17.

Risk Management Framework The sources of risk, and their magnitude, have
changed dramatically. Due to globalisation, changing risks and their global dimension,
pose challenges not only to business and governments but also to society and economies.
Inadequate risk evaluation for credit derivatives is identified as one of the causes for the
global meltdown of 2008. The Task Force felt that the board must be provided with
information on the most significant risks and how they are being managed to integrate
risk management in decision making activity. A strategy must be instituted to deal with
and manage or mitigate each of the identified risks with an objective of creating
equilibrium between risk minimisation and risk optimisation. While the policy need not
be made public for reasons that confidential information ought not to be published as
would compromise competitiveness, the fact that the risk management strategy has been
implemented and responsibility allocated, as certified by the CEO and countersigned by
the Chairman of the Audit Committee, would act as a deterrent to those who may take
unjustifiable risks with the objective of increasing compensations and incentives by short-
term individual performance.
18.
19. Recommendation 18: Risk Management The Board, its audit committee and its
executive management must collectively identify the risks impacting the company’s
business and document their process of risk identification, risk minimisation, risk
optimization as a part of a risk management policy or strategy. The Board should also
affirm that it has put in place critical risk management framework across the company,
which is overseen once every six months by the Board.

RESPONSIBILITIES OF THE BOARD

C. Risk Management i. The Board, its Audit Committee and its executive management
should collectively identify the risks impacting the company's business and document
their process of risk identification, risk minimization, risk optimization as a part of a risk
management policy or strategy. ii. The Board should also affirm and disclose in its report
to members that it has put in place critical risk management framework across the
company, which is overseen once every six months by the Board. The disclosure should
also include a statement of those elements of risk, that the Board feels, may threaten the
existence of the company.

Audit Reports and Audit Qualifications: Mandatory Recommendation: In case a company

has followed a treatment different from that prescribed in an accounting standard,
management should justify why they believe such alternative treatment is more
representative of the underlying business transaction. Management should also clearly
explain the alternative accounting treatment in the footnotes to the financial statements.
Non-mandatory recommendation Companies should be encouraged to move towards a
regime of unqualified financial statements. This recommendation should be reviewed at
an appropriate juncture to determine whether the financial reporting climate is conducive
towards a system of filing only unqualified financial statements.
 Role of the Audit Committee in Corporate Governance
The role of the audit committee forms the cornerstone for effective corporate governance.
Boards rely on their audit committees to offer effective oversight of the annual auditing
process. Members of the audit committee do their best quality work when the majority of
the members are independent and objective. Regardless of their experience, nearly all
audit committees have room to improve the financial reporting process. Effective audit
committee oversight is a vital process for protecting investors and the health of the capital
markets.

Audit committees also oversee the system of internal controls and ensure that the
company is compliant with laws and regulations. Audit committee oversight extends to IT
security and operational matters. Certified public accountants report directly to the audit
committee, as opposed to reporting to management. The role of the audit committee
includes such responsibilities as appointing and overseeing the work of the auditor and
managing the auditor’s compensation.

Role of the Audit Committee in Corporate Governance

Audit committees should have at least one individual on the committee who is considered
a financial expert. It’s not necessary for all members of the committee to be financial
experts, but they should be individuals who are knowledgeable about financial issues and
who have a solid understanding of accounting principles and audit and finance terms and
definitions.

Senior managers and independent auditors also have distinct roles in the financial
reporting process. Managers are responsible for preparing the financial statements and
establishing internal controls over the financial reporting. Management must also
maintain the internal controls and ensure that the financial reporting process is accurate
and effective. The independent auditor bears the responsibility for expressing an opinion
on the fairness of the financial statements, the company’s financial position, operational
results and cash flows and helping to ensure that those issues conform with generally
accepted accounting principles.

Before the audit committee begins its work, committee members will need to understand
how management develops and reports internal financial information. Reviewing internal
information gives audit committees an opportunity to ask questions about the
completeness, accuracy and timeliness of audit reports. Having a good understanding of
audit reports ensures that audit committee members will know the potential impact of
financial statements. All audit committee members must also be up to speed on recent
professional and regulatory changes and announcements.

The audit process is an interactive process between the audit committee, auditors and
management. Audit committees review the results of the audit with senior managers and
external auditors, including matters that managers generally share with the audit
committee under general auditing standards. One of the primary responsibilities of the
audit committee is to review significant accounting and reporting issues.

Working With External Auditors

Audit committees are uniquely different from other committees in that they have more
authority than most other types of committees. Because of their unique relationship with
external auditors and the importance of their duties, it’s necessary for audit committees to
have authority over their budgets and for managing external auditors.

For companies that have an internal audit department, the audit committee reviews and
approves the audit plan, reviews staffing and provides insight over the organization of the
audit plan. The audit committee also meets with internal auditors and management to
touch base for periodic review. During these reviews, the audit committee may propose
alternative audit approaches and coordinate the audit with internal audit staff.

During the annual audit, the audit committee meets separately with external auditors to
discuss matters that need to be discussed privately. It’s important for audit committees to
work toward preventing fraud. Auditors with forensic audit expertise are adept at
detecting willful accounting errors and anomalies.

The audit process is designed to protect investors, and the hope is that shareholders will
have trust in the financial reports that the company releases.

Understanding Regulations
Members of the audit committee should be familiar with the Sarbanes-Oxley Act of 2002
(SOX). The Securities and Exchange Commission (SEC) adopted a rule in 2003 that
mandates the national securities exchanges and national securities associations to
disallow listings that aren’t in compliance with the audit committee requirements of SOX.

SOX contains several rules that are specific to the role of the audit committees of publicly
listed companies. The law says that all committee members must be independent to
preserve the integrity of the auditing process. By virtue of ensuring that all audit
committee members are independent, shareholders gain assurance that the company is
doing its best to prevent inside employees from manipulating the work of the committee
and the external auditors.

Audit committees are responsible to choose and oversee the issuer’s independent
accountant. The board must have procedures in place to manage complaints about the
issuer’s accounting practices. The audit committee’s charter gives the committee the
authority to enlist the help of independent advisors and to budget accordingly for them.
Audit committees also have the authority for the budget for funding the independent
auditor.

In addition to SOX regulations, NYSE listing standards involve having audit committees
review major issues related to accounting principles and how the company presents
financial statements. The standards also require audit committees to explain significant
changes in the company’s application of accounting principles, internal controls and other
material control deficiencies. NYSE recommends that audit committees review these
issues with management on a quarterly basis.

NASDAQ requires companies to disclose the purpose of the audit committee as it is

described in its charter and the role of the committee in overseeing the financial and
accounting reporting processes of the company and the audit reports of the financial
statements.

Some of a board’s most crucial duties are performed by the role of the audit committee.
It’s vital for the audit process to remain confidential until financial reports are thoroughly
reviewed and ready for public release. A board portal system by Diligent is a highly
secure platform in which audit committees can record and store updates on regulations
where audit committee members can access them at any time. A secure board portal also
provides an online place where committee members can meet remotely and exchange
documents confidentially. Diligent Messenger is a software communication tool that
integrates seamlessly with Diligent Boards so that audit committee members can
communicate electronically without the fear of being hacked.

Improving board effectiveness

Five principles for getting the most out of a board assessment

By: Alice AuCorporate boards today are expected to be more engaged, more
knowledgeable and more effective than in the past. One tool that a growing number of
boards are using to examine and improve their effectiveness is the board evaluation.
Annual assessments have become the norm for boards in many countries, with nearly all
listed companies in Canada, France, the U.K. and the U.S. conducting some sort of
assessment each year. The practice is also widespread in Italy and Spain and is gaining
attention in many Asia Pacific markets, where the issue of board effectiveness is moving
up on the corporate governance agenda.

