Board Composition| The Impact Of Board Culture On Effective Evaluation
A key first step in a board evaluating, and possibly improving, its culture would be formally adding a review of its culture to the board’s periodic assessment, especially if it is carried out by an outside firm.
Much has been written about the importance of a company’s culture as a key factor in its performance. The “most brilliant” corporate strategy may fail if it is not aligned with and supported by the company’s culture, which is defined by the National Association of Corporate Directors as “the sum of the shared assumptions, values and beliefs that create the unique character of an organization.” Peter Drucker, one of the most well-known business commentators of our time, is often quoted as having said, “Culture eats strategy for breakfast.”
It is far less recognized or discussed in business literature that boards have their own culture, and it can have a huge impact upon the board’s performance. Yet, board culture is often overlooked and is seldom mentioned in board assessments and evaluations, especially when they are performed by the board itself or its nom/gov committee. There is a Japanese proverb that states, “To clean a river, you must go upstream,” and observing and reporting on board culture should be the starting point in board assessments and evaluations.
So, what is board culture? Similar to company culture, it is a “sum of the assumptions, values and beliefs,” but, in this case, those that underpin the board and its activities, including how it is organized and composed, how it plans and conducts meetings as well as how it makes decisions and follows up on them.
To further define and understand what we mean by board culture and how it shows up in the case of a particular board, think about the differences and variances directors can easily observe across the different boards on which they themselves have served. As a starting point, and from a general perspective, how seriously does the board take its role? Some of us are old enough to remember when, unless there was something of remarkable importance happening in the company, boards were passive and had a “check-the-box” mentality, just fulfilling the legal requirements of corporate governance, without any sense that the board and its actions had important value. 
Beginning in the 1970s, with the growth in institutional investing, along with increased regulatory focus, corporate governance grew in its perceived importance. This trend was accelerated by the Enron crisis and developed into corporate governance being taken far more seriously. However, there is still a wide range of variation in board practices. Whenever a company crisis occurs, the first question asked by news outlets is, “Where was the board?” Litigation has grown in its pursuit of alleged breaches of board fiduciary duties, and directors and officers liability insurance has increased in cost and requirements for coverage.
With the increase in perceived importance of corporate governance comes greater attention to board culture. Proceeding from the general point above about the perceived overall importance of the board and how seriously a board takes its role in general, there are specific factors that can be assessed, such as:
- The rigorousness of the bylaws, how regularly they are reviewed, any changes that may be considered and how well their requirements are adhered to. Bylaws typically make it relatively simple for a board to form special committees, change board size, as well as other factors relevant to board activities — and even adjust the bylaws themselves. But these capabilities are too infrequently utilized. The company’s bylaws should be reviewed at least annually — as well as whenever any major changes occur, such as important acquisitions or divestitures — to determine whether the bylaws should be updated.
- Board composition and how regularly it is reviewed, especially in the context of any changes in the company’s size, areas of activity and performance. There are inertial forces that resist changes in a board’s makeup, since board members may become comfortable with each other and their board’s dynamic. Updating the board’s skills matrix regularly can be a useful tool in maintaining optimum board composition.
- The organization and makeup of board committees and how regularly it is reviewed.
- The degree of preparation required for board meetings, the breadth and quality of information that is disseminated in advance of those meetings as well as whether directors are, in fact, reviewing such information in advance and showing up prepared.
- The board’s degree of familiarity with the management team and the company’s operations. Optimally, the board should be acquainted with everyone in a position of importance on the management team and have visited one or more important company operation sites, if that is reasonably possible. The board should be reminded of the “noses in, fingers out” rule, but nonetheless be sure they are getting the appropriate access for each specific situation.
- How new board members are onboarded, so as to be completely up to speed with incumbent and long-serving board members. This requires time and a defined process, which should not be left to the new board member alone.
- The board’s attitude toward, and resistance to, change in general. The greatest opposing force to improving corporate governance is typically inertia – an often unspoken opposition to change of any kind. It is said, “The only animal that likes change is a wet baby,” and boards often become set in their ways and resistant to change. So, how a board views change overall is an important element in its culture.
