Performance Evaluation of Directors - The Dark Side of the Compliance Disclosure of the SEBI LODR 2015

  Corporate Governance Practice Audit  

* Birendra K Jha                                                                                                                                                                       Independent Director, IICA ( Ministry of Corporate Affairs ); Corporate Governance  Practice Audit; CSR Social Impact - CSR Planning & Implementation;  Expert Company Law -SEBI Law - Social & Environmental Law   EMail: birendrajha03@yahoo.com

In Indian situation the Performance Evaluation of the Board of Directors, comprising Director - Independent Director and Managing Director, is very poor. The deep audit of the Annual Reports disclose the dark side of the SEBI LODR compliance on the Performance Evaluation. This is  "Copy-Paste" of the past report. In this situation how Director - Independent Director and Managing Director shall perform correctly ? The dark side compliance culture on the Performance Evaluation as in practice in Indian Companies are poor. This is violating the provision mandated under the SEBI LODR 2015, Regulation 17 (10 ), Regulation 17 (11 ), Regulation 25 (3), Regulation 34 (3)- Schedule V and Schedule IV ( Part D ). This is very serious matter. This needs improvement from the side of the Independent Director and the Company Secretary  to reform. They should must stop bogus reporting. A  tool  is here for the Independent Director and investors - how they can check whether reporting on the Performance Evaluation is  bogus or correct ? They can challenge this in meeting. There is also one clue here - urgent need to link Performance Evaluation with the remuneration ( see part 7) . This shall bind directors to perform and earn remuneration.  

1. Background And Problem: 

Boards which take a  ‘copy-paste’ approach simply to meet compliance is abusing the process of Corporate Governance Administration. The Independent Directors  are not taking care of the investors. This is mandatory duty of the Independent Directors to check the Annual Report, where Performance Evaluation is discussed about the Directors. 

The Independent Director has the ethical responsibility    to give full force of the provision of the SEBI LODR on the Performance Evaluation. So far this is weak and poor. Most of the Performance Evaluation reports are just  ‘copy-paste’ of  the past reporting. This mandates that the Annual Report should must be audited by an outside expert before it is published, to identify problem stated here. 

Just begin with a sample test from a top listed company. The company  in its Annual Report FY 2023-24- page 58 / FY 2024-25 page 69 use ‘copy-paste’ approach on the Performance Evaluation reporting: 

“The Board and the Nomination and Remuneration Committee reviewed the performance of individual directors on the basis of criteria such as contribution to board and committee meetings, preparedness on issues, meaningful and constructive inputs.”

This is exactly ‘copy-paste’ of the past reporting of the Performance Evaluation.  Let us take another example. The same company in its Annual Report FY 2023-24- at page 58 and  FY 2024-25 at page 69, say again:

"The performance of the Committees was evaluated by the Board after seeking inputs from the Committee members on the basis of criteria such as the composition of committees, effectiveness of committee meetings." 

I have extensive experience of HR Administration of more than 20 years, where I have evaluated aggressively the Corporate Governance and measured the Performance Evaluation of the senior to the junior employees.  Such language structure demonstrated above say that the Performance Evaluation has not been done here. Only papers filled in ‘tick-box’ culture to make it compliance oriented. 

Such Corporate Governance insight is a problem in Company Administration.  The Institutional Investors often red-flag such disclosures :

• Same text repeated year after year. 
• No numerical evaluation results
• No director wise scorecard
• No KPI or measurable criteria.
• No improvement action after evaluation.

This is not alone the top listed company. One very large IT company  in its Annual Report FY 2020; FY 2021, FY2022; FY 2023 and FY2024 has used the same language structure in the Board's Report: 

"Pursuant to the provisions of the Companies Act and SEBI Listing Regulations, the Board has carried out annual evaluation of its own performance, its Committees and individual Directors". 

Clearly The Performance Evaluation criteria remain identical every year typically including Board structure and composition, participation in meetings, strategic guidance and  safeguarding stakeholders interest. What is missing "No Measurable Scoring or Evaluation Outcome". 

In this problem background, certainly the investors should must be worried to deploy best Independent Director in the Board to protect their investment. 

2. Purpose & Concept: 

Independent Directors (IDs) are pivotal to corporate governance reform in India. Statutorily enshrined in the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), they are expected to promote transparency, protect minority shareholders, and ensure accountability across corporate boards. This paper examines the underlying aims and objectives of appointing Independent Directors, critically evaluates whether these objectives are being achieved through Performance Evaluation mechanisms, identifies existing structural and functional gaps, and proposes measures to strengthen their effectiveness within the Indian corporate landscape.

Corporate governance forms the backbone of a stable business environment. Independent Directors, by virtue of their non‐executive status, bring objectivity and oversight to corporate decision-making. The introduction of IDs in India was inspired by the global move toward stronger governance post major corporate scandals in the 1990s, such as those highlighted in the Cadbury Committee Report (1992). In India, this found early roots in the Kumar Mangalam Birla Committee Report (1999), which recommended mandatory inclusion of independent directors in listed companies.  

The Companies Act, 2013 institutionalized the role, casting upon independent directors a fiduciary duty to act with integrity, maintain professional independence, and safeguard stake holding larger than management interests.

3. Objectives of Deploying Independent Directors

The central aims of having Independent Directors are:

Enhancing Board Accountability: IDs are expected to monitor management decisions and ensure they align with shareholder and stakeholder interests.

Protecting Minority Shareholders: IDs serve as an impartial voice safeguarding minority interests from domination by promoters.

Promoting Transparency and Ethical Conduct: Through audit committees and risk management oversight, IDs help enforce ethical corporate practices.