Despite their growing adoption, board assessments are falling short of their promise of
enhancing board effectiveness in some cases. Boards that take a compliance-oriented
approach — or structure the process in a way that prevents a true examination of the
impediments to board effectiveness — lose the opportunity to gain valuable shared
insight into the operation of the board and ways to improve its composition, processes
and relationships.

When done effectively, board evaluations provide a forum for directors to review and
reinforce appropriate board and management roles and ensure that issues that may lie
below the surface are identified and addressed promptly. In short, evaluations give the
board an opportunity to identify and remove obstacles to better performance and to
highlight best practices.

How can boards make sure that they get the most out of the assessments, so that they
really improve board effectiveness? In our experience, boards derive the highest value
from a board assessment that is shaped by five key principles:

1 The board has clear objectives for the evaluation.

2 A board leader drives the process.

3 The process incorporates perspectives from senior managers who regularly
 interact with the board.
4 The assessment process goes beyond compliance issues to examine board
effectiveness across a broad range of measures.
5 Directors commit to reviewing the results of the assessment together and address
issues that emerge.

1. The board agrees on clear objectives for the assessment.

One of the most common mistakes boards can make when embarking on an assessment is
failing to agree at the outset on the purpose and objectives of the process. While it may
seem obvious, coming to a shared agreement about what directors collectively want to
accomplish through the assessment encourages board members to commit time to the
process and to provide the candid feedback that is essential to identifying and addressing
potential roadblocks to board effectiveness. Without the commitment from the board as a
whole and directors individually, an assessment is unlikely to yield the desired results.
Clarifying objectives and defining the scope of the assessment also helps to avoid a
situation in which the board is using the process as a way to put off dealing more directly
with non-performing directors.

For some boards, a “triggering event,” such as the arrival of a new CEO or a change in
board leadership or composition can shape the priorities and objectives of the assessment.
For example, an assessment occurring amid a CEO transition can help forge an
understanding between the CEO and the board about expectations and accountabilities,
clarify the respective roles of the board and CEO and ensure that time is spent early in the
CEO’s tenure to consider whether changes are needed in the way the board is composed,
structured or operates.

Furthermore, board structures, governance issues and cultural norms differ by company
and country, and these differences also can affect the style and scope of the board
assessment. To be most effective, a board assessment must be tailored to the company’s
current business context and include any relevant issues.

Among the questions boards should consider at the outset:

What is the scope of the assessment?

For example, should the process only involve assessments of the board and committees,
as required in many countries, or also include individual director assessments? Boards
with little experience conducting assessments may define a narrower scope the first year,
expanding the scope in subsequent years as directors become more confident and
comfortable with the process.

What’s the most appropriate assessment approach for the board?

Boards approach assessments in a variety of ways, ranging from a director questionnaire
to a robust process in which directors are interviewed individually, typically by a third
party, to draw out candid views about the board’s effectiveness.

Should board leaders be assessed?

Our experience is that the board’s effectiveness is impacted directly by the board’s
leadership. Even though the chair is guiding the process, the best situation is when that
person is open to feedback about his or her leadership.

What areas does the board want to delve into more deeply?
These areas could include board process, behaviors, communication issues, the
effectiveness of executive sessions, the role of the lead independent director, the board’s
relationship to management and development of the board’s agenda. In countries where
annual assessments are required, some boards find the process more valuable when each
year they choose a specific topic — such as the board’s committee structure or its role in
the strategic planning process — to examine more closely.

What gaps exist in the current assessment process?

Boards can become dissatisfied with assessment techniques that fail to get at issues that
are impacting their effectiveness. It is helpful at the start of the assessment to consider
whether to evolve the assessment approach or the issues that are reviewed in order to
make the process more productive.

Back to the 5 Key Principles

2. A board leader is responsible for driving the process.

Essential to a successful evaluation is having an independent board leader champion the
assessment process. The independent board chair, chair of the governance committee or
the lead independent director is in a position to drive the process — involve the right
people, ask for directors’ time, schedule time on the agenda to discuss the results and
ensure that the board follows up on the issues that emerge. And while the CEO should be
an integral part of the process, he or she should not be leading it.

The board leader driving the assessment process plays a significant role in managing
expectations about the process, serves as an independent resource for directors and
management to turn to with concerns, and may deliver feedback to individual directors, if
the board is not working with a third party to facilitate the process.

Back to the 5 Key Principles

3. The process incorporates perspectives beyond the board directors themselves,

including those from senior management and best practices from outside the
company.
Another way the board can limit the value of a board assessment is to look only inwardly
at its own effectiveness. An emerging best practice among U.S. boards, although still less
common in European boards, is to seek input about the board’s effectiveness from the key
senior management team members who interface with the board. Soliciting input from the
executives who participate in most of the board meetings — such as the general counsel,
the president, the chief financial officer and head of human resources — can broaden the
perspectives on the board’s effectiveness in key areas, including board/management
relations. As regular board observers, these executives often have very thoughtful
feedback about what the board does well and what it could do better.
Board assessments also can be more valuable when boards benchmark themselves against
other high-performing boards in the same industry segment or against best practices in a
specific area. For example, boards often want to know how they compare to peers in
areas such as committee structure, compensation and mandatory retirement age. A third-
party facilitator with significant experience in the boardroom and knowledge of
governance guidelines and regulations can provide perspectives on how the board
compares to its peers or “measures up” to the evolving standards of corporate governance
by providing an up-to-date perspective on best practices.

Back to the 5 Key Principles

What can a board effectiveness assessment include?

 Board processes and supporting materials

 Board composition
 Committee organization and processes
 The role of the board and board leaders
 The board's relationship with the CEO
 Board culture and dynamics
 Potential board development needs
 Overall board effectiveness
 Individual director effectiveness

4. The assessment process should go beyond compliance issues to examine board

effectiveness.
Many boards have relied on director questionnaires to conduct their assessments. This
paper-and-pencil approach can provide a sense of how directors are feeling about
compliance issues — whether or not the board is involved in strategy discussions or CEO
evaluations, for example — but they are less valuable in revealing issues or concerns that
are affecting the board’s effectiveness. While a board may be doing all of the things it is
supposed to be doing by law, these activities may not be yielding results that are
improving the outcomes for the company. Similarly, behaviors on the board may be
preventing the board from serving as a strategic adviser for management or limiting its
strategic influence.

In the most effective board assessments, directors are interviewed individually on a

confidential basis and asked for both their qualitative and quantitative assessment of the
key areas that determine the effectiveness of the board. The assessment interviews should
be conducted by a seasoned boardroom consultant who understands boardroom issues
and CEO/board relations. Interviews typically are wide-ranging discussions, examining
everything from board composition and organization, board processes, roles and
responsibilities to communication, boardroom dynamics, the board/management
relationship and the quality of boardroom discussion.

As part of our process, we recommend that a full board evaluation include a review of
governance documents, committee charters, board meeting minutes, board meeting
agendas and observation of a board meeting. Observing the board dynamics and
exchanges between directors during live meetings can be a very useful input when
providing advice and recommendations for improvement, particularly related to the
quality of board discussions.

The assessment process can reveal a variety of issues and obstacles to better board
performance. These range from easily addressed operational complaints about meeting
length or the composition of the agenda, to larger, thornier issues concerning the board’s
role in strategic decision-making, gaps in knowledge and competencies on the board, and
executive and director succession planning. The corrective actions range as well — from
improving the timeliness of board materials and winnowing overly long agendas, to
making changes in the composition and, occasionally, the leadership of the board.

