Top posts in listed firms may cease to be family matters
The Securities and Exchange Board of India (Sebi) may not allow family members, close relatives or related parties of the chairman of a listed firm from becoming managing director (MD), and vice versa, according to a source privy to the development.
At present, several companies have merged the two posts as CMD (chairman-cummanaging director).
When these are split, as proposed by the Sebi-appointed Uday Kotak Committee, holding the two posts by members of the same family will defeat the purpose, leading to an overlapping of the board and management and conflict of interest, said a Sebi source.
The issue surfaced recently when many companies, along with industry bodies, raised apprehensions over Sebi’s new listing regulation that stipulated the chairman of a company will not be executive director or related to the MD/chief executive officer (CEO) as defined in the Companies Act.
According to it, the top 500 listed firms in terms of market capitalisation have to comply with the new provisions by April 1 next year. Bajaj Auto, Godrej Industries, Apollo Enterprises, Adani Enterprises, Jaiprakash Associates, and Jindal Stainless are among the marquee companies that may need to change their existing management and boardroom structures because both the positions in these companies are held by members of the same family.
Sebi is not favourable to concentrating powers in one individual, particularly when the individual is the promoter of the company, said the source cited above.
Opposing the move, the apex industry chambers have submitted their feedback in December to Sebi Chairman Ajay Tyagi, saying the norm could be onerous and would not guarantee effective board leadership.
“Industry feels that the separation of the offices of chairman and MD may not be conducive to efficiency in decision-making. Companies should be permitted to select the structure and leadership that best fits their business needs,” said Dilip Chenoy, secretarygeneral, Federation of Indian Chambers of Commerce and Industry (Ficci), in a letter to Tyagi.
He said, “A presumption that (only a) non-related chairperson can be in the chair assumes that only such boards can safeguard governance, whereas there is no conclusive evidence that suggests that this would guarantee effective board leadership or improve corporate governance.”
According to Ficci, the focus instead should be on the effectiveness of the prospective chair of the board and whether the person possesses the necessary qualities. “(The matter) should be left for shareholders to decide. The decision needs to be made based on a voluntary, contextual, case by case approach through affirmative action by the shareholders. Prescribing a ‘one size fits all’ approach may not be appropriate,” Chenoy said in the letter. The Confederation of Indian Industry (CII) also feels the decision should be left to shareholders.
“Requiring the chairman and MD should not be related could be onerous and moreover may not be necessary, especially in the light of the checks and balances already present to counter any potential ill-effects of such a situation. Such a requirement is not even mandatory in many advanced economies. The decision is left to the will of the shareholders,” the CII said.
The CII said the board of the company was best-placed to determine whether the chairman and MD should be the same person. Nevertheless, the new rule can help achieve a better and more balanced governance structure by enabling more effective management supervision.
Sebi (Listing Obligation and Disclosure Requirement) rules do not mandate any separation. In many cases, it is the head of the promoter group (the family patriarch) who is CMD of the company. In Reliance Industries, Mukesh D Ambani is CMD; so is Pawan Munjal of Hero MotoCorp. Similarly, Wipro has Azim H Premji as both executive chairman and MD. In some cases, the chairman is also CEO of the company.
The Kotak Committee was of the view that the issue of whether to separate the roles of chairperson and CEO/MD, while not a recent phenomenon, is a growing concern in corporate governance worldwide.
The separation of powers of the chairperson (i.e., the leader of the board) and CEO/MD (i.e., the leader of the management) is seen to provide a better and more balanced governance structure. The committee cited global practices and said in some jurisdictions like the UK and Australia, this debate had tilted in favour of separating the two posts. In countries such as France and the US, the issue continues to be vigorously debated. Countries with a twotier board structure, such as Germany and the Netherlands, separate the top board and top management roles.