Fair Governance in India's Corporate World: The NRC's Crucial Role

Corporate Governance in Promoter-Driven Companies

Corporate governance is a cornerstone of any successful business, ensuring that companies operate with transparency, accountability, and integrity. At the heart of this governance structure is the Board of Directors, whose effectiveness is crucial in steering the company toward its strategic goals.

One of the most critical, complex, and often understated roles within the board is that of the Nomination and Remuneration Committee (NRC). This is especially true in emerging markets like India, where unique ownership models present distinct challenges.

Established within the Board of Directors and mandated by regulatory provisions for all listed companies, the NRC of Indian Boards is responsible for four key areas: (a) the appointment and re-appointment of directors, KMPs, and senior management; (b) recommending fixed and variable remuneration structures; (c) evaluating the performance of board members, including the Managing Director (MD) and Chief Executive Officer (CEO); and (d) planning for leadership succession. Additionally, the NRC also sets criteria for board qualifications and the independence of directors, formulates diversity policies, and periodically reviews the performance of senior management.

However, the Indian corporate sector is largely characterised by "promoter-driven", concentrated ownership structures. In India, a promoter refers to individuals or groups—often the founding families or major shareholders—who have significant influence and control over a company's affairs, extending beyond their shareholding. They are instrumental in the formation of the company and typically retain substantial control over its strategic decisions.

In the top 500 listed companies, more than 60% remain family- or promoter-controlled.

This creates complexities for the NRC, as promoters may exert influence over board composition and leadership appointments, often through indirect channels. This influence can challenge the NRC’s ability to maintain objectivity, particularly in ensuring that board appointments are based on merit and aligned with the company’s long-term goals.

Effective governance requires the NRC to balance these ownership pressures while selecting leaders that meet the company’s evolving needs. The NRC must avoid appointments based on loyalty or personal ties, focusing instead on skills, independence, and the ability to contribute to the company’s success and being capable of separating ownership from management. By upholding this balance, the NRC fosters accountability and creates a governance framework essential for sustainable growth.

In this article, we examine the NRC’s role in Indian boardrooms, focusing on the challenges of identifying and attracting genuine independent directors, managing promoter influence, planning leadership succession, and setting fair compensation. We explore how the NRC can build forward-looking boards that meet regulatory standards while exemplifying integrity, transparency, and strategic foresight.

The Independent Edge: Shaping India's Corporate Future

“Why do you need independent directors at all? Has the institution failed, or could you even manage without them?”

In promoter-driven companies, independent directors are crucial* in balancing ownership influence with objective governance. Acting as a bridge between ownership and management, they support the organisation's long-term stability by promoting accountability and ensuring adherence to transparency and ethical standards.

The Nomination and Remuneration Committee (NRC) plays a central role in identifying, selecting, and recommending the appointment of these independent directors. The NRC is responsible for ensuring that candidates meet the criteria of independence, skill, and experience needed to guide the company effectively.

True independence requires directors to navigate complex interpersonal dynamics, often with promoters or other influential figures subtly pushing their agendas. Independent directors must stay focused on organisational objectives, holding firm against undue influence while maintaining constructive relationships. Good corporate governance hinges on directors who can set aside personal friendships and maintain a single loyalty: the organisation and its stakeholders.

However, finding such independent directors is far from straightforward and NRCs in India continue to face considerable challenges in securing genuinely independent directors whose integrity extends beyond just freedom from influence.

The pool of available (and suitable) candidates is often limited, and those who are qualified may hesitate to accept the role due to the substantial responsibilities. There's also the matter of regulatory deterrence. Today, a director in India could face serious penalties if governance fails, making qualified candidates cautious about joining boards.

So, how should the NRC go about selecting independent directors? Every board requires members who bring wisdom and can guide the company's long-term strategy. Directors should be selected based on the mission and vision of the company, not merely its immediate management needs. The board needs individuals who can lead sustainably and who, both individually and collectively, have the courage to stand up to ownership when necessary for the sake of stakeholders.

Beyond director selection and appointments, the NRC should create a support structure that empowers these directors to exercise their duties with confidence. By providing the necessary tools and frameworks to balance risk and reward, the NRC mitigates the regulatory and reputation that often deter qualified individuals from taking on these roles. This support enables independent directors to make difficult decisions, even when they may conflict with promoters' interests.

The NRC’s ability to identify, attract and support independent directors is critical for maintaining the company’s governance integrity. By focusing on individuals who align with the company’s long-term strategy and are capable of standing up to ownership pressure, the NRC can play a key role in safeguarding the independence and accountability essential for sustainable growth.

*The composition of Indian boards is primarily influenced by regulations that dictate board makeup based on who holds the position of Chairperson. If the Chairperson is an executive director or a promoter, at least half of the board must be independent directors. Conversely, if the Chairperson is neither an executive nor a promoter, the requirement drops to one-third.

Succession Planning Amid Promoter Expectations

Succession planning is a critical function of the NRC - not only for the CEO but for key positions down the line as well. In promoter-driven companies, this task becomes more nuanced, as promoters, with their perspectives on the company and its legacy, often seek to have a say in leadership decisions. The NRC is responsible for identifying and recommending candidates who align with the company’s long-term strategic goals, especially for key roles like the CEO, but the final decision rests with the entire board of directors and shareholders, where promoters may play an influential role.

In many Indian companies, open discussions about succession can be culturally sensitive, with some fearing that such discussions imply a lack of confidence in current leadership. Despite these sensitivities, the NRC must carefully manage succession planning to ensure it reflects the company’s evolving goals and long-term sustainability. (It is worth pointing out here that, in contrast, multinational companies view succession as a natural progression, with the understanding that no position is permanent.)

