Evaluation Of Director's Performance In Light Of New Company Law

Evaluation Of Director's Performance In Light Of New Company Law

As a step towards inculcating good corporate governance, various stipulations have been imposed under the Companies Act, 2013 and the rules made thereunder and also the Clause 49 of the listing agreement has been revised vide notification dated 14.07.2014 in order to incorporate similar provisions for the listed companies in line with the Companies Act provisions in order to evaluate the performance of the Board as a whole, various committees of the Board, Independent Directors and other Directors of the Listed and Unlisted Companies are there so as to ensure appointment of persons possessing adequate qualifications, positive attributes, independence. However there is no consistency in the provisions thereby creating whole mess of the total intention behind this object which are elaborated and explained hereunder.

1. Who will evaluate whom?

1 A. Evaluation of performance of Independent Directors by the Board:

Clause VIII (1) of Schedule IV to the Companies Act, 2013 (hereinafter referred to as "Empowering Provision-1") states that the performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.

Similar provision is also incorporated in Clause 49 (II) (5) of the Listing Agreement for Listed Companies.

1 B. Evaluation of performance of Non-independent Directors by the Independent Directors of the Board:

Clause VII of Schedule IV to the Companies Act, 2013 (hereinafter referred to as "Empowering Provision-2") states that the independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management to:

• review the performance of non- independent directors and the Board as a whole;
• review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive d i rectors;
• assess the quality, quantity and timeliness of the flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

Similar provision is also incorporated in Clause 49 (II) (6) of the Listing Agreement for Listed Companies.

1 C. Evaluation of performance of all Directors by the Nomination Committee:

Section 178 sub-section (2) of the Companies Act, 2013 (hereinafter referred to as "Empowering Provisions 3") inter alia states that the Nomination and Remuneration Committee shall carry out evaluation of every director's performance.

1D. Reporting of evaluation by the Board:

"Clause (p) of sub-section (3) of Section 134" (hereinafter referred to as the "Reporting Provision" since this section talks about reporting the fact of evaluation in the Report of Directors) states that there shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include inter alia a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.

Pursuant to the above provision, the Board has to report the manner in which the performance of the Board itself and also the performance of its Committees and all individual Directors have been evaluated.

2. Applicable to whom?

Let us now see to whom these provisions are applicable.

2A.

Section 134 (3) of the Companies Act, 2013 states there shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall inter alia include in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors;

Rule 8 (4) of the Companies (Accounts) Rules, 2014 states that every listed company and every other public company having a paid up share capital of twenty five crore rupees or more calculated at the end of the preceding financial year shall include, in the report by its Board of directors, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.

It means the Reporting Provision is applicable to only Listed Companies and Public Companies having a paid up share capital of Rs.25 cores.

2.B.

Schedule IV to the Companies Act, 2013 is applicable to all those Companies in which Independent Directors are required to be appointed under Section 149 of the Companies Act, 2013.

Pursuant to Section 149 (4) of the Companies Act, 2013 every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 states that the following class or classes of companies shall have at least two directors as independent directors-

• the Public Companies having paid up share capital of ten crore rupees or more; or
• the Public Companies having turnover of one hundred crore rupees or more; or
• the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

It means that the Empowering Provisions 1 & 2 are applicable only to Listed Companies and Public Companies having a paid up share capital of Rs.10 cores or more, turnover of Rs.100 crores or more or Borrowings of Rs.50 crores or more.

It is pertinent to note that though the Empowering Provisions 1 & 2 are applicable to Unlisted Public Companies having a paid up share capital of Rs.10 crores or more, turnover of Rs.100 crores or mores or borrowings of Rs.50 crores or more, the Reporting Provision is not applicable to these companies unless the paid up share capital is more than Rs.25 crores and hence these companies need not give the statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.

It is pertinent to note that though the Empowering Provision - 3 is applicable to Unlisted Companies having a paid up share capital of Rs.10 crores or more, turnover of Rs.100 crores or mores or Borrowings of Rs.50 crores or more, the Reporting Provision is not applicable to these companies unless the paid up share capital is more than Rs.25 crores and hence these companies need not give the statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.

