By Jayant M. Thakur
Chartered Accountant
Background
A recent amendment to the SEBI LODR
Regulations 2015 requires that Chairperson of a listed company shall not
be an executive director or related to the Managing Director/CEO. This applies
to top 500 listed companies in terms of market capitalisation. Such companies
will have to ensure the change is made not later than 31st March
2020.
This change looks good on paper as in
principle, it is wrong to concentrate power in one person / family in large
quoted companies in India. However, I submit that this particular requirement
does not make sense in Indian context as many large companies are family
controlled. It will disrupt board structure of such companies and is actually
counter productive. It could also harm the company’s business and public image.
While the genesis of this can be traced back
to norms of corporate governance in the West, the immediate trigger for this
amendment is a recommendation of the Kotak Committee’s report on corporate
governance released in October 2017. The Companies Act, 2013, has certain
provisions governing this, but they are not as restrictive and absolute as
these new provisions under the SEBI Regulations. Let us thus review the
provisions under Companies Act, 2013, what the Kotak Committee has recommended
and finally what are the new provisions and their implications.
Provisions regarding split of post of
Chairman/CEO under the Companies Act, 2013
Section 203 of the Act, which applies to
certain specified companies, provides certain restrictions on appointing a
Chairperson who is also the MD/CEO. The proviso to this section, which contains
this provision, reads as under:
“Provided that an individual shall not be
appointed or reappointed as the chairperson of the company, in pursuance of the
articles of the company, as well as the managing director or Chief Executive
Officer of the company at the same time after the date of commencement of this
Act unless,—?
(a) the articles of such a company
provide otherwise; or?
(b) the company does not carry multiple
businesses:?
Provided further that nothing contained
in the first proviso shall apply to such class of companies engaged in multiple
businesses and which has appointed one or more Chief Executive Officers for
each such business as may be notified by the Central Government.”
However, as can be seen, this restriction is
not absolute. A company, can, for example, provide a relaxation in its articles
permitting such a dual post.
Kotak Committee on corporate governance
The Kotak Committee has recommended several
changes in the provisions relating to corporate governance.
The Committee gives elaborate reasons why
the post of Chairman and CEO should be segregated. Referring to a global trend
on this, the report talks of the advantages of this in the following words:
“The separation of powers of the
chairperson (i.e. the leader of the board) and CEO/MD (i.e. the leader of the
management) is seen to provide a better and more balanced governance structure
by enabling better and more effective supervision of the management, by virtue
of:
a)
providing a structural advantage for the board to act independently;
b)
reducing excessive concentration of authority in a single individual;
c)
clarifying the respective roles of the chairperson and the CEO/MD;
d)
ensuring that board tasks are not neglected by a combined
chairperson-CEO/MD due to lack of time;
e)
increasing the possibility that the chairperson and CEO/MD posts will be
assumed by individuals possessing the skills and experience appropriate for
those positions;
f)
creating a board environment that is more egalitarian and conducive to
debate. “
The Report of the Cadbury Committee is also
quoted where it was stated, “…given the importance and the particular nature
of the chairmen’s role, it should in principle be separate from that of the
chief executive. If the two roles are combined in one person, it represents a
considerable concentration of power”.
However, no comparative study has been made
in the Indian context. It is presumed that what is good for the West, is best
for the rest!
The Report, however, provides for a phased
out implementation of this recommendation.
Amendments to the SEBI LODR Regulations
2015
SEBI has, after due consideration, amended
the Regulations by inserting clause (1B) to Regulation 17. This new clause
reads as under:
“(1B) With effect from April 1, 2020, the
top 500 listed entities shall ensure that the Chairperson of the board of such
listed entity shall—
(a) be a non-executive director;
(b) not be related to the Managing Director or
the Chief Executive Officer as per the definition of the term
“relative” defined under the Companies Act, 2013:
Provided that this sub-regulation shall not be applicable to the listed
entities which do not have any identifiable promoters as per the
shareholding pattern filed with stock exchanges.
