess the board and evaluate. 

While concerning the laws, Section 166 was included to direct the acts of directors to increase board effectiveness. Section 134(3) r/w sub-rule (4) Rule 8 of the Companies (Accounts) Rules, 2014 mandated every company with a paid-up share capital of 25 cr. in the preceding financial year, is required to disclose any and/or all evaluation processes. For effective approach towards board effectiveness, Section 178 (1) r/w Rule 6 of Companies (Meetings and its Powers) Rules, 2014 requires the apposite companies to formulate a Nomination and Renumeration Committee.

Section 148(8) of the Act, directs independent directors to adhere to Schedule IV Part II and VII which states that; independent directors are required to bring an objective view in the performance evaluation and independent directors shall hold at least one meeting without non-independent directors to devaluate the company as required by the schedule; respectively. Schedule IV Part V and Schedule IV Part VII also requires the re-appointment of independent directors and prescribes evaluation mechanism in the prescribed manner, respectively. Section 134(3)(p) requires the board to have an annual own evaluation of committees and individual directors. 

Regulation (4)(2)(f)(ii)(9) of SEBI LODR 2015 states that the key function of board of directors includes monitoring and reviewing board of director’s evaluation framework. Regulation 17(10) mandates independent director’s evaluation via the whole board as instructed. Regulation 19(4) r/w Schedule II Part D(A) prescribes the role of Nomination and Renumeration Committee. Regulation 25(4) directs independent directors to review and access performance evaluation in the meeting referred in sub-regulation (3). Schedule V C(d) mandates mentioned disclosures concerning performance evaluation under the head of Nomination and Renumeration Committee. 

Evaluations are important for they provide an insight to support the board and the strategies of organisation. Due to unavailability of defined mandatory guidelines on board evaluation, interpreting the provisions and regulations it can be safely concluded that the process must be objective and developmental and shall not be entailed as mere formal exercise. Board evaluation should be considered as a step towards good governance and shall be taken voluntarily however that can make the results questionable. It was recommended via Corporate Governance Voluntary Guidelines, 2009 that a formal and rigorous evaluation should be conducted for the directors and committees. There are two ways of evaluating the board;

  • Internal evaluation 
  • External evaluation 

Three ways of evaluating the individual directors;

  • Self-evaluation 
  • Peer to peer evaluation 
  • External 

Two ways of evaluation via committees

  • Internal by board formed committees 
  • External 

If a company does not have any committee to overlook internal evaluation, and if the only evaluation process is HR’s questionnaire, it is clear that evaluation requires lot more. The major reasoning behind constitution of committees by directors is the authority problem. Directors do not take the evaluation questionnaire seriously and some do not bother taking it in the first place, leading to incomplete process. When the committee is constituted by the directors, with directors in it or the process is performed via directors, the position gives legitimacy to the procedure, hence making it obligatory for everyone to follow. The questionnaire can be included under the tools of evaluation however, it has to come from the directors and not from the HR department. Internal evaluation hence requires delegation of authority. Authority can be delegated to the nomination and renumeration committee and/or the lead directors or independent chairman. 

Taking the example of HDFC Bank Ltd., the process adopted by them was by the means of questionnaire covering various aspects of performance of board and its committees, for the chairperson and directors. Similarly, Hero MotoCorp Ltd. stated in their annual report led by Nomination and Renumeration Committee, carried out by individual questionnaires. It can be observed in the Tata Consultancy Services Ltd. that the process of evaluation as mentioned in the annual report is via meeting of independent directors evaluating the non-independent directors, board as a whole and chairman, taking into account the executive and non-executive directors. 

It is clear that questionnaires can serve as valid way of evaluation however what can be noticed is the process being initiated or done by directors. The performance evaluation of board and senior management cannot therefore be equated to the HR questionnaire. It stands as stated fact that the evaluation process serves as a backbone of smooth functioning of any organisation and it shall not be treated as a mere formality, rather shall be executed stringently. 

Aishwarya Says:

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