India Inc favours chairman, CEO role separation

Separating the roles of chairman and chief executive officer increases the effectiveness of a company's board, according to directors on corporate boards across the country.

As many as 75 per cent of the directors interviewed, from more than 100 companies, believed that having separate individuals in the two roles helped in improving corporate governance.

A recent joint study by management consultancy A T Kearney, legal advisory firm AZB & Partners and talent management company Hunt Partners, on the state of corporate boards also found that only 39 per cent of the companies had a formal evaluation procedure for board members.

The directors also wanted to see a more active board culture.

Commenting on the demarcation of roles, Vivek Gupta, managing director, AT Kearney, said, "It is the board's and chairman's job to monitor and evaluate a company's performance. A CEO, on the other hand, represents the management team. If the two roles are performed by the same person, then it's an individual evaluating himself. When the roles are separate, a CEO is far more accountable."

As Indian companies are still largely "proprietor-driven", the same individuals perform both the roles, Gupta added.

Nearly 80 per cent of the directors interviewed said that to improve effectiveness, boards need to increase and put in place better evaluation processes. In 64 per cent of the cases, the company boards assessed themselves.

Gupta agreed that this was an area which required major improvement. In developed nations, 70 per cent of companies have independent agencies evaluating their performances.

Further, while the average age of employees has been coming down, that of chairpersons (and CEOs) and managing directors increased by a year to 60.7 and 53.2 years respectively, in 2005-06.

"The boards prefer to select directors from existing boards rather than invite new untrained members," said Arjun Erry, senior partner, Hunt Partners.

On the issue of independent directors, the report found that while their numbers remained unchanged, the limited pool and absence of proper selection processes were the biggest impediments in changing board structures.

Ninety per cent of the independent directors were getting selected through friends or chairman's referrals.

Gupta believed this was not upsetting as a senior team of board of directors often helped offset the lack of experience of young employees.

Another indication that companies were selecting from existing pools was the fact that directors in India were members of eight external boards on an average.

In most developed nations, the average stood at 3-4 boards. However, both the number of board meetings and hours spent in such meetings increased in 2005-06, and, hence, the number of external boards a director joined was likely to decrease going forward.

Interestingly, more than half of those interviewed believed that increasing a director's compensation might not necessarily improve a board's performance.

In fact, there's a healthy consensus among directors that an increase in remuneration would least impact a board's performance.