Explanation.—The top 500 entities shall
be determined on the basis of market capitalisation, as at the end of the
immediate previous financial year.”
As can be seen, the new provision goes
beyond the recommendation of the Kotak Committee and it is now an absolute
requirement that this post should be segregated, and the chairperson should not
be related to the Managing Director/CEO.
Implications of new provision
The Chairman should not be an executive director,
nor should he be related to the Managing Director or CEO. Effectively, this
means that the Chairperson and the MD/CEO will not be from the same family.
Thus, for example, it would not be possible, for the father to be the Chairman
and the son to be the Managing Director. This will have implications for Indian
companies which are basically family controlled and / or family managed.
Do these new provisions make sense for
India?
The significant feature of companies in the
West is that the shareholding is widely held and the CEO is a professional
manager. Persons in control including the Board members normally have
insignificant holding even if their holdings are taken together. A widely held
shareholding could make it difficult for shareholders to get together and
exercise close control over the management. Thus, it matters how the Board of
Directors is structured. In such a situation for the more the checks and
balances, the better it is, for corporate functioning. Having the same person
as chairperson and CEO does result in concentration of power considering that,
as chairperson – CEO controls operations and influences. The issue is: Does
this provision have any relevance in Indian conditions? The answer, it is
submitted, is in the negative as most of large listed companies in India are
controlled by `promoter family’. The family normally has significant holding
and hence full operational control. The public shareholders know it and even
prefer it. Usually, it is the head of the promoter group (typically, the family
patriarch) who is the chairperson and thus the face of the group. For example,
the Bajaj group has Mr. Rahul Bajaj as the chairperson and Reliance group has
Mr. Mukesh Ambani. However, in India, the chairperson is also the CEO. This
really helps in giving a realistic picture of who is / or are the persons in
control of the company. Again, if the company is a first generation promoter
company, the chairperson and managing director is often the Founder – thus
segregating the posts of chairperson and managing director does not make sense
in India. Further the restriction that the relative of the managing director
cannot be chairperson is not relevant in view of fact that the Promoter Group
exerts control over the company. Moreover the family members of the Promoter
Group usually make up a significant part of the Board. The financial
institutions at times prefer this as they seek personal guarantees of the
promoters.
Hence, the principle that there should not
be concentration of power in the promoter family goes against the culture,
tradition and reality in India of how companies are founded and have been
governed over generations, for example, Birlas, Goenkas and many others. What
is needed in India is ensuring checks and balances over unbridled control by
the promoter group.
Strangely, though, the new requirement does
not apply to companies who do not have identifiable promoters. I feel in
companies which have no identifiable promoter the management should stand split
between the chairperson and the CEO. Further the provision should be in
consonance with section 203 of the Companies Act. It would be relevant to have
a chairperson who is not a relative of the CEO or the executive directors who
are actively managing the company.
Does the
Chairman really have any substantial powers under law in India?
Thus the real question then is whether the
chairperson who is not a relative will have any real power in the corporate
setup in India. The answer, I submit, is in the negative. Further the Companies
Act, 2013, and the SEBI Regulations that govern 500 top companies do not give
any real power to the chairperson. Normally a chairperson cannot and does not
take any significant/substantive decision.
The chairperson has limited administrative
powers of, say, chairing and conducting meetings, signing minutes book, etc.
Address the shareholders’ meeting. Even in family companies if the chairperson
is a patriarch he is a guide and has a balancing influence. Even the casting
vote, whereby he can break a deadlock, is rarely used.
In contrast, in public perception, the
chairperson is the corporate brand ambassador of the company. It makes sense if
the chairperson is from the founder/and or lead promoter group who actually
run, control and manage the operations. Insisting that the chairperson should
neither be the CEO, nor related to him, will result in making a chairperson who
has no real say in the company.
This would not make any difference in
corporate governance. Hence, the Kotak Committee rightly stops at recommending
that the post of CEO and chairperson should be split.
Conclusion
It is surprising that the corporate circle
has not reacted. However, it will not be surprising that these provisions will be
complied merely in letter, (box ticking), without any substantive benefit.
