Splitting CEO’s Duality role: The landscape to independent Board Leadership ?

Shubham Gupta, a 4th year law student at the Institute of Law, Nirma University

*Orginally published at Taxmann.com


In 2019, the Indian financial market has confronted many climacteric corporate issues like IL & FS, DHFL, Tata- Mistry, Infosys, etc. which appeal for a change in dynamics of corporate governance and compliance culture. In this regard, regulators and government bodies relentlessly fosters to adopt better compliance practices across the world. One of such advent interventions, the capital market regulator, SEBI vouched for separation of position of chairman and CEOs/ managing directors – which, in turn would cultivate a corporate democracy.Separation of position and roles of the chairman of board and CEOs/Managing directors is assumed on the basis that the management look over the affairs of  the company whereas the board supervises the management, on behalf of the shareholders of the company. Essentially, this demand a non-aligned interest between the board and the management to have effective governance and management.

On the recent ruffling into the boards of Indian Listed Companies regarding SEBI’s rules on segregation of roles and position of chairman and executive/managing director- the hotly debated is again into clamour.[1] This article reinvigorates the debate over the dual role of CEOs and analyses the empirical literature available on this subject. In this regard, the author has emphasised two critical theories of corporate governance- agency theory which advocates for the separation of dual role; and stewardship theory which asserts the unity of command in a single person. Lastly, this article suggests the implication on the Indian Financial Market.

SEBI’s LODR Regulations : A breather for Listed Companies ?

In May 2018, The Security and Exchange Board of India (SEBI) brought in an amendment into Regulation 17, SEBI LODR (Listing and Disclosure Requirements), 2015 envisaging a separation of position of chairman and executive/managing directors,[2] with the aim to create an independent board while in the interest of better governance and compliance. This amendment has been captured on the recommendation of Uday Kotak Committee on Corporate Governance,[3] and is effective from to 1st April 2020.

According to new rules, in 2018, SEBI has mandated that the top 500 listed companies (by market capitalization) must ensure that the chairman of the board and executive director are not the same.[4] Until yet 2020, 247 companies have not separated the position of chairman and executive director including RIL, Hindustan Unilever, etc.[5] This breather has been a stumbling stone to instil a better proposal for effective compliance. Behind time, this scenario, of course, ends up the corporations appointing dummy or titular chairman of the board, where CEOs/MDs will continue to exercise unfettered control over with some ineffective independent director on the board. Thus, this proposal may seem not to apply in letter and spirit where independent leadership has been aimed for.

Kotak Committee Recommendations: The power Conflict

Kotak Committee has recommended that a division of power of Chairperson (leader of the board) and CEO (leader of management) would provide effective supervision of the management and better segregation of responsibilities and duties. In most European, British, and Canadian businesses the roles are usually split in an effort to ensure better governance of the company, and in turn, bring higher returns to investors. However, in certain jurisdictions like US, this position is differently debated and corporation have been given discretion to separate the roles.  The power conflict to maintain position is seen to a sparkling debate amongst corporations.Kotak Committee vogue for following reasons -a) providing a structural advantage for the board to act independently;b) reducing excessive concentration of authority in a single individual;c) clarifying the respective roles of the chairperson and the CEO/MD;d) ensuring that board tasks are not neglected by a combined chairperson-CEO/MD due to lack of time;e) increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions;f) creating a board environment that is more egalitarian and conducive to debate.

Fostering Independence and Transparency – A Popular Opinion  

Aftermath the result of corporate scandals and the financial crisis, the reformers and, the investors have demanded functional independence by separating CEOs and Chairman jobs – while from the parlance of better corporate governance practices. Their argument is braced upon the agency theory which advocates that the CEO performs the management activities of the companies, while Chairman of the board looks into matters on behalf of the shareholders like hiring, compensation, and remuneration, etc., thus require their separation to instill corporate democracy.[6] Corporate democracy is an intertwined thread of management and board, and shareholders where the board supervises the management and report to the shareholders. Therefore, a separation would lead to better monitoring and oversight. If one person occupies both the roles, there would be a conflict of interest.Besides, boards should ensure that the Chairperson be able to commit sufficient time to carry out his or her duties and responsibilities effectively. The duties and expected workload will vary according to the type, scale and, complexity of the organization. This augments that separation would lead to creating independence and transparency into the affairs of the company. Also, the best corporate governance system discourages the concentration of wealth on a single or a few individuals’ hands who are managing the affairs of the company. The Corporate Governance Principles of the Organization for Economic Cooperation and Development (OECD-2015) also promotes the separation of the role of CEO and Chairman which will lead to improving discharging of responsibilities of the board under principle VI – Responsibilities of the Board Item E.[7]

At the outset, in India, where large-scale family-promoters run businesses is to be frowned upon where the transition from generation developed business leadership been witnessed. In India, severe financial irregularities have been observed in family-run businesses like in Satyam Scam. Thus, arguably bestowing power to an individual might lead to no flourishing governance, and maybe the rights of shareholders would have been prejudiced.

Does Separation ensure Independency?

