'Firms must reveal evaluation process to shareholders'

The International Advisory Board (IAB) of the Securities and Exchange Board of India (Sebi) has observed that companies should look at disclosing evaluation of boards to all their shareholders, as well as educate the board about the evaluation process.

“It would be a good practice if the result of the evaluation of the board as a whole is disclosed to the shareholders. There is a felt need that the boards of the companies are educated about the evaluation process,” the IAB said in its observations after its seventh meeting on January 13 and 14.

The observations assume significance especially in the wake of the boardroom battle between the Tatas and Cyrus Mistry. Several of the board members of various Tata group companies came out in support of Cyrus Mistry after their respective board meetings. But despite the support, Mistry was ousted from the boards of those companies.

According to IAB, the evaluation should go beyond just a box-ticking exercise and whether the standards of the board are being realised. “The process of evaluation of the performance of the board has to go beyond a box-ticking exercise. The process has to be conducive to the growth of the company and can differ from company to company,” IAB said.

The best evaluation is actually an exercise in self-evaluation of the company’s own performance and effectiveness in terms of its mission, financial returns, strategy, business model and social responsibility, and in this context, whether the standards expected from the board are being realised.

The IAB also had observations about making the board diverse, as well as making board appointments transparent.

“A matrix of expertise may be introduced to make the board diverse, balanced and in tune with the requirements for the effective functioning of the company. There has to be transparency in board appointments and removal process, and similar requirements need to be prescribed at both stages,” IAB observed.