Companies must have professionals on their boards

It is hard not to have two conflicting images of India: the India that is seeped in history, slower to change, and facing a dearth of infrastructure and demographic challenges; and India the outsourcing giant, at the forefront of technological innovation, helping to set the pace of the global economy. Looking at these disparate perspectives, one might wonder: Which India is most evident behind the doors of its boardrooms?

Turning the ‘New India’s’ momentum into a sustainable global opportunity, however, will take a concerted effort on the part of companies and their boards. As the situation stands now, many may not be ready to leave the past behind in order to take their place on a bigger playing field.

Historically, Indian companies have been family or solely owned, with boards that were saturated with relatives and friends who were happy to ’go along’ with the direction set by management. Furthermore, board members held numerous directorships in various companies, making their involvement in any one company relatively limited and more of a formality. For Indian companies to become more relevant in today’s global market, their boards will need to play a more constructive role in the companies they govern while also being open to closer scrutiny.

The first order of business is for India’s boards to embrace the compliance framework and regulations that are de rigueur elsewhere. For example, SEBI’s Clause 49 of the Listing Agreement requires that at least half of a company’s board should be independent directors, but so far only about 40% of companies have complied. In comparison, independent directors comprised 78% of US boards as of the new millennium.

Indian boards are also smaller than in other parts of the world, having an average of just 7.3 members as compared to 10-15 members in the US. Moving Indian boards toward these internationally accepted standards will afford Indian companies the standing they need to be regarded as serious players.

In addition, according to Korn/Ferry International’s most recent Board of Directors Survey, 95% of boards in Asia Pacific have a formal process for evaluating their CEO’s performance, up from 75% in 2006. The same survey indicates that 94% of the Asia-based respondents feel that individual directors should also have regular performance evaluations. These are standards that Indian boards might have to consider, to attain higher levels of credibility.

Similarly, while it might be tempting to keep ’friends and family’ on the board to avoid the hassle of recruiting in today’s risky business environment (60% of the non-Japan Asian respondents to the aforementioned survey said they have turned down a board position due to the high level of risk), if board directors primarily agree with the CEO, the potential for missteps that could tarnish the company’s image certainly increases. Of course, if from an outsider’s viewpoint such companies and their boards are seen as engaging in cronyism, the company’s positioning and brand integrity could likewise be undermined.

The well-publicised paucity of talent nation-wide is resulting in young, up and coming executives being promoted to the C-suite at a faster rate than ever before, bringing a fresh approach to how business is done while also presenting an opportunity for a generational shift in terms of how India’s boards are being influenced. Currently, in the 2,000-plus listed companies in India, there are more than 2,000 directors over the age of 70.

It is easy to see that such a shift is necessary. Although young, these executives should not be ruled out based on their lack of board experience alone. In fact, in the past three years 42% of the boards in Asia Pacific have added a director with no prior board experience; in Japan this number is 52%; and in non-Japan Asia it is 57% up from 42% in 2006.

Of course, this new pool of board talent brings boundless energy and enthusiasm to help address the issues at hand. Despite this, driving change promises to be difficult for them, since the reality is that many boards are still conducting ’business as usual’, as noted earlier.

As more and more Indian companies prepare to list on international indices and expand overseas, change in their boardrooms is not a choice, but a necessity. Soon, embracing international regulatory standards and holding CEOs and directors accountable will be non-negotiable. It is the forward-thinking companies that embrace these changes the most quickly that will lead the pack.

This is an opportunity for new talent to play a significant role in creating change. In the near term, however, a blend of the old and the new will be the easiest for people and organisations to assimilate. Opening the door to young directors allows the opportunity for stricter corporate governance, which in turn will lead to more respect amongst regulators, competitors and consumers world-wide.