Proposal to force the separation of chairman and chief executive roles at listed companies, as in U.K..
.jpg)
By Una Galani
MUMBAI (Reuters Breakingviews) - India is eyeing a heavy hand to deal with its tycoons. A proposal to force the separation of chairman and chief executive roles at listed companies, as in the United Kingdom, is too prescriptive. It comes amid efforts in India to learn from past mistakes, but it risks unintended consequences.
There is increasing scrutiny on governance following the pile-up of bad loans in the country, worth almost $150 billion. It is against this backdrop that a committee on corporate governance, under the direction of the securities regulator, is proposing companies with public shareholders owning more than 40 percent should be required to separate the top roles by 2020, with all listed entities to follow by 2022.
Dividing the top roles ensures checks and balances exist, and the jobs can require different skills. In India, though, it would require a huge response. Around 47 per cent of companies in the BSE 500 have an executive chairman, according to data compiled by Institutional Investors Advisory Services. These include the country's largest company, Mukesh Ambani's $90 billion Reliance Industries, and other blue chips like Azim Premji's IT outsourcer Wipro.
It might also not result in the optimal outcome. When Indian companies were handed a quota to install at least one woman on their boards, Ambani appointed his wife. There is nothing in the proposed rules to stop tycoons appointing family members to executive positions while leaving real control with the chairman. Such prominent workarounds risk making a mockery of the requirements.
Unlike in the UK, many Indian companies still have large family or founding shareholders, too. Sandeep Parekh, Managing Partner of Finsec Law Advisors, argues that the creation of alternate power centres contributed to recent high-profile governance blowups at the Tata Group and Infosys. In both cases, professional executives were unable to operate out of the shadow of the people above them.
If a UK-style approach is too black and white for today’s India, the U.S. model, where high-handed chairman-CEOs abound, is hardly ideal either. Maybe a starting point could be to make boards split the top jobs or explain why they haven’t. India’s resolve to improve its corporate governance is admirable, but overly rigid rules may backfire.
- A committee on corporate governance constituted by India’s securities regulator has proposed that listed companies should separate the roles of chairman and chief executive.
- The so-called Kotak Committee, led by veteran banker Uday Kotak, has recommended that companies in which public shareholders own more than 40 percent should separate the roles by April 2020, with the requirement extended to all listed companies by 2022.
