Separation of powers

A section of corporate India has spoken out against the idea of separating the positions of chairman and managing director (MD) or chief executive officer (CEO), and appointing a non-executive director as chairman of the board. A report in The Indian Express quoted top businessmen and industry associations as saying that it was a needless reform at this time. The bone of contention is the Securities and Exchange Board of India’s (Sebi’s) order, making it mandatory for the top 500 listed entities to appoint a non-executive director as chairman by April 1 next year. Further, the chairman should not be related to the MD or CEO. The regulator introduced these changes broadly in line with the recommendations of the Uday Kotak committee on corporate governance, which submitted its report in October 2017. The committee noted the separation was seen to provide a more balanced structure of governance. This will enable the board to act with more independence and reduce the excessive concentration of powers. Since Sebi’s mandate, more than two-thirds of India’s top publicly traded companies have separated the positions.

The issue is still being debated in many countries. There is considerable pressure from shareholders in the US, for example, to separate the two and companies are moving in that direction. The proportion of S&P 500 companies whose chief executives were also chairmen more than halved in 2018. The underlying idea behind the rules framed by Sebi is to improve governance. Adhering to the higher standards of governance would benefit both the promoters and minority shareholders. There is considerable merit in the argument that having the same person as chairman and MD presents a typical case of conflict of interest. If the chairman is also the MD, he or she could be tempted to ignore the failures of the management. By separating them, a company can clearly distinguish management authority from board authority, and empower the chairman and CEO to pursue their respective duties without concern that interests in one position might negatively influence the other.

However, at a broader level, there are two important issues. First, the separation of positions is not to undermine promoters because it would not stop them from running the business or making decisions in the interest of the company and creating wealth for shareholders at large. In fact, reduction in the concentration of powers would lead to better decision-making, assuming both the MD/CEO and chairman have their roles clearly defined and are well qualified to hold the respective positions. Second, from the regulatory standpoint, rules by themselves are unlikely to change things as desired. There have been a number of cases in the recent past where the presence of independent directors, for instance, did not stop the management or promoters from taking decisions that were not in the best interests of either the company or minority shareholders. This is true for even companies with professional management. Therefore, it is important for the regulator to improve disclosure norms and develop capabilities to make sure that listed companies follow regulations. Nonetheless, while improving regulatory capability is an ongoing process, separating the position of chairman and MD/CEO is likely to improve supervision at the company level itself and lead to better governance. Higher standards of corporate governance will help attract more risk capital and augment overall economic growth.


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