by Smriti Wadehra (email@example.com)
Corporate governance standards world-over have highlighted the role of the chairperson in corporate boards of listed entities. There has also been a move recently as to separation of the role of the CEO and the chairperson, such that the person who is executive head of the company (CEO) is also not its supervisory head (chairperson). However, what exactly is the function of the chairperson in Indian laws? Is the chairperson merely the convenor of board and general meetings, or does he/she have a role beyond meetings? In light of the answer to this question – a significant question is, is it necessary for a listed entity to have a permanent board chairperson, or can the chairperson be appointed for each meeting? We have tried to answer this question in the context of Indian and global laws.
Unless otherwise provided in the Articles of Association of the Company, the Companies Act, 2013 (‘CA, 2013’) and Listing Regulations, 2015 do not explicitly lay down provisions mandating the appointment/election of a permanent Chairperson of the Board. However, section 104 of the CA, 2013 provides that either the Chairperson of the Board, or the one of the directors or one of the directors, as the case may be shall act or be elected as the Chairperson of a general meeting. In view of the same, having a permanent chairman is not mandatory, however, having a chairman for board and general meeting is mandatory.
The word “Chairman” is used very loosely in general parlance, however, chairman of companies are of different types depending upon their requirement. Therefore, in order to understand the importance of chairperson in a Company, we have to first understand the reason of appointing chairman and capacities a chairman holds in a Company. Generally, a chairman may be:
a) Chairman of Board;
b) Chairman of General Meeting;
c) Chairman of Company and;
d) Chairman of Committees;
In most of the cases, they are the same, however, they have a thin line of difference between each one of them which has been discussed in a detailed manner below:
Chairman of Board
Usually, the Chairman of the company becomes the Chairman of the Board. However, if the company does not have a Chairman, the Directors elect one of themselves to be the Chairman of the Board and conducts the Meetings of the Board. Further, if no Chairman is elected by the Board or if the Chairman is unable to attend the Meeting, the Directors present at the Meeting shall elect one of themselves to chair and conduct the Meetings, unless otherwise provided in the Articles. Further, the board committees may elect different chairperson for its meetings. Considering the aforesaid, the listing regulations, 2015, also requires a Company to appoint Chairperson for board meeting and different chairpersons for board committees.
Therefore, on conjoint reading of the above, it can be concluded that every meeting of the Board requires a Chairman, however, the Company may not have a chairman on board. To clarify, please note that the provisions of Act suggests for having a chairman for meeting of board therefore it is the discretion of the Company they may appoint a specific individual as ‘Chairman of the Board’ or appoint randomly any director at every meeting of Board as ‘Chairman of the Meeting’. Further all the provisions of law relates to Chairman of the Board and not Chairman of the Meeting i.e. for instance as per the provisions of SS-1:
“Chairman” means the Chairman of the Board or the Chairman appointed or elected for a Meeting.”
Hence, the chairman of general meeting can be either chairman of board or any member as may be selected by members themselves during the meeting.
Further, the Listing Regulations refers to having a Chairperson with respect to examining the composition of the board and appointment of requisite number of IDs in order to have proper composition as:
“17(1)(b) where the chairperson of the board of directors is a non-executive director, at least one-third of the board of directors shall comprise of independent directors and where the listed entity does not have a regular non-executive chairperson, at least half of the board of directors shall comprise of independent directors”
In this case, the composition of the Board is dependent on the designation of the chairman of the board, however, the same shall be applicable only when the Company has a permanent chairman on the board. Accordingly, if the company has a practice of appointing a chairman at the respective board meetings, the condition of the said regulation shall not apply.
Chairman of General Meeting
As per the provisions of Secretarial Standard 2 on General Meetings issued by ICSI provides:
“Chairman” means the Chairman of the Board or the Chairman appointed or elected for a Meeting.”