Another general aspect of a board’s culture is how disagreement and the posing of alternative viewpoints are received. All too often, such variance in viewpoints is subtly or even openly discouraged, which can lead to missing potentially important issues.
One of the elements of corporate governance that can weaken its culture is the board’s leadership. If the board chair, committee chairs or board members, introduced by large shareholders, are overly protective of their roles, it can contribute to negative cultural forces. While this possibility alone does not mandate a requirement for periodic change or rotation of board or committee leadership, this factor should at least be openly and periodically discussed and such rotation might be a helpful practice to prevent a “sclerosis” in board thinking and action.
A key first step in a board evaluating, and possibly improving, its culture would be formally adding a review of its culture to the board’s periodic assessment, especially if it is carried out by an outside firm. Once a board knows cultural aspects will be included in the formal assessment and evaluation it carries out periodically, it may proactively take steps to consider the potential for improvements in each of the areas, as well as others that may be specific to that company and board situation.
The importance of a board’s culture in how it approaches and performs its duties cannot be overstated. Boards should recognize this and take steps to evaluate their culture and improve it as necessary. Read More.
Board Effectiveness | Three Ways Board Chairs Can Strengthen Effectiveness
The need to manage ongoing short term change while positioning organizations for long term opportunity is prompting boards and C-suites to revisit strategic priorities, strengthen scenario planning, and rethink their ways of working.
In today’s dynamic global landscape, business leaders are having to constantly adapt their response to new challenges and opportunities.
The need to navigate ongoing short-term disruption while positioning their organizations to capture long-term opportunities means boards and C-suites are revisiting both their strategic priorities, approach to scenario planning and their ways of working.
Boards beyond traditional models of governance
The fundamental role of a board, whatever the environment, is to enable the success of an organization while protecting its long-term resilience. Today’s complexity is causing boards to look beyond traditional models in the way they engage and work with their management teams. This is particularly important when it comes to building resilience – whether this means mitigating today’s risks, or reshaping business models to secure long-term growth.
Deloitte Global research conducted with nearly 750 board members and executives in more than 50 countries explores how the Board-C-suite relationship is evolving. Findings point to an increasingly proactive approach to oversight and governance, with most respondents (86%) saying their boards have increased their focus on monitoring risk, overseeing growth strategies and bolstering long-term resilience. The report also shows chairs and their boards communicating more frequently and openly with the C-suite.
Chairs have a significant role when it comes to organizational resilience, and it is evident that the demands placed on them and their boards to challenge, support and add value to management are growing.
1. Partnering with the CEO for strategic alignment and ongoing guidance
The relationship between chair and CEO is evolving to be more fluid: more than half (57%) of survey respondents say their chairs are now having more informal meetings with their CEOs. Chairs can serve as a thought partner for their CEOs by being a reliable, challenging and supporting sounding board – while maintaining clear boundaries between oversight and execution.
To enable effective board discussions, chairs and CEOs also need to work together to shape board agendas, ensuring they appropriately balance oversight of short-term activities with longer term strategic matters. Many recognize this need, with half (50%) of the survey respondents saying their chair is holding more strategy development and scenario planning meetings with management than previously.
2. Optimizing board composition and structures
There has never been a more important time for chairs to ensure they have the right governance structures, skills and levels of commitment in their boardroom.
Chairs can elevate their board’s engagement and performance by:
Re-evaluating their board’s structure in line with external and internal environments – optimizing governance pathways, committee constructs, remits and interdependencies to provide the full board with more capacity to focus on strategic matters.
Carrying out appropriate assessments of the skills, capabilities and attributes required in the boardroom to enable the right blend of expertise across strategic industry topics; across governance areas from risk management to scenario planning; and mixing long-serving and newer members to balance experience with new perspectives.
Creating clarity with the entire board regarding the expectations of all directors in terms of engagement, preparedness and self-education. Chairs should support directors across these aspects, while holding them accountable for their own commitment and contributions.
Providing continuous learning opportunities for all directors through an agile board education program or by bringing in external expertise on specific topics.
Establishing a thought-through board effectiveness review programme, at a cadence appropriate for the business, to garner external and internal views on the effectiveness of the board, success factors to build on and development areas to address.
