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TMI BlogGuidance Note on Board EvaluationX X X X Extracts X X X X X X X X Extracts X X X X ..... evaluation prevalent among listed entities in India. An analysis has also been done of the global practices in various jurisdictions like regulatory requirements, best practices, internal versus external evaluation, disclosure requirements etc. The matter was further discussed with the industry associations, stock exchanges, market participants and international bodies and experts to obtain their views on this subject. 4. Based on the aforesaid analysis, a guidance note in this matter has been prepared in order to guide listed entities by elaborating various aspects of Board evaluation that may help them to improve the evaluation process, derive the best possible benefit and achieve the objective of the entire process. 5. 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 Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meeting of independent directors of the company (without the attendance of non-independent directors and management), such directors shall: i. review the performance of non-independent directors and the Board as a whole. ii. review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors. iii. assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties. b. The independent directors shall bring an objective view in the evaluation of the performance of board and management. 3. Evaluation of independent directors : The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated. 4. Disclosure requirements : a. A statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors shall be included in the report by Board of Directors placed in the general meeting. b. The performa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f qualifications to conduct its affairs effectively. iv. Diversity in Board under various parameters : Gender/background/ competence/experience, etc. Whether there is sufficient diversity in the Board on the aforesaid parameters. v. Appointment to the Board: Whether the process of appointment to the board of directors is clear and transparent and includes provisions to consider diversity of thought, experience, knowledge, perspective and gender in the board of directors. b. Meetings of the Board: i. Regularity of meetings : Whether meetings are being held on a regular basis ii. Frequency: 1. Whether the Board meets frequently 2. Whether the frequency of such meetings is enough for the Board to undertake its duties properly iii. Logistics : Whether the logistics for the meeting is being handled properly- venue, format, timing, etc. iv. Agenda : 1. Whether the agenda is circulated well before the meeting 2. Whether the agenda has all relevant information to take decision on the matter 3. Whether the agenda is up to date, regularly reviewed and involves major substantial decisions 4. Whether the quality of agenda and Board papers is u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strategic risks 3. Whether the Board overall reviews and guides corporate strategy, major plans of action, risk policy, annual budgets and business plans, sets performance objectives, monitored implementation and corporate performance, and oversees major capital expenditures, acquisitions and divestments. iii. Governance and compliance: 1. Whether adequate time of the Board is being devoted to analyse and examine governance and compliance issues 2. Whether the Board monitors the effectiveness of its governance practices and makes changes as needed 3. Whether the Board ensures the integrity of the entity s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards. 4. Whether the Board oversees the process of disclosure and communications. 5. Whether the Board evaluates and analyses the compliance certificate from the auditors / practicing company secretaries regarding compliance of conditions of corporate governance. iv. Evaluation of Risks: 1. Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of performance of the management and feedback: 1. Whether the Board evaluates and monitors management, especially the CEO regularly and fairly and provides constructive feedback and strategic guidance 2. Whether the measures used are broad enough to monitor performance of the management 3. Whether the management s performance is benchmarked against industry peers 4. Whether remuneration of the management is in line with its performance and with industry peers 5. Whether remuneration of the Board and the management is aligned with the longer term interests of the entity and its shareholders. 6. Whether the Board selects, compensates, monitors and, when necessary, replaces key managerial personnel based on such evaluation. 7. Whether the Board steps back to assist executive management by challenging the assumptions underlying strategy, strategic initiatives (such as acquisitions), risk appetite, exposures and the key areas of the entity s focus. ii. Independence of the management from the Board : Whether the level of independence of the management from the Board is adequate iii. Access of the management to the Board and Board access to the management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether the person has sufficient understanding and knowledge of the entity and the sector in which it operates d. Fulfillment of functions : Whether the person understands and fulfills the functions to him/her as assigned by the Board and the law (E.g. Law imposes certain obligations on independent directors) e. Ability to function as a team : Whether the person is able to function as an effective team- member f. Initiative : Whether the person actively takes initiative with respect to various areas g. Availability and attendance : Whether the person is available for meetings of the Board and attends the meeting regularly and timely, without delay. h. Commitment : Whether the person is adequately committed to the Board and the entity i. Contribution : Whether the person contributed effectively to the entity and in the Board meetings j. Integrity : Whether the person demonstrates highest level of integrity (including conflict of interest disclosures, maintenance of confidentiality, etc.) Additional criteria for Independent director: a. Independence : Whether person is independent from the entity and the other directors and there if no conflict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xternal assessment may be done based on questionnaires/interviews or a combination of the two and done on a regular basis. Such external assessment complements the internal assessment and adds an objective aspect to the evaluation process. Effective use of Information Technology through use of board evaluation software, applications, etc. can also play a facilitating role. D. Feedback Providing feedback to the individual directors, the Board and the Committees is crucial for success of Board Evaluation. On collation of all the responses, the feedback may be provided in one or more of the following ways: a. Orally given by Chairman/ external assessor or any other suitable person to i. Each Member separately ii. To the entire Board iii. To the Committees b. A written assessment to every member, Board and Committee The active role of the Chairperson is desirable in providing feedback to the members. If members are not comfortable to open individual assessments, provision for confidentiality may be made where possible. For effectiveness of the evaluation, it is essential that the feedback be given honestly and without bias. E. Action Plan Based on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such review of the evaluation process lies with the Board of Directors in accordance with SEBI LODR. Such review may involve the following: a. Whether objectives and criteria for evaluation are adequate or needs to be changed/ updated b. Whether the process/method of evaluation is appropriate for individual members, Committees and the Board c. Whether the actions based on the Board evaluation is being followed up on a timely basis d. Whether the Board evaluation has enhanced effectiveness of the Board e. Whether the review of the process is being done on a regular basis f. Whether feedback of the members to improve the process is being taken into account Such review may be done based on feedback from management, Board members, Chairperson, external assessors, various stakeholders, etc. Annexure A1 Main provisions under Companies Act with respect to Board Evaluation Section 134(3)- There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include- (p) in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions under SEBI LODR with respect to Board Evaluation CHAPTER II: 4(2)(f)(ii): Key functions of the board of directors- (9) Monitoring and reviewing board of director s evaluation framework. Chapter IV: 17(10): The performance evaluation of independent directors shall be done by the entire board of directors: Provided that in the above evaluation the directors who are subject to evaluation shall not participate: 25: (3) The independent directors of the listed entity shall hold at least one meeting in a year, without the presence of non-independent directors and members of the management and all the independent directors shall strive to be present at such meeting. (4) The independent directors in the meeting referred in sub-regulation (3) shall, interalia- (a) review the performance of non-independent directors and the board of directors as a whole; (b) review the performance of the chairperson of the listed entity, taking into account the views of executive directors and non-executive directors; (c) assess the quality, quantity and timeliness of flow of information between the management of the listed entity and the board of directors ..... 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