As per the SS-2 the Chairman of the Board shall take the Chair and conduct the General Meeting. However, in case the Chairman is not present within fifteen minutes after the time appointed for holding the Meeting, or if he is unwilling to act as Chairman of the Meeting, or if no Director has been so designated, the Directors present at the Meeting shall elect one of themselves to be the Chairman of the Meeting. Further, if no Director is willing to take the Chair, the Members present shall elect, on a show of hands, one of themselves to be the Chairman of the Meeting.
Further, the provisions of Section 104 of the Companies Act, 2013 provides:
“Unless the articles of the company otherwise provide, the members personally present at the meeting shall elect one of themselves to be the Chairman thereof on a show of hands.”
Therefore, this suggests that the chairman of the Board appointed as per the Articles of the Company, may chair the meeting of shareholders. However, in case the Company does not have a chairman on board the members present may elect one of themselves as Chairman for that specific meeting.
Accordingly, one may conclude that having a Chairperson on the Board is required considering the role and responsibility and election of a Chairperson of general meeting is a mandatory as per law.
Chairman of the Company
Referring to our aforesaid discussion, we may say that appointment of permanent chairman is a discretionary power of companies, usually exercised to avoid inconvenience of appointing new chairman for the board and general meetings, respectively.
Chairman of Committees
A member of the Committee appointed by the Board or elected by the Committee acts as Chairman of the Committee, in accordance with the Act or any other law or the Articles, who shall conduct the Meetings of the Committee. However, if no Chairman has been so elected or if the elected Chairman is unable to attend the Meeting, the Committee shall elect one of its members present to chair and conduct the Meeting of the Committee, unless otherwise provided in the Articles.
Further, 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 members present may choose one of their members to be Chairperson of the meeting.
The Listing Regulations specifically provides the eligibility for appointment of chairman in specific committees as appended below:
- Audit Committee:
“18(1)(d) The chairperson of the audit committee shall be an independent director and he shall be present at Annual general meeting to answer shareholder queries.
- Nomination and Remuneration Committee
19(2) The Chairperson of the nomination and remuneration committee shall be an independent director:
Provided that the chairperson of the listed entity, whether executive or non-executive, may be appointed as a member of the Nomination and Remuneration Committee and shall not chair such Committee.
Stakeholders Relationship Committee
20(2) The chairperson of stakeholders relationship committee shall be a non-executive director.
Risk Management Committee
21(3) The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.”
Therefore, in case of committees the regulations specifically provides the eligibility for appointment of chairman.
Who can be a Chairman?
Considering the aforesaid provisions, it is clear that designating one person as the permanent Chairman of the company is not mandatory. However, the same needs to be elected in every meeting. Therefore, the company has two options:
- Designate a person or a position as the one to be the chairperson [for ex: the company may state that the MD shall always be the chairperson of the company];
- Appoint the chairperson in every meeting.
Separation of role of Chairman and MD
In this regard, we would also like stress upon the fact that the Act, 2013 does not specifically requires companies to appoint a chairman however Section 203 of the Act, 2013 restricts a Managing Director or CEO to be a chairman of the Company. The provisions lays down:
“Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,—
(a) the articles of such a company provide otherwise; or
(b) the company does not carry multiple businesses:
Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government”
The provisions explicitly provides that the chairman of the Company cannot be the MD or the CEO considering the power and authority involved in both the spheres. Here, the Act provides that if the AoA of the Company permits so and if the Company is engaged in multiple businesses, then the companies may have the CEO and the chairman as the same individual.
On reading the provisions, we understand that the intent of law is to stress on the fact that the chairman of the Company have been entrusted with great responsibilities and powers which designating to an executive director may affect the independence of the board altogether. Further, Managing Director is a person entrusted with substantial powers of management, which makes an MD the decision maker in the Company. Therefore, designating a person a CMD in the Company may not do justice to both roles i.e. the MD may not be able to discharge his responsibilities completely as an MD or as Chairman. However, where the Company is engaged in multiple businesses with more than one MD/CEO in the Company, then in that situation the Company may rethink to designate a person as CMD.
