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.
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