While many of the concerns that surface through evaluations focus on board procedures,
they sometimes go to the important relationship between the board and management,
which can vary depending on the size and development stage of the company, the
international makeup of the board and the current state of the business. In Europe, many
boards also are re-examining the board’s involvement in areas such as succession
planning and strategy planning, considering whether the board should be more involved
earlier in the process, for example, to review the competitive assumptions that are
shaping management’s strategic plan.

Back to the 5 Key Principles

5. Directors commit to reviewing the results of the assessment and prepare an action
plan for addressing issues that emerged.
Another way assessments can fall short is when boards do not commit the time to review
the results and address the issues that are raised. Some boards, for compliance reasons,
begin an assessment process, but then spend little or no time on discussing the findings.
In addition to leaving issues unresolved, this lack of follow-up can generate cynicism
about the process and the board leadership’s commitment to improving effectiveness in
the future.

Boards have to be open to the results of the assessment and be prepared to deal with the
findings. This involves having an open discussion among the board members about
performance issues that were raised and prioritizing items that should be addressed in the
coming year. Follow-up is typically delegated to the governance committee, which
develops an action plan based on the board recommendations. The board reviews its
progress as part of the following year’s assessment.

Back to the 5 Key Principles

Conclusion
Done properly, a board assessment is not a report card for the board as a whole or for
individual directors. Instead, it should be viewed as a tool for continuous improvement
and learning. Successful assessment processes:

 Reflect the culture of the organization and its board

 Are championed by a chairman or other board leader who participates actively in

the process
 Have shared support among all directors
 Begin with clearly stated objectives for the board assessment process
 Include adequate time on the board’s agenda to discuss the results and establish a
clear approach for acting on the findings, including developing an action plan with a
timeline and milestones
 Are characterized by confidentiality throughout the process

A More Effective Board of Directors

The definition of board effectiveness has shifted dramatically over the past decade. In the
aftermath of the global financial crisis and numerous corporate scandals, a director now
confronts not only complex oversight accountability, but also personal risk and liability.
Clearly, this is a job not for the faint of heart.
As the supply of courageous board candidates dwindles, global companies are in need of
battle-tested directors more than ever — board members who fully understand and can
actively engage in virtually all aspects of an enterprise’s operations. To be truly effective,
a board needs directors who can work as a group to clearly define their role and mission,
and in specialized individual roles, such as succession planning, acquisitions and capital
allocation.
In this context, it’s become rather easy today to identify the weakest boards. Typically,
such boards comprise directors who act distant and detached — traits anathema to a
business environment that demands transparency and accountability.
My colleagues and I recently studied what makes some boards more effective than others.
We found that boards tend to progress from good-to-great along a four-phase continuum:
1) foundational, 2) developed, 3) advanced, and 4) strategic. Essential to creating a high-
performance board is agreement and alignment, at the outset, on where the board actually
stands in this continuum and where it needs to be.
The continuum essentially represents a corporate hierarchy of needs, akin to the famous
personal-development hierarchy created by psychologist Abraham Maslow. In the
corporate model, you equate a “foundational board,” which provides basic compliance
oversight, to basic survival needs such as food and shelter in the human hierarchy.
Similarly, a “strategic board,” which provides prescient forward-looking insights to form
a company’s foundational strategy, is fully actualized and high-performing.
Foundational — survival — boards focus on compliance; they play it safe. These are the
weak performers in the corporate food chain, with directors who are unwilling to take
strong positions, make tough decisions, or play proactive operational roles. Strategic —
actualized, in Maslow’s terms — boards underpin high-performance companies, where
directors take appropriate risk to make significant contributions and lasting impact on
enterprise value.
So how can weak boards advance along the effectiveness continuum if they find
themselves clinging to survival basics? In our study, we found five elements —
“disrupters” — that tend to hinder the progression of boards toward self-actualization and
high performance:
6 Lack of clarity on the roles of individual directors and the board as a whole. Role
ambiguity slows decision-making and causes unnecessary director conflicts.
7 Poor process management hinders effective board preparation, meeting
management, and communications. This results in indecisiveness and a lack of
urgency on critical challenges facing the organization.
8 Lack of alignment and agreement on company strategy causes disinterest
among board members, who then simply default to tackling regulatory and
compliance issues. Poor strategic alignment also hampers a board’s ability to
prioritize issues and set their near-term agendas. This often causes board disruption
and sends damaging signals to financial markets.
9 Poor team dynamics fracture boards and lead to power struggles. Like any
effective working group, a board should be comprised of professional peers who
respect and work well with each other.
10 Board composition is a serious impediment, if not done right. Today’s challenges
require new perspectives and skills. But boards often lack the ability to objectively
evaluate their makeup to determine if they have the right people and skills at the
table.
I’ve seen my fair share of effective boards and dysfunctional ones. The worst cases nearly
always exhibit at least one of the disruptors described above.
Classic dysfunctional examples include organizations where the company founder
dominates board discussions and stifles all attempts to change and modernize the
company or alter the composition of the board (i.e., poor team dynamics). In other cases,
highly compensated boards literally run a company into the ground by churning through
CEO after CEO (lack of strategic alignment). Other weak-performing boards focus on
recruiting “big-name” directors — typically high-profile CEOs — who are simply too
distracted by operational and financial issues facing their own companies to make any
significant contribution (poor board composition).
In stark contrast, I’ve worked with board chairs who had the foresight and courage to spin
off a successful division to help that now-standalone unit focus its resources on building
its brand and market presence. In these instances, short-term personal gains were cast
aside in favor of the long-term viability and health of the division — and the corporate
entity.
The board of an international restaurant chain, for instance, played a leading role in
reducing the company’s overall risk profile. Specifically, a director personally
spearheaded the development and adoption of an advanced enterprise resource planning
system, working hand-in-hand with internal staff. Another high-performing board
immersed itself into a global financial services firm’s complex financing activities, as it
successfully navigated a financial crisis. These directors went well beyond basic
compliance to provide true strategic counsel.
To add such strategic value, high-performing boards must be “talent-centric.” At its most
basic level, this manifests itself in a board’s composition and diversity level. An
enterprise must attract directors who can provide valuable, strategic input, while building
a board that can draw on the diversity of its members’ expertise and backgrounds —
across geographies, gender, race, and experience — to create a whole that’s literally
greater than the sum of its parts.
Strategic directors also commit to performing at their full potential and have the courage
and self-confidence to raise and address any personal developmental needs. They also
must be able to give constructive feedback to other directors to enhance the personal
effectiveness of their board colleagues. A number of talent-development tools are
available to help, including individual director and board assessments that gauge learning
agility (the ability to learn from past experience and manage amid uncertainty) and other
valuable traits and skills.
Effective corporate governance is more complex and challenging than ever. Companies
need boards to help them meet regulatory compliance basics. But the most effective
boards are those that easily check that box, while also delivering solid strategic counsel
and direction. Recruiting and developing directors who go well beyond basic needs is the
secret to building a high-performing, fully actualized board.