The critics of this concept believe that mere separating a role or position wouldn’t ensure independence, both theoretically and empirically.[8] Arguably, having an independent chair does not necessarily seem to have an independent mindset, and in any case, a wise-CEO would have discussed disagreement with Chairman prior to going into a meeting. This would lead an anomalous result which is to be perceived by separating the roles. In one of the studies conducted in US Companies, despite a large number of separations between the position of CEO and Chairman of the board, it has been observed that only 16% of people have been observed as true independent chairman.[9] Thus, there is a shred of weak evidence[10] that independence and effective governance would increase. However, in total, 13 studies have been conducted, to determine whether separation would lead to independent board leadership and effective governance. Out of 13, ten inclined to show that separation has either positive or no effect on the performance of company or firm,[11] and only two have shown a negative consequence of it.Admittedly, they have advocated stewardship or administrative theory which argues that the benefits of separating the chairman and CEO roles are not free from any blot and would suffer from a ‘unity of command’ in an individual which is essential for effective management and decision making. It advocates that the person must have clear and unambiguous authority, to which management can effectively report the affairs of the company. The same has been recently relied on by Rishabh Premji, the chairman of Wipro who had requested to remain on the executive position.[12] However, the board of Wipro has stated that ‘We will compile with SEBI Regulations’.

Analysis : Implications of Indian Financial System

According to one of the studies,[13] that apart from the structural attribute of the boards, the behaviour of the boardroom – what actually happens in the boardroom reflects the effectiveness of leadership. Thus, we must focus on behavioural studies of the board, rather a clinging separation between the roles. The specific industry knowledge of separate chairs, their leadership skills, and how they shape board process has received scant attention, and the pay-off must be to incorporate all these factors. The structural attribute of the board like managing dissent, conducive boardroom discussion and facilitating the synergy between board and management must be incorporated in policy or regulations.

In Companies Act, 2013, there is no clear line of segregation of roles and responsibilities of CEO and Chairman and Companies have given leverage to decide the roles and responsibilities according to their framework based on their organizational setup and size of the company. If the CEO-Chairman relationship is strong, which in turn provides company benefits from having twice as much from the talent at the top, each having distinct leadership roles. Combining the roles does have its advantages, such as giving the CEO multiple perspectives on the company as a result of their multiple roles, and empowering them to act with determination. This, however, avows a leeway into CEO’s act  may lead to  a way for corruption and scandal. However, the enduring problem is with the implementation – as Corporation hasn’t implemented it and likely to appoint mere dummy/titular chairman of the board with some ineffective independent director.In India, the listed companies are being seen to be powered by a single shepherd that i.e. CEO. Corporation may unlikely to implement the law in letter and spirit, which again pose a peppering question: Does Independent Board Leadership exists? Thus, the regulator must seek to create an additional qualification for the appointment of chairman and relationship with the existing CEOs to implement the law in its letter and spirit.


From the standpoint of organizational prosperity, it is pertinent that companies to be managed effectively for long-term, and to create a sustainable value for shareholders. Separating the two positions strengthens the overall integrity of the company and encourages an environment of teamwork, communication and mutual respect.

[1]Letter to BS: Splitting CMD role to help improve corporate governance, Business Standard (Jan. 09, 2020).

[2]Reg. 17 (d) (1B) SEBI (Listing Obligations and Disclosure Requirement) (Amendment) Regulations, 2018.

[3]Report submitted by the Committee on Corporate Governance, SEBI (Oct. 05, 2017).

4]Reg. 17 (d) (1B) SEBI (Listing Obligations and Disclosure Requirement) (Amendment) Regulations, 2018.

5]Over 200 big companies yet to split Chairman, MD roles, ET (Jan. 06, 2020)

[6]Separation of Chair and CEO Roles, Harvard Law School Forum on Corporate Governance, (Sept. 01, 2011).

[7] OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264236882-en

[8] Roshima H. Said, Zuraini Yaacob, Norasmila Awang, Jurina Ismail, Kamaruzaman Jusoff, “Chief Executive Officer duality and company performance: A case of Malaysian companies,” Interdisciplinary Journal of Contemporary Research in Business, 1(6), 2009, 120-142 at 124.

[9] SpencerStuart, “2009 Spencer Stuart Board Index,” October 2009.

[10] B. Ram Baliga, R. Charles Moyer & Ramesh S. Rao, “CEO Duality and Firm Performance: What’s the Fuss?” Strategic Management Journal, 17, 1996, 41-53.[

11] CEO Duality, Succession, Capabilities and Agency Theory: Commentary and Research Agenda Author(s): Dawn Harris and Constance E. Helfat Source: Strategic Management Journal, Vol. 19, No. 9 (Sep., 1998), pp. 901-904 Published by: Wiley Stable URL: https://www.jstor.org/stable/3094091 Accessed: 06-01-2020 13:08 UTC

[12] Wipro’s Rishad Premji may lose executive chairman role due to new rules, Economic Times, Jan 2,  2020.[13]Separation of Chair and CEO Roles, Harvard Law School Forum on Corporate Governance, (Sept. 01, 2011).

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