Separation of Role of Chairperson and MD/CEO

Separation of Role of Chairperson And Managing Director (MD) /Chief Executive Officer (CEO)

SECTION 203(1) OF THE COMPANIES ACT, 2013

(1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,—

(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;

(ii) company secretary; and

(iii) Chief Financial Officer

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

An Individual MAY be appointed or re-appointed 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 only if –

 a) The articles of such a company contain an enabling clause (Type 1 company)

b) Company is carrying single business (Type 2 company)

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.

Public Companies having paid-up share capital of rupees 100 crore or more AND annual turnover of rupees of 1000 crore or more which are engaged in multiple business and have appointed Chief Executive Officer for each such business shall be the class of companies for the purpose of second proviso of Section 203(1). The paid-up share capital and the annual turnover shall be decided on the basis of latest audited balance sheet. (MCA Notification dated 25/07/2014)

It is perceived that separating the roles of chairman and chief executive officer (CEO) increases the effectiveness of a company’s board. This is also provided in the Section 203 of the Companies Act, 2013.

Observation

• • It is the board’s and chairman’s job to monitor and evaluate a company’s performance. A CEO, on the other hand, represents the management team. If the two roles are performed by the same person, then it’s an individual evaluating himself. When the roles are separate, a CEO is far more accountable. A clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/CEO promotes balance of power.
  •  This is nothing in the 2013 Act or in the rules issued thereunder specifically prohibiting the appointment of the same person as the chief financial officer and company secretary. However, the spirit of Section 203 of the Act appear to suggest appointment of at least three separate individuals holding the three distinct positions covered under (i), (ii) and (iii) should be engaged on whole time basis by every company to which sub section (1) apply. It appears that intention of the statute is to have three distinct individuals acting as KMP as the term whole time KMP is stated in the said section. In fact, these positions are referred to in throughout this section as whole-time key managerial personnel

WHAT ARE THE FACTORS THAT SHOULD BE CONSIDERED WHEN DEMARCATING THE ROLE OF CHAIRMAN AND CEO?

Unless the roles are clear, the relationship between the CEO and the board including the chairman, risks devolving into misunderstandings, loss of trust, and ineffectiveness. To this end, it is important for the board to clearly define the respective functions and set out the boundaries of the chairman and the CEO

Relevant considerations are outlined below:

• • articulate the expected time commitment in the service contracts of the chairman and CEO;
  • define the criteria for evaluating the chairman and CEO, taking into account the responsibilities outlined in the board charter and job descriptions;
  • provide the CEO with the room to perform, but be prepared to intervene when the need arises; and
  • clarify the nature and extent of the other directorships that can be held by the chairman and CEO.

SEBI (LODR) REGULATIONS, 2015

SEBI (LODR) Amendment Regulations, 2018

In pursuance of SEBI Board’s approval, vide SEBI  (LODR) were  amended  in May  2018 mandating, with  effect  from  April  1,  2020,  top  500  listed  entities to ensure that the Chairperson of the board shall be

• • a non-executive director
  • not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013.

Deadline for compliance extended by 2 years i.e. April 1, 2022

Considering that the companies may need more time to prepare themselves  for  the  transition and various other  difficulties, the provision for mandating Separation of the role of Chairperson and MD/CEO of listed companies will be applicable from April 01, 2022 for top 500 Companies.

Compliance with these provisions made voluntarily – SEBI Board Meeting (February, 2022)

Considering rather  unsatisfactory level  of compliance  achieved so  far, with respect to this corporate governance reform, various representations received, constraints  posed  by  the prevailing  pandemic  situation and with  a  view  to enabling the companies to plan for a smoother transition, as a way forward, SEBI Board at  this  juncture, 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”.

Observation

• • The main drawback of making such a separation may be that the enhanced performance of the board may reduce. An independent chairperson may be deprived of the intricate knowledge of the company as that which may be employed by the CEO cum Chairperson.

 Also the separation may lead to duplication of hard work and may prevent timely and appropriate decisions due to division of the top roles.

• • Executive pay is decided by a corporate board, meaning a CEO who is also chair votes on their own compensation—a clear conflict of interest.

• • Also, Boards monitor corporate governance, or how the CEO runs the company relative to its mandate and shareholder wishes—making it difficult for a chair/CEO to objectively monitor themselves.

• • One of the board’s main roles is to monitor the operations of the company and to ensure that it is being run in conjunction with the mandate of the company and the will of the shareholders. As the CEO is the management position responsible for driving those operations, having a combined role results in monitoring oneself, which opens the door for conflicting views of the position.

• • When the CEO, being the leader of the management, is also the Chairperson, who is the leader of the board, it may pose to be a challenge in carrying out the responsibilities of the two roles fairly and there is a possibility of faulty time management by the individual leading to not being able to dedicate adequate time and expertise the role requires under each position assumed. Further giving an individual so much power within the company may lead to a power play and increase the chances of the individual not discharging their duties and responsibilities in the best interest of the company.

• • Further the independence of the audit committee is also of prime importance which gets enhanced when they report to the board and not the CEO. If the chairperson and CEO is the same person, then reporting freely to a member of the management i.e. CEO reduces its effectiveness. Thus a distinction of the roles will help as the employees and other related individuals maybe more open to reporting fraud when the board is not led by management, thus there being lesser risk of reprisal.