SEBI’s move towards bringing a balanced Board Structure

-By Kirti Sharma (corplaw@vinodkothari.com)

Background

The Securities and Exchange Board of India vide its Board Meeting held on 28^th March 2018 has accepted some of the recommendations of the Uday Kotak Committee on Corporate Governance. One of such accepted recommendations was the recommendation for separation of the role of Chairperson and MD/CEO for top 500 listed entities by market value with effect from April 1, 2020. What will be the impact, here is an anlaysis.

Provisions under the Companies Act 2013 & SEBI LODR Regulations, 2015

Proviso to Section 203 (1) of the Companies Act 2013 states that

“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.”

Part E of Schedule II of SEBI LODR Regulations, 2015, which provides for the discretionary requirements for the listed entities-

“D. Separate posts of chairperson and chief executive officer

 The listed entity may appoint separate persons to the post of chairperson and managing director or

chief executive officer.”

Rationale behind the proposed changes in the Committee Report

The Uday Kotak Committee Report[1] expressed that with the same person holding both the roles of the Chairman & Managing Director limits the board’s independence to question the management. The segregation of these powers shall bring in a more balanced board structure and an effective control over the management.

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:

a) providing a structural advantage for the board to act independently;
b) reducing excessive concentration of authority in a single individual;
c) clarifying the respective roles of the chairperson and the CEO/MD;
d) ensuring that board tasks are not neglected by a combined chairperson-CEO/MD due to lack of time;
e) increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions;
f) creating a board environment that is more egalitarian and conducive to debate

Practice Worldwide

Several corporate governance codes for best practices across the globe recommend this, a few jurisdictions require it, and many companies are actively debating whether to undertake it. The Committee has noted that in some jurisdictions, such as the U.K. and Australia, this debate has tilted in favour of separating the two posts. In other countries, such as France and the U.S., the issue continues to be vigorously debated. Countries with a two-tier board structure, such as Germany and the Netherlands, separate the top board and top management roles.

In this regard, the Committee also noted the rationale of the United Kingdom’s Cadbury Committee in the Report of the Committee on the Financial Aspects of Corporate Governance (1992) that “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”.

Effect of the proposed change

With the segregation of the role of the Chairperson and Managing Director/CEO, the board shall function more independently. Separate roles of the Chairman and Managing Director shall bring in a balance of power and authority reinforcing their independence and accountability.

[1] http://www.nfcg.in/KOTAKCOMMITTEREPORT.pdf