Checking the box on skill diversity

By Hetal Dalal

Disclosures suggest that boards have clearly misunderstood the intent of the regulation. Worryingly, they remain shy of an honest evaluation of themselves

For boards to be effective, they must comprise directors that bring together a set of skills that are relevant for the business and aligned to the business’ strategic direction. In keeping with this, SEBI mandated that companies disclose the skill composition of their boards — in the FY19 annual reports, the disclosure was for the board and in the FY20 annual reports, the disclosure requirement was granular, at director level.

SEBI has often used disclosure as a form of enforcement, and in asking companies to disclose director-wise skills, it is pushing boards to evaluate themselves from this perspective. However, companies are still shying away from this assessment.

Some companies are meeting the regulatory disclosures by obfuscating the skill definition. For example, one NIFTY 50 company has decided to evaluate the entire board on only behavioural or soft skills. Every director on this board checks all the skill boxes. Technical skills, or understanding its rather disparate set of businesses, was not a consideration for skill assessment. That could be interpreted in two different ways — one, that the non-executive directors did not possess any material technical skills and therefore the silence; or two, that the management is in complete control of the business and the role of the board is limited.

Where companies have outlined a set of technical and behavioural skills, some companies claim that all directors possess all skills. That means that a medical professional has legal skills, and an architect can be a member of the audit committee. Companies that are defaulting (and where the promoter is facing debt recovery litigation in global courts) have a perfect score: all its directors possess all technical and behavioural skills (which include, among others, expertise in corporate governance, operational experience, strategic planning, leadership, and financial, legal, regulatory and risk management expertise). If the directors of these boards are unable to face the reality of their own skills, will they ask the right questions, or take the hard decisions during board deliberations?

The issue of skill relevance has also been brought to fore in some cases. A material handling and construction equipment manufacturer appointed an infertility specialist and laparoscopic surgeon to its board in September. Similarly, a company with diversified businesses in cement, sugar, heavy engineering, and information technology appointed a 77-year-old with five decades of experience in the food-based FMCG space, and 73-year-old retired surgeon to its board. This isn’t to say that boards should think of skills in a strict and narrow sense, but for such appointments, where the skill and experience differ widely from the company’s main business, the board needs to explain how it believes these directors will add value to board deliberations.

In promoter-led companies, there is another uniform theme — all promoters (independent of their age and tenure) automatically have a wider gamut of skills than the (more) experienced executive and non-executive directors. Yet, when Microsoft Corporation puts out its skill matrix for the board, it shows that Bill Gates isn’t superman.

Then there are the check-the-box disclosures. Directors’ skills are disclosed at an individual level — much like a laundry list — but there is no tie-in to the skills required at the board level and for the business.

Boards are misreading the intent of the disclosure. In asking boards to disclose director-wise skills, there are two questions to which answers are being sought.

First, what are the skills that the board currently possesses relative to those necessary for the business? This must be seen not narrowly in the context of where the business is, but also where the business is heading towards. Changing market conditions, new threats, global trade wars, or new opportunities must be seen for their potential and skill matrices need to be defined accordingly. In defining the set of skills, the board must also think about what depth of skill is required for each aspect and also its breadth — essentially, how many directors need to possess a particular skill?

Second, where are the skill gaps and, therefore, does the board need addition or rotation? This must be the driver of appointing directors on the board and reappointing existing ones — rather than the regulatory check boxes of gender or the criteria for fit and proper or disqualifications.

The evaluation of the board is not director-specific per se — the skill matrix is essentially the evaluation of the board as a team, broken down, in disclosures, to the contribution of each team player. High-performance teams comprise a mix of skills and to varying degree — and so it is true of high-performance boards as well.

The current disclosures on director skills suggest that boards of Indian companies continue to resist an honest evaluation and to be held accountable. Directors may want the certain prestige associated with being a director — and more so if it is on the board of a listed company — but are happier without the attendant responsibility. Boards continue to shy away from holding up a mirror.

Hetal Dalal works at Institutional Investor Advisory Services India Limited. Twitter: @hetal_dalal. Views are personal.

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