Splitting MD, chairman roles: Firms divided; experts for staggered rollout

"We have for the longest time had separation of MD and chairman, as two separate roles… I can't imagine how it would be like to have both of those roles combined into one…" says Kumar Mangalam Birla

In a recent conference on corporate governance in Mumbai, Kumar Mangalam Birla, chairman, Aditya Birla Group, was asked about his views on the Securities and Exchange Board of India’s (Sebi’s) directive to split the roles of chairman and managing director (MD) in the top 500 listed companies with effect from April 2020.  

Referring to the industrial conglomerate he heads, Birla said: “We have for the longest time had separation of MD and chairman, as two separate roles… I can't imagine how it would be like to have both of those roles combined into one…” He was quick to add that it would be “quite ironic” to have both functions carried out by the same person. “Chairman and chief executives should not be related. I dread to be in a situation like that. It would be an extremely complex situation to deal with.”

However, most promoter-families of business groups in India Inc do not subscribe to Birla’s views. With the April 2020 deadline for effecting the changes in the management structure just a few months away, there has been a strong pushback from corporate India, largely through representations to the government by industry bodies. Industry watchers say what galls promoter-families most is the provision that the non-executive chairman and the MD should not be related. The realignment of roles in top management for family members and prospect of inducting professionals in managing director/CEO positions is something most promoter-families are least comfortable with, say experts. The way forward could be staggered a role out of the separation provisions, with the absence of relation clause kicking in latter, they add.   

It is not that India Inc did not see these changes coming. Several developed jurisdictions, such as the US, the UK and many other  European nations, have had rules to ensure different persons occupy chairman and MD/CEO positions. And the reasons are not hard to figure out.

“The chairman is the chairman of the board. The board has the responsibility of ensuring that management does it's work properly. The MD is the head of management and is answerable, on behalf of management, to the board,” explains former Sebi chairman M Damodaran, and chairperson, Excellence Enablers, a corporate governance specialist firm.

He asks a pertinent question: “The chairman is answerable to the community of stakeholders who expect the management to ask the right questions. How can the same person carry out these responsibilities?”

Damodaran is of the view that the role of the board is to constructively challenge the management. “If that is the role of the board, clearly the two roles should be separated,” he says.

However, Venu Srinivasan, chairman and managing director, TVS Motor Company, who has been vocal in his objections to the separation of the roles of chairman and MD, feels the concept is more suited for the US and European nations. 

“Regulations should be based on economic situations and the level of economic development of a country. Given India’s situation, this concept is not relevant,” he says.

He is of the view that most promoters in India have a significant holding in their businesses and are single-largest shareholders. “They are committed to creating wealth. India should not copy rules blindly from the West and apply them here,” he says.

Kavil Ramachandran, professor, Indian School of Business, who has researched management of Indian family businesses over the years and advises family offices, feels the reasons for India Inc’s apprehensions are deep-rooted. “Actually, they don’t want to have someone from outside to decide for them or tell them what to do when they believe that they know it best!”

As a way forward, Damodaran suggests a middle ground. “The presumption that relatives act in concert is not universally true. We have instances of sons, brothers, daughters, and sisters adopting positions different from their elders,” he says.

His is in favour of implementing the regulations. “The question of the relationship between the two persons can be addressed two or three years down the line. Change need not be disruptive,” he suggests.

Ramachandran feels this as an opportunity for corporate India to revisit and improve governance quality of the board. “They should find a high-quality non-family chair or high-quality CEO depending on which role needs further strengthening. They should look for independent, capable people who share their values,” is his advice to promoter-families.