3. Fostering a board culture of trust and accountability
With many discussions requiring nuance and balance, creating the conditions for constructive debate and fresh thinking is essential. In the survey, two thirds of respondents view open, transparent communication between the board and CEO as the top leadership factor impacting resilience.
Harnessing the board’s diversity of thought is particularly important at this time. Chairs should encourage all members to express opinions, stressing that an absence of debate and discussion implies agreement in the boardroom. Relationships are at the heart of building trust, and chairs need to increasingly spend time with board members to canvas their views and concerns, and to encourage them to contribute fully to discussions. Providing opportunities for directors to input in advance of meetings and share one-on-one feedback on the chair’s approach is also key.
It is equally important for the chair to facilitate an ongoing dialogue with the C-suite, to help ensure the right sessions are planned for the board meetings, that management priorities and concerns are understood and, importantly, to enable that the discussions are set up for success.
Future-ready governance
The challenges we face today require boards and management teams to work closer together than ever before to steer their organizations through volatility, and toward long-term growth and resilience. By working closely with their CEO, increasing their board’s impact, and fostering trust and collaboration between their board and management, chairs can help prepare their organizations for the unexpected and position them to thrive in the future. Read More.
Corporate Governance Trends | The Future Of Corporate Governance And Changing Boardroom Priorities
Boardrooms worldwide are embracing momentum by refining their priorities to remain relevant, resilient, and responsible in a changing business landscape.
In an era marked by unprecedented transformation driven by technology, globalisation, climate change, and shifting stakeholder expectations the role of corporate governance has never been more critical. Boardrooms across the globe, and particularly in India, are undergoing a paradigm shift, redefining their priorities to stay relevant, resilient, and responsible. At the Institute of Directors, we believe that directors must not only govern with foresight but also lead with purpose.
Governance beyond Compliance
Traditionally, corporate governance was largely viewed through the lens of regulatory compliance. Today, it is evolving into a more holistic, value-driven framework. Boards are now expected to go beyond the letter of the law to uphold the spirit of transparency, accountability, and long-term sustainability. Investors, regulators, and society at large are closely scrutinising the ethical compass of companies. Integrity in decision-making is now as vital as financial performance.
Sustainability and ESG Oversight
One of the most prominent boardroom shifts has been the elevation of ESG (Environmental, Social, and Governance) responsibilities. With SEBI mandating Business Responsibility and Sustainability Reporting (BRSR) for the top 1000 listed companies, ESG has become a board-level imperative in India. Directors are now required to develop a deep understanding of climate risk, supply chain sustainability, and social impact, ensuring these onsiderations are embedded into corporate strategy and risk management.
Digitisation and Cybersecurity Risk
Digital transformation continues to disrupt traditional business models, and boardrooms must keep pace. While embracing technology enables agility and innovation, it also brings significant risks. Cybersecurity is no longer an IT issue it is a governance issue. Boards must take ownership of digital oversight, ensuring data protection, resilience against cyber threats, and ethical AI use are treated as top priorities.
Preparing Boards for 2030: A Futuristic Outlook
Emerging trends in corporate governance and building futuristic boards for 2030 include a range of complex and interconnected challenges. How do we build more tech-savvy, diverse, ethical, and inclusive boards and workplaces? How do we address cyber risks while ensuring responsible digitisation and the ethical use of AI? Boards today face mounting economic, environmental, and geopolitical challenges. Directors and CEOs must demonstrate resilience and the ability to lead in a volatile world. For instance, boards must determine the strategies necessary to truly embrace sustainability, not just for the present, but with a clear vision for future generations of board and corporate leadership.
Further, in the countdown to 2030, while pursuing netzero ambitions, key focus areas must include strengthening board performance, improving digital strategy, and staying current on cyber risks and organisational resilience. Over the next decade, many of the most pressing boardroom challenges are likely to be climate-related. The United Nations Environment Programme’s gap report warns that governments are not doing enough, and time for meaningful action is running out. Future boards must rise to the occasion—providing not only responsible leadership but also effective governance that is timely, bold, and impactful.