Appraising Boardroom Performance

Rare is the company that does not periodically review the performance of its key
contributors—whether they be individuals, work teams, business units, or senior
managers. But one contributor usually escapes such review, and that one is arguably the
single most important—the corporate board.
More than a few good reasons come to mind why companies should annually review the
effectiveness of their boards, the most pressing of which is that influential investors—in
particular, institutional investors—are beginning to demand it. A 1997 survey
commissioned by Russell Reynolds Associates found that the quality of a company’s
board has now become an important evaluation factor for institutional investors.
Other important reasons abound. Appraising a board’s performance can clarify the
individual and collective roles and responsibilities of its directors, and better knowledge
of what is expected of them can help boards become more effective. While no one can yet
show a direct link between a board’s effectiveness and its company’s profits, few would
be likely to disagree that improved board performance translates into better corporate
governance. In fact, directors have told us that after they initiated board evaluations, their
meetings went more smoothly, they got better information, they acquired greater
influence, and they paid more attention to long-term corporate strategy.
Done properly, board appraisals may also improve the working relationship between a
company’s board and its management—a powerful argument in itself for doing them.
Directors have told us that the evaluation process encouraged greater candor in their
dealings with the CEO and other senior managers. Formal appraisals of the board as a
whole, and also of individual board members and the CEO, help ensure a healthy balance
of power between the board and the chief executive. Furthermore, once in place, the
appraisal process is difficult to dismantle. Thus an institutionalized review process makes
it harder for a new CEO to dominate a board or avoid being held accountable for poor
performance.
Done properly, board appraisals may improve the relationship between a company’s
board and its management.
The changing roles and rewards for corporate directors create another compelling reason
to review board performance regularly. As greater attention has focused on corporate
governance, directorships that were once relatively low-paid and essentially honorary
positions have become demanding and well compensated. Investors understandably want
to know what they are getting for the millions of dollars in stock options and cash their
companies are paying to directors.
The most obvious impediment to periodic board evaluations is that no one can perform
them but the board itself. However, if the right evaluation process is in place, self-
evaluation need not be self-serving evaluation. Nor need it be the kind of unpleasant,
time-wasting event that makes performance appraisal nearly every manager’s least
favorite activity.
No one can evaluate a board but the board itself. Nevertheless, self-evaluation need not
be self-serving evaluation.
Appraisals in the boardroom are a recent and not-yet-widespread phenomenon. A survey
of directors at Fortune 1,000 companies conducted in 1996 by Korn/Ferry International
indicates that even though roughly 70% of the largest U.S. companies have adopted a
formal process for evaluating their CEOs, only one-quarter evaluate their boards’
performance. Evaluations of individual directors are even rarer and more controversial,
occurring in just 16% of the companies surveyed. (See the table “What Companies
Evaluate.”)
What Companies Evaluate Percentage of Fortune 1,000 companies with evaluation
practices Over a two-year period, we interviewed and gathered written surveys from
CEOs and board members at a dozen companies that are aggressive pioneers in
performing and applying boardroom appraisals. Our research has allowed us to develop a
set of best practices that represents a composite of the most effective techniques used by
all these organizations.
Any discussion of performance appraisals must necessarily cover two broad areas—the
what and the how. In the case of a board, what should be appraised is its ability first to
define its responsibilities and establish annual objectives in the context of those general
responsibilities, and then its record in achieving those objectives. An appraisal must also
look at the resources and capabilities the board needs and has available to perform its job.
The how of board appraisal is, of course, the process the board uses to evaluate its own
performance. We’ll discuss the what first, then the how.
Activities and Responsibilities: What the Board Does
There’s little argument about the modern board’s responsibilities. First, it is responsible
for business strategy development: not for setting strategy—that job falls to the chief
executive and senior management team—but for ensuring that a strategic planning
process is in place, is used, and produces sound choices. Further, the board must monitor
the implementation of current strategic initiatives to assess whether they are on schedule,
on budget, and producing effective results.

Second, a board is responsible for seeing that the company has the highest caliber CEO
and executive team possible and that certain senior managers are being groomed to
assume the CEO’s responsibilities in the future.
Third, as the ultimate oversight body, the board must be sure that the company has
adequate information, control, and audit systems in place to tell it and senior management
whether the company is meeting its business objectives. And it is also the board’s
responsibility to ensure that the company complies with the legal and ethical standards
imposed by law and by the company’s own statement of values. Finally, the board has
responsibilities for preventing and managing crises—that is, for risk management.
Before a board can even begin to evaluate its performance in these broad areas of
responsibility, it must articulate the specific actions that each of them implies. In other
words, boards must set objectives for themselves within those broad categories against
which they can eventually measure their performance. The boards of most of the
companies we looked at create a set of objectives annually—generally speaking, at the
beginning of the fiscal year—that reflects the directors’ collective judgment about which
aspects of the board’s overall responsibilities need particular attention in the coming year.
The nominating or governance committee may design an initial set of objectives that it
feels covers the essential responsibilities of an effective board. But it is vital that the full
board and CEO then take time to discuss, debate, and agree to the final set of objectives
and to establish priorities among them. Not until then can the board establish the criteria
it will use to measure its own performance in meeting those objectives. For instance, as
part of its role in developing business strategy, the board and the CEO may decide that
the company will seek to become the leader in Latin America in its major product
segments within three years. The board then specifies the evaluation criteria it will use to
assess whether it is helping the company achieve that goal. Those criteria may include
improving the board’s knowledge of the region by adding a director who has Latin
American expertise, facilitating the establishment of a partnership with the Venezuelan
government, or holding a board meeting at the company’s Latin American headquarters in
Brazil in order to meet local managers.
Because of the many demands on a board’s time, not every board responsibility need be
evaluated every year. In a particular year, it is useful for the board to pick four to seven
areas that it needs to improve. So, for example, a board might choose to focus one year
on improving its evaluation of senior management talent at the divisional level, on
identifying a system for tracking a strategic initiative, and on enhancing its CEO
evaluation procedure. The choice of topics should reflect the areas the board feels are
currently the most vital to the company, but all major areas of responsibility should be
covered periodically. It is best if the board sets these developmental objectives in a
meeting separate from the one at which the board appraises its performance during the
past year.
Resources: What the Board Needs to Do an Effective Job
A board is a team of knowledge workers, and to do its job, the board needs the same
resources and capabilities that any other successful team of knowledge workers needs.
Research done here at the Marshall School of Business’s Center for Effective
Organizations indicates that to do their jobs effectively, such groups need knowledge,
information, power, motivation, and time.
Knowledge.

The combined knowledge and experience of the board members absolutely must match
the strategic demands facing the company. Because today’s business environments are so
complex, it is nearly impossible for a single person or even a small group of individuals
to understand all the issues that come before a board. Such complexity argues for
assembling a group of members whose skills and backgrounds are diverse and
complement one another. Ideally, so that the board not grow unwieldy, each of its
members should satisfy more than one need. Selecting directors for a single area of
expertise or background characteristic can contribute to the creation of a board whose
members focus only on their particular interests.
The knowledge and experience of the board members absolutely must match the strategic
demands facing the company.
A performance evaluation that systematically assesses boardroom expertise and identifies
current and future gaps is therefore critical to assuring that the board maintains the right
mix of knowledge. A leading aerospace company uses a simple matrix highlighting the
capabilities of its directors, making it easy to see if individuals representing the right mix
of knowledge are on both its board and its various committees. The required capabilities
are derived directly from the company’s long-term business strategy. They include
competencies in such areas as developing new technologies, doing business in the Pacific
Rim, dealing with governments, and creating shareholder value.
The CEO explains the matrix’s purpose: “We use it to evaluate the disciplines we want to
have on the board, the capabilities we currently have, the capabilities that may rotate off
the board because of retirement or other reasons, and the types of people we should be
looking for. We do the same thing with the composition of our board’s committees. We
want to make sure those committees have the right kind of breadth and that there is a
continuity of experience. We try to move people around so that the capabilities we want
to have on particular committees are covered. It’s a chess game that gets played every
year.”
Information.

