At first SEBI’s (Listing Obligations and Disclosure Requirements) Regulations (LODR), 2015 mandated the separation of the roles of Chairperson and Managing Director CEO of the top 500 listed companies on the bourse by market value, from April 1, 2020. Subsequently, the compliance date was deferred to April 1, 2022. But weeks ahead of this new deadline, SEBI changed this requirement from “mandatory” to “voluntary”.
The reasons for this reprieve were the unsatisfactory level of compliance achieved, representations received by SEBI, constraints posed by the prevailing pandemic situation and to enable companies to plan for a smoother transition going forward. Surprisingly, an unsatisfactory level of compliance became a reason to pardon non-compliance by the boards of corporate India.
Companies immediately benefiting from this reprieve included Reliance Industries, Adani Ports and Hindustan Unilever among others. In fact, according to Primeinfobase, a firm that maintains corporate information databases, 30.4% of top 500 firms continue to have common CMDs.
SEBI never intended to weaken the promoter’s position, but instead wanted to ensure effective supervision of the management, provide a balanced governance structure and improve corporate governance. Merging the two posts leads to overlapping of the board and management resulting in a conflict of interest with excessive concentration of authority in a single individual.
The advantages of separation and the reason why this move has the support of shareholder activists are crystal-clear. A company chairman’s responsibilities, besides running board meetings, include overseeing the process of hiring, firing, evaluating and compensating the CEO of the company, which is a clear conflict of interest situation.
Secondly, a split of the two positions results in a better of control, without the organisation relying too heavily on only one person leaving no scope for checks and balances. Thirdly, the chairman serves as a dispassionate outside adviser and advocate, different from the CEO, making sure he acts as a lubricant among the company’s entities.
Who isn’t aware of recent instances where corporate governance has taken a severe beating? At the National Stock Exchange recently, the CBI had to arrest NSE’s former CEO and MD in the wake of allegations that she had allegedly leaked confidential information from the exchange to a “Himalayan Yogi”, an unnamed spiritual guru living in the mountains. Wither corporate governance with a complete breakdown of security and best practices at the nation’s largest bourse which was acquiring growing clout in the global equity market?
Corporate governance was severely compromised once more, when Ruchi Soya, an Indore-based edible oil maker began to have a stellar run ever since it was relisted on the bourse. Acquired in a bankruptcy sale with a well-known yoga guru on board as a non-executive director, the rapid rise in market cap is an incredible feat by any standards. When the firm had a follow-on public offer, not only was the lead manager flagged for violation in the marketing of the issue, the FPO remained open beyond the original closing date.
So why does SEBI meekly adjust itself to corporations that refuse to comply with the requirement that they must be separated and unrelated persons appointed as chairperson and managing director? Isn’t non-compliance by the corporates a case of betrayal of public confidence in the power of lawful authority and against the logic of good and reasonable governance?
While a separate chairman would undoubtedly bring heft to an organisation, PSUs like BEML, BHEL, and Coal India continue to have a common chairperson as the Chairman & Managing Director. However, a sort of balance emerges due to the presence of government nominee directors.
Being from the nodal ministry, they play a de-facto advisory role to which the CMD is obliged to defer to. It is the private sector CMDs (with the maxim “my way or the highway”), who populate their boards with handpicked directors who are reluctant to have anybody breathing down their necks.
So why did SEBI go back on improving corporate governance, reducing the excessive concentration of authority in a single individual and avoiding conflict of interest? Aren’t reforms of this nature required to prevent instances like the Himalayan Yogi or the Ruchi Soya case? Why doesn’t SEBI tackle this resistance from the corporates instead of changing the mandate itself and declaring compliance to be voluntary? After all, SEBI only had appointed the Uday Kotak panel to improve corporate governance standards based on the western corporate governance good practice of separating the Chairman and CEO’s posts.
It is still not too late. SEBI can revisit this requirement making it mandatory once again this time insisting on the government’s wholehearted backing.
(The writer is former Executive Director and Member, Board of Directors, BEML)