The Securities and Exchange Board of India’s (Sebi’s) about-turn on its decision to make splitting of the posts of chairperson and managing director (CMD) by listed companies mandatory defies logic. It is also patently unfair to more than half the Nifty 500 companies who followed the regulatory mandate and split the role within the deadline. One can’t fault them for feeling let down by Sebi, which appears to have caved in to pressure from powerful corporate lobbies yet again. In this regard, finance minister Nirmala Sitharaman’s comment last week that the regulator should hear the concerns raised by corporate India on the requirement was surprising. Though she clarified that she was not giving any diktat to an independent regulator, the minister should have been made aware that extensive consultations had been held with all stakeholders on the issue over a fairly long period of time. Sebi had earlier mandated that the two roles be separated from April 1 this year after a two-year extension to the initial roll-out date.
In its order on Tuesday, Sebi said there has been barely a 4% incremental improvement in compliance by the top 500 listed firms in the last two years, and hence “expecting the remaining about 46% to comply by the target date would be a tall order”. It is rather strange to see the regulator trying to justify the action of those who have violated its order with impunity. The logic given by those who had opposed splitting the roles is that it can disrupt functioning of business in companies where majority shareholding and control are held by promoter families. This argument doesn’t hold water as corporate governance standards should be applicable to every single listed company, irrespective of their ownership pattern. Another strong argument put forward against the separation of roles is that it impacts the “unity of command” and creates two parallel power centres. This too is flawed as it assumes that the board and the management have same roles. The Uday Kotak committee that first recommended splitting the roles had given a sound reasoning, that corporate democracy is built into the interconnected arrangement between the board, the shareholders, and the management, where the board supervises the management and reports to the shareholders. Thus, the separation of powers of the chairperson and the CEO/MD is expected to provide a more balanced governance structure by enabling more effective supervision of the management. This, in the committee’s view, could be achieved by providing a structural advantage for the board to act independently, reducing excessive concentration of authority in a single individual and creating a board environment that is more egalitarian and conducive to debate. The Cadbury Committee (UK) in the Report on Corporate Governance (1992) noted that given the importance and the particular nature of the chairman’s role, it should be separate from that of the chief executive. “If the two roles are combined in one person, it represents a considerable concentration of power”.
It is thus crystal clear that the leadership of the board and the management can’t be vested in the same person. Worse, a large number of companies thought they can convince the regulator to dilute its order, even though they had two years to comply with the guidelines and plan the transition. Whether separation does mean good governance is a subjective issue, and it is equally true that regulators in most countries had recommended such a separation with a “comply or explain” approach, instead of taking the Sebi route of making it mandatory. But it can be safely assumed that the proposal will get a quiet burial now that compliance has been made voluntary by Sebi. That is because India Inc’s track record in adopting voluntary provisions is abysmally poor.