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Informist, Friday, Nov. 22, 2024

By Rajesh Gajra

MUMBAI – The Securities and Exchange Board of India must summon the courage to get listed companies to compulsorily separate the posts of chairperson and managing director, a provision which the regulator rolled back at the last minute due to pushback from promoters, former chairman of the market regulator M. Damodaran said Friday. Speaking at a corporate governance event in Mumbai, Damodaran said SEBI has developed "cold feet" and did not enforce the separation it had ordered companies to do.

SEBI had in May 2018 amended its listing regulations to mandate that the chairperson of boards of the top 500 listed companies by market capitalisation should be a non-executive director and not be related to the managing director or chief executive officer. This change was to be effective from Apr 1, 2020, but three months before the deadline, SEBI extended it by two years.

SEBI in February 2022 made the separation of the posts voluntary. It effectively meant that companies could continue to have the same person as chairperson and managing director. Around 230 companies had not separated the posts of chairperson and managing director, according to data given by the SEBI at that time.

The combined post "is the ultimate negation of corporate governance", Damodaran, who was the chairman of SEBI from February 2005 to February 2008, said. The chairperson of a company heads the board of directors which is supposed to hold the management accountable, and the managing director is the head of management who is supposed to run the company, he said. "If both these functions reside in the same individual, you have a great conflict of interest," Damodaran said.

SEBI had junked the mandatory provision partly due to pushback from promoter families. According to Damodaran, many promotor families would have lived with the separation of the two posts but for the additional requirement that the chairperson and the managing director should not be related to each other.

Damodaran also criticised the practice of having an executive chairperson where the managing director or the chief executive officer was a different person. "The real problem there is (for such companies) it becomes a person-centred organisation... everything that that person does is what drives the organisation," Damodaran said. Further, if the chairperson is involved in day-to-day operations, the board may not be able to effectively hold to account the acts of the management of which he or she is a part.

The former SEBI chief also took a dig at a South India-based information technology company whose middle name he said was synonymous with corporate governance. Around a decade ago, this top-notch IT company got back its founder promoter who had earlier stepped down from the board as the executive chairperson even though the company had an active managing director at that time, Damodaran said.  End

Edited by Saji George Titus

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