Posted by: CS Shilpi Thapar
The role of the Board of Directors is becoming more complex now days due to increasing regulatory burdens, technology changes and globalised markets. Organisations that don’t perform well are often targeted by strategic competitors or private equity funds. The Board of Directors and C-Suite Executives operates under tremendous pressure to survive and sustain at the global platform. The corporate catchphrase of the year 2012 was Strategic Business Planning and Risk Management but in 2013, it will be reviewing, assessing, updating, monitoring and implementing Corporate Governance, Risk Management, sound Internal Control process, procedures and practices in the organization.
The most significant issues for the Board of Directors to consider and discuss in the Board Room in 2013 are:
- The board and its committee’s composition: It is often said that great leaders make great organization. The Board and its committee’s composition play an important role in enhancing the performance of the organization. There should be a balanced mixture of executive, non-executive, independent and women directors on the board, possessing vast industry experience, skills and expertise in the field of finance, law, innovation and human relations development. Such constitution of balanced board and its committees have become a very challenging task for organizations. Most of Directors are not able to devote time to the activities of organizations , some do not possess ability to work together with other directors and management of the company. There are individuals who are competent, independent and have industry expertise and experience but they do not wish to be part of the board due to the reputation or industry risk associated with the business of the organization. There is lack of Gender Diversity on Boards. In India, currently around 5.3 percent women are grossly under represented on the Boards of Indian Companies as against the global figure of around 15 percent. As per clause 149 of New Companies Bill, 2012, there is a mandatory clause of the appointment of one woman director on board of specified organizations. Gender Diversity ensures broader outlook to the Board for taking effective decisions. Further, it is found in most of the studies and surveys that organizations with more women directors on board takes better decisions have better performance statistics and corporate governance practices implementation. So sincere efforts should be made by the Board to balance the composition the board by inducting wide range of professional women as Directors on the Board.
- Board Effectiveness: The key secret for any business and boardroom success is effective relationship among the directors and management of the organization esp. Chief Executive Officer. Boardroom success depends on how well the human side of the organization is taken care off.The key challenge of Board for governing the company is to bring together individuals who may be having vast experience in different fields, possess different values, belongs to different countries, cultures, by framing effective board structures and practices, disclosures process and procedures, effective resolution of conflict of interests that will enable all individual directors to work and interact effectively among themselves and take effective decisions in the best interest of the company.
- Management Development and Succession: Management Development and Succession esp. Chief Executive Officer (CEO) should not be an event but should be part of routine activity of the Board of Directors. It should be a main agenda for the Board and not merely a compliance item. It is always advisable to do proper succession planning in advance for C-Suite Executives of the Organization which includes CEO, COO, CFO, CS and there should be a constant development of insider candidates who are selected for succession. Board of Directors should not be dependent on succession information and analysis provided by the CEO but they should independently meet potential candidates, review and monitor that their development process is carried out effectively. Recently, CEO succession in big corporates like Apple, Citigroup, Hewlett-Packard, Yahoo, Best Buy have clearly indicated the crucial need for management development and succession in organizations. Due to increase tension between stock market volatility and potential negative effect on investors’ returns, it is imperative to attract, motivate and retain high-quality talent in the organization to get better results. The Board of Directors should recognize, direct and retain proper, efficient and high quality talent in the organization so that objectives can be achieved speedily in the best interest of the organization and stakeholders at large.
- Strategic Planning: The Directors should be able to see big picture i.e what is really going on globally, where are the opportunities, who are the competitors globally, what are the strategies adopted by the competitors, what are potential business opportunities, What is the probable risk associated i.e reputation, business, operational, financial, market or climate, what are customers expectations, sustainability plans, etc. For executing the important role of strategic planning and oversightness, board should have proper in depth knowledge and information on the subject matter. Board Meetings should begin with a strategy updation and discussion and sufficient high quality time should be spent on these important issues. Further company’s policies, risk management, internal control, corporate governance process, policies and practices should be regularly reviewed, monitored and revised. The board has to handle growing complexities of the company due to globalization, increasing size of business and rapid technology changes.
- Stakeholders Relationship and Communication: Due to the malfeasance of Enron, Tyco, Worldcom, Satyam, stakeholders are becoming more active especially proxy governance firms and institutional investors. They are becoming defacto regulators. The Board of Directors is facing a lot of pressure from stakeholders to perform well and sustain. Stakeholder’s esp. Shareholders and investors are generally concerned about Dividends, Buybacks, mergers/demergers, profitability statistics etc. There are certain class of shareholders who pressurize Board to appoint their representatives as Directors so that their nominees can facilitate in fulfilling their demands. To overcome such type of shareholders attacks, the board of directors should develop proper processes to communicate with shareholders so that smooth relations can be maintained with them. The board should periodically do meetings with top 20 shareholders every month and note their viewpoints on the performance of the company as per last quarterly results. Their approach should be stakeholders oriented. Decisions should be taken by the Board in the best interest of the company taking into account various viewpoints and proposals of stakeholders and if any proposal of stakeholders was not accepted by the board, they should give valid reasons that why the proposal was not accepted in the best interest of the company. In the new Companies Bill, 2012, Clause 245 and 246 provides for class-action suits by shareholders/investors in a court of law against directors, management, auditors if they believe that the affairs of the company are being conducted in a manner detrimental to the interest of the company and its shareholders. This will improve quality of financial reporting and corporate governance among organizations. Further, in USA, Dodd and Frank Act has introduced the provision of “Say-on-Pay”- Shareholder advisory votes on executive compensation. The companies should receive an average 90 percent of shareholder votes to get the approval of resolution related to executive compensation in the meeting. So this provision enhanced the importance of shareholder democracy and corporate governance in the organization. In India, the new Companies Bill, 2012 is introduced with a main objective of Investors Protection, better accountability, disclosures and transparency, corporate governance of the organization. Hence, the board has a huge agenda of revising their existing company policies in light of the provisions of New Companies Bill, 2012.
