Evaluation of the performance of an Independent Director

Part VIII of the Code for Independent Directors provides that based on the performance evaluation report term of an independent director may be extended or he may be reappointed. The performance evaluation of the independent director is to be conducted by the entire board of directors.

1 . Requirements of Schedule IV; “ Code for Independent Directors”, 

(i) provides that the Independent Directors shall bring an objective view in evaluation and performance of the Board and the Management. 

(ii) The Independent Directors shall meet at least once in a year without attendance of Non-Independent Directors and members of the Management. All Independent Directors strive to be present at the meeting and meeting shall. 
a) Review the performance of Non-Independent Directors and the Board as a whole. 
b) Review the performance of the Chairman of the company , considering the views of executive directors and non-executive directors. 
c) Assess the quality, quantity, and timelines of flow of information between the company management and the Board that is necessary for the Board to perform their duties effectively and reasonably. 
d)The performance of Independent Directors should be assessed by the Board of Directors as a whole. 
e)The Independent Director ,whose performance being evaluated should not participate in the Board Meeting and engagement of Independent Directors with the company should be extended based on results of his evaluation. 

(iii) Section 134(3)(p) of the Companies Act, 2013 provides that there should be a formal Annual Evaluation of Board of its own performance and that of committee and Individual Directors. Rule 8(4) of the Companies ( Accounts) Rules, 2014 mandated Annual Evaluation of Performance of Board , Committees, and Individual Directors for. 
a) Every Listed Company and 
b) Every other Public Company having Paid-up Share Capital of 25 Crores or more calculated at the end of the preceding financial year. The above company should include a Report in its Board Report and a Statement indicating the way Formal Annual Evaluation has been made by the Board of its own performance and that of its committee and Individual Directors. 

(iv) Section 178( 2) 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 directors’ performance. 

2. PROVISIONS UNDER SEBI (LODR) REGULATIONS,2015 asides Companies Act, 2013 and Insurance Act, 1938, The SEBI ( LODR) Regulations, 2015 also contains some regulations for Evaluation of Performance of Board of Directors as follows. 

(i) Regulation 4- Kay Function of Board of Directors includes monitoring and reviewing board of directors’ evaluation framework 

(ii) Regulation 17- The Performance Evaluation of Independent Directors shall be done by the entire Board of Directors. Provided that in the above evaluation the directors who are subject to evaluation shall not participate. 

(iii) Part D-of Schedule II – provides the role of Nomination and Remuneration Committee. 
a) The formulation of criteria for evaluation of performance of Independent Directors and the Board of Directors. 
b) Whether to extend or continue the term of appointment of the Independent Director, on the basis of the report of performance evaluation of Independent Directors. 

IMPORTANT STEPS FOR EVALUATION PROCESS 

(i) To develop a methodology for evaluation. It may be different for different companies based on their types of management and constitution of Board. 

(ii) As a good practice , the company may also develop a Policy on Board Evaluation. 

(iii) Ideally, evaluation process could commence each year ( during last quarter) to evaluate the performance of concerned body or individual in the succeeding year. 

(iv) It is a good practice that each director is given a copy of the form for assessing the overall performance Board/Committees/Directors/Chairperson/Managing Director/Whole Time Director/Executive Director/Independent Director, as the case may be sufficiently in advance, so that he become aware the evaluation process and well as the parameters on which performance will be evaluated; 

(v) The forms which include a set of questions , should have a rating mechanism or subjective questions ,which may be analysed by the Nomination and Remuneration Committee. 

(vi) Ideally Nomination and Remuneration Committee should compile the feedback and comments in the evaluation forms and appropriately review the same. 

(vii) Thereafter the consolidated feedback and comments along with its recommendation be placed before the Board. 

COMPONENT OF BOARD APPRAISAL. 

1. Evaluation of the Board as a whole.
a) Internally 
b) Externally( by an expert). 

2. Evaluation of Individual Directors ( Independent, Executive, Non-Executive, MD,WTD etc). 
a) Self-evaluation. 
b) Peer to Peer evaluation. 
c) External ( by an expert). 

3. Evaluation of Committee 
a) Internal( by Board). 
b) Externally( by an expert). 

4. Evaluation of a Chairperson. 
a) All Directors. 
b) Externally( by an expert).