Splitting chairman and CEO post: A tricky terrain!

It’s now mandatory that role of chairman and chief executive officer (CEO) or managing director (MD) should be separated to avoid excessive concentration of power in the hands of a single individual.

This rule is to be implemented in phases -- From April 1, 2020, for top 500 companies and from April 1, 2021, for top 1,000 firms. The SEBI (Securities and Exchange Board of India) has given ample time to the industry to realign their board structures to comply with this requirement and the industry is surely adjusting -- though grudgingly.

As of July 2018, a good 291 NSE listed companies out of the top 500 got dual positions in one and had to separate them whereas as on June 30, 2019, the number came down to 115.  That’s a good progress.

While making the recommendation to separate the positions, the Uday Kotak Committee relied on observations of Cadbury’s UK committee which said “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”.

The perception that chairman is very powerful is a legacy the corporate world is carrying from colonial days. The family value system only adds to that perception. In family dominated entities, as youngsters take charge of executive functions, elders are moved to the chairperson’s position as a mark of respect. The same value system plays out in any discomfort for separation of chairman and CEO posts.

Legally, at best, the chairman is first among the equals. All executive powers reside in the CEO of the company and therefore, he or she is in a position to command all corporate resources. The law does not chalk out any role or bestow any responsibility on the chairman except that “The chairman shall exercise absolute discretion with regard to the inclusion or non-inclusion of any matter in the minutes on the grounds specified in sub-section and can preside over the meetings… in an orderly fashion”.

The chairman may have a casting vote to resolve a tie in voting, if any. However, considering the responsibility vested with independent directors, they are becoming an important pressure group within the board, thus constraining powers of executive directors.

With shareholder and regulatory activism on the rise, independent directors are more and more recording dissent when required. This is turning out to be an effective check on chairman’s discretion in determining minutes.

The question to ask: Is the chairman legally so powerful? It is interesting to note that the Companies Act and Listing Regulations recognise two types of chairman -- Executive Chairman and Non-Executive Chairman. The law also recognises the scenario where a company may not have a chairman.

The model Articles of Association (Table A, Companies Act) lays down a few more guidelines. “The board may elect a chairperson of its meetings and determine the period for which he is to hold office. (ii) If no such chairperson is elected, or if at any meeting, the chairperson is not present within five minutes after the time appointed for holding the meeting, the directors present may choose one of their number to be chairperson of the meeting,” it states.

A random study of top few companies suggests that the rule of law and model articles are adapted by most of them -- They have the flexibility of electing a chairman for every meeting instead of electing a him or her for a specific tenure.

According to the amended Listing Regulations, with effect from April 1, 2020, the top 500 listed entities shall ensure that the chairman of the board of such listed entity shall (a) be a non-executive director and (b) not be related to the MD or the CEO.

It appears that this regulation is applicable only in cases where the company has elected a chairman for a given tenure. If this presumption is true, a very simple way of separating the two positions is not to elect a person to hold the office of chairman for a certain tenure. Instead, each meeting can elect its own chairman.

This move will be compliant with the regulatory requirements and addresses concerns of both the corporate world and regulators. Under this arrangement, there is no designated chairman. But in practical terms, at every meeting, the same person is elected as chairman of the board. This way, continuity in the office of chairman is ensured. Even corporates need not face the embarrassment of asking the incumbent chairman to relinquish the position.

Most listed PSUs have combined the positions of chairman and MD – it takes effect with a government notification or order. Therefore, the government has to take a call on how to go about the whole process.

There are no serious studies in India that have subscribed to or contradicted the views of the Kotak committee. It is necessary not just to commission a study on this topic, but also to examine the relationship between board structure and corporate performance.