Diversity, Equity, and Inclusion (DEI)
Another critical area of change is the growing emphasis on board diversity. Research consistently shows that diverse boards lead to better decision-making and enhanced corporate performance. Gender diversity has seen gradual progress in India post the Companies Act amendments, but there remains a pressing need to broaden this lens to include diversity of thought, age, expertise, and background. The future boardroom must reflect the stakeholders it serves.
Stakeholder Capitalism and Purpose-Driven Governance
The traditional shareholder-first model is being replaced by a broader stakeholder-centric approach. Boards are increasingly expected to define and uphold a clear corporate purpose that aligns with societal needs. Long term value creation, not just quarterly profits, is becoming the central boardroom theme. Directors must strike a balance between fiduciary duties to shareholders and moral obligations to employees, communities, and the environment.
Board Evaluation and Continuous Education
High-performing boards are those that continuously self-reflect and adapt. Periodic board evaluations, director assessments, and structured feedback mechanisms are becoming the norm. At IOD, we have seen a growing demand for director development programmes, signalling a strong shift towards lifelong learning in the boardroom. Informed directors are empowered directors.
IOD’s Role in Board Transformation
As stewards of corporate responsibility and custodians of long-term value, directors must navigate an increasingly complex landscape. Governance is no longer confined to statutory meetings and checklists; it is about shaping the future with vision, vigilance, and values.
At the Institute of Directors, India, we are proud to play a catalytic role in this transformation by equipping boards with the knowledge, insights, and networks they need to lead responsibly. As we look ahead, we must continue to foster a governance culture that is dynamic, inclusive, and anchored in ethical leadership.
The boardrooms of tomorrow are being shaped today. Let us lead the change decisively and with purpose. Read More.
Environmental, Social, and Governance | ESG And Data Protection Clauses Shaping Commercial Contracts In 2026
New regulations are bringing meaningful change to commercial contracts. Privacy-related regulations are now active in multiple countries, while global frameworks for AI governance and sustainability continue to move forward.
The past year has quietly but decisively changed what “standard” commercial contracts will need to look like. In November 2025, India’s long-discussed privacy reform finally became operational with the notification of the Digital Personal Data Protection Rules, 2025 (“DPDP Rules”), giving shape and timelines to the Digital Personal Data Protection Act, 2023 (“DPDP Act”). At the same time, SEBI’s Business Responsibility and Sustainability Reporting (“BRSR”) and BRSR core framework (a subset of BRSR) (“BRSR Core”), moved from being a new disclosure template to an embedded part of listed companies’ reporting cycles. The BRSR seeks disclosures from listed entities on their performance against the nine principles of the ‘National Guidelines on Responsible Business Conduct’ (“NGBRCs”). Outside India, the EU AI Act has entered into force and is now working towards its general date of application on 2 August 2026, while European sustainability and supply-chain rules are being refined rather than rolled back.
For Indian businesses, 2025 has been the year in which direction became clear. 2026 will be the year in which this direction has to be written into contracts. Six clusters of clauses in particular will define how parties allocate risk: representations and warranties, introduce ESG as contractual risk allocation and not as a disclosure, data-sharing arrangements, cross-border data transfers, provisions on AI tools, and green supply-chain covenants. Looking back at 2025 The DPDP Rules give operational shape to India’s data protection regime by confirming a phased approach to implementation, clarifying expectations around “reasonable security safeguards”, and introducing a structured time-bound framework for personal data breach notification to affected individuals and to the Data Protection Board.
On ESG, SEBI’s BRSR Core framework embeds a mandatory assurance “glide path” for key Environmental, Social and Governance (“ESG”) indicators. In 2025, SEBI also refined value-chain obligations to make them more workable, including revised criteria for identifying value-chain partners and more focused disclosure expectations. Thereby, ESG disclosures shall be applicable to top 250 listed companies (by market capitalisation), on a voluntary basis from financial year 2025-26. Further, provisions allowing entities, in the first year of value-chain ESG reporting, to treat disclosure of the previous year’s data as voluntary, such as permitting FY 2024-25 data to be optional for FY 2025-26 reporting, serve to meaningfully reduce the initial compliance burden.
