SEBI’s decision to make the separation of Chairperson and Managing Director posts for the top 500 listed companies “voluntary”, as opposed to mandatory earlier, may have India Inc breathing a sigh of relief. When the Uday Kotak Committee on Corporate Governance recommended this in 2017, it had asked the regulator to set an April 1, 2020 deadline for companies with a 40 per cent public shareholding to comply with it, and an April 2022 deadline for all listed companies to fall in line. But despite applying it to the top 500 listed companies alone and extending them time until April 1, 2022, SEBI found that compliance level was no more than 54 per cent. In fact, the change in law did not make much of a difference to compliance, with 50.4 per cent of the firms already compliant in September 2019. While separating the Chairperson and MD roles offers positive spinoffs on corporate governance, India Inc doesn’t appear ready for this change yet. SEBI has thus been pragmatic in turning it into a aoluntary practice for now.

The Kotak committee had advanced several logical arguments in favour of the CMD separation. It argued that endowing two different people with the powers of Chairperson and MD, would provide a balanced governance structure by reducing excessive concentration of power in one individual. Different people manning these posts would also ensure that Board-related tasks were not neglected by an acting executive bogged down by day-to-day affairs. Given that a company’s MD/CEO is tasked with taking tactical and strategic decisions for its growth, and the Board’s role is to ensure that he or she doesn’t cut corners on governance, separation also avoids a conflict of interests. But while the arguments are sound in theory, there are practical difficulties in implementing them. In India, unlike in other developed markets, most listed companies are family-founded and still feature promoter stakes of 50 per cent plus. Controlling shareholders who have nurtured their businesses from the ground up are unlikely to cede overarching powers to a non-executive Chairperson. Nor is India home to a large pool of experienced corporate executives with cross-functional leadership experience and deep sectoral knowledge required to take the chair in boardrooms. Listed companies have trouble even in filling independent director positions on Boards with persons of competence and integrity. There’s also no empirical evidence in India that Board-managed, professionally run companies deliver better governance. Recent revelations on how NSE’s professional MD acted beyond her powers while the marquee Board stood by mutely, proves this.

But India Inc needs to recognise that it has won only temporary reprieve on this issue. As companies scale up, a dilution of promoter stakes in favour of institutional and public investors is inevitable. Globally, it is the pressure applied by institutional shareholders that prompts large corporations to separate their CMD roles for better governance and market valuation. It may only be a matter of time before the same market forces nudge Indian companies to adopt this global best practice.

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