A new study on corporate governance standards shows there is no progress in India Inc on the contentious matter of separating the posts of chairman and managing director (MD)/cheif executive officer (CEO).
The 2024 report on corporate governance by Excellence Enablers, an initiative by former Securities and Exchange Board (SEBI) chief M. Damodaran, shows there is actually a decline in the number of companies separating the posts of chairman and MD/CEO. The study, conducted on the Nifty100 corporate giants show that the number of companies venturing to follow this good governance practice actually went down between 2022 and 2023.
According to the study, the number of companies who have separated both the posts went down from 66 to 65 last financial year, even while those not following actually went up from 34 to 35.
The report noted that combining the two roles in one person runs counter to the basic principle of Corporate Governance which is that the management, headed by the MD or CEO, shall be answerable to the Board headed by the Chairperson. If both the Chairperson and the MD have executive responsibilities, the requirement of Corporate Governance does not get adequately addressed.
“It is unfortunate that this separation has been made non-mandatory,” the report says.
Section 203 of the Companies Act 2013 stipulates that an individual cannot be both chairperson as well as MD/CEO at the same time (with some specific waivers). It was also promoted by the OECD as a good governance norm to be emulated all over the world. Four years later, the Kotak Committee on Corporate Regulations had recommended the same to the SEBI which tried to enforce it from April 1, 2020.
But by the end of 2020, just about half of the top 500 listed entities had complied. Therefore, responding to industry demand, this requirement was deferred for another two years, to April 1, 2022, to give ample time for compliance – to little avail.
As of December 31, 2021, just 54 per cent of top 500 listed companies were compliant. By 2022, SEBI had made it all but voluntary.