India Inc needs independent directors with domain knowledge, directors with cyber security skills: NSE study

ET INTELLIGENCE GROUP: A first of its kind study of board skills disclosures and practices in India, undertaken by the National Stock Exchange and Institutional Investor Advisory Services and covering companies of the Nifty 50 and Nifty Midcap 50 indices, has found that only 58 of the 100 companies have independent directors with domain knowledge – suggesting it to be an area to focus on when the companies refresh their boards.

Similarly, only 56 of the companies have technological and cybersecurity skills on their boards despite cybersecurity being a growing business risk due to data breaches, lost trade secrets or failed regulatory compliance.

Under market regulator Sebi’s listing regulations, companies are required to disclose the domain knowledge that individual directors possess, although the granularity of the disclosures required has not been specified.

Based on the disclosures made by the 100 companies in their 2019-20 annual reports, the study assessed the companies across five parameters – whether companies reported director-specific skill mapping, whether the board defined the set of skills it believed were necessary for board effectiveness, disclosures on assessment of both technical and behavioural skills on the board, presence of independent directors with domain knowledge and presence of technological or cybersecurity skills on the board.

The study found that 82% of the companies disclosed director-wise skills, even though it was mandatory for all the companies to do so. In promoter-led companies, boards’ reticence in doing an honest assessment was reflected in promoters (irrespective of their age or tenure) purportedly having a wider gamut of skills than the more experienced executive and non-executive directors. In case of public sector undertakings, the study found that many companies did not disclose a skill matrix saying the directors were appointed by the Government of India.

In 79 cases, companies defined the set of skills they believed were necessary for board effectiveness while 82 companies were found to disclose assessment of both technical and behavioural skills on the board. The report, however, mentioned some companies meeting the regulatory disclosures by obfuscating the skill definition. For instance, one Nifty-50 company evaluated the entire board on only behavioural or soft skills and every director on this board checked all the skill boxes.

The study found Nifty 50 companies to be ahead of their Nifty Midcap 50 peers in three out of the five parameters that were assessed. It also provided examples of director skill matrices as disclosed by overseas companies Microsoft, Prudential Financial and Walmart.