Industry Tells Sebi To Defer the Rule Barring Chairman & MD From Being Related


Facing stiff resistance from top industry leaders, SEBI backtracked on its demand that the top 500 listed companies split the joint chairman and MD post, making the governance rule voluntary. The issue was contentious, debatable, and even emotional: nearly 46% of corporate India had not yet complied with the 4-year-old norm due to take effect on 1 April 2022. 

 SEBI’s summons for board leadership restructuring read as:

  • Split the positions of the chairman and MD/CEO
  • The chairman and CEO must not be related to each other
  • The chairman must be a non-executive director

Often, in family-owned or promoter-led companies, the CEO or MD simultaneously serves as chairman of the board. These firms were expected to be the hardest hit, even though they are leaders in finance, comprising 60% of the top 500 companies. SEBI’s rollback is thus positive as much as it averts unnecessary instability. 

Industry leader Sanjiv Bajaj provides insight: “It is clear that SEBI wants to have multiple loci of power with an eye on improving corporate governance. However, the issue may swing from over-centralisation to over-regulation. Such a divide may have unintended consequences in India, where the family business dynamic is different, and promoter-led companies have fared well in the pandemic.”

Here’s more on why top financial advisors cautioned against a one-size-fits-all approach to governance in corporate India and why SEBI’s move was apt.

Sanjiv Bajaj: Competitiveness is at stake

Research has shown that having a non-executive chair is not a guaranteed recipe for success. In fact, a study on firms in the US and Canada has illustrated that having separate chairs can lead to “strained relationships”, “lack of direction”, and “problematic interactions”. Moreover, the data indicates that a CEO/chair can serve well as a CEO and a non-executive chair.

However, for a non-executive chair to succeed, many puzzle pieces must fit together. One needs to have deep industry knowledge, clear vision, leadership skills, understanding of the board process, charisma, and independence. These emerge as home-grown virtues in a promoter-led company, passed down from generations, and honed in a familial environment. 

“It is not that splitting the CEO and MD is an inherently bad idea”, says top industry leader  Sanjiv Bajaj; however, “neither is inherently good”. Chairman and directors  are expected to undertake greater responsibility, and that’s in conflict with mandating a non-executive role for chairman.”

A non-negotiable stance from SEBI may have led to a Pandora’s box of issues in corporate India and crippled the  industry’s growth. “These guidelines taken together are not even there in any significant country, and we will weaken our competitiveness, especially at a time when the pandemic is on,” Mr. Sanjiv Bajaj had said. 

Sangita Reddy: Family mentorship yields a different mindset

Selecting the next CEO is no ordinary HR task, nor is it as simple as passing on a baton. A lot is at stake, and a wrong CEO can quickly take a company’s performance downhill. Further, having the right chair is also key to achieving consensus and accelerating long-term targets. The stewardship theory of corporate governance favours the dual CEO cum chair role and advocates that clarity in command leads to better performance. 

Keeping these nuances in mind, family-owned businesses tend to concentrate authority on one financial leader, who is the  unanimous choice of a careful succession process. “It takes years to groom a successor, and in a family-owned/managed company, it is often a family member who has been mentored by an elder,” says Sangita Reddy, Joint Managing Director of Apollo Hospitals.

A study revealed that family CEOs “think differently” and “pursue different strategies.” Another study on a family-owned business in India revealed that when  firm’s espoused and enacted values are aligned, “stewardship behaviour of managers results in exemplary corporate governance practices.” Given that academic research does not dismiss the CMD office, SEBI was right to soften its stand on the CEO and chair being necessarily unrelated.

Ajay Tyagi: Guidelines favour better governance

Top financial advisors opine that SEBI’s thrust for doing away with the Two Job – One Person framework will protect the interests of shareholders, lead to better functioning of independent directors, and ensure the company is managed professionally. There is no doubt that such fruit can arise when both  CEO/MD and chair do not belong to the promoter group.

SEBI chief Ajay Tyagi had earlier said that this mandate “will reduce the excessive concentration of authority in a single individual” and also help “avoid conflict of interest”. In softening its stand, SEBI said that its decision would enable “companies to plan for a smoother transition.” It would be interesting to note how many companies split the CMD role voluntarily and if SEBI will turn up the heat once the pandemic situation subsides.

A study from the Stanford Closer Look Series reckons the research literature has little evidence that chairman/CEO duality necessarily leads to bad future performance or governance. SEBI’s compromise on making the norm recommendatory and not mandatory is thus fair. In fact, it may be the best route to avoiding promoter-led mismanagement and regulator-led micromanagement.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.