Separation of the Chairperson and CEO Roles in India: SEBI’s Missed Opportunity

The Securities and Exchange Board of India (SEBI), at its board meeting held on 15 February 2022 decided to make it voluntary for the top 500 listed entities to separate the positions of the chairperson of the Board and the chief executive officer (CEO) of the company. Earlier in 2018, the SEBI had amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 mandating the top 500 listed entities to ensure that the chairperson shall (i) be a non-executive director and (ii) not be related to the Managing Director or the CEO, in accordance with the definition of ‘relative’ under Section 2(77) of the Companies Act, 2013. While this was sought to be enforced from 1 April 2020, based on industry representations, the deadline was extended to 1 April 2022.

SEBI’s proposition to split the roles of the chairperson and CEO was based on the 2017 report of the Committee on Corporate Governance (Kotak Committee), which, citing the Cadbury Committee report (1992), recommended the split for reasons including providing a structural advantage for the board to act independently and reducing excessive concentration of power in a sole individual. In recent times, the ability of the board to monitor management has assumed heightened importance. Accordingly, if the chairperson (as leader of the board) is the same individual as the CEO (the leader of the management), conflicts of interest may arise.

Notably, Section 203 of the Companies Act, 2013 provides that the same individual cannot hold the position of chairperson and CEO simultaneously. However, Section 203 is a default provision which can be deviated from, if permitted by the company’s articles of association.

SEBI’s volte-face on this good governance initiative was stated to be pushback from industry and the low level of compliance — from September 2019 until December 2021, the percentage of compliant companies only moved from 50.4% to 54.0%. Some argue that Indian corporate law already contains sufficient requirements to check conflicts of interest, including those pertaining to a minimum number of independent directors and precluding voting by interested parties on related party transactions. As such, the focus ought to be on strengthening the ‘independence’ of independent directors, instead of tackling the chairperson-CEO split, which is relatively unproblematic in India. Consistent with Section 203 and its underlying spirit of shareholders’ democracy, shareholders of each company should be allowed to decide whether they prefer the roles of chairperson and CEO to be vested in the same person or two different individuals.

Further, in making the separation of the posts voluntary, SEBI departs from regulatory tradition in India. Unlike the UK, which has conventionally relied on code-based, soft-law approaches to corporate governance, India has demonstrated a strong inclination towards prescriptive corporate governance regulation, and voluntary governance measures have not been particularly successful.

That said, the SEBI’s prescription to mandatorily split the roles of chairperson and CEO was arguably misplaced. The evidence is weak — research indicates that ‘the independence status of the chairperson is not a material indicator of firm performance or governance quality’. Reportedly, the separation requirement might not have met with stiff opposition, had SEBI not also insisted on the chairperson and CEO not being ‘related’ (this was not a recommendation of the Kotak Committee either). This rule presents an obstacle to the succession plans of Indian family-run businesses (300 of the top 500 listed entities!), where the senior member typically moves into the chairperson role, and the CEO position is utilised to groom the younger member. For families which concentrate their entire wealth in their businesses, inducting an outsider CEO or chairperson is understandably unpalatable. In this environment of vested interest, incremental reform would have been the ideal approach.

However, SEBI has perhaps missed an opportunity to adopt a position of compromise. Moving forward, while it is unlikely for SEBI to once again shift to a mandatory separation requirement, it could instead consider including a ‘duality disclosure’ requirement, similar to that introduced by the SEC in 2010. While the separation requirement itself should be kept voluntary, listed entities ought to be required to disclose their rationale behind combining the chairperson-CEO roles. Research suggests that having this information in the public domain helps investors make informed activism and stewardship decisions, taking firm-specific characteristics into account and consequently shape sound corporate governance practices.

In fact, in the US, the disclosure requirement partly stemmed from the demands of institutional investors like ISS and Glass Lewis to split the positions, and if not, justify the duality. In either case, whether Indian investors demand this separation, or whether disclosure of this information creates this demand, the end-point remains the same — stricter standards of corporate governance. Similar to SEC’s Regulation S-K, this disclosure requirement can also be stretched to IPO bound companies in their offer documents, by way of an amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 as investors should be provided with the rationale behind the particular governance structures adopted by the issuer company.

Companies with a combined chairperson-CEO position should also be required to appoint a lead independent director (LID). Interestingly, while LIDs are directly relevant to the separation debate, and the Kotak Committee had in fact recommended introducing the LID position in India, SEBI has not yet considered this. In the US, the LID emerged as an alternative to counter-balance the combined chairperson-CEO role. In this context, the principal role played by LIDs is monitoring the chairperson of the board, akin to the monitoring expected of the chairperson of the CEO, and acting as an additional point of contact for shareholders. BlackRock, in its investment stewardship guidelines (effective 2022), also recommend that LIDs be empowered to shape board meeting agendas and call separate meetings of independent directors.

India has lately seen an increasing focus on governance issues, promulgation of stewardship codes, an uptick in instances of shareholder activism and dilution of promoter holdings in favour of institutional investors. As such, it could only be a matter of time before institutional investors here begin demanding separation of the chairperson-CEO post, based on specific circumstances, particularly for companies which face governance, audit and other associated risks. In fact, 92% of respondents to a recent survey amongst Indian investors voted in favour of this separation. Introducing requirements for disclosure of duality, and appointment of LIDs would only facilitate this demand, aligning India with global best practices. The lack of ‘relation’ between the chairperson and CEO should be taken up subsequently. Once this groundwork has been laid, self-regulation, adequate disclosure and market-based enforcement led by investors who take into account firm-specific characteristics could well be the next chapter of the separation story.

Rudresh Mandal is an Associate with the Capital Markets Practice Group of Shardul Amarchand Mangaldas & Co, New Delhi. All views expressed are personal.