Globally, 2024–25 has seen a steady growth in ESG-related enforcement, greenwashing litigation and stakeholder scrutiny. Contractual representations, warranties and covenants are increasingly being used to allocate ESG-related regulatory and litigation risk, especially in cross-border transactions. These developments make it increasingly difficult for listed entities to ring-fence ESG risk internally, pushing them to contractually allocate ESG compliance, data accuracy and remediation obligations across their value chains. Representations and warranties: The first area where change is visible is the front part of the boilerplate – representations and warranties. Across sectors, two patterns from 2025 are instructive: Regulators and investors are asking for evidence, not just statements. BRSR Core pushes listed entities to disclose standardised ESG metrics – from greenhouse gas emissions and energy use to employee well-being and fair treatment of customers. Litigation and enforcement around inaccurate or overstated sustainability claims are increasing globally.
In 2026, ESG representations are likely to be unpacked and articulated along their Environmental, Social and Governance dimensions, rather than being subsumed within generic governance warranties. Environmental representations will increasingly focus on the accuracy and completeness of sustainability data, such as emissions, energy use and waste metrics, together with compliance with applicable environmental permits and regulatory consents, particularly where such data feeds into statutory disclosures or investor reporting. Social representations are expected to address labour and human-rights risks more explicitly, including compliance with labour laws, the absence of forced or child labour and modern slavery in operations and key suppliers, and the existence of effective grievance redressal and whistle-blower mechanisms. Governance representations, in turn, will go beyond anti-bribery and corruption compliance to cover ESG oversight structures, including board-level or committee-level responsibility for ESG matters, documented policies, internal controls and escalation frameworks. Together, these representations reflect a shift from high-level assurances to evidence-based guarantees designed to withstand regulatory scrutiny, assurance exercises and enforcement action. In the coming years, parties can be expected to move away from a single, catch-all statement that “each party complies with applicable law” and towards more nuanced, evidence-backed, risk-sensitive guarantees with commitments to notify the counterparty of any material investigation.
Increasingly, core governance principles themselves may form part of the representation package, for example, the business is conducted in an ethical, transparent and accountable manner, supported by documented policies, controls and oversight mechanisms. Data-sharing and breach clauses: With the DPDPA and DPDP Rules now framed, data-sharing provisions will be read as part of a compliance programme rather than as standalone boilerplate. This will influence standard data-processing clauses in 2026 in several ways: Role clarity: contracts will need to be explicit about who is the data fiduciary and who is the processor to specify the purposes and scope of personal data processing in line with the underlying commercial arrangement.
Notice and purpose specification requirements: contracts must ensure that notices provided by the data fiduciary to data principals contain all mandatory disclosures, including (i) personal data and purpose of processing such personal data (ii) manner in which the data principal may make complaint to Data Protection Board of India established by Central Government (“Board”). Detailed security schedules: minimum technical controls aligned with DPDP expectations, rather than general “industry standard” wording. Data protection failures are increasingly being viewed not merely as compliance lapses, but as governance failures with ESG consequences, particularly under investor scrutiny. Structured incident-response obligations: notification timelines that allow the data fiduciary to meet 72-hour reporting expectations to the Board, together with clear cooperation and evidence-sharing commitments. Retention and deletion duties: implementing the DPDP Rules’ approach to data retention and erasure following prolonged inactivity, while preserving logs and key records for at least one year or as otherwise mandated. Going forward, the contracts will need to embed operational obligations with clear allocation of data fiduciary and data processor roles, structured breach-response timelines, verifiable consent mechanisms, and transfer constraints where applicable. In effect, data-processing terms will become compliance artefacts rather than boilerplate, requiring organisations to hard-wire governance and accountability into their commercial arrangements. Cross-border transfers: Commentary on the DPDP Rules emphasises that transfers of personal data outside India remain conditionally possible and are subject to any country-specific restrictions that may be notified by the Central Government. Significant Data Fiduciaries (“SDFs”) may have tighter localisation requirements for specified personal data & associated traffic data categories, which must remain in India. In parallel, the European Union’s AI Act and existing data-protection rules continue to shape global expectations around data flows, risk assessments and technical measures – with most AI Act provisions becoming applicable from August 2026. For 2026 contracts, this suggests three trends: Data-flow mapping as a contractual deliverable; ‘Change in law’ mechanisms tailored to data migration etc, and recognising that future regulatory changes may require architectural changes and thus, a cost allocation for redesign. AI tools: By the end of 2025, AI tools had become part of day-to-day commercial operations – drafting assistance, customer engagement, fraud detection, logistics optimisation and more. What has changed is that regulators now expect governance around these tools. Under the DPDP Rules, organisations designated as SDF’s may be subject to enhanced governance obligations, including the requirement to undertake data protection impact assessments for processing activities that present heightened risk to data principals, as may be prescribed or notified. While the DPDP Act does not regulate artificial intelligence systems as a standalone category, SDFs are expected to exercise appropriate oversight and to perform due diligence on technical and algorithmic systems that process personal data, including AI-driven tools. In the EU, the AI Act introduces a tiered regime distinguishing prohibited AI, high-risk AI and general-purpose AI models, with core obligations becoming appslicable between 2025 and 2026. Such assessment is done to verify and assess whether there is anything that is likely to pose a risk to the data principals. In contracting terms, this is likely to translate into AI-specific disclosure clauses, using case-based restrictions and providing for audit and testing rights. For Indian counterparties that serve global clients, these clauses will increasingly be driven by foreign regulatory expectations as much as by domestic law.
In ESG terms, AI governance is fast becoming a core ‘G’ metric, with contractual clauses acting as the first line of accountability. Green supply-chain covenants: SEBI’s BRSR and BRSR Core frameworks, together with later refinements, have made it clear that listed entities are expected to report not only on their own footprint but also, progressively, on their value-chain partners. Globally, supply chains remain at the centre of ESG scrutiny, from working-conditions and modern-slavery concerns to Scope 3 emissions and biodiversity impact.
In 2026, green supply-chain covenants are likely to focus on data and disclosure obligations, cascading obligations, i.e. expecting Tier 1 suppliers to impose similar standards and monitoring on their own key partners, remediation rather than immediate termination and alignment of incentives. 2026: What should commercial contracts now aim to do? A practical way to approach 2026 contracting is to ask, for each significant relationship: Are our ESG related representations and warranties anchored in evidence and systems, not just aspirations? Do our data-sharing and breach clauses reflect the structure and timelines of the DPDP Rules, including phased commencement? Have we mapped and contractually addressed cross-border data flows, including the possibility of future localisation requirements for some datasets? Are we treating AI tools that touch personal data and high-impact decisions with the level of contractual governance that forthcoming regulations expect? Do our ESG and supply-chain clauses provide the ESG information and assurance that BRSR Core, investors and global counterparties will expect over the life of the contract?
“Beyond boilerplate” in 2026 will not mean longer contracts. It will mean clauses that are specific, operational and aligned with the regulatory journey that began in earnest in 2025 – allowing businesses to meet new standards without losing sight of commercial practicality. As the DPDP regime, BRSR Core, and global AI and sustainability rules continue moving from “principles” to “systems”, commercial contracts will be expected to reflect that same change in maturity. This could mean replacing aspirational language into defined expectations, measurable outcomes, and clear demarcation of responsibilities between parties. In other words, the new generation of “boilerplate” clauses will be less about legal formalities and more about operational resilience. They will help businesses demonstrate that they have the systems, controls and governance structures required under India’s DPDP framework, BRSR Core regime and the upcoming global AI compliance landscape. This would also result in a major shift in India’s business outlook – where ESG and data protection clauses will increasingly be judged, not by how well they read, but by how well they withstand and operate under stress and real world situations — audits, incidents, regulatory scrutiny and litigation. Read More.
Board Independence | Strengthening Board In Modern Governance
A recent S&P Global Market Intelligence article notes that as regulatory and investor pressure for board independence grows, more companies are emphasizing stronger independent oversight and governance practices.
With increasing independence requirements, more and more companies are appointing a Lead Independent Director (LID) if the board chair is not (or no longer) regarded as independent by a large majority of investors and proxy advisors or in case of other concerns surrounding the board. The LID originates from the one-tier board system, in which an independent ordinary member of the board of directors is given special powers to compensate for the disadvantages of a nonindependent chair.