Balancing Power Dynamics: They prevent concentration of power among promoter or executive directors, thereby promoting board autonomy.

Strategic Guidance: IDs bring external expertise and diverse perspectives, adding value to strategic decision-making.

As noted by Kalyani (2025), independent directors are “statutorily mandated cornerstones of corporate governance” aimed at bridging the trust deficit between management and stakeholders 

4. Performance Evaluation: Have the Objectives Been Achieved?

Despite a robust legal framework, evidence suggests that the intended outcomes have only been partially realized. Several studies indicate that the independence of directors often exists “in form but not in function”. This limited functionality stems from multiple factors: the selection process dominated by promoters, lack of access to critical information, and ambiguous liability norms. Empirical research by Mishra (2020) found that the proportion of independent directors on the board has a negative correlation with firm profitability between 2003 and 2019 — suggesting that formal compliance has not necessarily translated to improved governance efficiency. Notable scandals such as Satyam (2009), IL&FS (2018), and Yes Bank (2020) exposed severe governance failures despite the presence of independent directors. Their inability to prevent such crises questions the effectiveness of the current performance evaluation framework.

5. The Existing Gap In Performance Evaluation:

The recurring gaps between policy and practice include:

Independence in Appointment: IDs are often selected by promoter-driven boards, compromising genuine independence.

Information Asymmetry: IDs rely heavily on management for operational insight, limiting their oversight capacity.

Ambiguous Accountability: Legal frameworks impose liability without clear protective mechanisms, discouraging proactive involvement.

Poor Performance Evaluation Mechanism: Many Board of Directors keep Performance Evaluation poor. This is hidden poor practice and the dark world of the compliance. 

Cultural and Structural Constraints: Indian corporate culture often undervalues dissent, curbing IDs’ influence.

As Jayarao and Rawat (2023) note, “structural and cultural issues restrict the efficacy of independent directors despite their critical governance role” 

6. What Needs to Be Addressed: 

To bridge these gaps, several reforms are essential.  Recent SEBI initiatives — including the move toward dual approval of ID appointments (majority of shareholders and minority shareholders separately) — represent progress but, this is still   insufficient without cultural change and enforceability. But, I shall focus here on the Performance Evaluation.

Revised Evaluation Framework : 

The "copy-paste" culture of Performance Evaluation as demonstrated above needs to be changed with strong hands. This is poor Corporate Governance. The "copy-paste" culture says the evaluation has not been done. The Independent Directors should must protect the Performance Evaluation mechanism and get it linked with the remuneration. 

Institutional investors (such as BlackRock, Vanguard Group, State Street Global Advisors and proxy advisors like Institutional Shareholder Services or Glass Lewis) do not rely on the Annual Report's of the Performance Evaluation given by the Indian listed companies. 

I use "Advanced Governance Tests With Numerical Scorecards" to check whether the Board and Directors’ Performance Evaluation is genuine or cosmetic. I use  basically  5 Questions Test: 

• Are specific KPIs listed for directors?
• Does the report disclose how the evaluation was conducted?
• Is there separate evaluation of the Chairperson?
• Are evaluation results linked to remuneration and  reappointment?
• Does the company disclose board skill-matrix and gaps?

If 3 or more answers are “No”, the Performance Evaluation is bogus. 

7.  Link Performance Evaluation With Remuneration: 

Under Regulation 17(6) of LODR, the board must recommend remuneration to non-executive directors including independent directors, and it requires shareholder approval in a general meeting.

Important Rules:

• Board recommends remuneration
• Shareholders approve remuneration policy
• If one non-executive director receives more than 50% of total remuneration of NEDs, a special resolution is required.
• Independent directors cannot receive stock options (ESOPs). Thus, SEBI focuses on transparency and approval rather than fixing a specific pay benchmark.

Apart from the SEBI Law there is "Market-Force". Best companies which dream of improving company business, retain good talent and pay the directors  Market-Benchmark Remuneration.  

Average compensation for Independent Directors in Nifty-50 companies is now around ₹1 crore annually. This is more clear if we look following chart of seven peer companies.  

                           

                       

The peer companies  determine the  "Market-Force". The benchmark approach that can be used here is  Benchmark = Median remuneration of peer group companies ± 20% acceptable deviation.  Above 50% deviation = Governance Red Flag

If "Market-Force" is linked with the Performance Evaluation. Then it shall address immediately three important problems: 

• The Performance Evaluation shall be realistic. Not just "copy - paste".
• In real term the Directors shall perform. Now they know if performance is poor. Remuneration is going to cut down.
• The investors money shall be safe, if  correct Performance Evaluation is there.  

8. Conclusion

The Independent Directors should must use "Advanced Governance Tests With Numerical Scorecards" what I have suggested above.  

They should bring robust  Performance Evaluation arrangement and link it with the remuneration. This shall force the Directors to perform, which is now missing. 

References

• Sarfraz Alam, “Independent Directors in India: Guardians of Governance or Paper Tigers?”, Indian Review of Corporate & Commercial Laws (IRCCL) Blog, 3 August 2025, available at IRCCL.
• Kalyani, V. R. (2025). An analysis of the role and accountability of independent directors under the Companies Act, 2013. Indian Journal of Law and Legal Research (IJLLR), 7(4). Available at: ijllr.com.
• Arora, A. (2024). Do independent directors enhance better corporate governance in companies in India? Public Administration and Policy, Emerald Publishing.
• Mishra, S. (2020). Do independent directors improve firm performance? Evidence from India. Global Business Review, SAGE Publications.
• Jayarao, S., & Rawat, T. (2023). Role of independent directors in maintaining corporate governance: An Indian perspective. International Journal of Advanced Legal Research, 4(1). Available at: ijalr.in.