- Risk Management: This is one of the important functions of the audit committee of the Board of Directors of the organization. The Risk Management policies related to reputation risk, business risk, operational risk, financial risk, market risk, climate risk should be periodically reviewed, monitored and revised if necessary, taking into consideration the present global market business conditions. It should be a top agenda in any board meeting of the company. Most individuals are reluctant to join the Board of Directors of any organization due to reputation risk and other business risks associated with it.
- Government Regulations: The Board of Directors should consist of Directors who are well versed with ever changing statutory regulations. For better accountability and transparency, laws are changing rapidly and becoming more stringent. The new Companies Bill, 2012 is passed in Loksabha and will take a shape of an Act very soon. The new Companies Bill, 2012 seems to impose heavy duties and responsibilities of Directors, C-Suite Executives and Professionals. So it is advisable to induct lawyers, financial and legal professionals on the Board who shall provide suitable legal and financial guidance and can be ultimately responsible for compliances of all Statutory Rules and Regulations applicable to concerned organizations.
- Information and Document Management: Due to globalization, the business activities of the organization are carried out across the globe due to which there is a huge flow of information and documents. If information and documents are not properly secured, protected and preserved effectively, secrecy will be lost and organizations will be more prone to Corporate Frauds. Further, to enable the Board to take effective strategic decisions , there should be a proper and accurate flow of right and required information from the bottom level. The timely information and documents provided to Directors should authenticated and in proper form. The accountability and responsibility of the Executives providing the required information and documents should be fixed by the Board.
- Corporate Corruption and Fraud Control: Proper policies related to anti bribery, corruption issues, whistle blowing should be framed, reviewed, monitored and implemented by the Board from time to time as if any non compliance is there, the ultimate responsibility is always on the board no matter to whom it is delegated in the organization. Recently, in Wal-Mart case, the issue of corporate corruption and bribery was widely discussed. After the investigation started at Wal-Mart to detect non compliances, it has created high-level positions to help root out corruption. It is spending millions on anticorruption training and background checks of the lawyers and lobbyists who represent Wal-Mart before foreign governments. So it is very important agenda for the Board to start anticorruption training programs in the organization in order to implement effective corporate governance, combat reputation risk protecting its brand image.
- Corporate Social Responsibility to respect human rights in Business Relationships: Considering the recent tragic incident of Delhi Rape Case, I believe that corporates should come forward to extend help to the society by respecting human rights and it should be a mandatory part of corporate social responsibility. Human rights are violated by the corporates in one or the other way intentionally or otherwise for profit maximization. In Infrastructure sectors, one of the main issues initially has to do with taking over land and resettling the population which involves adequate consultation and compensation. There are also issues pertaining to the physical security of the person: conflicts between companies and communities; labour rights, privacy rights. Human rights due diligence is now also in the requirements of the OECD (Organization for Economic Development and Cooperation) guidelines for multinational enterprises. They have complaints mechanism, so that people who feel that their human rights have been harmed can actually bring a complaint against a company to an office in any the 42 countries that adhere to the OECD guidelines. The European Commission has incorporated the same principles, including human due diligence, into a new EU strategy for corporate social responsibility. In the U.S., the Dodd-Frank Act includes a due diligence element for companies sourcing certain minerals closely tied to conflict in the Democratic Republic of Congo.
To conclude, there is a great responsibility and duties cast on the Board of Directors of the organisation by introducing new Companies Bill, 2012 by the Government. It will ensure effective governance, accountability and transparency. There are more clear provisions in the Bill pertaining to Board Procedures, Disclosure Norms, Rotation of Auditors, Investor Protection, Stringent Penalties, Special Courts, Serious Fraud Investigation Offices, Class action suits and Corporate Social Responsibility. Hence, proper training programs should be started by the Government institutions or organisations themselves for imparting adaptable and flexible professional training, educating and assisting wide array of corporate players comprising of Directors, C-Suite Executives like Chief Executive Officer, Chief Financial Officer, Company Secretaries, management and employees of the companies, entrepreneurs, innovators and members of the professional bodies in performing their duties efficiently towards their organisations by achieving key strategic initiatives in a very robust, cost effective, dynamic and converged framework.