Governance and leadership are the yin and the yang of successful organisations. If you have leadership without governance, you risk tyranny, fraud and personal fiefdoms. If you have governance without leadership, you risk atrophy, bureaucracy and indifference.” — Mark Goyder (director of Tomorrow’s Company)

When we look around, we see that many MNCs that are headquartered in the developed world are shifting their focus to the emerging markets where they see a huge opportunity. But this strategy is fraught with challenges, particularly on the cultural front. At the other end of the spectrum, we see an insatiable appetite within entrepreneurs and companies in emerging markets such as India to grow through mergers and acquisitions in the developed markets. Rather than growing organically, many Indian companies are using the M&A route to gain access to superior technologies and established markets. Also, companies everywhere are looking to drive costs out of their operations by undertaking process efficiencies, technological integration and offshoring. What this means is that businesses today are globalised and complex to manage. There are other pressures in the form of increasing regulation, protectionist measures, rising shareholder activism and uncertainty in external environment.

The boards today have their task cut out in governing organisations effectively. Boa-rds are the crucial link betwe-en shareholders and management and what they say and do shapes the ethos of an organisation. Boards, therefore, have a fiduciary responsibility in addition to responsibilities imposed by law. Promoters expect the board to contribute and add value beyond regulatory compliance. They expect individuals on the board to bring to the fore their experience and external perspectives in shaping the direction of the company. Regulators on their part expect the board to be objective, forthright and report what they see. The wider stakeholders expect the board to adequately question any real or perceived instances of promoter excesses such as related party transactions, excessive CEO compensation, doubtful valuations and the like.

To meet these divergent expectations, it is important for the boards to put in place a mechanism to evaluate performance, at least on an annual basis. The US, the UK and Australia have for years had stock exchange rules requiring boards of listed companies to evaluate their performance and make adequate disclosures of the processes and outcomes relating to such evaluations. Despite the presence of such regulations, the consensus post the financial crisis is that boards need to be more transparent and accountable. Corporate India too is demanding higher standards of accountability from boards. The recently released Voluntary Guidelines on Corporate Governance state that a rigorous performance assessment of the board, its committees and individual directors should be undertaken. With these developments, the concept of board evaluations is gaining ground. In my experience of interacting with company boards, I am even aware of some PSU boards that have made progress in this direction.

The board has a responsibility to commit time to understanding the company, its industry and operations, contribute to strategy, monitor regulatory and ethical compliance and above all mentor the CEO to improve corporate performance. A board evaluation helps assess how the board has actually gone about meeting these responsibilities and whether the dynamics of the board’s interaction with management can be further enhanced to drive value. Many Indian listed firms have marquee names on their boards. Yet, this heady mix does not guarantee that they will collectively deliver the best inputs. The sporting analogy that “a champion team is not a team of champions” is particularly applicable to corporate boards.

The board evaluation process should start with the full board and then be extended to individual directors. Evaluating individuals helps determine whether the composition of the board and its various committees are aligned to the company’s strategic priorities. In many companies, board evaluations do not succeed because they are often driven by wrong individuals and the process is too checklist-oriented and lacks a clear sense of purpose. In companies that have done it successfully, the evaluation essentially focuses on improving the dynamics of the overall functioning of the board. Board evaluations should be undertaken through a combination of one-on-one interviews and a 360-degree feedback mechanism where different individuals assess each other and the full board’s functioning. Also, the evaluations should be led by a director who has exemplary interpersonal skills and is respected equally by both the promoters and non-executives. Where such individuals do not exist internally, boards should consider bringing in external facilitators with these qualities. Rather than filling forms and questionnaires, the process should facilitate dialogue. The informality of the process is extremely important to achieve the right results and use evaluations as a strategic tool to improve corporate governance.