Performance Evaluation of Additional Directors and Directors Liable to Retire by Rotation - MMJC

Provisions with respect to performance evaluation

Performance Evaluation is a periodic process which aids the management to assess the performance of the Individual directors and the board as whole which is then further aligned with the organizational goals.

Section 134 (3) (p) read with Rule 8 (4) of the Companies (Accounts) Rules, 2014 states the Board Report must include a statement indicating the manner in which the formal annual evaluation of the performance of the Board, its committees (where applicable) and of individual directors has been made. As per Section 178(2), the Nomination and Remuneration Committee of every listed company and any other class of public companies as may be prescribed by the Rules shall indicate the manner for the effective performance evaluation of the Board, the committees and individual directors. Further, the evaluation is conducted either by the Board, Nomination and Remuneration Committee or it could be done by an external agency.

In case of reappointment of independent director performance evaluation is mandatory. In the same way no time limit is prescribed for performance evaluation of individual directors other than independent directors.

In this write up we will check two instances when performance evaluation of an individual director should ideally be done.

Performance evaluation in case of Directors to retire by rotation

Section 152(6) of the Companies Act states that, unless the articles provide for retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company are those eligible to retire by rotation. The retiring director is eligible to be re-appointed at the same general meeting. and may be re-appointed, but the company may also appoint some other person in place of the retiring director.

It would be a good practice, where a retiring director offers himself for re-appointment as a director the performance evaluation of the retiring director is being done by the Nomination and Remuneration Committee. The same can then be recommended by the Nomination and Remuneration Committee to the Board and then the shareholders to make informed decision regarding the re-appointment.

In a recent case Mr. Samir Modi, executive director of Godfrey Philips India Limited being liable to retire by rotation at the annual general meeting of 2024. Mr Samir Modi offered himself for re-appointment at the AGM of 2024.

While considering his request for reappointment as a director liable to retire by rotation, Nomination and Remuneration Committee [‘NRC’] of Godfrey Philips India Ltd did performance evaluation of Mr Samir Modi. On performance evaluation NRC did not recommend the reappointment of Mr Samir Modi. While recommending against NRC noted as follows, “The Nomination and Remuneration Committee of the Company (“NRC”), at its meeting held on 7th August 2024 considered Mr. Samir Kumaar Modi’s offer to be re-appointed as a director and his recommendation in this regard. In the course of detailed deliberations, the NRC considered various aspects, including Mr. Samir Kumaar Modi having placed himself on multiple occasions in situations of conflict with interest of the Company, his conduct in the meetings in the recent past (as recorded) being unbecoming of a Director, his concerted efforts to propagate a culture of disrespect for fellow Directors and Senior Officials of the Company, his levelling false allegations against fellow Directors and his deliberately taking inconsistent position on matters discussed in the meetings. The NRC also observed that Mr. Samir Kumaar Modi’s overall conduct in the Board Meetings and outside is much against his fiduciary duties and responsibilities as an Executive Director of the Company instances of which are captured in the minutes of the meetings and are clearly reflected in the developments of the recent past. Accordingly, the NRC unanimously decided to recommend against his re-appointment as a director keeping in view the overall interest of the Company and its stakeholders. Thereafter, the Board at its meeting held on 7th August 2024 considered the recommendation of the NRC and after detailed discussions, unanimously decided to accept the same. The Board further decided that, subject to approval of the shareholders at the ensuing Annual General Meeting, the vacancy caused by the retirement by rotation of Mr. Samir Kumaar Modi be not filled by the Company for the time being[1].” Pursuant to this member of Godfrey Philips India Ltd rejected appointment of Mr Samir Modi as a director liable to retire by rotation.

Performance evaluation in case of Additional Director

Section 161(1) of the Companies Act states that the Board is empowered by the articles to appoint any person (other than a person who fails to get appointed as a director in a general meeting) as an additional director at any time. Such a director shall hold office until the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever earlier.

On completion of tenure as an additional director an individual is subject to provisions of section 160 sub-section (1) of Companies act, 2013 for being appointed as a director. First proviso to section 160 sub-section (1) of Companies act, 2013 states that deposit of amount shall not apply in case the director appointment is recommended by NRC. So, while recommending an individual for the office of director NRC should not only consider his qualifications and experience but also undertake performance evaluation of the tenure during which he was acting as an additional director. The criteria here could be his attendance, involvement and contribution during the Board and committee meetings. The Nomination and Remuneration Committee can also consider the ability of the additional to bring his wisdom to the Board. This will come to the aid of the members to conclude whether the additional director to be elected as a director on the Board.

Conclusion

Performance evaluation shall be preferably undertaken at the time of appointment, re-appointment and in situations of retirement by rotation. Further, the evaluation done by the independent directors and their views on the same should be of utmost importance, reason being independent directors may not give an influenced opinion.

The views/ feedback of independent directors and the Nomination and Remuneration Committee should be considered by the board at the time of determining the action plan with respect to results of performance evaluation. This would go a long way in strengthening the board as the exercise would involve identifying the strength, weakness and accordingly determine the corrective mechanism.

[1] https://www.godfreyphillips.co.in/public/storage/images/annual-report/2023-24/7711cd33ab4038e2fc22073d4533911f.pdf