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Separate Positions of Chairman and Managing Director/CEO: Tussle between Good Governance and Maximum Benefits

September 1, 2018

[Ankit Handa is a fourth year B.A. LL.B. (Business Law Honours) student at National Law University, Jodhpur.]

 

Historically, some of the world’s most successful companies have had the Chairman of the Board and the Chief Executive Officer (CEO) or Managing Director (MD) as the same individual, like American Express’ Kenneth I. Chenault, FedEx’s Frederick Wallace Smith, Exxon Mobil’s Rex W. Tillerson and Apple’s Steve Jobs. However, in light of the recent scams in India such as the one relating to ICICI Bank, it is important to ask the question whether this concept can be replicated in India so that it may maximize a company’s success or should our approach be more focused towards good corporate governance by separating the two positions.

 

I. Role and Functions

 

As per the Companies Act, 2013 (Act), a CEO means an officer of a company, who has been designated as such by it.[1] Whereas, a managing director, essentially, is a director entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. A CEO and an MD fall within the ambit of Key Managerial Personnel (KMP) of a company,[2] and are, thus, whole time employees of the company who are responsible for its functioning.

 

On the other hand, a “chairman” has neither been defined in the Act nor been included within the ambit of KMP. However, post the Companies (Amendment) Act, 2017, it has been clarified that he may be designated as a KMP by the Board.[3]

 

It can be inferred from section 104[4] of the Act that a chairman’s appointment must be made according to the Articles of a company and, unless specified in the Articles, it can be done by a show of hands at the meeting. The chairman is obligated to exercise absolute discretion in regard to the inclusion of matters in the minutes of board meetings,[5] order polls at a meeting, and regulate and scrutinize such polls.[6] Moreover, according to Table F of the Act which provides the draft Articles of Association for a company limited by shares, the chairperson of the board shall normally preside as chairperson at every general meeting of the company.[7] He is provided the power to adjourn meetings[8] and to rule upon objections raised during voting.[9] Very importantly, he has a right to make a casting vote at board meetings[10] as well as committee meetings.[11]

 

Thus, it can be seen that the role performed by a CEO/MD is inherently different from that of the chairman. While a CEO’s focus remains on the smooth functioning of the business of the company so as to make maximum profits, the chairman’s role is to responsibly regulate the governance of the board of directors, the meetings and the committees.

 

II. Liability of a Chairman versus a CEO/MD 

 

In Shamanur Shivashankarappa v. India Sugars and Refineries Ltd., the petitioner was a director (as well as chairman) of a sugar refining company which had allegedly violated procurement norms. The Karnataka High Court observed that a chairman being only authorised to preside over the board and the general meetings and would not be prima facie liable. However, it observed that if an MD or an Executive Director or the person who has been looking after the day today affairs of the company acts as a chairman, i.e. in a dual capacity, he ipso facto becomes liable for the offences committed by the company vicariously.

 

In Maharashtra State Electricity Distribution Company Ltd. v. Datar Switchgear Ltd., the Apex Court held that a presumption cannot be drawn that the chairman of a company is responsible for all the acts committed by or on behalf of the company. Wherever, by a legal fiction, the principle of vicarious liability is attracted, it has to be specifically provided in the statute concerned or by means of a specific averment in the complaint.

 

Thus, the principle is quite clearly enunciated that a chairman is not, prima facie, liable for the offences committed by a company. However, where a person is exercising the dual role of a chairman and a Managing Director, it may be presumed that he was responsible for the running of the company and thus held liable.

 

III. Existing Legal Framework

 

(a) Companies Act, 2013

 

The Companies Act 2013, in clear terms, specifies that an individual shall not be appointed or reappointed as the chairperson of the company as well as its MD or CEO at the same time.[14] However, this requirement is limited only to a listed company and every other public company having a paid-up share capital of ten crore rupees or more.[15] Even for those companies, this requirement may be surpassed in a scenario where either of the following requirements are met-

  • the articles of such a company provide otherwise, or

  • the company does not carry out multiple businesses,[16] or

  • public companies having paid-up share capital of rupees one hundred crore or more and annual turnover of rupees one thousand crore or more are engaged in multiple businesses and have appointed Chief Executive Officer for each such business.[17]

 

(b) SEBI LODR Regulations

 

As per the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations),[18] the listed entity may appoint separate persons to the posts of chairperson and MD or CEO. Thus, the provision is not made compulsory as such.

 

Further, as per clause 49 of the SEBI Listing Agreement[19], the norms on corporate governance for entities that seek to be listed require that, where the chairman of the board is a non-executive director, at least one-third of the board should comprise of independent directors, and, in case he is an executive director, at least half of the board should comprise of independent directors.

 

Thus, the LODR Regulations and the Listing Agreement do not specifically follow the spirit of section 203 of the Act so as to separate the positions of Chairman and CEO and allow the same individual to exercise such the said roles by allowing for an executive director to also be the chairman.