To be effective, a board needs a broad range of information about the condition of its
corporation. It needs, for example, up-to-date information on the competition, on key
strategic issues, and on possible acquisition targets. And it needs that information
presented clearly and concisely because its time is limited. Furthermore, the board needs
to get its information from a broad range of sources such as outside stakeholders,
customers, employees, and the directors themselves. An evaluation of board resources,
therefore, must examine not only the kind of data a board gets but also their origins.
Power.
An effective board needs authority—the authority to act as a governing body, surely, and
to make key decisions—but also the power to see that senior management is accepting
and implementing its decisions. One clear way to grant the board the independence it
needs to exercise effective oversight of the CEO is for the board’s chair to be someone
other than the CEO, to be someone who represents the owners of the company. “This is
the single most important factor in creating the right balance of power needed for
effective governance,” says Benjamin Rosen, chairman of Compaq Computer
Corporation. “Our country has this separation of powers, why shouldn’t companies?” The
separation of chair and CEO is common in companies initially financed through venture
capital. But it is unlikely to be widely adopted among large corporations in the United
States because, Rosen says, “there is so much peer pressure on CEOs to keep the two
roles together.” Today only 3% of those chairing boards at large public companies in the
United States are not current or former chief executives of the company.
Even when a single person is both the chair and the CEO, a company can take steps to
achieve a balance of power between the board and chief executive. One step is to appoint
a lead director, who represents the outside directors when setting agendas for meetings
and who can take charge in a crisis. Instituting a formal evaluation of the CEO’s
performance also works to maintain a balance, as does making a portion of the CEO’s
compensation dependent on attaining targets agreed to by the board. (See the insert
“Evaluating the CEO.”) In addition, the board can schedule regular executive sessions at
which only outside directors are present. These meetings would allow the board to
discuss sensitive issues without raising alarms among senior managers.

Evaluating the CEO

A board’s power is a function of the backgrounds of its members and the way they are
chosen. It is crucial, then, that a committee of independent directors—and not the CEO—
oversees the process of selecting new directors. Directors who have ties of business or
family to the CEO and the company may have difficulty exercising independent
judgment. They may be more easily swayed by the CEO’s strong stance on an issue.
Similarly, board members who sit on one another’s boards create potential personal
conflicts of interest.
It follows, then, that to assess the state of its own power, the board should in an appraisal
ask such questions as: Do we have a healthy balance of power with our CEO? Is the
board itself well led? Do we control the agenda of our own meetings? and, Can we act
quickly to replace the CEO if necessary?
Motivation.

The right incentives must be in place to align directors’ interests with those of the
individuals they are meant to represent: the shareholders and other stakeholders in the
corporation (employees, customers, and the community, for example). Together with the
process by which directors are selected, the reward system is a lever that companies can
use to influence the motivation of board members.
A growing number of companies require directors to own shares, paying them partially or
wholly in stock rather than offering pension plans or other perks. According to David
Golub, managing director at Corporate Partners, which specializes in taking large equity
positions in publicly traded companies, “The most important factor in determining if a
board is effective is whether there is a small group of directors—it doesn’t need to be
every one—that has a substantial ownership stake in the company, enough so that it hurts
them personally if the company is underperforming.”
An evaluation process identifying high-quality directors may be as critical as
compensation policies that motivate behavior.
The board evaluation should take note of the requirements for owning stock and the
degree to which directors’ compensation is in stock rather than cash. It should also
examine the mix of short-term versus long-term rewards. Although it makes sense to
orient directors’ compensation toward the long term—with, for instance, options that can
be exercised only after several years or upon retirement—it is also important to remember
that money may not be a director’s primary motivation. As Harvard Business School
professor Jay W. Lorsch has recently commented, “Directors, most of whom are highly
compensated in their regular jobs, do not serve for financial rewards. Rather, they join
boards because of the new ideas they gain and out of a sense that they have a
responsibility to participate in the governance process.” Thus having an evaluation
process in place that focuses on identifying high-quality directors and encourages an open
exchange of information may be as critical as establishing compensation policies
intended to motivate some desired behavior.
Time.

To make effective decisions, directors need sufficient, well-organized periods of time

together as a group. Evaluations should note whether the frequency of meetings is
adequate, whether there is sufficient time available to prepare for meetings and to
deliberate on important decisions, and whether time spent in meetings is used efficiently.
For instance, board members should not devote time in meetings to getting information
from management that could have been communicated earlier. Rather, they should spend
meeting time engaged in substantive discussion and decision making. Accordingly, an
appraisal should consider whether board members are receiving the advance information
they need in order to come to meetings prepared to debate crucial issues. It should also
consider whether the meetings themselves are devoted to the right issues. Evaluating the
way the board operates will not necessarily lead to the conclusion that it needs to meet
more often. On the contrary, after appraising its own performance, one board we studied
reduced the number of regular board sessions and instead delegated more work to
committees and telephone conferences.
Because even the most efficient boards can run short of time for in-depth discussion of
corporate strategy during regular meetings, some companies are scheduling annual
strategy retreats. In some cases—for instance, in high-technology industries, where
product life cycles can be less than a year long—meeting annually in such retreats is not
enough. That’s why Compaq devotes “a couple of hours at every board session to some
part of the business that is going to affect its strategy,” says outside director Ken Roman.
Dayton Hudson Corporation adopted a similar process after conducting an evaluation of
its board. The directors concluded, says general counsel and corporate secretary Jim Hale,
that “there’s too much strategic information for us to absorb all in one blast. Spread it out
over the year, and give us the strategic issues affecting one operating division at each
meeting.” The board evaluation process should help boards decide whether they currently
have enough time to discuss strategy and what the optimum forum for strategy
discussions should be.
 Evaluation: How the Board Rates Itself
Whatever their individual advantages, all the approaches to board appraisal we observed
were incomplete. Either they failed to gauge the adequacy of important board resources
and capabilities or they failed to set clear performance objectives. We have therefore
drawn on the strengths of several different approaches to synthesize a best-practice
process that is both rigorous and comprehensive.
Evaluation is particularly difficult for boards of directors because it requires members to
make decisions about themselves.
Self-evaluation is not an easy issue for any group to deal with. It is particularly difficult
in the case of boards because it requires board members to make judgments and decisions
about themselves and about issues that affect all stakeholders. The effectiveness of the
evaluation very much depends on how the board structures the evaluation process. It
should consist of three phases: The first—setting annual board objectives at the beginning
of the fiscal year—we have discussed above. The process picks up again at the end of the
year, when, in the second phase, the board secretary collects and disseminates
information about the board’s activities. With that information in hand, in the third phase,
board members can judge how close they came to meeting their objectives while also
examining the adequacy of the resources available to them over the year.
Disseminating Information.

The information disseminated to board members should come from both internal and
external sources. It should include an analysis of how the board spent its time in
meetings, breaking down the year’s activities and accomplishments according to how
they contributed to each area specifically set out for evaluation in the annual objectives.
For instance, board members should be able to scan a list of topics and issues that they
addressed at meetings the previous year relating to business strategy development, and
the list should be organized by the dates of each meeting and the length of time spent on
each topic. Wherever possible, this information should be linked to tangible benefits to
the board or the company that may have resulted from these activities. For example, the
record of a decision by the board to expand the company’s markets in China should be
connected to the opening of the company’s sales office in Beijing some two months later
and to sales figures in the region for the appropriate period.
A careful examination of the topics covered at board meetings might also reveal that
certain of the board’s objectives or portions of the company’s business were largely
overlooked. Such an analysis might reveal, for example, a failure to hear from a member
of the senior management team who is a prime candidate to succeed the CEO, or perhaps
it might reveal a failure to review the company’s substantial real-estate holdings.
At the start of every fiscal year, Texaco’s board defines its general areas of responsibility
(for instance, oversight of the company’s financial health, assuring adherence to corporate
vision and values, planning for succession, and reviewing the CEO’s performance) and
lists, according to their priority, objectives it creates for itself within each broad category.
At the end of each year, the nominating committee then analyzes the minutes of all board
meetings to determine how the board allocated its time relative to those priorities. Board
members receive this information as the basis for a discussion of the board’s
effectiveness. “We look back each year and ask how we did on each of these points and
did we do enough,” observes Texaco’s corporate secretary, Carl Davidson. What results is
not a report card, he explains. “It is, rather, an objective listing of what we spent time on
and a subjective assessment of how well we did in paying attention to our key
responsibilities.”
Evidence suggests that institutional investors, in particular, want to be asked for their
views on board performance.
An element essential to the board evaluation process was missing from nearly all the
companies we studied: data obtained from outside the corporation. Information derived
solely from internal sources may have inherent biases that distort the reality of the
company’s competitive or financial position. Outside data are particularly pertinent when
assessing a board’s performance relative to that of its competitors. Institutional investors,
market analysts, regulatory bodies, the press, and academic journals are all potential
sources of outside information. Evidence suggests that institutional investors, in
particular, want to be asked for their views of board performance. Our analysis of the
Korn/Ferry survey indicates that directors also view the evaluation process as
significantly more effective when boards receive feedback from company stakeholders.
Evaluating the Board’s Effectiveness.

