“A leader is a dealer in hope.” — Napoleon Bonaparte

The board of directors is perhaps the most critical and yet the most complex part to construct and maintain. The board of directors has a fiduciary duty to look after the corporation's regulatory obligations and finances. To know the status of Indian boards, Institutional Investor Advisory explored the board composition of NIFTY 500 companies, which accounts for 96% of the total market capitalization, and issued a report titled 'Indian Boards: Structure and Breadth.'

 

In order to have a proper analysis, the companies were divided into four categories: promoter or family-owned, public sector undertakings (PSUs), multinational corporations, and institutions-controlled companies.

 

In India, most directors on boards are still family members, putting the board's freedom at risk. The board must have 50% independent directors, but the board of directors had tenured independent directors, jeopardizing the board's independence. Though recruiting independent directors is not enough to ensure proper governance still, there is more chance of better execution of work.

 

In terms of key highlights of the report our of a number of issues studied, when compared globally, the average director tenure of NIFTY 500 companies is 8.2 years, while that of S&P 500 companies is 7.9 years. In comparison to 16 percent of S&P500 firms, 41 percent of NIFTY 500 companies have an average board age of 59 or less.

 

Also while comparing NIFTY 500 with NIFTY 50, it was discovered that the statistics of both boards are identical, except for the quality of board representatives. In comparison to 26% of NIFTY 50 firms, 41% of NIFTY 500 companies have an average board age of 59 or fewer.

 

Various considerations are addressed in the study to analyze the appropriate composition of the Indian board.

 

Board Structure and Independence

The boards of directors play a critical role in ensuring both business oversight and fostering sound governance practices. When a board has a combination of independent and non-independent directors, it is profoundly successful. According to the report, 14 percent (70 companies) of companies were non-compliant with board structure norms as on December 31, 2020, with most companies being PSUs. Since PSUs are all regulated by the government of India, board independence has long been an issue of debate.

 

The willingness of an independent director to articulate independent and impartial opinions is inversely proportional to tenure. But having them on the board for 30-40 years increases the familiarity of decisions; hinders the director's willingness to make drastic changes when required. As a result, the report focuses that companies shall classify tenured Independent directors with more than ten years of service as Non-Executive & Non-Independent Directors.

 

Board Size

When it comes to board size, larger boards are not always better. Changes in regulatory framework and an emphasis on board compositions that need greater transparency and diversity have drawn a lot of attention towards board size.

 

When businesses focus on having several promoter family members on the board, the board size can grow, but it is not that these directors are ineffective, but the presence of family dynamics contributes to the overruling of the professional decisions in the boardroom at times. Nonetheless, several large corporations, such as Emami Ltd and MRF Ltd, have a 50% Promoter presence on their boards ruling out the laws.

 

Board Oversight

The Board of directors has a basic legal obligation to provide oversight and transparency for the company. The board's "fiduciary" duty is to ensure that the company is properly stewarding the funds earmarked to it and that all legal and ethical principles are being followed.

 

According to a SEBI amendment, companies must divide the positions of Chairperson and Managing Director, and the Chairperson must be a non-executive director. However, according to the report till December 31, 2020, 58 percent of the chairpersons are executive directors.

 

Skill & Experience – Key to success

The Board of Directors oversees shaping the organization's future while adhering to its fiduciary responsibilities. As a result, determining the core competencies of the Board members is critical towards ensuring that only eligible individuals take on this critical position. SEBI mandated that every listed company shall publish a map or matrix listing out the skills/expertise/competence of the board of directors in its annual report, but companies like PSUs, where directors are appointed by the government of India, lack appropriate skill/expertise.

 

Though age is not a prerequisite for nomination, but young director's lack of expertise can prove to be a constraint to their effective performance of their duties because when it comes to overcoming problems or planning a company's long-term approach, experience is the key. According to the report, 52 percent of the overall directors on NIFTY 500 boards were over the age of 60 in 2020, and 12 companies also had directors over the age of 90 on their boards.

 

Women in Boardrooms

Gender equality on corporate boards is a major subject for discussion of the report. Previously, women were often treated inferior to men in all respects, but as time has passed, such rules have been enforced by the government to hold men and women on equal footing. From 1 April 2014, the Companies Act of 2013 made it mandatory for boards to have at least one female member. The legislative drive has yielded results.

 

Even so, one area that requires action is the appointment of women to the board of directors to ensure better gender based diversity. Despite the steady rise in female directorships over the years, only 21 of the NIFTY 500 firms had a female Chairperson in 2020.Despite the provision to have at least one female director be on the board, women's presence in executive roles remains poor at 11%.Off the overall female executive directors, only 31% were Executive Directors, while the other 69 percent belonged to the promoter group or were promoter members.

 

Strong governance necessitates the presence of independent directors. Instead of requiring one-third of the board to be made up of independent directors, corporations must ensure that at least half of the board is made up of independent directors. Promoter-driven or family companies often fail in this field, and an experienced and impartial Board of Directors may make a significant difference in those businesses' long-term trajectory.

 

One of the major concerns analyzed from the report to consider the state-owned enterprises (PSUs), as these firms are faces a number of issues for staying non compliant because of their control by the government and having less chances to place interventions on the subject.

 

Therefore, there is a requirement for companies to be professionally managed rather than having dominance of promoters, for the reasons that they develop good governance principles and have management transparency. These companies' boards of directors are mostly made up of professional directors, and their executive teams are skilled at fostering fruitful dialogue with board members.