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'Nodders' in the boardroom

December 26, 2008 12:54 IST

The Satyam fiasco has turned the spotlight on the company's independent directors, some of whom are now desperately trying to distance themselves from the board's aborted decision to buy two companies belonging to the promoter group.

While Satyam has made a mockery of corporate governance, many other Indian companies also haven't covered themselves in glory on selection of independent directors.

Former Sebi Chairman M Damodaran used to say quite often that some people get on company boards and become permanent entities -- more permanent than the furniture in the boardroom. In fact, one of the major weaknesses in Indian corporate governance has been provisions allowing the appointment of purportedly independent directors who are old friends or associates of management or of controlling shareholders.

A round table discussion organised by Spencer Stuart, one of the world's leading executive search consulting firms, showed that quite a few independent directors in Indian companies are nominees of the chairman or the CEO and perform the role of the 'Nodders' in the PG Wodehouse short story of the same name. They nod whenever the chairman says anything.

The vast majority, however, are people conditioned by culture -- the culture of not expressing dissent very forcefully -- and are therefore intimidated or unsure how their criticism will be taken.

Others agree. A study by AT Kearney, AZB & Partners and Hunt Partners revealed that 90 per cent of companies it surveyed appointed independent directors using referrals from the chief executive or chairman. Observers say the result is obvious: Directors so appointed want to be viewed by the controlling shareholders as flexible and cooperative rather than rigorous or principled.

The only way to improve the situation is to have better evaluation processes for the board members. The At Kearney survey showed that in 64 per cent of the cases, the boards of Indian companies assessed themselves. In developed nations, however, over 70 per cent of companies have independent agencies evaluating their performances.

That raises a fundamental question that every company should ask frequently: Is your board of directors competent enough or are the board slots being filled up with those who have made it a profession of becoming directors?

Tom Neff, chairman of Spencer Stuart in the US, says the answer lies in having a proper evaluation process to rate the performance of the board members. Boardrooms in the US, Neff says, now use an improved process for selecting new board members that is normally led by the nominations committee. They regularly hold executive sessions during each board meeting without the CEO present.

These sessions allow independent directors to discuss the effectiveness of management, the quality of board meetings and other issues or concerns. In spite of initial resistance, boards have found the practice so helpful that many hold an executive session after every board meeting rather than the suggested once or twice a year.

Compare this with what India Inc does. Independent surveys have found that only one out of five companies appraises the board's performance in India. The move towards board reviews has been relatively slow and there continues to be some resistance by older or more senior directors, in particular, to the idea of individual director appraisals.

There are of course some exceptions such as Infosys where the board evaluates the performance of non-executive/independent directors through a peer-evaluation process every year. Each external board member has to present before the entire board on how they have performed/added value to the company.

Every board member evaluates each external board member on a scale of 1 to 10 based on the performance indicators.

Some of the performance indicators on which the independent directors are evaluated are their ability to contribute to and monitor the company's corporate governance practices, active participation in long-term strategic planning, and commitment to the fulfilment of a director's obligations and fiduciary responsibilities - this includes participation and attendance.

Another critical area often ignored in India is the need for continuous director education programmes. Spencer Stuart says this is because good governance is a moving target.

Sending your directors back to school may not be a bad idea as research for the 2008 Spencer Stuart Board Index in the US showed that nearly a quarter of new independent directors on S&P 500 boards are serving on an outside public company board for the first time.

In India, board directorships are still network-oriented, but as the need for more independent and impactful boards intensifies, the trend of first-time directors may become a reality sooner than later.

Shyamal Majumdar