SEBI has blinked once again. In the face of a sustained campaign by family-run corporates, it has thrown in the towel and decreed the separation of the posts of chairman and CEO/MD — due to kick in from 1st April, this year — will now be ‘voluntary’.
Market regulator Securities & Exchange Board of India (SEBI), in a rather unabashed ‘reasoning’ for its pull-back, cites “unsatisfactory levels of compliance achieved so far with respect to this governance reform” and “constraints posed by the prevailing pandemic”.
There couldn’t be a more specious argument. To justify bad compliance as a reason for the withdrawal of the provision, SEBI says just 54% of the 500 top companies have complied so far. If laws and rules are made based on who is willing to comply with them ‘voluntarily’, then we are signalling the law of the jungle is near.
Good corporate governance is something everybody pays lip service to, but is reluctant to implement. Ditto for SEBI. The market regulator set up a Committee on Corporate Governance in June 2017 under the chairmanship of leading banker Uday Kotak with the aim of improving the standards of corporate governance of listed companies in India.
The Kotak Committee submitted its Report in October 2017 recommending various changes for listed companies, including maintaining a minimum number of directors on the board, strengthening the role of independent directors, etc. Perhaps, the most important of its recommendations was that listed entities with more than 40% public shareholding should separate the roles of chairman and MD/CEO from April 1, 2020.
Better governance standards
SEBI implemented most of the 91 Kotak committee recommendations in March 2018, either in full, or in modified form. In the case of separation of posts of chairman and CEO/MD, it implemented it for the top 500 companies by market value instead of those with 40% or more shareholding. The companies were given time till April 2020 to implement the proviso, but in the face of opposition, the deadline was further postponed to April 2022.
In the United Kingdom, in adherence to the UK Corporate Governance Code, about 95% of all Financial Times Stock Exchange (FTSE) 350 companies have implemented the principle of separation of roles. In the US, there has been resistance. Microsoft, in 2016, went against the grain by appointing its CEO Satya Nadella as chairman after the departure of the previous incumbent John W. Thompson. However, by mid-2021, about 60% of S&P 500 companies in the US had separate CEO and chairman positions. This is an increase from 55% in 2020 and 37% in 2011.
The obvious advantage of separation is that it introduces a system of checks and balances. When the posts are held by one leader, there is always a potential conflict of interest. The CEO runs the company and the chairman runs the board, one of whose responsibilities it is to monitor the CEO. If the chairman and the CEO are one and the same, it is hard for the board to criticise the CEO or to express independent opinions. Separating the two roles is, therefore, essentially a check on the CEO’s power.
Family businesses
In opposition, some of the big companies see this provision as undue interference in a company’s internal affairs. The Confederation of Indian Industry (CII), in its submission to SEBI, called it a case of “over-regulation”. On balance, the separation of the two posts is the more sensible- it allows collective leadership. A survey in 2020 by the Chartered Financial Analysts (CFA) Institute found overwhelming support among its 3,200 members for the principle of separation.
So where is the opposition coming from? It is mainly from the top echelons that are reluctant to divest family control in any away. The press release by SEBI concedes as much when it says the market regulator revised its view to enable “the companies to plan for a smoother transition.”
As many as 150 big listed companies currently have the same person as chairperson and MD/CEO. Most of these are family-run houses where the patriarch is all in charge. Some of them include Mukesh Ambani of Reliance Industries, Gautam Adani of Adani Ports, Sajjan Jindal of JSW Steel and Sanjiv Bajaj of Bajaj Finserv.
In the face of such heavy firepower, SEBI could hardly hold on to its position! And where the government should have stood for better corporate governance, Finance Minister Nirmala Sitharaman nudged the market regulator telling it to address “the concerns of Indian industry”.
Most of the big ‘family’ corporates don’t want these changes as they have skirmishing scions to deal with. The one-person-one post rule in fact would have forced these promoter families to make early succession choices that would lend itself to both, peaceful coexistence internally and better, long-term, corporate governance. An opportunity has been lost.
Splitting of chairman & MD role at will
Just 54% of top 500 companies complied. If laws and rules are made based on who is willing to comply with them ‘voluntarily’, then we are signalling the law of the jungle is near.