This article is written by Komal Shah, Content Head, iPleaders.

It is a common industry practice for any new entrant to an organisation to be informed about the business of an organisation, what it stands for, the objectives it is trying to achieve, the people, especially whom the new entrant will be required to deal with, and the policies, systems and culture prevalent within the organisation. There is no reason why this process should not be carried out for a new entrant on the board of directors. In fact, this process becomes all the more relevant for an incoming board member since he or she will be involved in the strategy formation of the company, which is not possible unless he or she is fully aware of the current strategy and resources. If you are offered an appointment as a director in a company, one of the things to check is if the company has a laid down induction process for directors. If it does not and you still accept the position, the first thing to do is to get a program installed.

Interestingly, there is no specific requirement in either the Companies Act, 2013 or the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR regulations) for induction of directors. However, the LODR regulations provide that one of the responsibilities of the directors shall be to encourage continuing directors’ training to ensure that they are kept up to date. However, a systematic induction process will increase the effectiveness of the training. Having a director secure information on the job can have really adverse consequences, since the authority and the liabilities vest right from day one.

What purpose should an induction process serve?

An induction process should aim at providing a director with all necessary information as would enable him to function and discharge his responsibilities as effectively as possible. A director will be a part of the board and the board is collectively referred to as the brain of the company. The information to be provided within an effective induction process should, therefore, be all-encompassing.

Induction has a higher degree of relevance for non-executive directors since they are not involved with the day to day operations of the company. For their part, non-executive directors should devote adequate time to the induction if they intend to contribute effectively to the board as well as be clear about the type and quantum of responsibility they are undertaking.

In case of managerial personnel i.e. Chief Executive Officer / Chief Financial Officer / Chief Operating Officer is appointed to the board, they should be briefed about the extension to their liabilities in terms of various legislations and the additional relationships with shareholders and regulators, on account of their appointment as a member of the board. However, they need not be briefed as extensively about the business and operations of the company since they can be expected to be well aware of these in view of their positions.

In fact, for a person who has been appointed as the Chairperson, one of the responsibilities would be to take the lead and ensure that a newly appointed board member receives appropriate induction and training.

What should be covered within a comprehensive induction program?

An ideal induction program should be capable of being customised in accordance with the category of the person being appointed as a director, contain a proper balance of written information, meetings and site visits. It should be spread appropriately so that there is no information overload resulting in missing out crucial information. Help and hand-holding can be secured from existing board members, however, care should be taken to see that the new entrant does not lose his individual perspective in this method. It may also be considered if the prospective director could attend a board meeting as an ‘observer’. This, however, should be done only when the appointment is certain.

Business and Entity level information

If directors are expected to contribute to the direction of the business of the company, they need to be made aware of the business sector in which the company operates i.e the industry and the segment(s). For instance, State Bank of India is in the banking sector in retail banking, while JP Morgan is in the investment banking and asset management segment in India. If you are to be appointed on the board of a company, the understanding of the sector in which it operates is essential. The spread of the operations of the company – geographic as well as departmental also needs to be known. Board members should also be aware of the infrastructure (particularly in the case of companies involved in manufacturing, processing or construction) and the human resources which the company possesses. The financial position of the company is something which a director would inevitably need to be aware of, given that the directors have the responsibility for the preparation of financial statements under the Companies Act, 2013. Finally, no one who is involved in the strategy formation of the company can afford to be unaware of the market for the company’s products or services and the competition and a director would, therefore, need information on this aspect too.

At an entity level, a director would need to be aware of the constitution of the company, the structure of the group within which it operates and the legislation to which it is subject. The constitution sets the boundaries within which the company operates and therefore, the director would need to function within those boundaries.

More often than not, directors would have specific responsibilities under sector-specific legislation and therefore, this is a crucial piece of information for them.

