Ratan Tata. (Mint )
Ratan Tata. (Mint )

Opinion | How owners and professional CEOs can get along well

We should try the idea of a two-tier board: a management board and another one in a supervisory role

Family businesses in India constitute more than 95% of all businesses and have largely remained owner-driven. The challenges of growth, technology disruptions, a paradigm shift in the regulatory regime and global competitiveness over the past two decades have led family owners and promoters with controlling interests to increasingly engage professionals to lead their businesses. While doing so, however, they have tried to retain an unfettered ability to rein in, at will, their professional CEOs.

Growing concerns about corporate governance in family businesses and pressures to enhance stakeholder value, amid tightened regulatory oversight, have placed professional CEOs at the centre of the governance structure. No doubt, therefore, that they have been the first in the line of fire for civil and criminal action in cases of corporate failure and economic offences, even though these might be attributed to the actions of owners. Realizing this, such CEOs have begun to exercise independent judgement, which goes against the interests of owners or promoters at times. This has caused tensions and, in some cases, led to bitter fights between them and the owners.

Cyrus Mistry, for example, was sacked unceremoniously in 2016 as the chairman of Tata Sons for alleged departures from the Tata Group’s ethos and culture, and it was widely reported that the relationship between him and former chief Ratan Tata was not working well. In the case of Infosys, the founders, acting as large-stake owners, caused the exit of its professional CEO Vishal Sikka in 2017 over issues of corporate governance, though Sikka put his exit down to a continuous drumbeat of distractions and negativity (from founders) that he said was inhibiting value creation. There are many high-profile cases where professional CEOs were reportedly discredited by owners, despite their role in the transformation of these firms into successful businesses.

Ironically, despite being board-managed, companies with independent directors and professional CEOs have remained “subservient" to owners. A professional manager designated as CEO—or as chief financial officer or chief operating officer—has onerous responsibilities under the Companies Act, 2013, Prevention of Money-Laundering Act, and numerous other laws, apart from rules of the Securities and Exchange Board of India (Sebi), without necessarily being able to exercise commensurate authority. In small family businesses, a CEO is commonly used as a shield by family owners against prosecution for legal violations.

The governance structure under the Companies Act or Sebi’s public-listing requirements clearly define the role and responsibilities of the board, the shareholders and the CEO, with checks and balances. A professional CEO, acting as managing director under the Companies Act, is entrusted with substantial powers of management. In reality, however, owners dominate decisions since they effectively control the board. The role of independent directors in ensuring good governance at the board level has been illusory so far.

Business owners and professional CEOs are meant to complement each other and deliver value within the bounds of good corporate governance. In recognition of this, the current governance structure needs to be revisited so that a professional CEO is granted the requisite freedom to act within the mandate given to him, and he can be held accountable based on an objective evaluation of his performance by the board. The structure must ensure that no fraud or impropriety takes place, and this will be easier if there is some distance between the professional CEO and the owners.

Currently, in India, a company’s board of directors comprises owner directors, a CEO, executive directors, and independent and other external directors. The role of the board is to provide strategic direction, exercise control and, at the same time, oversee the management of the company’s affairs. The role of owners and management in such a situation gets blurred, and governance suffers.

The idea of a two-tier board—a management board and another in a supervisory role—needs to be tried, as is practised in some European and Asian countries, suitably adapted. This will delineate the interface between owners and the CEO. The management board, with just the managing director and employee directors, could be responsible for formulating a shared vision and strategy, and for the company’s management. The supervisory board, with independent and other external directors appointed by shareholders, would provide strategic direction to the other board and oversee its performance. The professional CEO would thus enjoy managerial freedom and also be held effectively accountable. If implemented, a two-tier board would also align the role of independent directors with what they’re liable for. As part of the supervisory board, they would not be held liable for decisions and actions of the management.

The contribution of family businesses to our economic growth has been substantial, and yet less than 10% of such older firms see success beyond two generations. Owners and professional managers need to be in sync in order to succeed and sustain good governance. Owners should limit their engagement to long-term value creation, and a company’s management is best left to a professional CEO. Corporate governance norms should provide a framework to nudge and facilitate this.

Ashok Haldia is a former secretary of the Institute of Chartered Accountants of India

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