CEOs as deemed Managers: Ascertaining their true role and liability

Sharon Pinto, Manager, corplaw@vinodkothari.com 

Introduction

The Board of directors of a Company typically comprises of executive and non-executive directors. The Board is supported by the Key Managerial Personnel (‘KMP’) and senior management i.e. personnel of the company who are members of its core management team excluding Board of Directors comprising all members of management one level below the executive directors, including the functional heads. KMPs have been defined under Section 2 (51) of Companies Act, 2013 (‘Act’/ ‘CA, 2013’) to include Chief Executive Officer (‘CEO’) or Managing Director (‘MD’) or Manager, thus placing them on the same pedestal while differentiating the said posts on the basis of mere nomenclature. Due to the said differentiation in nomenclature, it is often seen that companies have a practice of regarding the person designated as CEO different from Manager of the company. Thus, the person holding a position at the head of the organisational hierarchy, is interpreted to not be the Manager on account of only being designated as CEO of the company. The result of this rationale / categorisation results in avoidance of the restrictions and procedures for appointment and remuneration as enlisted under the Act under Section 196 and 197 which specifically prescribe that the terms of appointment shall be placed before the shareholders, for a Manager in case of appointment of a CEO.

The position of a ‘Manager’ in the corporate organisational structure has been around for decades. It has been defined under Companies Act, 1956 which can also be seen in the Companies Act, 2013. In recent times, corporates have developed a pattern of designating the head of the corporate organisation, with substantial powers of the management, as CEO who is often a professional, rather than designating the said person as Managing Director or Manager and appointing them on the Board. A few examples of such corporates which have the CEO as the head of the organisation include Microsoft, Pepsico, Google Inc, etc.

We have in our previous article[1] deliberated on the various combinations of KMP positions that can legally be held by two different individuals. In this article we shall discuss the concept of CEO and analyse whether the same is different from the positions of a Manager and MD.

Concept of CEO

• Companies Act

The term CEO was not mentioned under Companies Act, 1956. It was included and defined under the Act, 2013 and formed part of the definition of KMP. As per the Report of JJ Irani Committee[2], as KMPs play a significant role of formulating and executing company policies. Thus, in order to provide a legal recognition to KMPs and also to define their liabilities arising out of such a position held, the committee recommended the following to be identified as KMP:

1. Chief Executive Officer (CEO)/Managing Director
2. Company Secretary (CS)
3. Chief Finance Officer (CFO)

The committee further recommended key managerial personnel including WTDs and MDs shall not be in whole time employment of more than one company.

The report of the Company Law Committee[3] dated February 2016, recommended that a whole time KMP may hold more than one position in the company in order to reduce cost of compliance and to facilitate optimum utilisation of their skills and competencies. The committee further recommended flexibility in appointing other officers of the company in whole-time employment as KMP, pursuant to which the definition of KMP was expanded to include ‘such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board’ under its ambit.

Section 2 (18) of the Act defines a CEO as ‘an officer of a company, who has been designated as such by it.’ Thus the position of CEO is designation oriented and the role is not specifically defined under the Act. Therefore, a person performing the role of any other KMP as specified under the Act, may be designated as a CEO.

• Listing Regulations

Regulation 2 (1) (e) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’), have defined CEO as the person so appointed in terms of the Act. The erstwhile Listing Agreement vide Clause 49 (IX) stated as follows:

“The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that:”

In order to harmonize the provision with the newly inserted definition of KMP under Companies Act, 2013, the said clause was amended[4] as follows:

“The CEO or the Managing Director or manager or in their absence, a Whole Time Director appointed in terms of Companies Act, 2013 and the CFO shall certify to the Board that :”

The above-mentioned provision also specifies that CEO shall be the officer so designated by the Company, who may have the role of a Manager or a Managing Director on line with the specification under the Act.

Analysis of the role and function of CEO, Manager, MD

The Act under Section 2 (53), defines Manager as ‘an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not’. Whereas an MD is defined under Section 2(54) as ‘a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. In Regina v. Boal, (1992) BCLC 872 (CA[5]), it was held that assistant general manager of its bookshop, had responsibility for the day to day running of the shop but had been given no training in management, health and safety at work or fire precautions. Thus only those who were in a position of real authority, who had both the power and the responsibility to decide corporate policy would be construed to be ‘Manger’ for the purpose of the Act. It also needs to be noted that the person occupying the position of a ‘Manager’ should be under the superintendence of the Board.

Thus, the definition of Manager can be construed to be function based, irrespective of the designation of the individual. The same has been held in the SC judgment of Ramchandiram Mirchandani v. The India United Mills Ltd., AIR 1962[6] wherein the apex court held that the definition of the word “manager” is very wide, and whatever be the nomenclature employed by the parties, if large powers of management of substantially the whole business of the company are vested in a person then that person becomes the manger. In Basant Lal v. The Emperor[7] it was held that it was held that a person who is not in charge of the entire business of the company cannot be deemed to be a manager. In the case of Commissioner Of Income-Tax, Kerala Vs.Alagappa Textile (Cochin) Ltd. 1980[8], the Supreme Court held that Manager must be an individual, having the management of the whole or substantially the whole affairs of the company, subject to the superintendence, control and directions of the Board of Directors in the matter of managing the affairs of the Company. The key difference between a Manager and an MD is that an MD has substantial powers of management and is also on the Board of the company, while a Manager has the management of whole or substantially the whole of the business of the Company. There are judicial precedents that indicate that while both enjoy substantial powers of management, the source from which this power arises is different. In case of manager his power is natural and in case of an MD, it has to be entrusted by the Board in him.

