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As boards meet to review the year gone by, they will be more focused on the new financial year. Given that the environment is expected to remain volatile, I believe that the following should be on the top of their agenda this year, in no particular order.
Review of the credit profile: As expected, there are some companies with a strong balance sheet and at the other end, those that are in distress —most of which would have been classified as an non-performing assets (NPA) by banks. But there is a thick swathe in the middle. Some of these businesses will find the environment less supportive than assumed, leading to their credit profile deteriorating. With the Reserve Bank (RBI) tightening its bad loan framework and making it mandatory for companies with loans above a specified threshold to be referred to the insolvency process, companies can no longer rely on any forbearance from their bankers. This means that boards need to review their company’s capital structure and stay on top of its cash flows and loan repayments. They need to discuss the amount of capital the promoters or large shareholders can bring or conversely, the amount of equity dilution they can stomach. Given a tightening credit environment, companies need to have plans in place to raise capital within the shortest possible timeframe. While the RBI talks of loan sizes of more than Rs 20 billion, this is imperative for all companies irrespective of their loan amount.
External environment and regulation: Expected stronger global growth provides an opportunity, which is getting weighed down by the risk of the US-China trade war escalating and spreading to other geographies. Restrictions on the free movement of people is also now a reality. CEOs and boards need to ensure that they have an agile strategy in place to take advantage of a rapidly changing external environment.
For example, I for one, expect that China’s opening-up its financial system will have the same impact on the global financial services sector over the coming decade as their manufacturing sector has had over the past two. This will have a seismic impact on global markets. Boards will best serve their companies if they spend time anticipating such shifts.
While regulatory changes overseas will have their impact, local regulations too will continue to engage boards. While there are no big-ticket items like the companies act, roll-out of GST, shift to Ind-AS, which dominated the board agenda these past few years, regulators will remain on overdrive and boards need to be alert as the consequences of being blindsided are dire.
Technology: Whole businesses — rather I should say industries — are being upended because of technology — digital, mobile, data analytics, artificial intelligence, robotics, blockchains, internet of things. Technology is as much an enabler as it is a disrupter. While telecom, retail, media are affected today, boards need to constantly review the developments and changes taking place regarding technology, what their competitors are focused on and what are start-ups doing. As the digital payment platforms have shown, it may be just a sliver of the revenue streams that get affected, but now a new player has a foot in the door. Equally important is an understanding how customers use technology. Only then can boards build and refresh the digital strategy.
Illustration by Binay Sinha
The crisis at Facebook speaks of the need for boards to have policies in place for protecting confidentiality of customer data. Boards take cyber threats too lightly. This threat is real (it is said companies must prepare for when there is a cyber breach, rather than if). Boards must put in place a protocol for both dealing with cyber breaches and its disclosures.
Reskilling the board and succession planning: When the new Companies Act came in, many companies planned ahead, staggering the retirement of their board members. An equal number appointed board member for five years. They will now retire in 2019. This provides an opportunity for companies to relook at the board composition and structure. The mandatory board evaluation is a great place to ask questions such as what skills are needed for it to be effective and does the board need younger blood, more in sync with the millennials. The chairman of the company and that of the NRC need to start this conversation, more so in the context of the Kotak Committee, which has asked for the separation of roles between the chairman and the CEO.
Interacting and communicating with investors and other stake holders: All along boards have tasked the CEO to communicate with investors. As long as investor focus has been on routine business, performance and profits, this was appropriate. But as institutional shareholding has increased, investors are looking beyond numbers — culture, societal impact, brand resilience. High-profile corporate developments over the past 24 months point the need for boards to effectively communicate with investors. For this, boards need to understand what matters to their investors and other stakeholders particularly in the medium to long-term and accordingly reprioritise what is on their governance agenda. Redefining the role of the stakeholder grievance committee, to a stakeholder engagement committee and tasking it with this responsibility, will help boards effectively deal with this change.
These issues, along with the more traditional ones including building a corporate culture, hiring and retaining talent, risk management, capital allocation, performance measurement and business strategy, will broaden the board’s agenda.
Amit Tandon is with Institutional Investor Advisory Services India Limited. Twitter handle: @amittandon_in
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
