Why is SEBI right on the new rule separating the roles of corporate board chairman, CEO?

The rule is based on the report of a committee headed by banker Uday Kotak that was submitted four years ago. Promoter-led companies have ample time to prepare for change, but they are reluctant to separate operational responsibilities between family and professionals. He again petitioned SEBI, demanding that it reconsider the necessity of such a rule. The Confederation of Indian Industry (CII), in submission to SEBI, has reiterated its opposition to the rule, calling it a case of “over-regulation”, which, it argues, will act as a deterrent to a conducive business environment.

However, corporate governance experts support the SEBI rule. According to an analysis by Institutional Investor Advisory Services, the move will force promoter families to opt for early succession options. The separation of roles at the top would increase the oversight of the management of the board. Another survey conducted in 2020 by the Chartered Financial Analysts, or CFA Institute, among its 3,200 members saw overwhelming support for SEBI’s rule.

The reason is simple. Indian corporate history is replete with incidents involving abuse of power by the heads of boards to influence decisions. The collapse of IT services company Satyam, a victim of fraud in 2008, is a classic example. The company’s board had approved investment in real estate firms owned by Satyam’s promoters and their relatives, ignoring strong protests from minority investors.

The mandate of SEBI and the logic of its new rule is to protect minority shareholder interests. In the Indian context, pension funds and other long-term institutional investors are the only voices who speak for minority shareholders in corporate boardrooms—though often not enough. Even these investors, while not actually active shareholders, usually go with the preferred positions of promoter shareholders, reducing their influence on important corporate governance-related decisions such as the composition of the board, and independent directors. , prefers the titles of CEO and President. And also compensation for top level executives.

It is against this background that the Uday Kotak Committee’s recommendation was that all listed companies with more than 40% public stake should separate the roles of Chairman and MD/CEO with effect from 1 April 2020. SEBI accepted the recommendation of top 500 listed entities by market capitalization. Instead of the ‘40% public shareholding’ suggestion. The Boards of such listed entities shall be headed by non-executive directors who shall not be related to the Managing Director or Chief Executive of the company. SEBI also extended the date for implementation of that rule to April 2022.