After board members have had time to review the information provided to them, a lead
director, the head of the committee overseeing the evaluation, or a respected and trusted
outsider (such as the corporate counsel) should survey all board members confidentially
to collect their views on the board’s performance relative to the objectives it had set for
itself and to examine the nature and adequacy of the available resources. The survey
should use a mix of open-ended questions and numerically scored multiple-choice items
that remain consistent from year to year, thus allowing the board to track its performance
over time.
Amoco Corporation and Motorola take two different approaches that are both quite
effective. Each uses a four-page questionnaire. Motorola’s asks board members to
indicate degrees of agreement or disagreement with 27 specific statements, such as: “The
board of directors is prepared to deal with unforeseen corporate crises.” It then poses
seven open-ended questions, one of which, for instance, asks: “Does the board have an
appropriate mix of overview and approval activities? If not, what should be different?”
(For a sample of Motorola’s questionnaire, see the exhibit “How Motorola polls its Board
Members.”)
How Motorola Polls Its Board Members

Read More
The Amoco questionnaire summarizes the board’s responsibilities in each of six
categories (“succession, planning, and selection,” for instance) and asks directors to judge
the board’s performance in each as “excellent,” “satisfactory,” or “needs improvement.”
In each category, there is also space for comment. Two open-ended questions at the end
of the survey ask directors how they would rate the board’s overall performance and
solicit suggestions for improvements. At other companies, an individual member of the
board—frequently, the chair of the nominating, governance, or compensation committee
—conducts interviews with each director in person or over the telephone using open-
ended questions. Written questionnaires yield more consistent information, and we
believe they are equally effective as long as they include an option allowing directors to
schedule an interview with the chair of the appropriate committee, if they wish.
The committee responsible for corporate governance should analyze and discuss the
results generated by the evaluation data. At Honeywell, that’s the nominating committee,
which reviews the written questionnaires and comments from all board members. As at
most of the companies we studied, the committee does so after the directors’ names have
been removed. Results are compiled into a single report showing nearly verbatim
responses to each question, identifying where the board has met its objectives, and
indicating where it needs improvement.
Finally, the committee’s findings are presented to the entire board in summary form. The
board discusses the areas identified for improvement and creates appropriate action plans.
Not only is the content of the presentation to the board important but so is its tone. The
presentation of appraisal results must be balanced, highlighting the areas where ratings or
viewpoints diverge and preserving the anonymity of individual members unless
individuals specifically ask that their names be used. The most effective presenters are
those who are good listeners and are trusted by board members. They must be seen to be
independent of the CEO and senior management. Lead directors are often a good choice.
When the board has not appointed a lead director, a good choice is the outside director
who heads the committee responsible for corporate governance.
Conducting an appraisal in this way has several advantages. First, the scores on the
questionnaires help the board members rank themselves objectively along a series of
dimensions. Directors can also see where their viewpoints differ. But boards should also
consider an additional technique that we never observed, even in our best-practice
companies—having independent experts on group process observe some board meetings
and contribute advice on how the board’s performance might be improved. With little or
no vested interest and an understanding of group-process issues, outside experts are better
positioned to recognize dysfunctional team dynamics. They can also draw attention to
implicit rules of behavior that may be interfering with the amount and candor of
information flowing among board members.
Keeping the Process Effective
Once an effective board-appraisal process is in place and running, it is a good idea to
reexamine it regularly to see how it can be improved or varied to avoid growing stale.
When Dayton Hudson, for instance, began evaluating its board 15 years ago, it used a
very formal process. Every year, board members reviewed each description of the board’s
responsibilities, as well as those for each committee, Evidence suggests that institutional
investors, in particular, want to be asked for their views on board performance. paragraph
by paragraph, to determine whether they were meeting their obligations. “There was a
point in our history when that was useful and productive,” recalls the general counsel,
Jim Hale. “But over time, it got stilted, and we felt that it was more important that we
have good communication than that we have a specific format.” Rather than serving as a
forum meant to foster rich discussion and debate, a board evaluation that takes too
detailed an approach can eventually turn into a mechanical process in which
accomplishments are merely checked off. What’s more, reviewing the same dimensions
repeatedly over many years will, at best, begin to yield merely incremental improvements
and, over time, may discourage innovative challenges to established boardroom
procedures. Using the same dimensions over and over again can also cause the board to
lose sight of other areas it may need to review.
Throughout the last decade, Dayton Hudson’s board has set aside a block of time each
year to review its governance procedures and to evaluate their effectiveness,
experimenting with a variety of different formats. Ideally, a board’s governance
committee will conduct a thorough review and critique of the board evaluation
procedures, actively seeking input from all board members in the process. For example,
during the takeover boom in the 1980s, members of Dayton Hudson’s board did a case
study to learn how the board of another company that had been through a hostile takeover
dealt with that process. In other years, they have sent out written surveys to the directors,
similar to the Amoco survey, asking them to assess the information the board was given
and to suggest how the process could be improved. Last year, they circulated their
extensive, publicly available, corporate-governance guidelines and asked the board
whether any amendments were needed.
As the pressure mounts on publicly owned companies to improve their corporate
governance practices, we are likely to see more of them adopting formal board
evaluations. A few will take the bolder step of formally evaluating the performance of
individual directors. (See the insert “Should Individual Board Members Be Evaluated?”)
But formal board evaluations are no panacea, particularly if companies are simply going
through the motions to satisfy the investment community. The chair of one company that
recently instituted processes for evaluating both its board and its individual board
members admitted that he didn’t believe it was important. “It’s important to others, but
it’s not important to good corporate governance,” he maintained. “It’s just that people
conduct best-practice surveys of corporate governance, and we wanted to have the
evaluations on our checklist.”
Should Individual Board Members Be Evaluated?
 Read More
Even when employed at companies that do take them seriously, evaluations are no
guarantee against trouble. Texaco’s board has been a leader in the adoption of best
practices in corporate governance, and yet these practices did not help it avoid a well-
publicized incident suggesting corporate racism. On the other side of the coin, Business
Week and Chief Executive magazines, for instance, consistently rate the Walt Disney
Company as having one of the worst boards, as measured by governance procedure
standards, and yet under Michael Eisner’s leadership, Disney has produced exceptional
returns to shareholders.
But if done correctly, evaluations create a way for the board and the CEO to hold each
other accountable to clearly defined performance expectations while avoiding the dangers
of getting the board involved in day-to-day management. Evaluations can also improve
the operations of the board, clarify the respective roles of the board and the CEO, and
ensure that both consistently focus on their responsibilities. Perhaps the clearest and most
consistent benefit we’ve observed in those companies that have adopted board appraisals
is a commitment by directors and the CEO to devote more time and attention to long-term
strategy—and that by itself is an outcome significant enough to justify their
implementation.
Boards are like fire departments: they aren’t needed every day, but they have to perform
effectively when they are called upon.
In a way, boards are like fire departments: they aren’t needed every day, but they have to
perform effectively when called upon. One chair observed that in good times corporate
governance is largely irrelevant, but in bad times it is crucial. Formal, periodic board
appraisals can help ensure that when the board is needed, all the right processes,
procedures, members, and relationships are in place and ready to go.

