Who should conduct a board's evaluation?

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In India, listed and large unlisted companies have a legal obligation to conduct annual Board evaluations. Though the law does not lay down a firm methodology for doing these evaluations, there are plenty of helpful nudges towards global best practices.

The Companies Act, 2013 and the SEBI Listing Obligations and Disclosure Requirements (LODR), 2015 provide the primary legal underpinning for evaluations of boards, the board committees and the directors.

This law hands out the responsibility to oversee and manage the board evaluation process to the Nominations and Remunerations Committee.

A large share of the onus of evaluating the Chairperson of the board is placed on the independent directors. A note by the Institute of Companies Secretaries of India (ICSI) released in 2015 provided the compliance framework and  recommended the involvement of external experts in the process.It suggested that the board consider the following criteria -- the time spent on relevant matters, the fulfillment of the terms of reference for each entity and the broader compliance with the law.

This note was subsequently supported by SEBI through a Guidance Note on Board Evaluation in January 2017. It laid out a standardised framework that companies could work with to define the process of evaluation.

It highlighted the need for parameters that assess the structure of the board, including the experience and competence of the individual members, and criteria that appraise the independence of the board as a whole, its compliance, strategy and governance functions.

The number and quality of Board meetings also was flagged. Like other regulators around the world, SEBI leaned in on the side of external assessment experts as a complement to robust internal processes.

"Use of external experts imparts an independence to the evaluation process and therefore is used by many entities globally," the note pointed out.

SEBI, however, was quick to caution against taking an easy route to compliance. It added that to ensure impartiality and genuinely improve governance "care must be taken to ensure that the external assessor is not a related party or conflicted due to closeness of the Board.

"However, few Indian companies make use of external assessment experts to evaluate their Boards and its constituents.A survey running over three years by the proxy advisory firm, Institutional Investor Advisory Services (IiAS) in association with National Stock Exchange found in February 2018 that only 17% of their survey respondents were using external agencies for the process.

This IiAS-NSE study, one of the few on the topic in India, found the board evaluation practices uneven at best across the spectrum. Perhaps, it is early days for this practice to take root.