Split offices of chairman, CEO, govt tells India Inc

NEW DELHI: In a bid to strengthen corporate governance across India Inc, the government on Monday came out with a set of voluntary guidelines for the industry, making significant recommendations like separation of offices of chairman and CEO and a cap of seven on the number of directorships an individual can accept. Other important recommendations are rotation of audit firms every five years and an annual review of the effectiveness of the company's internal controls, something considered crucial to prevent recurrence of Satyam-like fraud.

Corporate affairs minister Salman Khurshid said corporate governance norms required to be strengthened. "The existing set of corporate governance framework needs to be taken to a higher level to ensure greater level of accountability to shareholders," the minister said at the concluding event of 'India Corporate Week' where President Pratibha Patil, who was the chief guest, asked companies to work for the development of rural economy.

The proposal to separate offices of the chairman and CEO is considered tricky for Indian industry as most listed companies are controlled by promoters, who often hold over 50% of the voting stock. "To prevent unfettered decision-making power with a single individual, there should be a clear demarcation of the roles and responsibilities of the chairman of the board and that of the MD/CEO. The roles and offices should be separated, as far as possible, to promote balance of power," the guidelines said.

On reducing the ceiling on directorships from the existing limit of 15, the guidelines said, "In case an individual is a MD or whole-time director in a public company, the maximum number of companies in which such an individual can serve as a non-executive director or independent director should be restricted to seven."

The guidelines sought a fix 6-year tenure for independent directors, perhaps to break complicity between them and the management and ensure induction of fresh blood. "... a period of three years should elapse before such an individual is inducted in the same company in any capacity," the guidelines said. On auditors, the recommendations sought a three-year term for an audit partner and five years for audit firm to get a "fresh outlook" on the audit exercise. The recommendations had special mention on internal controls and said the company board should conduct an annual review of their effectiveness.