CII launches Guidelines on Appointment of independent Directors and Process of Board Evaluation
Confederation of Indian Industry (CII) launched the "CII Guidelines on Appointment of Independent Directors and Process of Board Evaluation." The publication compiles a set of Guidelines that have been ideated to serve as guidance on role and responsibilities of independent directors, aspects of appointment and Succession Planning, imbibing Diversity, Equity and Inclusion (DEI); need for indemnity and insurance and compensation of independent directors. The importance of Board evaluations has been increasingly recognized as a key element for building good corporate governance. The Guidelines also focus on bringing out effectiveness of the Board through efficient evaluation process.
The CII Guidelines describe how the role and responsibilities of independent directors has evolved over the years and may now also encapsulate crisis and risk management, internal controls, standards of conduct and sustainability in addition to the traditional roles in strategy, finance and audit.
Detailing the selection process for independent directors, the CII Guidelines detail phases like diagnosis and definition; director identification; candidate engagement and decision and implementation. Boards may focus on relevant domain knowledge as well possess diverse combination of knowledge, skills, experiences and backgrounds. Appointing directors from different backgrounds will also help in upping the social initiatives of the company including stakeholder engagement, human capital management and Diversity, Equity, & Inclusion (DEI) initiatives. This will help further support its ESG journey.
On succession planning, the CII Guidelines explain it may be seen as a continuing process of reviewing and identifying needs, rather than an episodic event or exercise. The company strategy may tabulate the range of skills most needed around the Boardroom table. When thinking about Board succession there is a need to identify and prioritize the skills, experiences and other criteria that will be most valuable in both director and committee roles. An ideal mix of expertise will ensure that the Board can fulfil its responsibility to advise and oversee the company affairs. Succession planning for Independent Directors is recommended where his / her tenure is likely to end within the next 12 months.
The CII Guidelines suggests that there is a need to create legal and procedural safeguards relating to personal liability of independent directors, and initiation of prosecution itself should be an exception rather than the rule, to keep risk and rewards of being an independent director proportionate. The whole idea of decriminalizing civil duties is essential to conserve faith in the institution of independent directors. There is need for availability of indemnity and/or insurance that may be formalized through appropriate written agreements. While directors and officers (“D&O”) liability insurance is mandatory for the Top 1000 entities by market cap as per the SEBI LODR, it may be advisable for all listed entities (to start with) to consider this protection for their directors.
Elaborating the process of Board evaluation including steps for performance evaluation, the CII Guidelines suggest that in a situation where the Board evaluation of an Independent Director is not satisfactory, then the Chairman of NRC may have a face-to-face discussion with such Director/Independent Director to provide feedback of the Board evaluation. The Board/ NRC may review, update and approve the questionnaires as well as the review parameters, say, every three years.
Speaking on the launch, Mr R Dinesh, President, CII & Chairman TVS Supply Chain Solution Ltd. cited that in the intricate thread of corporate governance, the appointment of Independent Directors and the meticulous process of board evaluation is elementary in leading an organization towards harmony, transparency, and sustained success. There has been significant amount of shareholder activism on inclusion of role and responsibilities of Independent directors especially in different set ups ranging from a large company to a small company to companies at different levels of maturity, conglomerates, new-age business ecosystem comprising unicorns and startups etc. There is an urgent need that the role, expectations, and responsibility of Independent Director to be defined clearly to avoid situations of conflict.
Mr Sanjiv Bajaj, Chairman, CII Corporate Governance Council said he believes that Independent Directors have a socio-strategic role viz. role of a conscience keeper of the corporate governance representing image of a business in consonance with the role of driving the business strategies. Given this role, it is important that compensation for Independent Directors is commensurate with their heightened responsibilities, strategic inputs and risk bearing - while running the risk of facing criminal liability actions.
Mr Chandrajit Banerjee, Director General, Confederation of Indian Industry highlighted CII initiatives in the governance domain and spoke of the publication to be a strategic tool for organizations committed to fostering a culture of excellence in governance. He highlighted that the compilation comprises 10 guidelines for companies which are considered best practices that ought to be possible to comply with in true letter and spirit. The Guidelines are forward looking for members to chart in the times to come thereby enabling ease of doing business.
Mr Sanjeev Krishan, Chairman, CII Sub-group on Independent Directors (CII Corporate Governance Council) and Chairman, PwC in India expressed how corporates are now focusing on augmenting their Board with members who come from diverse backgrounds and with varied experience. There is an increasing reliance on the viewpoints of Independent Directors and majority of the corporates are now going back to the drawing Board to lay down the key attributes required from an Independent Director and also setting up a continuous evaluation process for their directors in line with the long-term strategy and commitment, he said.
5 February 2024
New Delhi