Indian corporate governance norms have evolved from a voluntary board evaluation model, as was laid down in Clause 49 of the erstwhile Equity Listing Agreement, to a mandatory board evaluation model under the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). There are various provisions under the LODR Regulations which require listed companies to compulsorily evaluate the performance of its directors. Listed companies were encouraged to come up with their own board evaluation norms in compliance with the LODR Regulations, however, given that compulsory board evaluation is still in a nascent stage in India SEBI has now issued a guidance note for the benefits of listed companies.
The evaluation of the board is done at multiple levels, i.e., the board as a whole, at the level of committees of the board and at the individual director and chairperson level. The guidance note covers all major aspects of board evaluation including the following: (a) subject of evaluation i.e., who is to be evaluated; (b) process of evaluation including laying down of objectives and criteria to be adopted for evaluation of different persons; (c) feedback to the persons being evaluated; (d) action plan based on the results of the evaluation process; (e) disclosure to stakeholders on various aspects; (f) frequency of board evaluation; (g) responsibility of board evaluation; and (f) review of the entire evaluation process periodically. The guidance note mandates the Nomination and Remuneration Committee (NRC) to formulate the criteria for evaluation of performance of independent directors and the board of directors. The NRC is also tasked with evaluation of every director’s performance and determining whether to extend the term of appointment of the independent directors, on the basis of such evaluation.
There is no doubt that SEBI was motivated to issue the guidance note in light of the recent fracas within the Tata group. Be that as it may, this guidance note will enhance performance by the directors given that they are under regular supervision of their peers. Improved performance will eventually lead to better governance of companies.