Summary of the above provisions in tabular form:

The above provisions have been summed up in the following table for proper comparison and understanding:

3. Who will formulate the Evaluation Criteria?

Sub-section (2) of Sec.178 of the Companies Act, 2013 states that the Nomination and Remuneration Committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director's performance.

It is not clear from the above provision that the criteria for evaluation should also be laid down by Nomination and Remuneration Committee.

Clause 49 (II) (B) 5 of Listing Agreement which is applicable to only Listed Companies states that the Nomination and Remuneration Committee shall lay down the evaluation criteria for performance evaluation of independent directors and the company shall disclose the criteria for performance evaluation, as laid down by the Nomination Committee, in its Annual Report.

It appears that evaluation criteria have to be formulated by Nomination and Remuneration Committee for performance evaluation of independent directors only. The requirement for formulation of criteria for evaluation of other directors is not prescribed in the law.

Though there is no specific provision in the law for formulation of criteria for evaluation of non- independent directors, assuming that the persons liable to evaluate can formulate the criteria for evaluation, the criteria for evaluation has to be formulated as under:

On the basis of above assumption, it is advisable to get the Criteria for evaluation of all the Directors to be formulated by the Nomination and Remuneration Committee and get the same approved by the Board.

4. How the Board will evaluate:

It is very difficult to evaluate the performance of any Director by any other Director who normally meets only at the Board or Committee Meetings particularly when no specific responsibility is being fixed. However, the following criteria may be adopted to evaluate the performance of Directors to some extent:

• His/her stature, appropriate mix of expertise, skills, behaviour, experience, leadership qualities, and understanding of business, strategic direction to align company's value and standards.
• His/her knowledge of finance, accounts, legalities, investment, marketing, foreign exchange/ hedging, internal controls, risk management, assessment and mitigation of risks, business operations, processes and Corporate Governance.
• His/her ability to create a performance culture that drives value creation and a high quality of debate with robust and probing discussions.
• Effective decision-making ability to respond positively and constructively to implement the same in order to encourage more transparency.
• Open channels of communication with executive management and other colleagues on Board to maintain high standards of integrityand probity.
• Recognize the role which he/she is expected to play, internal Board Relationships to make decisions objectively and collectively in the best interest of the Company to achieve organizational success and harmonizing the Board.
• His/her global presence, rational, physical and mental fitness, broader thinking, vision on corporate social responsibility etc.
• Quality of decision making on source of raw material/procurement of roughs, export marketing, understanding financial statements and business performance, raising of finance, best source of finance, working capital requirement, forex dealings, geopolitics, human resources etc.
• His/her ability to monitor the performance of management and satisfy himself/herself with integrity of the financial controls and systems in place by ensuring right level of contact with external stakeholders.
• His/her contribution to enhance overall brand image of the Company.

5. Distinction between evaluation of performance and review of performance:

According to Cambridge Dictionary the term "Evaluate" means to judge or calculate the quality, Jmportance, amount, or value of something. Whereas the term "Review" means to re-think to consider something in order to make changes to it, give an opinion on it or study it.

6. Conclusion:

The following inferences can be drawn out of the above narrated provisions of the Companies Act, 2013 and various clauses of Listing Agreement:

• There is no empowering provision for evaluation the performance of the Board itself and its Committees;
• The Board of Listed Companies and Non- Listed Public Companies having paid up share capital of Rs.25 crores should evaluate the performance of their Board, Committees and all its Directors, both Independent and Non-independent.
• Nomination Committee of Non Listed Public Companies having paid up share capital of Rs.10 cores or more, turnover of Rs.100 crores or more or Borrowings of Rs.50 crores or more should also evaluate the performance of all its Directors, but need not report in Board's Report;
• Board of Non Listed Public Companies having paid up share capital of Rs.10 cores or more, turnover of Rs.100 crores or more or Borrowings of Rs.50 crores or more should also evaluate the performance of all its Independent Directors, but need not report in Board's Report;
• Independent Directors of Public Companies having a paid up share capital of Rs.10 cores or more, turnover of Rs.100 crores or more or Borrowings of Rs.50 crores or more shall evaluate the performance of Non- independent Directors.

Irrespective of the fact whether there is any empowering provision or not, the Non-Listed Public Companies having a paid up share capital of Rs.25 cores or more should evaluate the performance of all its Directors, Committees and its Board and report the same in its Director's Report.