Separating Chairman / Managing Director positions - a challenge for corporates
Bhumesh Verma 17 May 2019

Separating Chairman / Managing Director positions - a challenge for corporates

From the business / management perspective, the two top posts of the Chairman and the Managing Director are very vital in any organization. Most of the executive powers may be concentrated in one or both of these positions.

Therefore, a state of conflict of interest may arise on concentration of powers associated with chairman and managing director positions in a single person. Power corrupts and absolute power corrupts absolutely – such concentration of powers can adversely affect the management of the company business and result in unlawful acts and downgrading the corporate governance standards at organizational level.

Therefore, engagement of different persons for such positions may be a more professional and correct strategy for administration/compliance/business convenience and most notably to dodge any conflict of interest (ownership vs management) at management level.

To avoid the side effects associated with the concentration of powers in a single person and as a part of revamping the corporate governance reforms, the Securities and Exchange Board of India (SEBI) has issued a directive ordering top 500 listed companies to make it a point to have separate personnel for the positions of chairman and managing director.

As a consequence, listed entities are barred from employing same person to perform the duties and observe the responsibilities assigned to chairman and managing director position.

With the target to comply with the SEBI directive, some of listed companies are in a hurry to promote their independent director (Director) to the chairman position. Such a move can prove to be counter-productive and won’t serve the real intent of the SEBI directive.

Typically, in a family promoted business the position of chairman and managing director are held by members of promoter family only. If absolutely necessary, the family may nominate a Director (who is close to promoter family, but designated as an independent director) to the Chairman position – it may assist the promoter family to keep a tight control over the management of the company’s operations.

Post such appointment, the independent director in his new role as the chairman  will remain to be part of the board in a non-executive role – by and large, the board composition will continue to be the same as engagement of Director as chairman won’t make any difference in the board management.

It is not just family promoted businesses but even also other companies who are mandated by law are mulling on elevation of Director to chairman status.

It is expected that the foregoing proposition will be integrated by listed companies into proposals to be discussed during the upcoming board meetings or annual general meetings scheduled for financial year 2019.

The SEBI directive will be forcing around 30-35 reputed companies (Piramal Enterprises, Lupin and Godrej Consumer Products, Reliance Industries, Adani Enterprises, etc.,) to reconstitute the composition of their respective boards by this fiscal end to be in compliance with the SEBI directive.

It is vital to establish a clear distinction of powers between different positions on the Board not just in letter but in spirit to preserve the economic interest of minority stakeholders as non-compliance of law in spirit could result in conflict of interest amid the majority/minority shareholders.

The real compliance with law by the company in its truest sense will be reflected in protecting the economic/business interest and legal rights of minority shareholders on equal footing with the interest/rights of the majority shareholders in real time.

Chairman/managing director position has an eminent role to play in the company management as chairman/managing director is empowered to eliminate a director from the board, to conduct board meetings, to carry / modify the meetings agenda and to monitor the business operations in regular course of business.

Given the significance of chairman/managing director role in the company management - The companies should employ different qualified and independent professionals for the chairman and managing director who are proficient in working without bias and perform their duties and responsibilities in a transparent manner for the well being of all stakeholders.

Employment of impartial and different persons as chairman and managing director will not only ensure companies conformity with the SEBI directive but also fortify the corporate governance standards of the company to next level and guarantee unbiased management of company business along with preserving the economic interest of majority/minority equally.

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