Every public company in India is to have a Board of Directors (Board), responsible for holding management accountable and for safeguarding the interests of stakeholders, including shareholders. The Board comprises a Chairperson, a Managing Director, Executive Director(s) and Non-Executive Directors, both Independent and non-Independent.
A Chairperson is the person who heads the Board. She/ he is first among equals, and is elected by fellow Directors. The Chairperson presides over meetings of the Board, and of shareholders (Annual General Meetings and Extra-ordinary General Meetings). He/she also has to sign statutory statements and reports, on behalf of the Board. She/he plays a vital role in setting the tone at meetings. She/he is also expected to play a role in setting the agenda. She/he ensures that meetings run smoothly, and remain orderly, and works at achieving a consensus in board decisions. Ordinarily, the Chairperson does not exercise a casting vote in any Board decisions.
A Managing Director (MD) and/or Chief Executive Officer (CEO) is the person who is the highest-ranking executive, responsible for the overall management of the company. An MD is appointed by shareholders, and is a Director on the Board, while a CEO is appointed by the Board and is not a Director. His/her primary responsibilities include making major corporate decisions, managing the overall operations and resources, delivering business performance and acting as the main connect between the Board and the management. Management reports to the Board, and the MD or CEO is accountable to the Board.
Over time, companies have adopted varying leadership structures. While some companies have moved towards separating the posts of Chairperson and MD/CEO, with two separate persons manning these positions, others continue to have the same person in both these posts.
Common leadership structures observed:
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- Promoter Chairperson, whether executive or non-executive, and Professional MD/ CEO-The founder or promoter of the company serves as the Executive or the Non-Executive Chairperson of the Board, while the Board appoints a professional MD/ CEO, with domain expertise.
- Executive Chairperson and Professional CEO-The Chairperson and CEO both hold executive responsibilities in the company.
- Chairperson, who is also MD/ CEO (Chairperson and MD or CMD) –In some companies, both roles are vested in the same person. This may not only be in promoter led companies, and is commonly seen in Public Sector Undertakings.
While legal provisions in India permit any of these leadership structures, SEBI LODR Regulations, 2015, under discretionary requirements that promote corporate governance, state that it is desirable to have two separate persons, one as a non-executive Chairperson and one as MD/ CEO. This helps in establishing proper accountability of the management, led by the MD/ CEO, to the Board, led by the Chairperson.
Advantages of having separation of roles of Chairperson and MD/ CEO-
- Proper accountability of management.
- Role clarity for the Chairperson and the MD/CEO.
- Reduced concentration of power.
- Positive impact on independence of Board.
Concluding perspective:
The most effective governance structure is one where the Chairperson is a non-executive member and MD/CEO leads the management independently. Combining these roles dilutes accountability.