KS Badri Narayanan

At a recent CII event, Ajay Tyagi, SEBI Chairman, re-emphasised the importance of separating the roles of Board chairperson and MD/CEO of a listed company.

Separation of the roles will reduce excessive concentration of authority in a single individual. Having the same person as the Chairman and the MD brings in a conflict of interest, he said, adding that: "The underlying idea for such a separation is not to weaken the position of a promoter, but to improve the corporate governance. The objective is to provide a better and more balanced governance structure by enabling more effective supervision of the management." The proposal was earlier made by the SEBI-appointed Uday Kotak-led committee on Corporate Governance Reforms in 2018.

SEBI has now extended the deadline for complying with this rule by two more years i.e. with effect from April 1, 2022, after taking into consideration the feedback received from India Inc. As at end-December 2020, only 53 per cent of the top 500 listed entities had complied with this provision.

Some genuine fears

While the regulation was a well-intended one, some market experts are still not convinced. According to them, a one-size fits all strategy may not work in every case, and the rigid stance could even ruin the prospects of a company, if it does not get a suitable candidate with industrial expertise. In a niche industry, finding a suitable talent for a separate CEO or MD role could be a difficult task. Even if a company manages to find such a candidate, it may come with a huge cost. Another fear is about maintaining secrecy on important decisions or trade secrets..

'Promoters outperform'

The fear of the experts may not be totally unfounded. A recent study by EMA Partners, a firm that helps companies find suitable executives for local and international businesses, found that family-owned companies have outperformed professionally managed companies in wealth creation.

Between 2016 and 2020, the top 250 listed Indian companies yielded an average negative 2 per cent total return to shareholders (TRS). Family member CEOs have outperformed the market and have created a positive 2 per cent average TRS return while professional CEOs have created an average negative TRS growth of 4 per cent. Total Returns to Shareholders (TRS), is a measure based on increase in share value and dividend paid per share.

"Since the study covers the past five years (2016-2020), including the Covid months, the Rashford method is used, which employs the 60-day average of share price to determine TRS," EMA Partners said.

However, given the state of corporate governance in India, the SEBI decision appears to be prudent. Companies should adhere to the norm for the benefit of all stake holders including minority shareholders. The SEBI Chairman, however, has also acknowledged the role played by promoters.

"Some articles have opined that there is a tendency to portray the promoters in a bad light and that there is too much focus on only one set of stakeholders i.e. minority shareholders. I would like to clarify that we, at SEBI, acknowledge the very important role played by the promoters and entrepreneurs in wealth creation".

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