The Time Press
Opinion

Let us not lament Sebi’s U-turn on role division


In a surprise turn, the Securities and Exchange Board of India (Sebi) on Tuesday made it voluntary instead of mandatory for our 500 top-valued companies whose shares are traded publicly to separate the distinct roles of board chair and management charge, vested in either a designated managing director (MD) or chief executive officer (CEO). Reluctance to comply with Sebi’s 2018 order asking for oversight and executive leadership to be split was evident in its records. Even with a deadline pushed forth to 1 April 2022, only about 54% of the 500 had done it by end-2021, as reported. This shift was among the reforms proposed by a panel on corporate governance headed by Uday Kotak that Sebi had set up in 2017. The rationale, on paper, has always been sound. If a board must watch how a business is run on behalf of its stakeholders, its chief must not be the one running it. To minimize the scope for conflict of interest, the two should not be related either. The regulator’s dropping of its insistence on role separation, thus, represents an awkward climbdown. Yet, we should not lament this reversal. After all, what works in theory need not in practice. And the idea had too little going for it in the realm of operational reality to be adopted as an article of faith.

The country’s business arena features a significant proportion of large enterprises that are held closely by families, not just in terms of equity but also executive control. While we have seen a wave of professionals take charge after a shift in economic policy made space for competition, family-run firms have not only held their own, the sustained success of many has served to highlight the merits of long-term stability in strategic direction afforded by such concentrations of power. A quarter-to-quarter orientation rarely afflicts their plans and it is hard to argue that a bigger external say would necessarily improve their performance. No doubt, public equity participation requires us to protect the interests of minority shareholders (among others), and this is an important board responsibility. Even if the two top roles were to be kept apart, however, the de facto dynamics of internal authority are unlikely to defy the dictates of a business’s pattern of ownership. Even unwittingly, the very stature of a high-profile business leader could reduce the cleaved-apart role to that of a figurehead and defeat the purpose. It is for similar reasons that boards packed with independent members have not worked as well as hoped. When power gaps are large, who is beholden to whom can get in the way of defined duties. All considered, a role-split would not have meant all that much.

However, we must not let circumstances get the better of us. Ultimately, the task of keeping watch of corporate calls must devolve upon shareholders at large. And to empower shareholder democracy, we need greater disclosure. To its credit, this too has been a Sebi pursuit. For example, a recent rule it made that comes into force in 2022-23 asks listed firms to report related-party transactions with explanatory notes. Though shareholder nods needed for large related-party dealings may be regulatory overkill, as it could slow legitimate processes down within a business group, incestuous deals have long been a conduit for siphoned funds and Sebi-mandated disclosures could aid the cause of better governance by alerting investors and deterring such shady practices. Moves that enhance what’s publicly known would help engage a wider chunk of ownership. This is the sort of oversight we must encourage.

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