Opinion

It’s countdown to splitting CMD posts

R Anand | Updated on April 13, 2021

Ushering in change   -  Warchi

India Inc must work towards separating the roles of the chairman and MD in right earnest to improve governance

The SEBI Chairman recently said that the posts of Chairman and Managing Director (CMD) need to be split from April 1, 2022. He has also highlighted that “Separation of the roles will reduce excessive concentration of authority in a single individual”.

The next statement is equally powerful: “The underlying idea for such a separation is not to weaken the position of the promoter but to improve corporate governance”. The top 500 listed companies should get ready with the implementation plan. The splitting of the posts is among the several moves taken by SEBI to improve corporate governance. What are the key issues that need to be addressed here?

Centralised power of CMD

When a person occupies both the posts, he is the virtual power centre. Nothing in the company can be decided without the knowledge of the CMD. In board matters he not only decides the agenda items but also answers all the questions and issues arising thereon. So the buck stops with him/her. Most Articles of Association provide for a casting vote to the chairman and to this extent the CMD has two votes when there is a deadlock. But the issue has come up for re-examination in the light of recent corporate failures and scandals.

Is over-centralisation of control with one person the cause of the problem? Have other directors, including independent directors, been mute spectators where CMDs have ruled the roost? These are questions crying out for answers.

Merits of splitting

Though not defined in the Act, based on the Model Articles of Association, a chairman has powers under the common law, such as: power to preside over the meetings, bring discussion on any question, and power to adjourn the meeting if necessary under circumstances.

The chairman, in reality, is the effective captain of the team and in the current context his roles and responsibilities are onerous. Even in the case of a non-executive chairman, the liabilities are the same as that of an executive chairman or that of a chairman and managing director. It is no longer about dealing with the agenda items and ensuring that minutes are properly recorded. The chairman also intervenes and takes a decision when conflicting viewpoints emerge.

The stature of the individual plays a significant role in shaping the way a chairman conducts the meetings. Similarly an all powerful MD used to having a sway over the board can be put to test by a chairman who can not only exercise his authority but also have the proverbial last word on the subject.

This is exactly where the splitting of the posts will help to achieve the right balance in decision making.

So, when the posts get split between two persons, it paves the way for collective wisdom as against centralised decision making.

The chairman, who is a non-executive, will have absolute command over the agenda items and will dictate the course of board meetings. The MD, in this context, will be subservient to the chairman.

While routine decisions do not pose any problems, it is decisions like (a) Related party transactions, (b) Diversification into new lines of business, and (c) Appointment of key managerial personnel that will require a chairman and an MD to have an understanding before they come up to the board. Even if there is some disagreement, it is useful to present both sides to the board to arrive at the right decision.

Corporates have to bite the bullet post March 31, 2022 since SEBI has mandated it after giving two years notice.

One way to get around is to bring in a ‘Convenient’ independent director as a non-executive Chairman with the promoter MD still calling the shots. This will be in adherence to the regulations by the letter of the law but not in spirit.

Having said that judging by the experience of the conduct of independent directors so far, the regulator will up the game and monitor how this split in roles works on the ground.

Global trend

The UK and Australia have moved in the direction of separating the two posts as have Germany and the Netherlands.

The trend across the globe seems to be more in favour of splitting and hence the timing of the decision is appropriate in the Indian context.

Enhancing the effectiveness of the board is the most vital link in improving the overall corporate governance agenda.

The steps taken by SEBI in improving the role of independent directors and the move to split the CMD posts will undoubtedly improve the governance matrix.

Corporate India needs to take this up in right earnest and not try and ‘game the system’ that would defeat the objective.

The writer is a Chartered Accountant

Published on April 13, 2021

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