Where the Companies Act, 2013 provided for separation of role of Chairman and CEO the provisions of SEBI (LODR) Regulations, 2015 remain silent on the topic and provided a discretionary requirement. However, the recommendations of Uday Kotak Committee on Corporate Governance clearly provided for separation of role of CEO/MD from the chairman for better governance. The relevant extract of the recommendation is provided below:
“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 by enabling better and more effective supervision of the management, by virtue of:
- providing a structural advantage for the board to act independently;
- reducing excessive concentration of authority in a single individual;
- clarifying the respective roles of the chairperson and the CEO/MD;
- ensuring that board tasks are not neglected by a combined chairperson-CEO/MDdue to lack of time;
- increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions;
- creating a board environment that is more egalitarian and conducive to debate”
Considering the aforesaid recommendations of Uday Kotak Committee on Corporate Governance, the provisions of Regulations, 2015 were amended through the SEBI (LODR) (Amendment) Regulations, 2018 (“Amendment Regulations”) brought in force from 9th May, 2018. By virtue of the said regulations a new sub-regulation was inserted in regulation 17 which states:
“(1B). With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall –
(a) be a non-executive director;
(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013:
Provided that this sub-regulation shall not be applicable to the listed entities which do not have any identifiable promoters as per the shareholding pattern filed with stock exchanges.
Explanation-The top 500 entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.”
The new sub-regulation inserted provides that the chairman of the board has to be mandatorily a Non-executive director and should not be related to the MD or CEO of the Company. Here, the Amendment Regulations, has provided more stringent requirement that the Chairman can definitely not be a executive director i.e. MD or CEO but also he should not be a relative i.e. spouse, children, mother, father etc. of the MD/CEO as per the provisions of section 2(77) of the Act, 2013. The said amendment shall be applicable from 1st April, 2020 on top 500 listed companies. However, the question which arises here is that whether pursuant to this regulation every listed company is required to have a permanent chairman of the Board. The recommendation of the Uday Kotak Committee does not specify such an intention, however, the same is subject to interpretation of the reader. However, in our view, the sub-regulation requires a Company to have a non-executive chairman if the Company has one.
The separation of chairman and CEO or Managing Director is coming from Sarbanes Oxley, and thereafter has been adopted in corporate governance codes of several jurisdictions, including the UK. Its need and relevance to Indian context is quite limited. The term “Chairman” is a decorative position in India. Unlike global boards, chairman does not hold any substantial powers, except the power to convene board and general meetings. If chairmanship is a position without any substantial powers, and therefore, without any special responsibilities, not much can be hoped to be achieved by splitting the two. Hence, in our view, separation of role of MD and chairman shall not have any impact as the requirement may be complied by companies by executive directors giving up the chairman’s role to an independent director and control the company in other ways. Therefore, such requirement may result in a cosmetic change to corporate governance without any intent.
Comparison of role of Chairman in India and in other countries
In general, the role of a Chairperson in India, is to chair the meeting and head the Board or committee, as the case may be. Considering the provisions of CA, 2013, the Chairperson has been empowered to deliver various functions, which in a nutshell can be termed as the role of a Chairperson which inter-alia includes:
- ensuring that the meetings of the Company are conducted in a fair manner and look after the meeting related compliances in terms of his role to conduct or declare or answer on the related matters; and
- casting vote in case of deadlock of management (if explicitly provided in the Articles of Association of the Company)
In India, the role of chairman has been limited to conducting meetings. However, codes of various countries bestows a wider responsibility on the chairperson which includes shareholder engagement, ensuring effectiveness of Board relations and understanding of the organisation’s financial position, strategic performance, operations on the chairman of Company etc. Further, the corporate governance codes internationally prescribes bifurcation of role of CEO/MD and the role of Chairman.
|Sl. No.||Country||Who can be chairman?||Powers and responsibilities of Chairman
|1.||United Kingdom||As per UK Corporate Governance Code:
The chair should be independent on appointment when assessed against the circumstances set out in Provision 10. The roles of chair and chief executive should not be exercised by the same individual. A chief executive should not become chair of the same company. If, exceptionally, this is proposed by the board, major shareholders should be consulted ahead of appointment. The board should set out its reasons to all shareholders at the time of the appointment and also publish these on the company website.
