Distribution of MD-CEO roles: SEBI’s decision to make it voluntary is a good step

In a detour from its earlier decision, the Securities and Exchange Board of India (SEBI) on February 15 returned compliance with the requirement to split the roles of Chairman and Managing Director (MD)/Chief voluntary management (CEO) for listed companies.

Earlier, SEBI had mandated the top 500 publicly traded companies by market capitalization value to separate CEO and CEO. The original deadline of April 2020 has been extended to April 2022 in light of several industry representations and the low level of compliance by listed entities.

SEBI’s decision to split the roles was based on recommendations from the Kotak Committee, which was formed on June 2, 2017, under the chairmanship of Uday Kotak.

The committee was made up of various stakeholders from government, stock exchanges, industry, and legal and professional universities. The committee was required to provide its recommendations for improving corporate governance standards and it suggested some modifications and additions to the existing provisions.

Main recommendations

Some key suggestions included increasing the minimum number of directors on the board, female director tenure, higher quorum requirements, increasing the minimum number of independent directors and their eligibility, splitting roles key and increased meetings and governance of related party transactions. These suggestions aimed to address tedious compliance issues, ensure inclusive decision-making, protect minority interests, inspire accountability, and provide a balanced governance structure.

It is relevant to note that the recommendation to split the roles is inspired by the Cadbury report (The Financial Aspects of Corporate Governance), 1992, presented to the European Corporate Governance Institute. It is based on the principle of apply and explain rather than apply or explain.

Companies like Mahindra & Mahindra, Sun Pharma, Ultratech and Asian Paints have followed SEBI’s mandate to divide key management roles. The intent behind this proposal was to provide a structural advantage to the board of directors to act independently of management and shareholders. Overlapping board and management leadership risks causing overlap and blurring lines.

However, the execution of the mandate could have disrupted the functioning and governance of the established companies. Big companies like Bajaj, Adani Ports, Reliance, Bharti Airtel and JSW Steel did not follow the mandate. Given the majority ownership and family control of the promoters, splitting these roles could create uncertainty about future value creation for stakeholders. Thus, most of the Indian companies controlled by developers require that the positions of chairman and managing director are intertwined.

SEBI changed its mind after reviewing the compliance status of the top 500 listed companies, where it observed that from 50.4% of companies in September 2019, the level of compliance had risen to 54% by December 31, 2021.

According to SEBI, a mere 4 percentage point increase in compliance over two years made it difficult to expect the remaining 46% of companies to be compliant over the next two months.

However, there does not appear to be compelling evidence that the separation of roles results in effective board leadership, better governance, or shareholder value. On the other hand, it would replace shareholder participation and supplant their ability to choose how their company’s management should be formed. Moreover, the application of this additional obstacle harms the ease of doing business by interfering with the internal operations of the company.

In pursuit of this principle, the Companies Act 2013 also defers to shareholders’ resolution and allows the chairman to serve as chief executive officer/managing director, if the company’s articles of association so provide. At this point, it should also be noted that this clause would have a detrimental effect on domestic family businesses, which account for 300 of the top 500 listed companies.

In conclusion, SEBI should foster entrepreneurship and remove any barriers to progress. There are currently sufficient checks and balances in place under the Companies Act and SEBI regulations (registration requirements and disclosure requirements) to ensure that boards of directors make independent decisions and maintain a checks and balances .

SEBI’s decision to make segregation of roles voluntary prioritizes positive shareholder action and emphasizes competent board leadership rather than a unitary approach.

The writers are legal professionals

Published on

April 01, 2022

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