Opinion

How NomRem panels can improve governance

R Anand | Updated on July 30, 2020 Published on July 30, 2020

The Nomination and Remuneration Committee must play a proactive role in assessing key personnel and succession planning

The Nomination and Remuneration Committee (NRC) of a company’s board is an important cog in the wheel of the corporate governance framework. Unfortunately, it has, by its own making, relegated itself to playing a second fiddle to the Audit Committee of the board. The main reason is the obsession with compliance of various regulations and focussing on various audits that take place in a company. A thumb rule is that if an Audit Committee meeting takes three hours, the NRC would take a maximum of half an hour. The issue is not about agenda items but the realisation of the members of NRC that they have a greater role to play in the ecosystem of good corporate governance.

Key managerial personnel

The nerve centre of the management of corporates is the identification of key managerial personnel (KMPs) and their roles and responsibilities. While some of the roles/duties are cast by the regulations some have to evolve with the needs of the organisation. It is imperative that the NRC spends quality time assessing the roles executed by the identified KMPs. The organisation chart should be constantly reviewed just to ensure there are no square pegs in round holes.

A proactive role by the NRC in these two areas will give the required comfort to the board that the people part of the company is in good shape. When a KMP or senior management team member resigns there is a crying need to now assess the detailed reasons for his/her exit. A proper exit interview and what transpired should be placed before the NRC and if there is something material, the NRC should brief the board. Any extension of tenure beyond the age of retirement of senior personnel should also be discussed at the NRC since such a move thwarts the growth of the next person waiting in queue.

Most boards are reluctant to discuss the subject of succession planning since it is touchy and intrudes into the domain of the promoter directors. Naming a successor to the CEO/MD is one of the primary functions of the board. However, boards can do more than simply identify a single next-in-line successor. More strategically-minded boards actively guide the organisation’s leadership development process and focus on recruiting, motivating, and retaining high performers on a broader scale than just the Chief Executive’s office.

Time has come for the NRC to take this subject seriously. Uncomfortable questions have to be raised if it is in the overall interest of the organisation. Succession is not restricted to the succession of family members but covers senior management team and, in some cases, even middle management. There has to be one shadow person for every KMP and every important person in the senior management team.

The concept of ‘we will cross the bridge when we come to it’ should be jettisoned forever. The organisation cannot be allowed to decay on account of lack of succession planning at various levels. The NRC should on an annual basis not only evaluate this aspect but also insist on the so-called shadow person to be exposed to various committees of the board to derive the required confidence.

In the times that we live in and the changing dynamics of doing business, people-related cost is an investment and not an expense — notably at senior levels — and the NRC has to take up the cudgels in discussing and dealing with succession planning.

Remuneration

When issues like increase in remuneration comes up before the NRC it should not shy away from asking data on similar personnel in competing companies and if the increase, in comparison, is within range. In practice, matters relating to remuneration are already decided and just pushed through the NRC for ticking the box and no serious discussions take place. Such a practice negates the importance and the role of the NRC. The role of NRC, particularly in fixing remuneration package of KMPs, should look beyond directors and shareholders and extend to all stakeholders. There was an interesting case of a successful company where business and profits grew by 40 per cent.

The NRC met and recommended a pay increase of 20 per cent to the promoter MD. When the matter came up to the board, the MD stood up and announced a 10 per cent reduction in his pay, saying: “I am already getting much more that what my needs are! I would rather take a cut and distribute it to the foot soldiers on the ground.” Such examples are a rarity and sets the right tone at the top.

Course corrections are forced on account of changing situations. The role of NRC will now be felt stronger than ever before. Apart from the agenda items which it has to deal with on a routine basis, it has to create its own dynamic agenda to counter internal and external challenges. It will have to equip itself to play a meaty and substantive role to provide the required comfort to all the stakeholders.

The writer is a chartered accountant

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Published on July 30, 2020
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