Also, United Kingdom’s Cadbury Committee in the Report of the Committee on the Financial Aspects of Corporate Governance (1992)
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 responsibility of chairman are as follows:
a) To seek regular engagement with major shareholders in order to understand their views on governance and performance against the strategy.
b) To receive written statement from NEDs on their resignation and circulate to the same to the board.
c) Leads the board and is responsible for its overall effectiveness in directing the company.
d) Facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information.
e) Considers having a regular externally facilitated board evaluation.
|2.||Australia||The Corporate Governance Code:
The Governance Principles recommend that a majority of the board should be independent (non-executives directors that are free from the relationships that may impede independent judgement) and that the chair be an independent director.
|The role of the chair is not defined in the Corporations Act 2001, thus many functions of the chair are customary rather than formalised by law.
a) facilitating proper information flow to the board;
b) facilitating the effective functioning of the board including managing the conduct, frequency and length of board meetings;
c) communicating the views of the board, in conjunction with the CEO, to the organisation’s security holders, broader stakeholders and to the public.
d) setting the agenda for the matters to be considered by the board;
e) seeking to ensure that the information provided to the board is relevant, accurate, timely and sufficient to keep the board appropriately informed of the performance of the organisation and of any developments that may have a material impact on the organisation or its performance;
f) Seeking to ensure that the board as a whole has the opportunity to maintain adequate understanding of the organisation’s financial position, strategic performance, operations and affairs generally and the opportunities and challenges facing the organisation;
g) Overseeing and facilitating board, committee and board member evaluation reviews and succession planning;
|3.||New Zealand||Corporate Governance in New Zealand- Principles and guidelines:
We recommend the chair be independent. No director should simultaneously be a chair and chief executive of the entity (or equivalent). Only in exceptional circumstances should the chief executive go on to become the chair.
The chair also has a pivotal role between the chief executive and the board. The balance between these roles is important. It works best if the roles of chair and chief executive (or equivalent) are clearly separated, and the chair is an independent director. In general, the chief executive should not go on to become the chair. Only in special circumstances should this occur, for example where an individual has the skills, knowledge and experience not available elsewhere to the entity. These circumstances should be fully explained to investors and stakeholders.
|The duties of the Chairman are as follows:
a) fostering a constructive governance culture and ensuring directors and management apply appropriate governance principles.
b) promoting cooperation, mediating between different perspectives, and leading informed debate and decision-making
c) leading the process of evaluation and review of the board’s performance.
d) exercises pivotal role in creating balance between the chief executive and the board.
|4||NYSE||NYSE- Corporate Governance Guide
We believe that the role of the Chief Executive Officer and management is to run the business of the company and the role of the board of directors is to oversee management. We believe given these different roles and responsibilities, leadership of the board should be separated from leadership of management.
|The Chairman shall have such duties and powers as set forth in the Company’s By-Laws or as shall otherwise be conferred upon the Chairman from time to time by the Board.|
To conclude, we may say that the requirement of appointing a chairman and their role is very subjective. Whereas, the Act, 2013 and the Listing Regulations does not mandatorily require a Company to have a permanent chairman on the board, however, the provisions require the chairman to be independent i.e. non-executive and his office should be separated from that of a CEO/MD. In this regard, whether the intent of the Amendment Regulations is to mandate the appointment of chairman or not is subject to interpretation and clarification. Recently, companies are receiving notices from stock exchange for not complying with the requirement of Regulation 17(1)(b) i.e. not having adequate number of independent directors in cases where companies do not have a permanent chairman on Board. Therefore, though the requirement is not mandatory, companies should exercise caution while constituting its Board.