Preamble/Introduction:
To attain success in business, it is imperative to establish a robust governance framework within the organization. When the governance structure is well-defined and effective, it substantially enhances the business culture, reputation and engagement with stakeholders, which will ultimately result in the increased revenue of the organization. While going through the challenges faced by the present Board, there is a possibility for the arousal of a question “How to formulate an effective board for an organization?” to implement an effective governance structure, the Board of Directors must operate effectively and strategically. In order to ensure the Board’s optimal performance, the Company Secretary or governance professional must take proactive steps to facilitate its smooth functioning and prevent any potential governance failures over the period. The following strategies can assist in achieving these dual objectives.
1. Appointment Letter to enforce responsibility:
Upon the induction of a director, it has been observed that numerous companies issue appointment letters that inadequately delineate the precise roles and responsibilities incumbent upon the appointee. Consequently, directors frequently find themselves insufficiently cognizant of their legal duties and the attendant repercussions for both their personal standing and the organization at large. It is incumbent not only upon the directors to be thoroughly apprised of their obligations but also upon Governance Professionals within the organization to elucidate the directors’ statutory powers and responsibilities. This ensures the Board’s operations are conducted with optimal efficiency and regulatory compliance.
2. Bring in Outsiders with proven track record:
In many Promoters Driven Companies (PDCs), including those that are publicly listed, decision-making is often monopolized by one or two directors. This leads to unilateral decisions without a robust system for discussion, and the Board members lack the necessary information and skills to contribute effectively. Consequently, it is imperative to appoint directors who possess the requisite experience and expertise to ensure that decisions are well-analyzed and healthy for the organization. There is a cost to that, but return would be exponential.
3. Orientation programme:
Upon the appointment of a new executive, an orientation programme is conducted to familiarize them with the organization’s structure, environment, and legal framework. Similarly, it is essential to conduct a comprehensive orientation for the newly appointed director(s). This orientation should encompass their roles, powers, duties and obligations, thus ensuring that they are fully aware of their responsibilities and can perform their roles effectively and efficiently.
4. Updates on Corporate Laws:
Pursuant to the principle “Ignorantia juris non excusat,” a director cannot absolve himself of his responsibilities due to a lack of awareness of recent legislative amendments. It is incumbent upon the Company Secretary or the designated governance officer to apprise the Directors about the latest updates and modifications in corporate law, securities regulations, and any sector-specific legal frameworks at each Board meeting. This ensures that the Board remains well-informed and can execute their duties effectively without any pitfall.
5. Prior meeting papers:
To foster active participation and facilitate meaningful discussions, it is imperative that the agenda and accompanying documents should be disseminated well in advance, allowing the Board members sufficient time for thorough preparation. Dispatching Board meeting materials at the eleventh hour significantly curtails the Board members’ ability to deliver a well-considered analysis of the agenda items. Thus, it is essential to disperse the Background papers to the members of the Board well in advance i.e., at least with the gap of 7 days.
6. Get others view, before chairman decides:
When addressing an agenda item, it is essential that all members of the Board of Directors, excluding the Chairperson and Promoter Director(s), are granted the opportunity to voice their inquiries prior to reaching a decision. Fostering a culture, of inviting Independent Directors to speak first, followed by non-independent Directors, will ensure robust debate and discussion, culminating in a thoroughly analysed and well-informed decision.
7. Independent Director meeting:
As delineated by diverse regulatory frameworks and legal statutes globally, it is imperative for Independent Directors to convene a meeting, in the absence of Non-independent Directors and other members of the management. This meeting enables Independent Directors to candidly express their concerns and perspectives among peers, thereby formulating a coherent framework for their contributions and decision-making in subsequent Board Meetings. The Company Secretary could act as a bridge between the executive and non-executive Directors.
8. External Expert Advice:
It is unreasonable to assume that Board members will possess comprehensive awareness of emerging technologies and trends that will benefit the corporation in the long term. When venturing into new foray, it is prudent to solicit the expertise of a specialist who can address all manner of inquiries from the Directors prior to making a decision. The involvement of an expert facilitates a deeper comprehension within the forum, enabling Directors to render more informed and confident decisions.
9. Monitoring the implementation of previous decisions:
The responsibility of Board stretches beyond the ambit of making decisions to effectively monitoring implementation of such decisions by frequently getting appraised about the plan and stage of action either by means of mail or any other mode of communication (advisable to receive a response) and also updating the board members about the actions taken and those which are currently going on, in the nearly ensuing board meeting to keep them updated about the actions of their decisions. Variance analysis of the actuals with the “budgeted”, will help to know the actual status of the project.
10. Evaluation of performance by external agencies:
The evaluation of the Board’s performance is often fraught with challenges, as those conducting the assessment are simultaneously subject to the peer review, thereby introducing potential emotional and personal biases. Consequently, the engagement of an external independent assessment agency proves advantageous. Such an approach ensures an equitable evaluation, grounded in material facts while eschewing personal and emotional biases in their entirety.
11. Professionally managed benefits:
When an organization is being managed by professional board members, rather than PCD or any other interested party of majority shareholder, it brings enormous benefits to the organization, both internally as well as externally. It increases the efficiency and effectiveness of surveillance, transparency, management of operation, formulation of new business strategy from an unbiased view with an organization centric approach. This will strike the balance between the interest of the stakeholders as well as the organization.
Conclusion:
Having an effective Board is not a choice in an organization, it’s a basic necessity. A company with good governance will contribute to the development of the organization along with its business in an ethical manner. “All companies with good business may not have good governance, but all companies with good governance will have good business”, thus fostering good governance will enable a company to function efficiently, effectively and ethically.
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