SEBI’s move for separation of the post of chairman and managing director

February 21, 2022

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Recently, SEBI made separation of the post of chairman and managing director (CMD) voluntary for better corporate governance.

Rationale behind the move

SEBI attributed the rationale behind the latest decision to “unsatisfactory level of compliance achieved so far” with respect to this corporate governance reform and continued representation from industry bodies and corporates expressing various compelling reasons, difficulties and challenges for not being able to comply with this regulatory mandate.
Pushback from India Inc: Since2018, when the SEBI board had changed the rules to separate the post of CMD and said the chairman of a listed company should not be related to the promoters, there has been a lot of pushback from India Inc.
Despite India Inc getting a four-year window to adhere to the rule, so far only 54% of the top 500 companies had split the post.

About

In 2018, SEBI had set up a committee to review corporate governance rules and suggest changes.
The norms were part of the series of recommendations given by the SEBI appointed Uday Kotak committee on corporate governance.
- The main rationale for the recommendation was that separation of powers of the Chairperson and MD/CEO may provide a better and more balanced governance structure by enabling more effective and objective supervision of the management.
A chairperson is the head of the board, while the MD/CEO is the head of management, who is supposed to report to the board.

Corporate governance

It is the collection of mechanisms, processes and relations used by various parties to control and to operate a corporation.
Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and include the rules and procedures for making decisions in corporate affairs.
Corporate governance is necessary because of the possibility of conflicts of interests between stakeholders, primarily between shareholders and upper management or among shareholders.
These include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders.

Expected implications of move

This was done to help leading Indian companies adhere to international corporate governance standards, most of which follow the practice of separation of the board and the management.
The idea was to allow a board headed by an independent person to oversee the operations of the management that will be headed by the MD.
The rationale behind the separation of the two posts was to have a better and more balanced governance structure.
Voluntary provision: With a view to enabling the companies to plan for a smoother transition, the SEBI board has decided that this provision may not be retained as a mandatory requirement and instead be made applicable to the listed entities on a voluntary basis.
The reprieve will benefit more than 150 companies, which currently have the same individual as chairperson and MD/CEO.
Numerous studies have shown that companies with better corporate governance standards tend to perform better at the bourses.
Separation of these roles seeks to increase the effectiveness of the board and reduce concentration of authority in a single individual.

Way forward

Globally also, this is a keenly debated aspect of governance, with countries like UK and Australia tilting in favor of separation of the Chairperson and CEO roles and Germany and Netherlands going a step ahead to adopt a 2-tier Board structure, separating the roles of board and management.

Source:BS