When less is more

Governance is agnostic to geography. Yet when it comes to voting on shareholder resolutions, it’s the location of the investor that determines the person’s vote. This is most true in the case of appointing independent directors because global investors have far higher expectations from them than domestic investors do. This has to do with market practices in their geographies. In the US and other markets, businesses are professionally managed and institutionally owned. Consequently, the dialogue between the executive management and investors is through the board. Therefore, there is a higher expectation from the board. In India, with the preponderance of family-owned businesses, the expectation remains that the buck starts and stops with the family. It is the family that is expected to deliver — except that whenever there is a crisis, it is the role of the board that is questioned.

As investors sit outside the board room looking in, they do not really know which of the directors has been constructive or how much each individual director has contributed. In the absence of a structured way of knowing this, they typically look at a few metrics to determine how effective a director is. These include tenure, attendance, and over-boarding.

The Companies Act has defined the maximum tenure for an independent director to be 10 years. It has then very generously grandfathered this provision and started the count of the years from 2014. If you were on a board, say, since 2002, this earlier association was redacted. Investors now increasingly consider the actual years and not the ‘Companies Act’ count, with companies too looking at the spirit and not the letter of the law.

As far as attendance is concerned, there is no bright-line. Investors just want all directors to attend all board meetings and show up at the annual general meeting. The Securities and Exchange Board of India did propose directors attending fewer than 50 per cent of the meetings over two financial years would have to approach shareholders for their continuance on the board, which was subsequently withdrawn. But with virtual meetings, board participation levels are high.

The third numerical measure is director over-boarding. Over-boarding is when a director serves on too many boards or has a full-time role — be it as an executive board member or a managing partner of a firm. Investors worry about the ability of directors to fulfil their board responsibilities, given the time commitment associated with each directorship.

Although there is no standard definition of over-boarding, this is becoming critical for two reasons. The first is that the board’s responsibilities are increasing. This has to do both with the increasing complexity of businesses, and directors are expected to focus on a wider set of issues — digital transformation, cybersecurity threats, sustainability, and corporate social responsibility. And for directors on committees, particularly the audit committee, with its constantly burgeoning agenda, the time spent is only going up.

And second, as mutual funds and other institutional investors step up on stewardship, governance risk becomes critical and, with it, the quality of the board, for which over-boarding is a central issue. This means that expectations regarding the maximum number of boards a director may sit on are set to change.

A recent survey regarding the NSE Nifty-100 found that, of these companies just seven boards met four times, while 26 met 10 times or more in FY21. Add the mandatory meetings of independent directors and the committee meetings. Looking at the audit committee, this survey found that in FY21 almost 80 per cent of the companies had more than the statutory four meetings, with 47 per cent having seven or more. And then you have the nomination and remuneration committee, the risk management committee, the stakeholder relationship committee, and the corporate social responsibility committee.

The above suggest that the earlier calculus of four meetings a year with three days of preparation and a day for travel, enabling directors to be on seven boards of listed companies, no longer holds. In fact the base assumption of four meetings itself a year no longer holds and needs to be revisited. And as I wrote earlier, if the time needed to fulfil your directorial responsibilities has gone up, so should what you are paid.

Investors currently anchor their over-boarding expectations on the regulatory maximum of seven listed companies, and if she/he is in an executive role, then a maximum of three listed companies. But in many geographies, notably the US, they have significantly lower thresholds. These take into account not just the number of boards but also the role, i.e. chair a board, a lead independent director, and committee memberships.

Companies too can draw a line. Apple Inc’s “Corporate Governance Guidelines” state: “Director Service on Other Public Company Boards Serving on the Corporation’s Board requires significant time and attention. Directors are expected to spend the time needed and meet as often as necessary to discharge their responsibilities properly. A director who also serves as the CEO of the Corporation should not serve on more than two boards of other public companies in addition to the Corporation’s Board. Directors other than the CEO of the Corporation should not serve on more than four boards of other public companies in addition to the Corporation’s Board.”

Change will happen either through regulation or investors asking for it, or companies voluntarily putting restrictions in place: The landscape and expectations have changed far too much for the existing status quo to continue.

The writer is managing director, Institutional Investor Advisory Services. Views are personal.

Twitter handle: @AmitTandon_in