A recent amendment in the SEBI LODR Regulations requires that chairmen of listed companies shall not be executive directors or related to the managing director/CEO. This will apply to the top 500 listed companies in terms of market capitalisation. They will have to ensure that this change is made not later than 1 April 2020.
The proposed change looks good on paper and may be well intentioned too. In principle, it is wrong to concentrate power in one person’s hands in large companies. However, this particular requirement does not make sense for Indian companies. It will disrupt board structures and is actually counterproductive in the Indian context -- it will actually harm the company’s corporate and business image.
While the genesis of this can be traced back to norms of corporate governance in the West, the immediate trigger for this amendment is a recommendation of the Kotak Committee’s report on corporate governance, released late last year.
The report suggests elaborate reasons and advantages, giving almost wholly the western context of separating the post of the chairman and the CEO. It quotes, for example, the report of the Cadbury Committee that says: “…given the importance and the particular nature of the chairmen’s role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power”.
That makes a lot of sense in the West, particularly since a concentration of power through such a combination of roles resulted in scams and mismanagement. In India, it does not make any sense, as we will see herein.
The significant feature regarding the control of companies in the West is that they are widely held. Persons in control including the board members have low holdings even if one counts all their holdings together. In contrast, almost as a rule, companies are controlled by a promoter family, who hold a controlling holding in the company and have full operational control. Public shareholders know this and even prefer it that way.
Usually, in India, it is the head of the promoter group (typically, the family patriarch) who is the chairman and thus the face of the group. Thus, the Bajaj group has Rahul Bajaj as the Chairman and the Reliance group has Mukesh Ambani. Often, the chairman may also be the CEO.
In recent years, though many promoter executive directors get paid well, the predominant return is through an increase in their wealth via a rise in the share value of their holding in the company. Hence, occupying the post of CEO is really about giving a realistic picture of a person in charge or who heads the company. It is not for earning significant money or for needing real and formal powers of management.
Saying that there would be concentration of power in the hands of a single individual if the chairman/managing director post is combined does not make sense in India. It is the promoter group as a whole who exert control over the company. The family members of the promoter group make up a significant part of the board. Where it is a first generation promoter company, the founder is often the chairman and the managing director. Hence, the principle that there should not be a concentration of power in one person’s hands goes against the culture, tradition, and reality in India, of how companies are founded and governed over generations.
Then there is also the question of whether the chairman has any real power in a corporate setup. The Companies Act, 2013, and the SEBI Regulations that govern such companies do not give any real power to the chairman. He has very limited administrative powers of, say, chairing and conducting meetings, signing the minutes book, among other things. He may also address the shareholders’ meeting. But none of these give even the slightest of substantial powers to him. Even casting a vote, whereby he can break a deadlock with an additional tie-breaking vote, is rarely given to chairman these days.
In contrast, in public perception, the chairman becomes the business, corporate and often the brand ambassador to the public. It makes sense if this is the founder/lead promoter who actually runs the company. Insisting that a person who is neither the CEO, nor related to him, should be chairman will result in him being a person who has no real say in the company. This does not help any cause and will be counter-productive. It results in a commercial and image loss, and even confusion as to why such an unrelated, powerless person is the chairman.
The amendment made is thus ignorant of Indian law and realities, and will cause considerable inconvenience and loss to companies. It needs to be reversed.
(The author is a chartered accountant)
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Updated Date: Sep 06, 2018 07:26:00 IST