Board Evaluation: Disclosures and Practices - 2016-17

This is the third study on Board Evaluation Disclosures and Practices in India, which has been jointly undertaken by NSE and IiAS (along with IiAS Research Foundation) and covers the 2016-17 annual report disclosures.

A lot has changed over the past three years. Evaluation of the performance of individual directors, and the effectiveness of the board and its committees, has required a shift in the mindset of existing companies and their boards. The process itself has established greater accountability and increased directors’ awareness regarding their contribution to board deliberations. Existing boards have successfully maneuvered themselves through this transition.

The first study, which covered disclosures in the 2014-15 annual report, was undertaken when the concept of board evaluation was first introduced in India under the Companies Act 2013 (Act). The Act mandated listed companies to formally evaluate their boards and committees and disclose the evaluation process in the annual reports.

Supporting the Companies Act 2013, the SEBI (Listing Obligations and Disclosure Requirements), 2015 (SEBI LODR), which came into effect on 1 December 2015, also requires periodic performance evaluation of the directors. Further, SEBI LODR mandates companies to formulate and publish criteria for evaluation of independent directors. In January 2017, SEBI has also put out a guidance note on board evaluation, to educate companies and their boards about various aspects involved in the evaluation process.

NSE and IiAS (along with IiAS Research Foundation) decided to carry out research for three years on the disclosure practices on board evaluation in the backdrop of this sustained regulatory focus. The current study, focused on the 2016-17 annual report disclosures, has been carried out in two parts:

• Part A deals with a board evaluation survey which was circulated among a cross-section of listed Indian companies. The survey, comprising 18 questions, sought the companies’ views on various issues related to board evaluation including who is evaluated, who conducts the evaluation, how is the evaluation carried out, and the steps undertaken to ensure robustness of the entire assessment exercise.

• Part B focuses on a comparative study of board evaluation disclosures in the 2016-17 financial year. This year, along with the Nifty 50 and Nifty Midcap 50 companies, the scope of the study was expanded to include 50 companies which got listed on the NSE platform in the two-year period ended 31 March 2017. The report carefully maps out the changes in disclosures over a three-year period.

With a three-year trend and survey responses from practitioners, it is clear that over the past three years, companies have strengthened the quality of their board evaluation processes and improved the overall quality of disclosures. This improvement has been a function of self-learning and experience, as well as the guidance provided by the regulators. Yet, from the investors’ perspective, there is a need for disclosures to be focused on the evaluation outcomes as much as the process. Moreover, boards now need to link director remuneration with board evaluation results – especially for non-executive directors.

This report has relevance to several stakeholders. Companies will find it useful to understand the level of disclosures across a broad-spectrum of companies – small, large, and those newly listed. This will, hopefully, encourage them to provide more transparency in their board evaluation reporting. For regulators, the report is useful in assessing the impact of their guidance, as well as the degree to which corporate India has adopted and imbibed the need for board evaluation. For all other stakeholders – including investors and lenders – the intent of boards to improve their efficacy is a telling sign of how important they consider good corporate governance.

For the full report on board evaluation, please click here.