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Boards need a robust and critical evaluation process, says former Sebi chief M Damodaran

Updated : November 19, 2019 07:19 AM IST

There needs to be a robust and critical evaluation process for board members, M Damodaran, former Securities and Exchange Board of India (Sebi) chief, told CNBC-TV18 in an interview. He further expounded upon a board's evaluation process and the market regulator's role in the exercise.

“What is the one thing that needs to be done is a very robust, critical board evaluation process. You don’t have that. You have prescribed a board evaluation process and you have allowed companies to do self-evaluation. Is that an honest evaluation? You prepare a few questions or everyone tells everyone else in the boardroom, you co-existed with that person in that room for years. Are you going to say this guy doesn’t measure up? You are not going to say that. So what you give in response to a written questionnaire is not the honest truth. Get outside experts who have board room experience to come and evaluate your boards if not every year, every alternate year,” he said.

“If you have an honest board evaluation, end of the day there must be recognition across the board that you need to keep the good persons inside and let the bad ones go. What can facilitate that other than an evaluation process? Not examinations. I may get 99 out of 100, am I a great director? No,” he added.

When asked if he sees takers for this evaluation process, Damodaran said: “Some companies have done that voluntarily, they don’t have to go outside, safety lies in doing it in-house. It must be prescribed that once in two-three years — it is not terribly expensive. I look at it as an investment and I have told people that a good robust evaluation process is an investment in your company.”

Infosys has been grappling with a whistleblower complaint in which a group of employees raised concerns about financial malpractices by the IT giant's top brass. Damodaran said that the whistleblower mechanism serves an important purpose but has the potential to be used for settling personal scores.

“Whistleblower mechanism was intended and can still function as an excellent mechanism to unearth things that needs to be unearthed in a company. Like every good instrument, it can also be used wrongly. You can use it to settle scores, you can use it to take potshots at people.

"If the whistleblower’s complain is not true, by putting it out on the exchanges prematurely, you might be spreading this falsehood, which is in no-one’s interest. It is important that whistleblowers first send the complaint in the company, that is how the mechanism works. It is quickly investigated, you don’t have the luxury of time.

"There are instrumentalities to see that it doesn’t go to the management, it goes to the audit committee. If it is a problem with the audit committee, where should it go, all of that can be taken care of and in fact it has been taken care of. It does not mean that merely because it looks credible and is well drafted, you think it is right and put it out. Early premature disclosure can be counterproductive. I don’t know about the specifics of any case but this is again a mechanism that needs to be tested, over the time we will get to know how to put in place these safety measures."
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