Origins in the US, now also common in Europe
The LID concept has mainly existed in the US for some time because, in the US market, it has long been a common practice to combine the functions of CEO and chair. After increasing criticism of this combination, since 2011, US companies with a one-tier board structure have had to justify why they have decided for or against a combined CEO and chairperson.
This has led to a significant increase in the role of the LID, which is widely considered a compromise solution in the US market. European markets with a one-tier board structure where a Lead Independent Director (also known as Senior Independent Director) is well established include the UK, France, Switzerland, and Ireland. In Germany, where the two-tier board system is predominant, the LID has found its way onto the supervisory boards of three listed companies for the first time in the last three years. In all three cases, the board chairs were largely considered non-independent. In the past, the appointment of a LID appeared less suitable and not a natural fit for the German two-tier board system as the roles of CEO and chair were already separate, but this view has changed. Meanwhile, a LID can be positioned in both prevailing board systems if the chairperson is not independent.
The role of a Lead Independent Director
The LID advises the board chair and adequately considers all shareholders’ interests in
the board’s actions, discussions, and decisions. Notably, a LID:
– Acts as an independent board member with sufficient time to fulfill his/her role.
– Is authorized to convene board meetings and to place items on the meeting agenda.
– Preferably acts as the chair of the board’s nomination committee and optionally is also a member of other key committees (but is at least entitled to attend committee meetings as a guest if not a member of a committee).
– Is responsible for the self-assessment of the board’s performance regarding its duties; he/she is also authorized to analyze the results and take measures to improve the board’s effectiveness in relation to the self-assessment results.
– Assesses the board chair’s performance and leads the process of nominating and installing a successor (unless he/she is the obvious candidate).
– Is dealing with the company’s environmental, social, and governance aspects and is authorized to develop measures relating to such ESG topics.
– Maintains an understanding of the issues and concerns of shareholders (and other stakeholders) and is available for investor engagement.
– Is an independent contact person for other board members, executives, and investors who may not wish to discuss issues directly with the chair.
– Acts as a mediator in the event of disagreements between (1) the CEO and board chair, (2) the board chair and (an)other member(s) of the board, and (3) between the board chair or the board as a whole on the one hand and investors on the other hand.
– Has all other rights and obligations the board decides by mutual agreement
An independent person with special skills
Considering the critical task that the LID performs, it is essential that a LID remains independent in every respect at the time of appointment and throughout the whole term of office. The LID must be independent of the entire board, but especially of the board chair, and free of any conflicts of interest that could arise if the LID must
challenge the board chair at a later date. Therefore, the LID should not be appointed by the board chair. Instead, the LID should be elected by all shareholder-elected board members in an independent role that complements the board chair. Once the LID has been elected, investors expect a clear and transparently disclosed division of responsibilities between the two positions, as the LID does not replace the board chair. The LID has additional powers and responsibilities in the interests of the company and its investors and must have independent judgment, know when to support the board chair, and know when to assume specific tasks and responsibilities.
He/she is also expected to have strong interpersonal skills. The LID must be able to acquire more knowledge about the company, the market environment, and its stakeholders than the other directors. Given the high demands on knowledge and understanding of the company, he/she should preferably be an existing board member. In regular times, the LID is an essential point of contact for the company’s investors to raise questions and concerns. Talking to the LID is also crucial if the dialog with the board chair has not led to a satisfying solution or if contact with the board chair would be inappropriate. Under challenging situations for the company, the board chair may have assumed a position that is perceived as too closely linked to the strategic decision-making of the executive board and is, therefore, not independent. In such cases, the LID can provide for good communication between executive and nonexecutive board members as well as institutional investors.
Investors value a Lead Independent Director
Established in the one-tier board system for many years, the LID concept is still new for companies subject to the two-tier system. In both governance systems, the LID is generally appointed if the board chair is not independent and lacks independent control. The appointment of a LID does typically not entail any significant disadvantages (provided that the chair’s and LID’s responsibilities are separated and disclosed). In fact, investors highly value a LID for communication purposes. In this respect, one can only agree that companies with a non-independent board chair should generally opt for the appointment of a LID to add value and improve or emphasize the
independence of the board’s leadership. Read More.