India: SEBI Tightens Reigns On Corporate Governance Yet Again

Last Updated: 3 January 2019

Article by Mansi Airi Gambhir

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1. Introduction

Securities Exchange Board of India ("SEBI"), caretaker of investors' interest, introduced

some amendments in the Securities and Exchange Board of India (Listing Obligations
and Disclosure Requirements) Regulations, 2015 ("Regulations"). It notified Securities
and Exchange Board of India (Listing Obligations and Disclosure Requirements)
(Amendment) Regulations, 2018 ("Amendments") through notification dated May 9,
2018. The Amendments focus on increasing transparency in governance of listed
companies' affairs to enable investors to track their performance as well as participate in
decision making. On June 2, 2017, SEBI constituted Kotak Committee under Mr. Uday
Kotak and assigned it with the task to produce a report highlighting methods to improve
corporate governance in listed companies so that the spirit of the Regulations is
implemented fully. The committee issued its report on October 5, 2017 and while SEBI
adopted 42 out of the total 81 recommendations, as of now, only 14 have made their way
in the Amendments. While most of the amendments will come into force on April 1,
2019, the Amendments provide for a phased timeline of October 1, 2018 to April 1, 2020
for the remaining. The period of 18 months will enable companies to adjust to new
governance requirements as well as overcome any implementation challenges.

This newsletter analyzes selective changes that the Amendments will introduce in
governance of listed companies.

2. Related party

Companies Act, 2013 ("Act") defines "related parties" under section 2 (76) to include
directors, key managerial personnel, their relatives and persons on whose advice directors
are accustomed to act. Section 188 of the Act restrains companies from executing
contracts with related parties without the consent of board and shareholders. One of the
conditions here is that the shareholders cannot cast their vote on resolutions for approval
of transactions where they are related parties. So, if a shareholder is not a related party,
then the company can execute an agreement with him and such shareholder can also vote
on resolutions for approval of such transactions. Regulation 3(a) of the Amendments
widens the scope of the definition of related parties to include promoters or promoter
group holding 20% or more shares. Once this amendment comes into force on April 1,
2019, listed companies can execute contracts with shareholders holding 20% or more
shares, but with board's and other shareholders' approval and the contracting shareholder
cannot participate in voting. Currently, listed companies can execute contracts with
promoters if they are unrelated parties and such promoters can also vote to approve any
transaction with them or their relatives. It appears that the underlying intent to bring
promoters within the definition of related party is to check situations where promoters
having a sizeable shareholding, are not related parties but act as service providers for the
company for their personal benefits.

Further, at present, the Act1 and the Regulations2 only require companies to disclose
related party transactions executed in a financial year in the annual board report. In order
to introduce greater transparency and enable shareholders to constantly monitor that
board and majority shareholders are not involved in self-enrichment, the Amendments
mandate that from April 1, 2019 onwards, all listed companies will have to make half
yearly disclosure of related party transactions on their website within 30 days of
publication of their half yearly financial results.

3. Board composition

The Amendments introduce major changes in board composition of listed companies.

Different timelines are prescribed for these amendments to become effective, as described
below:
3.1 Number of directors

The Amendments propose to increase the minimum number of board members to six as
against three under the Act.3 While this will ensure that a listed company has sufficient
number of directors to carry out multiple functions in a more effective manner, it would
have been better to mandate that all the directors must be from diverse skill sets viz.
finance, strategy and planning, marketing, so that the board is professionally competent to
fulfil different duties, as intended. In many listed companies, the board positions are
mostly held by family or friends who may not possess the expertise and skills to manage
the relevant departments under them. Although the board can seek external expert advice
on various matters, given the need for the board to make informed business judgements,
having a board comprising multiple skill sets would have proved to be a step in the right
direction although this will add to the costs. In addition, an even number composition
may create deadlock situations.

The amendment will come into effect from April 1, 2019 for top4 1,000 listed entities and
from April 1, 2020 for top 2,000 listed entities.

3.2 Women directors

The Act5 and the Regulations6 provide for at least one woman director on the board of
listed entities who may be either an independent or a non-independent director. The
Amendments provide for appointment of one independent woman director in addition to
a woman executive or non executive director. This is a positive step towards gender
diversity. Kotak Committee's report stated that corporate India had responded positively
on one woman on every board and women representation on the boards of NIFTY 500
companies, which was at 5% as on March 31, 2012 had increased to 13% by March 31,
2017.

As per the Amendments, a listed company must have at least one independent woman
director on the board of the top 500 listed entities by April 1, 2019 and for the top 1000
listed entities by April 1, 2020.

3.3 Separation of roles of chairperson and managing director

The Regulations permit listed companies to appoint two or more persons for the position
of chairperson (to preside over meetings) and managing director. So far, that has not been
mandatory. The Amendments now make it mandatory to have a chairperson who is a non-
executive director and who is not a relative7 of managing director. The idea here is to
ensure that excessive power is not concentrated in the hands of the managing director
who can focus solely on the operational activity.

This amendment will be effective from April 1, 2020 and will be applicable to only top
500 listed companies.

3.4 Independent directors

The independent directors play a critical role of watchdog of a company, its shareholders'
and employees' interests. As per schedule IV of the Act, independent directors are
obligated to raise concerns about the functioning of a company and ensure that the
concerns are recorded in board meeting minutes. Given this, the Kotak Committee made
several recommendations to increase the role of independent directors and ensure that
they are truly independent.

Section 149 of the Act and Regulation 16(1)(b) of the Regulations lay an exhaustive
criteria with respect to their qualifications. The Amendments supplement the criteria with
an additional requirement that a listed company cannot have an independent director on
its board who is non-independent director of another company. Simply put, if A is an
executive director of listed company A and an independent director on the board of
company B, then no non-independent director of company B can be an independent
director on the board of company A. The Kotak Committee has termed this as avoidance
of "board inter-locks" to cure "structural vulnerability of quid-pro-quo". This amendment
has widened the net of exclusions under the Regulations so as to make independent
directors independent in a true sense. The amendment has already come into force on
October 1, 2018.

In addition, in the interest of minority shareholders, in every board meeting at least one
independent director is now required to be present. There was no such requirement under
the Act or in the Regulations. As noted above, independent directors are expected to
safeguard the interests of stakeholders, particularly the minority shareholders and the
amendment further substantiates that duty. For top 1,000 listed entities the amendment
shall come into effect from April 1, 2019 and for top 2,000 listed entities, it shall come
into effect from April 1, 2020.

The Act permits appointment of alternate directors for all directors including independent
ones subject to fulfilment of statutory qualifications for an independent director.8 There is
no specific provision pertaining to alternate directors in the Regulations though. The
Amendments now prohibit appointment of alternates for independent directors. This is a
step in the right direction as independent directors are appointed based on their skills and
experience and unless there is a mandate to ensure that the alternate director must also
have similar set of skills to perform their job, replacement with another head negates the
purpose of having an independent director.

