Company Boards

Company Boards – Still Evolving

In a recent piece on independent directors, we tried to caution aspirants that the risks of assuming board responsibilities remain unreasonably high and the consequent rewards trivial. However, for those brave hearts that seek new challenges and learning, this paper shares some perceptions on the functioning of boards and how individual contributions might make them a little more effective.

Boards generally divide their time between compliance and strategic matters. Their role encompasses three elementary issues – to establish policy, make strategic decisions and oversee the company’s performance. Policies could include, for instance, those concerned with foreign exchange/treasury exposures, human resources and stock options or a crisis management manual. Clear policies help management to be consistent – for example the board could take a call on acceptable levels of un-hedged risks or compensation over and above statutory obligations in the event of an accident etc. Strategic decisions concern things that are significant in their nature, for instance a merger with another company, a critical diversification into a new business line, capital spends over a certain limit, etc. Boards should also involve themselves with such decisions that may either affect reputational risk or have material financial consequences. Oversight is perhaps the element of board responsibility that consumes most of its allocated time – reviewing business operation, financial performance and statutory compliances. But the difference between oversight and management sometimes becomes hard to define.

On the whole, board meetings are commonly a dull affair. There are figures to be checked, observations by auditors to be examined, risk exposures to be considered, together with a fair amount of tedious number crunching. The excitement happens occasionally when there is debate about new capital investment or perhaps a sexy acquisition. This is when members get to ask stimulating questions on risk, integration management and shareholder value.

In order to be effective and contribute, independent directors must read and a lot of it, and not feel embarrassed to ask questions. There are board papers to be studied – these include financial scores, operational parameters and routine resolutions. However, for effective debate to take place, directors must comprehend issues and undertake research beyond what is provided by the company. Discussions with specialists where possible are helpful (clearly without compromising on confidentiality issues), but in the least, web-based secondary research that is easy to do would seem essential. Whilst independent directors are not meant to become subject experts, they must in the least be able to ask the right questions.

Directors must insist that sufficient time be allocated for critical matters and regardless of the sequence of the agenda, these should ideally be taken up first. Remember, as the day progresses, fatigue sets in and critical things can slip between the cracks. Occasionally, perhaps once each year, board meetings should be spread over two days so time does not become a constraining factor.

Independent directors should insist on functional presentations – Corporate Strategy, Human Resource, Treasury, Social Responsibility and Sustainability, Public Relations and Reputation Management, Information Technology etc. These are critical to comprehend as they represent the capability of an organisation to run efficiently or handle a crisis. The diversity in the constitution of a board would enable healthier debate on such matters. Frequently, company presentations are long-winded and seem like endless drudgery, and by the time they are over directors have either lost interest or are simply too fatigued to bother with discussions. Ideally a ‘20 minute rule’ should be followed – what can’t be said in 20 minutes is simply not worth listening to. Rarely do listeners have the patience to remain attentive for longer – they simply drift away.

Independent directors must insist on field visits – for example to manufacturing locations if applicable, construction sites or operating centres. These are useful as no amount of board-room discussion can substitute for first hand observation. It is so much easier to relate to things being discussed if it is possible to visualise them. In any event, site visits are often a morale booster for employees who realise that what they do is important to the organisation.

Finally common courtesies are important to observe. For instance fiddling with a cell phone, or hacking away discreetly on an iPad, or for that matter dozing off, would not be considered good form. But this happens all too frequently – sometimes simply the result of unrelenting monologues that are supposed to have been crisp briefings. Independent directors must insist that management presentations are concise, incisive and to the point, without the unnecessary waffle that distracts from the focal issues. Unless individual members of a board actively interact they will lose interest and wilt away.

Ultimately, an efficient board is in many ways reliant on the role of the chairman and his ability to invite opinion, generate debate and encourage independent directors to speak. It helps if the chairman is an independent director himself, but arguably less so than whether or not he has the conviction and leadership skills to discharge his responsibilities. He must be assertive when it comes to ensuring order at Board meetings and the adherence to discipline, but quite the opposite when it comes to soliciting others’ opinions, particularly contrary points of view. These qualities can be hard to find.

All considered, company Boards are still evolving in India and their effectiveness remains dependent on a few individuals rather than an institutionalised capability across the corporate sector. Until the maturation is complete – a process that may take years – would-be independent directors must tread with care. There is learning and possibly, intellectual fulfilment to be attained in this profession. But there are also risks and frustrations in the job – and these must not be underestimated.

This piece was first published in the November 2014 edition of CFO Connect. It has been reproduced with permissions.