During the annual post-Budget interaction with FICCI, the Finance Minister’s response to concerns about mandatory split in the role of Chairman and MD re-affirmedthe government’s commitment to consultation.

Many laws have been drafted, amended and repealed over the last eight years only after active consultation amongst shareholders. And true to the spirit, the Finance Minister has advised SEBI to give a hearing to industry on this requirement.

Indian companies take pride in their superior governance practices and are constantly raising the bar. Strong governance practices have held Indian companies in good stead, helping them attract foreign investment from a wide array of investors. The Indian Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations have continuously evolved over the past years and kept pace with global practices.

India’s corporate governance landscape is slated to undergo a paradigm shift at the onset of the next financial year when the requirement to separate the offices of Chairman and CEO becomes mandatory for top 500 listed companies. SEBI’s directive that chairman of the board shall be a non-executive director, who shall not be related to the Managing Director or CEO, was to become operational from April 2020. However, its applicability was deferred for two years.

The pandemic made it difficult for companies to ensure timely compliance with many regulatory requirements. It is indeed commendable that the policy-makers granted many relaxations in timelines over the last two years and greatly improved the ease of doing business by accelerating the transition to digital mode. However, as the cut-off date draws near, Corporate India is once again confronted with the unacceptable proposition.

While the stated objective behind this provision is to offset concentration of authority in any one individual on the board of directors; its implementation may cause disruption in the manner companies are governed and there is a strong case for review of the same.

There does not seem to be any conclusive evidence to suggest that separation of roles would lead to effective board leadership, improve governance or benefit the shareholders. On the other hand, it would tantamount to abrogation of shareholders’ democracy and over-riding of their authority to determine how their company’s leadership should be structured. In fact, imposing this artificial separation hinders ease of doing business by interfering in company’s internal processes.

Given existing management and governance structures of some companies, separation of office of Chairman and MD/CEO may not be conducive for ensuring efficiency in decision-making. The leadership arrangements that would drive business excellence are best left to the judgement of the shareholders. In case, shareholders determine that the Chairman should occupy an executive position to be fully able to appreciate and understand company’s business processes and its nuances, there can be no justification for prescribing a non-executive chairman.

In recognition of this principle, the Companies Act 2013 also defers to the will of the shareholders and permits Chairman to hold MD/CEO’s position too, in case the Articles of the Company so provide. Responsible self-regulation with adequate disclosures and accountability is the mantra.

At this juncture, it would also be useful to note that this provision would adversely impact homegrown, family-run businesses which constitute 300 of the top 500 listed companies.

The family patriarch, along with other members of the family, can be credited with nurturing the business into resilient, growth-generating entities, which more often than not, have delivered stronger performance than their non-family governed peers. Imposing restrictive clause which mandates that non-executive chairman of the company cannot be related to the Company’s MD/CEO, would deprive the company of the visionary leadership which has steered the company to success.

The regulatory environment should continue to support entrepreneurial ventures and remove all hindrances to growth. Adequate, well-performing checks and balances already exist under the Companies Act and SEBI (Listing Obligations and Disclosure Requirements) Regulations for driving independent decision making by corporate boards and establishing balance of power.

For example, obligation to have at least 50 per cent directors qualifying as independent, board committees comprising independent directors, special resolutions for critical issues, scrutiny of related party transactions and precluding voting by related parties on such items, exclusive meeting of independent directors etc.

These safeguards omit the need to impose separation of Chairman and MD/CEO. The focus should be on selecting effective board leaders and the one-size-fits-all approach should be replaced with voluntary, contextual and case-by-case affirmative action of the shareholders.

The writer is Director General, FICCI

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