4. Investor participation

Increased participation by shareholders in general meetings enhances governance as it

promotes accountability of board and management towards the company and
shareholders. In order to ensure maximum shareholder participation in annual general
meeting ("AGM"), the Amendments have made it mandatory for top 100 listed
companies to provide live one-way webcasts from April 1, 2019 onwards. For greater
shareholders' participation, it would have been better if the provision were applicable to
all shareholders' meetings as against only AGMs.
Further, under the Act, it is mandatory for a listed entity to provide e-voting facility to
shareholders. Such e-voting is permitted until one day prior to the AGM and up to 5 p.m.
9 Kotak Committee had recommended that the e-voting should be kept open till midnight
on the day of the meeting so that e-voters could cast their vote based on the discussions
witnessed at the webcast. The webcast provision will meet the objective of maximum
shareholders' participation if the shareholders are able to cast vote at the time of or after
the webcast. As of now, SEBI and the Ministry of Corporate Affairs have put this
recommendation under consideration.

As per the Kotak Committee's report, in many countries such as South Korea, Thailand,
Italy, Singapore, Japan, etc. timeline for holding AGM is shorter than the timeline of six
months provided in India. Under the Act, listed Indian entities are required to hold AGM
within six months from the end of the financial year. This causes bunching of meetings in
August and September which can result in lower shareholder participation. The
Amendments now mandate holding AGM by August i.e. within five months from the end
of the financial year. However, this amendment will be applicable to top 100 companies
only. While the amendment may encourage higher shareholder participation, it would
have been better if the Regulations had obligated other listed companies to convene their
AGMs during August as well so as to avoid any probability of bunching of meetings.

5. Conclusion

The Amendments aim to provide a higher degree of transparency in the affairs of a listed
company. The foregoing provisions are positive steps towards better governance.
Needless to state, the Amendments are the tip of the iceberg and it is unclear why only 14
provisions have been included versus the 42 adopted ones. Further, there appears no
rationale behind excluding extra ordinary general meetings from the webcast provision
and retaining the e-voting timeline to one day prior to the AGM.

Nonetheless, the initiative is a laudable one and the expectation will be that all
stakeholders shall be propelled to participate and engage more with the corporations they
are a part of.

orporate Governance in listed Companies - Clause 49 of the Listing Agreement

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Aug 26, 2003

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Circulars

Deputy General Manager

Market Regulation Department
Email: sundaresanvs@sebi.gov.in

Tel: 2284 5355 Fax: 2284 5761

SEBI/MRD/SE/31/2003/26/08
August 26, 2003

The Executive Directors/Managing Director/Administrators

Of All the Stock Exchanges

Dear Sir/Madam,

Sub: Corporate Governance in listed Companies – Clause 49 of the Listing Agreement

 SEBI, vide its circular dated February 21, 2000, specified principles of corporate
governance and introduced a new clause 49 in the Listing agreement of the Stock
Exchanges. These principles of corporate governance were made applicable in a
phased manner and all the listed companies with the paid up capital of Rs 3 crores
and above or net worth of Rs 25 crores or more at any time in the history of the
company, were covered as of March 31, 2003. SEBI has issued six circulars on the
 subject of corporate governance inter-alia detailing provisions of corporate
governance, its applicability, reporting requirements etc. which are as follows–

Subject Date
Reference no.
Sr. no.

1 SMDRP/POLICY/CIR-10/2000 Clause 49 February 2

2 SMDRP/POLICY/CIR-13/2000 Applicability of Clause 49 March 09,

3 SMDRP/POLICY/CIR-42/2000 Amendments to Clause 49 September1

4. SMDRP/POLICY/ CIR- 03/01 Enforcement of Corporate Governance January 22

5. SMDRP/POLICY/ CIR- 19/01 Applicability of Clause 49 March 16,2

6. SMDRP/POLICY/ CIR- 53/01 Amendments to Clause 49 December

 In its constant endeavor to improve the standards of corporate governance in India

in line with needs of a dynamic market, SEBI constituted a Committee on Corporate
Governance under the Chairmanship of Shri N. R. Narayana Murthy. SEBI, based on
the recommendations of the Committee and public comments received on the report,
has approved certain amendments in the clause 49 of the Listing Agreement.
  Accordingly, in exercise of powers conferred by section 11 (1) of the Securities
and Exchange Board of India Act, 1992 read with section 10 of the Securities
Contracts (Regulation) Act 1956, SEBI has revised the clause 49 of the Listing
agreement. The revised clause 49 contains both, the sub clauses of existing clause 49
as well as new sub-clauses. All Stock Exchanges are hereby directed to immediately
replace the existing Clause 49 of the listing agreement ( issued vide circular dated
February 21, 2000, September 12, 2000, March 16, 2001 and 31 December 2001) by
the revised Clause 49 given in Annexure I. The revised clause 49 also specifies the
reporting requirements for the company.

 Please note that some of the sub-clauses of the revised clause 49 (given in
Annexure I) shall be suitably modified or new clauses shall be added following the
amendments to the Companies Act 1956 by the Companies (Amendment) Bill/Act
2003, so that the relevant provisions of the clauses on Corporate governance in the
Listing Agreement and the Companies Act remain harmonious with one another.

 The provisions of the revised clause 49 shall be implemented as per the schedule
of implementation given below:


1 By all entities seeking listing for the first time, at the time of listing.

b) By all companies which were required to comply with the requirement of the clause 49
which is proposed to be revised i.e. all listed entities having a paid up share capital of Rs
3 crores and above or net worth of Rs 25 crores or more at any time in the history of the
company. The companies shall be required to comply with the requirement of the clause
on or before March 31, 2004.

 The revised clause 49 shall apply to all the listed companies, in accordance with
the schedule of implementation given in the revised clause 49. However for other
listed entities, which are not companies, but body corporates (e.g. private and public
sector banks, financial institutions, insurance companies etc.) incorporated under
other statutes, the revised clause will apply to the extent that it does not violate their
respective statutes, and guidelines or directives issued by the relevant regulatory
authorities. The revised clause is not applicable to the Mutual Fund Schemes.
 The companies which are required to comply with the requirements of the revised
clause 49 shall submit a quarterly compliance report to the stock exchanges as per sub
clause (IX) (ii), of the revised clause 49, within 15 days from the quarter ending 31st
March 2004. The report shall be submitted either by the Compliance Officer or the
Chief Executive Officer of the company after obtaining due approvals.

 The Stock Exchanges shall ensure that all provisions of corporate governance
have been complied with by the company seeking listing for the first time, before
granting any new listing. For this purpose, it will be satisfactory compliance if these
companies have set up the Boards and constituted committees such as Audit
Committee, shareholders/ investors grievances committee etc before seeking listing. A
reasonable time to comply with these conditions may be granted only where the Stock
Exchange is satisfied that genuine legal issues exists which will delay such
compliance. In such cases while granting listing, the stock exchanges shall obtain a
suitable undertaking from the company. In case of the company failing to comply
with this requirement without any genuine reason, the application money shall be kept
in an escrow account till the conditions are complied with.

 The Stock Exchanges shall set up a separate monitoring cell with identified
personnel to monitor the compliance with the provisions of the corporate governance.
This cell shall obtain the quarterly compliance report from the companies which are
required to comply with the requirements of corporate governance and shall submit a
consolidated compliance report to SEBI within 30 days of the end of each quarter.

 Please note that this is a master circular which contains the revised clause 49 as
well as other circulars issued by SEBI on the subject, suitably modified. The
companies are required to comply with the provisions of revised clause 49, on or
before March 31, 2004. The companies shall continue to comply with all the
provisions of clause 49(issued vide circulars dated, 21st February, 2000, 12th
September 2000, 16th March 2001 and 31st December 2001) as well as other
circulars dated, 9th March 2000 and 22nd January, 2001, till the revised clause 49 of
the Listing Agreement is complied with or March 31st 2004, whichever is earlier.