Preparing for the great refresh

Boards are heading for what I describe as the great refresh. The Companies Act, 2013, which became operative in 2014, defined independence mainly for independent directors as being on the board for a maximum of 10 years. As this came with a concession that this 10-year clock will tick only from 2014 — all the prior years being expunged — 2024 is when most boards are now due for a major makeover.

Given this impending change, I expect a few companies — at least the progressive ones — to have started hiring new directors or at least have begun their search; it is clunky if all independent directors retire all at once, to say nothing that these companies will be left with very little institutional memory.

Since the new Act was rolled out, while there has been a great deal of focus on board effectiveness, board evaluation, and also the skills needed to be a good director, very little attention has been directed towards how potential directors should think about being invited to join a board.

In this context, a blog (https://ma-litigation.sidley.com/2022/04/ten-questions-to-ask-before-joining-a-public-company-board-of-directors/) by Sara Brody And Jason T Nichol, two lawyers at Sidley, Austin, makes helpful reading. They argue that in an increasingly “regulated and complex public company landscape, director candidates should conduct thoughtful and targeted due diligence on a company and its existing board practices before committing to a role that should be expected to extend over multiple years”. The two then list a series of questions that potential board members must ask before committing themselves to serving on a board. These are discussed below.

The starting point is prospective board candidates must be clear why they are being asked to join the board and whether they are the right fit. All too often, it is hard not to believe that we walk on water and have the requisite skills. But it is good to be clear-eyed about why you are being invited to join the board. Do you have the domain knowledge? Or the ability to open doors? Are you a friend of the promoter —or one of the other directors? Or do you tick some other box? Companies do issue a letter regarding the roles and responsibilities of joining a board, but a conversation with the chairman will help. It will bring clarity as to why the candidate has been invited and how the person is likely to complement the job of others on the board.

Closely linked to this is whether as a director you will have enough time. Only the director can answer this, but a rough rule of thumb is the number of meetings in a year, multiplied by the time spent on reading and absorbing the agenda. Add committee meetings. This has been discussed in detail in “When less is more”, my March column (https://www.business-standard.com/  article/opinion/when-less-is-more-122031501522_1.html). And mind you, this is for when it’s business as usual. If there is a large transaction, an approaching initial public offering, or a crisis, the time commitment will intensify. But even in normal circumstances, given how rapidly the burden of expectations from directors is rising, one should expect to double the time commitment over a five-year period. Put differently, there will be time for being on fewer boards.
 

Peter Drucker evidently said: “Culture eats strategy for breakfast,” signalling that the softer aspects of business are important. Given that businesses are (usually) family-owned, having a reading of the family dynamics and cross-shareholding is important. These often enough will determine the path a company will take. The pre-existing board dynamics also come into play, which means understanding those on the board and whom they represent. The board culture will determine whether the board encourages penetrating questions, the discussion is open, it gets access to unfettered information, or decisions taken by consensus or diktat. This helps in determining whether the leadership seeks guidance from the board or, instead, as the blog succinctly described it, “(views) the board as a group to be managed”.

There is the deep dive into the company and its operations. Potential candidates are expected to examine how the company is performing operationally and financially and what the company’s most material risks are. This means reviewing the company’s financial documents, outstanding litigation, and public filings (e.g. the “risk factors” and “management’s discussion and analysis” sections of its periodic filings and registration statements) as well as analyst reports, news articles and consensus or “street” estimates. It will also be prudent to review the promoters’ other business interests.

It is useful to look at resolutions placed before shareholders, how these have been voted on in the past, and how the company has dealt with shareholder dissent.

It is equally important to get a sense of the flow of information to the board and a large part of this is the equation between the board and senior management. Unfettered access to data and to senior management will help boards make their own assessment, and also give board members the ability to form an opinion on the quality of the people — important for those seeing themselves as part of the nomination and remuneration committee. This will also give the entrant make a direct call on the company’s attitude to compliance and risk.

Companies now routinely disclose how they view conflict of interest, and the expectation from directors; and it will be helpful to have a conversation regarding this. In fact, not just these, but also the other policies including the code of ethics, securities trading policies, restrictions on what you can and cannot do by virtue of joining a board.

Given the burden of expectations, potential candidates must ask about the compensation and the D&O (directors and officers) insurance that the company offers. Being clear about your own capabilities and seeking answers to the questions listed above will help in deciding whether you should join the board.

The writer is with Institutional Investor Advisory Services (iiasadvisory.com). Views are personal. @AmitTandon_In