Deloitte’s Goradia says company boards are ready for change, ESG, AI skills are in demand

In an interview, Goradia said companies are increasingly turning to headhunters to identify candidates with skills in areas such as artificial intelligence and environment, sustainability and governance (ESG), moving away from the earlier trend of choosing internally recommended candidates. The turnover is also opening up opportunities for more women as companies look to make their boards more diverse.

The board reshuffle is being triggered by a provision in the Companies Act that came into effect on April 1, 2014, that mandates a rotation of independent directors, who can serve on the board for a maximum of 10 years at a time — that is, two consecutive terms of five years each. After that, a cooling-off period is required before they can be hired by the same company, but they can join boards of other companies.

“So in 2024, we see a lot of seasoned independent directors who have been on boards for many years coming to the end of their terms. This is a transition year that has already begun. Some independent directors left last year, some are leaving this year, and some are still in the process of moving. Because of that, there is a lot of activity on boards, and the nomination and compensation committees of many listed companies are tasked with helping identify the right candidate for the board,” Goradia said.

She said companies are effectively using the rotation of independent directors as an opportunity to modernize their boards and address existing skill gaps. “Companies are actively looking for directors who bring complementary skill sets to the board, whether it’s technology, digital transformation, artificial intelligence or cybersecurity. This rotation of independent directors is infusing new life into boards,” Goradia said.

According to estimates, close to 30% of directors on boards of public companies are undergoing this transition, she said. “The term of around 2,000 independent directors is expected to end by December 2024 and the process is expected to continue in 2025 as some directors will complete their term next year,” Goradia said.

Experts say the world has changed in the last few years and that boards need to operate with greater transparency, trust and quality of decision-making. “Board members need to be prepared to deal with the challenges of our times. Boards need to be tech-savvy, have diverse minds and should prioritize inclusiveness in their approach,” said Manoj Raut, CEO and secretary general of the Institute of Directors, India’s leading professional body for directors.

The Companies Act mandates that every listed company must have at least one-third of its directorships reserved for independent directors, while certain classes of unlisted public companies are required to have at least two directors as independent directors. In addition to the requirement of the Listed Companies Act that listed companies must reserve one-third of their boards for independent directors, the Securities and Exchange Board of India (Sebi) has mandated an additional requirement that if the board is headed by an executive chairman, half of the board must be composed of independent directors. Unlisted public companies that meet certain thresholds of sales, paid-up capital, and outstanding loans and deposits are required to have at least two independent directors on their board. These directors, who are independent from the company’s management, are required to protect the interests of minority shareholders, ensure good governance, and provide an unbiased perspective to the board.

Goradia said that people who have reached the two-term limit at the companies where they have served can join other companies’ boards and that there is a demand in the market for directors with professional experience, whether they are accountants, lawyers or management graduates. “Traditionally, as we see it, these professionals have been the main candidates that companies have appointed as independent directors. However, companies are now increasingly aware of the need for expertise in areas such as technology, digital transformation, risk management, cybersecurity and ESG,” she said.

As a result, the composition of many companies’ boards will change, as some directors will be new and others will remain. “This means that companies need to prioritize onboarding new directors and implementing focused onboarding processes. Significant time will need to be devoted to training and orientation to ensure a smooth onboarding and adoption of new directors. Board dynamics may also change as board members gain comfort and understanding before they become more effective.”

“Professional headhunters are hired to identify candidates”

Traditionally, Goradia said, independent directors were selected from a network of major shareholders. But that is changing now, with professional headhunters being hired to identify candidates, especially when boards are looking for specific skill sets for which there is a limited pool in the market, she said.

In addition, companies are focusing on an annual board performance review exercise to assess the skills and strengths of their current board. This is a good tool for boards to help identify gaps in their composition, Goradia said.

“Companies are now seeing the value of having more diverse boards, meaning they’re not just looking for experience, but also diverse skill sets and even gender and age diversity. Many companies are actively looking for more female directors on their boards,” Goradia said.