Quick Take

Striking at concentration of power

| Updated on January 21, 2020

File photo   -  REUTERS

Separating the Chairman and MD roles is a good move to raise the governance bar on listed companies and SEBI must not back-track on this rule.

After talking tough on its new governance norms that required top Indian companies to separate their Chairman and Managing Director roles, it is disheartening to see the Securities Exchange Board of India (SEBI) cave in to their demands last week, to defer its April 2020 deadline for compliance.

The top 500 listed companies, over 200 of whom are said to be non-complaint, will now get two additional years until April 1 2022 to fall in line. Requiring companies with a significant public holding to appoint separate individuals in the roles of Chairperson and Managing Director (or Chief Executive Officer) was one of the most significant proposals in the Uday Kotak committee's report on corporate governance submitted to SEBI in October 2017. With SEBI notifying these rules in May 2018, the leading lights of India Inc have had nearly two years to meet them.

Therefore, their claims that they have had too short a time to adjust to the new norms or create a succession plan hold little water.

The truth is that promoters at India Inc have gotten used to wielding disproportionate decision-making powers at listed companies even after they have ceded majority equity stakes to public shareholders, a privilege they’re now loath to let go. There are quite a few sound reasons, enunciated by the Kotak committee, for why the separation of the Chairman and MD posts at listed companies helps raise the bar on governance.

One, given that the Board of Directors of a company headed by its Chairman is supposed to actively oversee the actions of the executive and ensure that top managers act in the best interests of minority shareholders, there’s an obvious conflict of interest in a single person occupying both roles.

Two, merging the Chairman and MD roles leads to excessive concentration of power in the hands of one individual. In the Indian context where a large proportion of listed companies are family run, risks of all-powerful CMDs sacrificing shareholder interests at the altar of their personal ambitions run high. Separating the Chairman and MD posts reins in this risk and makes for a greater diversity of opinions on key management decisions.

Three, even in professionally managed, well-run companies, MDs and CEOs tend to be caught up in operational and tactical decisions that require their day-to-day intervention, leaving little time over for strategic thinking or formulating a long-term direction for the business. Having an independent Board headed by a Chairman can help ensure that strategic decision-making on the company’s behalf is not neglected by a pre-occupied executive.

Four, in the context of family-run businesses, the separation of the two roles can help the appointment of qualified managers in MD/CEO roles while the key shareholder or promoter gets to occupy the non-executive Chairman slot. On this aspect, SEBI must perhaps make qualifications the key eligibility criteria for MD appointments and rethink its eligibility rules based on the relationship with the Chairman.

Given the above merits of the Chairman/MD separation, it is important that SEBI does not back-track on these rules, giving in to pleas from the corporate lobby that they raise the compliance burden and impact ‘ease of doing business’ in India. On the contrary, minority shareholder protection is one of the key aspects that the World Bank factors in while assigning ‘ease of doing business’ rankings for a country and this move will do much to strengthen India’s standing on this parameter.

SEBI must stick to its April 2022 deadline for enforcing these norms on the top 500 listed companies and extended it to listed firms beyond this universe as well.

Published on January 21, 2020

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