Corporate India seems to have ganged up to push back the separation of the positions of chairman of the board and the operational head, CEO/managing director (MD) by listed companies. The current deadline for implementing these provisions, mandated by Securities and Exchange Board of India (SEBI) by an amendment made in May last year of the ‘Listing Obligations and Disclosure Requirement’, is March 31, 2020.
The SEBI provisions also say the chairperson should be a non-executive director and not related to the MD or CEO.
The object is to bring in international best practices to avoid concentration of power in the promoters and owners, who designate themselves both chairman and MD/CEO. The separation of power is also to safeguard the interests of shareholders by ensuring professional management. Unfortunately, after a blitz of criticism by owners and industry bodies, the government is now signalling a possible postponement.
INDIA INC’S OPPOSITION
At last count, of the top 500 companies, the chairperson and MD/CEO are the same individual in 162 entities. In 52 companies, the chairperson and managing director/CEO are related. Mukesh Ambani of Reliance Industries, Rahul Bajaj of Bajaj Auto and Sanjiv Mehta of Hindustan Unilever are some of those who continue to hold dual posts. Some of the biggest PSUs – Indian Oil, ONGC and Coal India – too continue to flout this provision.
A section of India Inc has been opposing these provisions saying these are “western practices” and need not be imported into India where capitalist enterprises are still largely family-run businesses. Moreover, unlike corporate enterprises abroad where chairmen and chief executives have very little personal stakes in the company, Indian owners still hold large equity. Rahul Bajaj has pointed out recently: “If an owner holds significant percentage of equity in a company and is not allowed to pass on the reins to his family member, who will he hand over the reins to?”
Not all can be tarred with the same brush. Rishad Premji, son of Asim Premji, and promoters of IT giant Wipro, as well as Mahindra and Mahindra (M&M) chairman, Anand Mahindra, both have said that they will, effective April 1, 2020, move to the post of non-executive chairman.
While there is pressure in family-run businesses for hands-on management by owners/promoters, it defies the imagination why state-run organisations like State Bank or Power Grid Corporation continue to hand on to the merged designation of ‘CMD’. Shouldn’t the government ne setting an example?
INTERNATIONAL PRACTICE
The ‘separation’ principle has evolved through a combination of corporate practice and legislated codes. In the UK, 95 per cent of all Financial Times Stock Exchange (FTSE) 350 companies adhere to the ‘split’ principle. It was first advocated in 1992, and later crystallised by an Act of the Legislature in 2012. The ‘Combined Code’ as it is known says: “There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility.”
The UK model is largely followed by Germany, the Netherlands, South Africa and Australia. In the United States though, the practice has been to combine the two posts, but recent scams like the Enron Bankruptcy and the collapse of Lehman Brothers in 2008 has raised the cry for better corporate governance. Splitting the two posts has therefore gained ground and in recent years a host of major corporations – Boeing, Dell, the Walt Disney Company and Oracle – have all split their top posts. Today a little more than one-third of the US companies adopt this model.
In India, there has been nearly two decades of work on codifying the ‘separation’. SEBI’s Consultative Paper in 2009, first proposed splitting the top posts drawing heavily on the international best practices outlined by the think-tank Organisation of Economic Cooperation and Development’s (OECD) report, ‘Corporate Governance and the Financial Crisis’.
The report had concluded that the separation of CEO and chair of the board is a good practice but should not be mandated. This line seems to have been adopted when passing the Companies Act 2013, where for the first time Parliament unequivocally separated the position of the chairman of the board and the CEO in Section 2013 of the Act. To keep it voluntary though, an escape clause was provided allowing a waiver if the articles of association of the company provided otherwise.
To plug these ambivalent provisions, SEBI formed a committee under the chairmanship of Uday Kotak in June 2017. The committee’s recommendations for making it mandatory to split the top posts were ultimately adopted by SEBI in May last year. The Satyam Scam earlier, and the collapse of IL&FS last year have shown that those who we trust for good corporate governance have often failed their investors and shareholders. Voluntary norms thus have no meaning, and therefore need to be mandated.
In the short-term, family run businesses will have problems, but they will adjust. In the long run, India Inc and all its stakeholders stand to benefit. SEBI and the union government should not waver in its implementation.