 

For banking companies, as per the Banking Regulation Act 1949, every banking company is required to appoint one of its directors as chairman of its board (on a whole time or part time basis).[20] However, even in this scenario, matters become complicated because the Banking Regulation Act prescribes that, where a chairman is appointed on a whole time basis, he shall be entrusted with the management of the whole of the affairs of the banking company,[21] which is essentially the task of a managing director. On the other hand, when a chairman is appointed on a part time basis, an MD is required to be appointed.[22]

 

This effectively means that as per the Banking Regulation Act, 1949, the chairman can exercise the dual role of a chairman and an MD when he has been appointed on a whole-time basis. Thus, a conflict arises in case of banking companies that are listed entities and would be hit by section 203 of the Companies Act, 2013 and a clarity on this position is urgently required.

 

IV. The Way Forward

 

The Uday Kotak Committee Report noted that the issue of separating the roles of the chairperson and the CEO/MD is a growing concern in corporate governance worldwide and the separation is seen to provide a better and more balanced governance structure by enabling better and more effective supervision of the management. The report cited numerous reasons for this such as providing a structural advantage for the board to act independently, ensuring that board tasks are not neglected by a combined chairperson-CEO/MD due to lack of time, increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions and creating a board environment that is more egalitarian and conducive to debate. In this light, the Committee recommended that-

  • Listed entities with more than 40% public shareholding should separate the roles of Chairperson and MD/CEO with effect from April 1, 2020. 

  • After 2020, SEBI may examine extending the requirement to all listed entities with effect from April 1, 2022. 

Thus, the Committee has suggested that the existing discretionary requirement be omitted and a new sub regulation 17(1A) be inserted in the LODR Regulations for this purpose.

 

V. The ICICI Bank Controversy: Are the Recommendations Sufficient?

 

ICICI Bank has been plagued with allegations of its CEO and MD Chanda Kochhar having allegedly exercised nepotism and favoritism in sanctioning loans in 2012 to Videocon group on a quid pro quo basis for Videocon investing in NuPower Renewables, a company headed by Deepak Kochhar, Ms. Chanda Kochhar’s husband.

 

As per a statement released by ICICI Bank, its board of directors said that the credit committee, which sanctioned the impugned loan was chaired by then chairman of ICICI Bank, KV Kamath, and Ms. Kochhar was not the chairperson. The Chairman of the Credit Committee, till as late as June 2015, was always a non-Executive Director and the board cited this as a practice of ‘good corporate governance’.

 

However, the fact that even though Ms. Kochhar was not the de jure chairman of the credit committee and still loans which reeked of conflict of interest were approved by the said committee showcases the power that Ms. Kochhar exercised over the committee by virtue of being CEO/MD. Thus, even though a separate chairman may have been appointed by ICICI Bank, this transaction shows that Ms. Kochhar continued to be the de facto chairman and surpassed the LODR Regulations relating to conflict of interest so as to easily get the loan sanctioned as per her whim. Had the credit committee been chaired by a ‘separate’ and ‘independent’ chairperson, the loan would never have been sanctioned or at least Ms. Kochhar should have been recused from the committee for that transaction.

 

Further, in March 2018, the board of ICICI Bank (with chairman Mr. M.K. Shamra) said that it reposes “full faith” in its MD and CEO Chanda Kochhar, and that there is no question or scope of any favouritism, nepotism or quid pro quo in the bank’s loans to Videocon industries. This again seems like Ms. Chanda Kochhar giving herself a clean chit from ICICI’s side by strong-arming the board of directors, effectively acting as a ­de facto chairman.

 

Thus, a mere separation of roles as envisaged by the Kotak Committee would not be a stringent measure and what is urgently required is creating a statutory office (rather than one based on the Articles of a company) of a proactive chairman under the Companies Act, 2013 by providing him sufficient and independent powers to ensure good corporate governance in meetings and committees.

 

Recently, former bureaucrat Girish Chandra Chaturvedi has been appointed as non-executive part-time chairman of ICICI Bank, effective July 1, 2018, for a period of 3 years. However, in the absence of adequate powers of a chairman, one can only hope that he can efficiently ensure a resolution of the ongoing crisis.

 

[1] Companies Act 2013, section 2(18)

 

[2] Ibid, section 2(51)(i)

 

[3] Ibid, section 2(51)(v)

 

[4] Ibid, section 104.

 

[5] Ibid, section 118(6)

 

[6] Ibid, section 109

 

[7] Ibid, schedule-1, table F, clause 45

 

[8] Ibid, Schedule-1, Table F, Clause 49

 

[9] Ibid, Schedule-1, Table F, Clause 56

 

[10] Ibid, Schedule-1, Table F, Clause 68

 

[11] Ibid, Schedule-1, Table F, Clause 73

 

[12] Companies Act 2013, section 203 proviso

 

[13] Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014, rule 8

 

[14] Supra 6.

 

[15] Companies Act 2013, section 203 second proviso r/w Ministry of Corporate Affairs, Notification No. S. O. 1913(E) dated July 25, 2014.

 

[16] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, schedule II, part- E.

 

[17] SEBI (Listing Agreement to Indian Stock Exchanges), clause 49.

 

[18] Banking Regulation Act 1949, section 10-B

 

[19] Ibid

 

[20]  Ibid, section 10-B (1A) (ii)

 

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