On perusal of the above roles of the MD and Manager, basis the provisions, it is evident that an individual who has been entrusted with whole or substantial powers of management, shall be said to be performing the role of a Manager. Further, if the said individual is a director of the company he may be designated as the MD. However, companies may choose to designate the individual otherwise i.e. CEO of the company, if the said role and powers of management rest with the concerned officer. Thus, one can opine that the person who is at the top of the corporate hierarchy, with whole or substantially whole powers of the management and affairs of the company, in cases where not explicitly designated as ‘Manager’ shall be deemed to be a Manager of the company. CEO is a designation and the position of Manager is based on function. Merely, by not designating an individual as a Manager, compliance under the provisions of the Act cannot be avoided.

Compliances relating to appointment and remuneration

As per the analysis stated above, the procedure and restrictions relating to the appointment of a Manager shall be applicable to a CEO who holds such a position of a deemed Manager of a company. Thus, the company is required to comply with the provisions of Section 196 for appointment of such a person. The term of the deemed Manager shall not exceed 5 years at a time, wherein the re-appointment shall be done not less than 1 year before the end of the term. Further, the appointee shall have to satisfy the criteria and conditions specified in sub-section 3 of Section 196 in order to get appointed. As per the said provisions, the terms of the appointment and remuneration will be subject to approval of shareholders. Further, Part I of Schedule V has set forth certain conditions to be fulfilled in order to be appointed as a Manager. In case of appointment in variance of these conditions, the company in addition to approval by shareholders, is also required to obtain approval from the Central Government by stating the rationale of appointing such a person.

Similarly, the provisions relating to managerial remuneration specified in Section 197 read with Part II of Schedule V as applicable to a Manager shall be applicable to a deemed Manager. Thus the deemed Manager shall be entitled to remuneration as per the limits specified in this regard under Section 197 subject to approval of shareholders. Therefore, while determining the cap of total managerial remuneration i.e. 11% of the net profits of the company, the remuneration paid to CEO who plays the role of deemed Manager will also be required to be included. If there is an increase in the said cap, it will require approval from the shareholders of the company. Further, the said provisions also place a bar on the individual limits of remuneration paid to the Manager, which shall not exceed 5% of net profits of the company in case of not more than one MD/WTD/Manager and 10% of total remuneration payable to more than one MD/WTD/Manager. If the company wishes to pay in excess of the limits thus prescribed it may do so by obtaining approval of the shareholders in the form of a special resolution.

In case the company has inadequate or no profits, it is required to abide by the limits prescribed under Part II of Schedule V subject to approval of shareholders. Further, in case the company wishes to pay in excess of the said thresholds, the shareholders approval will be required to be obtained in the form of a special resolution.

The above-mentioned provisions of the Act do not cover the appointment and remuneration of KMPs other than MD, WTD and Manager. Since the CEO is considered to be different from Manager, their appointment and remuneration in many cases are not approved by the shareholders of the Company. However as per the analysis stated above, in case of a CEO having substantial powers of the management and being on the head of the organisational hierarchy, there is a need that their terms of appointment and remuneration to be paid is placed before the members of the company.

Circumstances which would result in consideration as deemed Manager under the Act

Conclusion

The intent of defining KMPs of the company separately under the Act was to ascertain the legal liability and to define their roles on account of them being the visionary and executive authority carrying out the policies and functions of the company. With power comes responsibility and it is lucid from the discussion above that the person having the requisite powers would be subject to the restrictions and procedures prescribed under the provisions in this regard, irrespective of the designation assigned to the post.

Kindly find below additional resources on the above-discussed topic:

1. http://vinodkothari.com/?s=remuneration
2. http://vinodkothari.com/wp-content/uploads/2018/10/Appointment-and-Remuneration-of-Managerial-Personnel.pdf
3. http://vinodkothari.com/wp-content/uploads/2019/09/Manangerial-Remuneration_IMTB-_26.08.pdf
4. http://vinodkothari.com/2018/09/managerial-remuneration-a-five-decades-old-control-cedes/
5. http://vinodkothari.com/2018/10/applications-with-cg-for-managerial-remuneration/
6. http://vinodkothari.com/wp-content/uploads/2018/09/Defaulter-companies-to-seek-lenders-nod-to-pay-managerial-remuneration-1-1.pdf

[1]http://vinodkothari.com/wp-content/uploads/2017/03/The_Combinations_of_KMP_positions_in_a_Company_Unravelling_a_mystery.pdf

[2] https://www.mca.gov.in/bin/dms/getdocument?mds=TRnXREiyG027hEwjF77x3w%253D%253D&type=open

[3] https://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf

[4] https://www.sebi.gov.in/sebi_data/attachdocs/1410777212906.pdf

[5] http://www.uniset.ca/other/cs4/1992QB591.html

[6] https://indiankanoon.org/doc/106177/

[7] https://indiankanoon.org/doc/879077/

[8] https://indiankanoon.org/doc/1799476/