How many corporate boards in Indian organizations have a defined succession plan to address future leadership challenges? Are Indian companies doing enough to structure boards that can tackle the complexities of corporate governance in today’s challenging regulatory environment? How do Indian boards select independent directors and what are the best ways to improve board effectiveness?
Korn Ferry in partnership with National Stock Exchange of India (NSE) conducted a survey on board practices in Indian companies and compiled it in a report called ‘Boards That Lead’ which may have some of these answers. As Robert Hallagan, Vice Chairman, Co-leader, Board Services, Korn Ferry said, “India’s growth story is inspiring. To continue to flourish, corporate governance standards must keep in step. ‘Boards that Lead’ is not just a survey, through this we are attempting to start an engaged discussion and ‘call to action’ to develop governance principles and practices in India that are respected around the world.”
Here are some of the key findings of the study:
Seamless transition of CEO and other top leadership roles is an important activity and boards need to have better processes to ensure viable successors for these roles, keeping in mind that the capabilities of these successors are aligned to the future priorities of the organization.
It was found that more than half (56%) of participating company boards had not yet identified successors for top leadership positions. Several company boards did not have a comprehensive and rigorous succession process, timely assessment and review for the CEO role, and other critical leadership positions.
Company size seemed to have bearing on how rigorously the practices were followed. Small cap companies lagged mid and large cap companies in succession planning. Only 32% of small cap firms reported having identified successors for their top leadership positions as compared to 57% for mid caps and 51 % for large caps.
Selection of Independent Directors
Independent directors (IDs) on Indian boards have a key role to play in ensuring that the company is on the right strategic path and is equipped for high performance. Two thirds of companies consider the capability to contribute to business strategy as a key requirement in the selection of IDs, while several companies emphasize on the potential of IDs to contribute and oversee company performance.
Among all sectors, Technology and Industrial sectors reported the lowest adoption rate for effective board practices in selection of IDs, particularly in terms of clearly articulating and communicating the roles of IDs to the prospective candidates at the time of on boarding. These companies also reported lowest figures on the evaluation of IDs for their ability to provide independent judgement. The presence of private equity in the Technology sector poses unique challenges for the companies, such as pressure on short term goals and intense focus on scaling up, sometimes at the cost of long-term sustainability.
Despite several challenges relating to achieving appropriate board composition, including fulfilling the legal mandate to have women directors, several Indian companies have invested time, money and efforts to put in place appropriate processes for the selection of independent directors Toward this end, they adopt an unbiased, scientific approach to selection by casting a wide net through internal referrals, search ﬁrms and industry networks. Not surprisingly, they are seeing value in their investment.
Improving board effectiveness
Board effectiveness is an evolving process. A formal and regular evaluation is a key instrument in maintaining and raising board effectiveness. While several companies (73% of sample size) reported on having a process for evaluation of the board, only 53% set objectives to measure board performance at the end of the year. In terms of ensuring legal, regulatory, ﬁnancial, and ethical compliances, which is considered a key metric in assessing board effectiveness, almost 96% of participating company boards reported being highly involved.
Navnit Singh, Chairman & Regional Managing Director, Korn Ferry India, explained, “A well-governed board has a strong positive influence on an organization’s performance and value creation for employees, clients as well as other stakeholders. The study reflects that boards need to spend more time on CEO succession as this is crucial to the well-being of the organisation and an area for which the board has the ultimate responsibility.”