Diversification of Board – Tool to de-risk an Enterprise and Board from perils of Non-Compliances

Gaurrav Jaiin, Founder, Lexcomply

In the current era wherein every Enterprise aspires to be a global leader, it is essential to de-risk an enterprise from all kinds of risks. Structured business entities make strategies to de-risk their organisation from various kinds of risks including financial, operational, legal/compliance, people, etc. Global reports have suggested that Compliance risks are increasing on a year-on-year basis especially those relating to Regulatory and Data Protection.

As per the recent study conducted by Stewardship – Asia, Boards are spending 35% of their time on Risk Management and 43% on Compliance Management. On the contrary, they are investing less than 30% of their time in pertinent subjects like Innovation, Sustainability, ESG, Talent Development, and Technology.

Compliances Management has gained weightage over the period due to the following reasons:

1. Globalisation of Business
2. Innovation in products and services
3. Increase in digital frauds
4. Increase in demand for personal data
5. The evolvement of new tech tools like AI
6. Increased focus on ESG compliances
7. Stronger administration by authorities
8. Introduction of new legislation having extra-territorial implications

Above-stated factors make a stronger case for having a focused and dedicated team to predict, identify, and evaluate associated compliance risks and thereupon curate a strategy to overcome such risks.

An organisation can adopt various tools to de-risk and one such tool is the restructuring of the Board of Holding and its subsidiaries. As per a recent media report, 75% of India’s GDP is contributed by family-owned businesses and is likely to increase to 80-85% by 2047. This makes it essential for family offices to plan diversification in the Board so that they can have sustainable growth along with de-risking the Promoter Directors against the perils of non-compliance, if any.

While an organisation may plan to induct various industry experts or personalities with business connections, it will surely be prudent to have Independent and professional Directors on Board even in unlisted entities.

Restructuring the Board with a lesser number of representatives of Promoters groups essentially does not mean losing control. India’s most successful family-driven business houses like Mahindra, Aditya Birla Group, Reliance Industries, and Godrej are best examples wherein the family has continued to retain the relevant control over the business with more professional, and Independent Directors on the Board of their holding and subsidiary entities.

Some of the rationale for having Independent and professional Directors and the benefits that could be derived from having such directors on the Board are as under:

a. Independent Directors

1. Transparency
2. Third-party and independent view
3. Self-governance process
4. Industry insight
5. Best Governance Practices

b. Professional Directors

1. Expert knowledge
2. Fine balance between Family and professional driven Board
3. Enhancing accountability of professionals heading various functions and responsible for compliances

Board basing of Board ensures that a business entity is not only able to benefit from the knowledge of the professional and Independent Directors but also functional heads on the Board become accountable to the authorities instead of other Directors.

Restructuring Boards by having more Independent and Professional Directors will enable an organisable to build a strong foundation and will enable them to plan its long-term growth.