Corporate Governance in Selection and Appointment of Directors
This post has been authored by Randeep Dahiya, a third year student of B.B.A LL.B at O.P. Jindal Global University, Sonipat.
Applying the principles of corporate governance to the selection and appointment of directors of a company is essential for ensuring that the potential director is competent with regards to the duties and responsibilities associated with the position. The framework used for appointing directors in India, Australia, Singapore, and the United Kingdom does not vary and uniform in essence. That being said, the current framework is insufficient in providing information to the shareholders in assessing the competency of potential directors. In an attempt to make it more robust, the framework ought to include an expanded disclosure stating the past education and work experiences of potential candidates, making it easier to assess whether these qualifications align with the company’s objectives or not.
The position of a director on a company’s board is a position of great significance and value. It is associated with a multitude of responsibilities and duties and is directly responsible for protecting the interests of all shareholders. For ensuring that the aforementioned responsibilities and duties are carried effectively, it is imperative that the director of a company must have the requisite knowledge and skills associated with the position. The importance of having a competent director is further emphasized in the Kotak Committee Recommendations in 2017[i].
This article analyses the legal provisions of different countries pertaining to the competency of persons featuring on the board of a company. It also suggests recommendations that could assist the already present legal provisions in assessing the board’s competence.
Corporate Governance Principles of India
In the Indian context, Section 178(2) of the Companies Act, 2013[ii]is the legal provision that overlooks the process of appointing a director to the board of the company. It entails that the appointment of the director rests with the company’s nomination and remuneration committee. It is the committee that determines the criteria and qualifications required for the positions as well as identify potential candidates for the same. The Committee is also responsible for regularly assessing the performance of every director and report its findings. According to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[iii], it is mandatory for a company to disclose its matrix of skills and expertise required by the company and the directors who possess them, effective from March 31, 2020[iv]. The objective of adding such a clause is bringing objectivity, clarity and transparency to the process of appointment of directors. The mandatory provision was added by the way of an amendment based on the recommendations made by the Kotak Committee.
Corporate Governance Principles of Australia and Singapore
In terms of corporate governance requirements, the jurisdiction norms of both, Australia and Singapore, closely resemble the aforementioned principles prevalent in India. The requirements in Australia (ASX Principles) mandate the nomination committee of the company to spearhead appointments. The ASX Principles also mandate disclosing of the matrix which entails skills and competencies required for the position of a director. The committee is responsible for the periodic assessment of the company’s directors. The Singapore code places the appointment process in the hands of the nomination committee, who is also required to disclose the criteria used by the company in identifying and selecting potential directors. Hence, the corporate governance principles of Australia and Singapore closely resemble the principles established in India.
Corporate Governance Principles of the United Kingdom
The UK Corporate Governance Code of 2018[v]prescribes that the board of a company must require a criterion of skills and competencies required. To establish such a criterion, the nomination committee is given the role of formulating the criterion for selection and appointment of directors, disclosing the said criterion, and evaluate the performance of directors in its annual report.
The ongoing discourse on corporate governance pertaining to the appointment of directors reveals that the framework used to identify and select potential directors is the same in all jurisdictions stated above. It is noteworthy that the qualifications required for the position of a director cannot be laid down in an objective manner taking into account the numerous subjective considerations involved. One of the drawbacks of disclosing the matrix used for selection and appointment of directors is that the company is mandated to disclose such matrix only to the investors. As a result, the company might deliberately disclose skills and competencies that align with the investor’s expectations. The matrix will not disclose a true picture. A company may also avoid disclosing skills which may hint the investors about its future endeavours in the market. Another drawback of the matrix is that the attributes required may be vague in nature i.e. ‘leadership, financial expertise’.
Owing to the aforementioned drawbacks , the corporate governance pertaining to selection and appointment of directors, in its present form, lacks in presenting the shareholders with adequate and sufficient knowledge about its director’s competence. The framework can be made more robust by making an expanded disclosure to the shareholders, in the form of the director’s past education and work experience. The aforementioned expanded disclosure resembles the provision of Section 407 of the Sarbanes Oxley Act of 2002[vi]in the United States which enables shareholders to ascertain whether a director’s past education or work experiences align with the requirements of the company. Adding another disclosure, present in the Singapore code, in the form of how a director’s attribute would benefit the company would make the framework even more robust. These disclosures would present greater information to the shareholder in assessing whether a potential director is competent with regards to the objectives of the company.
In conclusion, mere disclosure of skills and competencies required for the post of a director of a company is insufficient. The disclosure should be backed by the director’s past education and work experience. Moreover, the company should explain how these attributes would help in ensuring all the tasks and responsibilities are met effectively. By the way of expanded disclosure, the shareholders will have a greater awareness of the directors on the board and whether they are adept in handling the multitude of responsibilities and duties associated with its position.
[i] Securities and Exchange Board of India, Report of The Committee on Corporate Governance, 2020, https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporategovernance_36177.html. [ii] The Companies Act (Act 18 of 2013) [iii] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [iv] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Clause 2 (h) of Para C of Schedule V [v] UK Corporate Governance Code, 2018. [vi] Sarbanes Oxley Act, 2002.