Information related to the directorship and governance framework

Non-executive directors, particularly those brought into the board by an investor or venture capital entity, a foreign collaborator or lender, will always be representing these specific interests on the board. As against this, independent directors are expected to be objective and deliver a ‘stand back’ insight on the matters being discussed at the board level. Obviously, directors and specifically independent directors must satisfy the qualification criteria, but beyond the statutory requirements, a director must be clear about the objective and expectations of him.

For this purpose, it is essential for a director being appointed to know the precise terms of his appointment and check out in depth the document appointing him – whether this is an appointment letter or an agreement. The due diligence to be conducted prior to accepting appointment as a director is dealt with in another chapter.

It would be very useful for a new appointee to understand the mechanics of the composition of the board – the division into executive, non-executives and independent directors, whether the Chairman is the executive or non-executive, the stance of the managing director and the various interests represented on the board.

Directors would also need to be aware of the governance framework i.e. matters to be handled at board level, committees formed and their purpose delegated authorities to the managing director or other key managerial personnel etc.

Information on key relationships

Shareholders:

Relationship with the shareholders of the company is of the utmost importance to a director. Directors have certain specific duties towards the shareholders under the Companies Act 2013, which have been covered in another chapter. Listed companies would have further requirements towards disclosures for the benefit of the shareholders and the interaction of the directors with the shareholders, at general meetings or through press conferences or through other media need to be carefully managed.

In case of unlisted entities and group structure, the shareholders of the flagship entity can most likely be angel or private equity investors while the shares of the unlisted subsidiaries will mostly be held by the flagship company and nominees. Relationships with the private investors who are the shareholders will be managed with a clear objective of ensuring that the obligations as laid down in the shareholder’s agreements are fulfilled and the investor gets a sufficient return for his investments. Directors of a subsidiary entity with a foreign holding company will consistently be geared towards the country franchise being able to generate and increase business and returns for the holding company.

The newly appointed director should clearly be made aware of the shareholding pattern and the channels used to communicate with the shareholders. They should also be well aware of the group structure and the company’s place within the group.

Key managerial personnel and second level management

Often key managerial personnel can be vested with delegated powers from the board for various purposes and therefore, it is important that the directors have a relationship with the KMPs which is based on trust and confidence. Trust enough for the KMPs to report any misses immediately to the board and confidence enough for the board to delegate high stake projects.

The second level management consisting of the heads of various departments also form an important relationship for the directors because they can be covered within the definition of ‘officer in default’ for their specific areas.

The induction process must always provide for one on one meetings of the new director with the KMPs and the second level management.

Regulators

Any director would need to be aware of the regulators governing the business sector in which the company operates. A formidable tip in maintaining the relationship with regulators is to always keep the records up to date and demonstrate voluntary efforts to comply and install governance systems in areas where these are not mandated by law. If the regulators see the directors as being proactive in compliance and governance, this will help a lot at a time the regulator does conduct an investigation for any reason.

A new director must clearly be briefed about the regulators, their powers and periodical interactions or submissions required to be made with the regulators. They must also be informed about the people within the relevant departments of the specific regulator.

Key customers and suppliers

For obvious reasons, key customers i.e. those falling within the 20% bracket of the 80:20 rule (the 20% customers which account for 80% revenue) need to be taken care of. For some customers, being given access to or being approached by a director of the company caters to their feeling of importance. Freebies work for some others and after-sales services for yet other customers. In any event, an active interest by the directors in maintaining customer relationships goes a long way towards winning customer loyalty.

Key suppliers, especially those which supply a crucial raw material are an equally important breed. Supply issues can hamper and put customers off the product or service.

Meetings can be set up for the new director with the key customers and suppliers as a part of the induction process.

An induction process document needs to be prepared and it should be tailor-made and customised based on the size and complexity of the organisation and business as well as the position of the director.

Here’s how a Director induction program works at Marks and Spencer.

Here’s a 2016 policy for the training of directors of Steel Authority of India Limited

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