Promoter involvement is often most pronounced in CEO appointments. Even when the NRC conducts thorough assessments and makes well-considered recommendations, promoters— driven by their deep ties to the company—may influence the final decision. In such cases, the NRC chairperson has two options. One is to firmly reject the decision and request that it be referred back to the NRC for further consideration. The other, depending on the chairperson’s personality and willingness to confront the board, is to accept the outcome with reservations.

It’s a delicate balance, but it underscores the importance of having an NRC chairperson who is not only independent in the title but also has the resolve to maintain objectivity.

When it comes to the CEO, the NRC should agree on the criteria first. At any given stage, does the company need a visionary, a disruptor, a consolidator, or simply someone who can be a bridge for the short term? Each of these profiles brings a different skill set. If the company is stable, with solid earnings and brand strength, perhaps it’s time for a visionary. But if there are immediate challenges, the skill set might need to lean more toward a turnaround expert. By carefully assessing these needs, the NRC ensures that leadership aligns with the company's strategic objectives.

Although the NRC is ultimately a recommending body, its ability to offer well-supported and objective recommendations is vital for ensuring succession decisions serve the company’s best interests. By promoting transparency and rigour in the process, the NRC can support governance integrity while working collaboratively with promoters to ensure the long-term success of the business.

Executive Remuneration: Rewarding Excellence, Ensuring Equity

Executive remuneration in leading organisations across India continues to outpace performance and profitability and remains a sensitive issue. As per regulatory guidelines, the NRC is responsible for recommending remuneration policies that align with market benchmarks and industry standards.

When it comes to offering significant compensation packages, the NRC's role should be to establish parameters, not to respond to individual cases on an ad-hoc basis. Many advisory firms today provide industry benchmarks for executive compensation, which are readily available in the market. The NRC can decide whether to set compensation at the 75th percentile or if it's reasonable to aim for the 90th, but these parameters must be established upfront to ensure consistency and fairness across the organisation.

A company might have a well-defined incentive plan linked to performance, but external pressures can influence actual payout decisions. Often, the narrative is, "If we don't give this amount, the person will leave," which creates a chain reaction where everyone down the line begins demanding similar increments.

The NRC must ensure that remuneration remains closely tied to actual performance, not just perceived importance or relative benchmarks. However, it takes courage to stand firm and say, "This person didn't meet their objectives, so their variable pay will reflect that." Often, making that difficult decision and implementing it strengthens the organisation's culture of accountability and meritocracy over time.

Stock options introduce additional complexity. While they can be an effective incentive, stock options are tied to market performance, which may fluctuate independently of individual contributions.

The NRC must decide at what levels within the company these options should apply. Generally, N-1, N-2, and certain select positions in N-3 should be eligible, but not beyond that.

Moreover, the NRC should have clear policies about when to award stock options and when to withhold them. This isn't always an easy task. Imagine an executive approaching the NRC and arguing that due to a dip in share price, their options are now worthless and should be recalculated. These scenarios test the NRC's commitment to its policies and its ability to manage executive expectations.

Sometimes, individuals try to position themselves within the NRC's criteria for a particular compensation level. They might argue, "If that person is getting X, then I should get X-plus because my role is more impactful." It's human nature to believe one's work justifies a higher reward, which underscores the necessity for the NRC to enforce consistent and transparent compensation frameworks.

But what's the tipping point? If executives become too reliant on stock options or similar incentives, it can lead to perverse incentives where they focus more on stock price fluctuations than on long-term strategy. Is there a point where stock options, especially in excessive amounts, might actually hurt the organisation might actually hurt the organisation's long-term sustainability and strategic focus?

However, these policies are difficult to communicate and enforce. Inevitably, you're going to encounter people who argue they deserve special compensation due to unique skills or challenges. The real task for the NRC is to maintain fairness. Ultimately, stakeholders need to feel that whatever the compensation structure is, it's fair and that performance truly matters. It's the NRC's responsibility to establish principles that reward true contributions without making compensation an entitlement.

Enabling NRC Effectiveness: Independence and Diversity through Composition

Like the Board it is supposed to develop, the effectiveness of the Nomination and Remuneration Committee (NRC) hinges on having the right composition in place.

There is often an argument that the NRC should consist solely of independent directors to minimise bias and ensure objective decision-making.

While independence is essential, it's not necessary for the NRC to be entirely composed of independent directors. Independence is often perceived as a binary quality—you’re either independent or not. But real independence requires a mindset—the ability to question, to hold firm under pressure, and to prioritise the organisation's long-term interests over individual agendas. NRC priorities must identify those individuals who are not only independent in the title but also demonstrate true independence in practice.

Diversity within the NRC can be beneficial, provided it's well-managed. A diverse NRC brings together varied perspectives, which can enhance decision-making. Including members with different backgrounds—such as finance, law, or industry-specific expertise—can provide valuable insights when addressing complex issues like executive compensation and succession planning. However, it's imperative that all NRC members, regardless of their background, commit to upholding the principles of fairness, transparency, and accountability.

Extending beyond the NRC itself, diversity should be a strategic priority for the entire board— not just in terms of gender or ethnicity but across skills, experience, and perspectives. Diversity enriches board discussions and helps prevent groupthink. When boards are homogenous, they tend to view problems through a single lens, limiting creativity and leading to blind spots.

Coming back to the NRC, ultimately, the committee’s role transcends routine governance. It is entrusted with safeguarding the company’s strategic resilience and credibility, particularly by ensuring that its leaders are equipped, accountable, and aligned with long-term stakeholder value. With effective NRC oversight, an organisation can confidently navigate the complexities of today’s governance landscape - emerging as a leader that not only meets but sets standards in integrity and accountability.

The views and opinions expressed in this article are solely my own and do not represent the views of any third party, including those of any organisations I am professionally associated with. (The author)