Board committees: The driving force behind board's efficiency and direction

The business of business is no longer only profit maximisation. It has been redefined to focus on generating value not just for shareholders but for all stakeholders, promoting the long-term sustainable success of the company, and contributing to society.

Business is now more complex. Digital transformation, cybersecurity, artificial intelligence, recruitment and retention, climate change, geopolitics are just some of the more recent issues that boards need to address. Boards deal with this evolving and ever-expanding list through board committees that allow for enhanced decision-making. Some are for monitoring (audit committee) and others for advising (technology committee), ensuring that firms are well served. 
 

At last count, the BSE and NSE listed companies had around 626 committees, although most are just differently labelled, as they have a similar charter — for example, IT steering committee, IT strategy committee, IT stewardship committee, IT strategy and digital payment promotion committee, IT strategy, and information systems security committee. Others have been set up for a specific task, such as the legal and impaired asset reconstruction committee, the empowered committee for procurement of urea on government account, or the share allotment committee. A few will likely be wound up once the shares have been allotted or the urea procured, while others, such as an environmental, social and governance committee, will likely continue. 

Despite this proliferation, three things stand out. 

One, most of the work is done by a handful of committees. Two, areas that are complex and require specialist knowledge often have separate committees. And three, emerging areas are dealt with by separate committees. More on each:
 

First, boards primarily rely on a few committees that are mandated by regulators. The Companies Act has mandated that companies have an audit committee, a nomination and remuneration committee (NRC), a stakeholder relationship committee, and a corporate social responsibility (CSR) committee. Kotak Committee reforms to the Securities and Exchange Board of India’s (Sebi) listing obligation and disclosure requirements in 2019 mandated that the top 500 companies have a risk management committee. By 2021, this was extended to the top 1,000 companies. The agenda of the audit, the NRC, CSR and risk committees has always been comprehensively spelt out by the regulators — in fact, it is argued that these are too prescriptive. 

The second noteworthy feature is that business-specific needs are being addressed through special committees, but here too the pace is set by regulators. To just give a few examples, Sebi mandates that asset managers have an investment committee, the Insurance Regulatory and Development Authority expects insurance companies to appoint a policyholders protection committee, and the Reserve Bank of India (RBI) has proposed banks appoint a committee for classification and declaration of borrowers as wilful defaulters.
 

Further, as businesses get complex, committees staffed by executives are formed. A financial institution will have an asset liability management committee, enterprise risk management committee, information security committee, and a product innovation and review committee, among others.
   

How do companies deal with emerging issues like sustainability or technology? They either appoint an additional committee, like the digital transformation committee or ESG committee, or they task an existing committee to deal with the issue — for example, the CSR committee to look at ESG. There are a few things that companies need to do. The first is to revisit the committee charters. For one, the role of the stakeholder relationship committee (SRC) is amorphous.  It calls for “inclusive decision-making” and building “transparency and trust”. This committee was earlier called the shareholder grievance committee and was expected to resolve issues regarding the transfer of shares, or non-receipt of dividends.  
 

Given how technologically advanced our equity markets are, the SRC needs to redefine its role. This committee will better serve by interacting with investors through attending investor calls and hearing what questions investors are asking. They need to read sell-side reports, rating agency commentary, and review the recommendations of proxy advisory firms. They will be able to contribute more once they attend trade shows to better appreciate supply-side challenges. Boards need to review the existing charter of the SRC and modify it to allow for this change. Other committee charters, too, should similarly be reviewed.
It will be helpful for companies to look at their peers and review their various committees. 

Further, boards have gone through a refresh with new directors bringing in new skills. Placing them on the appropriate committee will ensure that the company is able to leverage their skills. Boards should use this opportunity to develop an onboarding programme for its various committee members as well as specify what the expectations from its members are. 

As committees are the engine room of the board, getting the structure right is important for the effective functioning of the board. Consequently, it is imperative that the various committees address both the board’s forward-looking priorities and the company’s needs. 

The author is with Institutional Investor Advisory Services India Ltd. The views are personal. X: @AmitTandon_in