I believe that such a mechanism would be ideal for not just IIM Ahmedabad, but most Central Government Educational Institutions, including IITs and NITs.
The Board members have a greater stake in the Institute, since they have been involved in policy making at the highest level, and would, in general, be able to judge the suitability of the candidates in a better way. This is not to say that MHRD has not been doing a good job of selecting Directors. Most of the Directors are indeed very distinguished and have reasonable amount of administrative experience. And a few who have not performed, would get selected in the modified scheme as well.
But, two things will happen if Board takes the role of selecting a panel of 3, out of which MHRD must select one. One, MHRD delays the whole process in a large number of cases. For example, a large number of NITs were without a full-time regular Director for several months. The boards will not delay sending the list, one hopes. Second, there have been many instances of Directors spending more time in Shastri Bhavan (MHRD offices) than on campus. With this change, the probability will be higher that Directors will feel more accountable to the board than the ministry.
Further, if we look at the system of selection of Directors in recent times, MHRD usually bunches multiple appointments. If they have to select 10 Directors, they will short-list only 15 candidates, and do a joint interview of all 15, and then take a decision on which 10 to be selected and which NITs they should be sent to. Earlier practice was to shortlist 8-10 candidates for each position of Director, and hold the interviews/discussion separately for Director of each Institute. But with increase in the number of institutes, this is no longer practical. This effectively means that the shortlisting becomes extremely important, which is not good.
Also, the board has internal representation in terms of two faculty members. It is important that the internal stake holders have at least some say during the selection process of the Director.
A process at the level of board is also likely to be more transparent.
So once IIM Ahmedabad is given this flexibility, we should ask for the same for all other central government institutions.