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Corporate ‘Double-hatting’ Could Be Dual-Faced Behaviour!

Critical assessment of dual roles that promoters play, in being the major shareholder / chairperson of the Board as well as being the Chief executive, has ramifications in understanding governance issues, including related party transactions.

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The disparity of wealth generation & accumulation amongst individuals, disparity in growth of nations, combined with the dilemma of varying demographics adds to the complexity of ever-changing societal behaviour. Also, the societal norms impact what’s accepted as morally-correct in one society; and that might be seen as bad behaviour in another society.

Corporate democracy denotes the power enjoyed by the shareholders of a company. After all, in certain respects, corporate democracy is akin to political democracy. Shareholders exercise their vote and elect directors to manage the affairs of the company, just as citizens elect the legislators to manage the affairs of the state. Many market-regulators cap the tenure of the CEOs & board members to avoid any potential governance-impairment. 

Governance - The ‘True North’

Sir Adrian Cadbury defined Corporate Governance as the system by which companies are directed and controlled. He defined “Corporate governance essentially involves balancing the interests of the many stakeholders in a company by allocating the corporate resources in a manner that maximizes the value for all stakeholders – these includes its shareholders, management, customers, suppliers, financiers, government and the community.”

Good governance is the soul of any sustainable successful corporate enterprise and part of its culture. Culture in the corporate sense is 'the way we do things around here'. Well-governed enterprises are inclusive in the way they deal with all their stakeholders, be accountable, transparent in their dealings and responsive in their communication. The fundamental objective of corporate governance is to enhance shareholders' value while protecting the interests of other stakeholders.

As we know but don’t remember often: transparency means having nothing to hide. It is a critical component of corporate governance because it ensures that all of a company’s actions can be reviewed at any given time by an external observer. Transparency helps strengthen integrity in a system. It needs accountability as a glue, to build transparency as a value system. In any entity, the theory of “holding one neck” is an easy way of explaining “who is accountable” for any errors and wrongs. It always boosts shareholder and other stakeholders’ confidence, in knowing that there is someone who is accountable.

Information & RPTs

Before internet access was widely available, “information arbitrage’ was a competitive edge for corporates. Subsequently with internet access increasing globally, that arbitrage is no more available or useable as competitive advantage. In fact, Information arbitrage, used against them is not liked by any stakeholder. The other aspect that the stakeholders don’t accept or even see it as impunity, is the “information asymmetry”. This could be anyone in the value-chain of a company who uses the available-information and an unintended or false result is the resultant outcome. In case of the Board of Directors or even regulators, if they cannot get the right & necessarily sufficient information on time, best of individuals cannot steer it towards a right & fair decision. 

This was the philosophy of having rigorous “related party transaction” (RPT) disclosures. To ensure that all shareholders have the relevant and adequate information in deciding if any of the RPT don’t hurt the organisation. The current RPT requirements have a certain materiality threshold % which will necessitate public disclosures. For large entities, this would mean that they don’t need to disclose even a large amount (value) of transaction, if it does not exceed the stipulated proportion ! So the execution of these rules defeat the very spirit intended by the same rules!

Apart from the current regulatory disclosure requirements  on RPT, there needs a watch on “family & friends” concept of transactions. In a familial society like India (even in the business circles), apart from those single-digit-number of individuals who qualify as family for anyone to declare transactions with them, we need to watch out for “friends-in-trust”; you can actually have 2 friends (buddies) of many years having transactions with each other’s entities (or empires) without violating a single (current) law, and yet breaking the spirit of the RPT rules. 

The two hats need two different heads?

Family-owned businesses are significant contributors to economies, and critically in job creation. Indian economy has also benefited by such family / promoter led entities. 

Being a shareholder is one hat that most of contemporary promoter-leaders balance, along with another hat - that of being the chief executive.It is in this small detail that the world expects distinctive behaviour and where governance is to be demonstrated. That the role of being a shareholder is very different from that of the chief executive of the firm.  At a time when a critical business decision has to be taken without bias, the role of that individual who wears both these hats will always be seen as “compromised”. The concept of “One for all, all for one” could very well apply to stakeholder management in terms of maintaining what’s good for the stakeholders should be good for the promoter. And not the other way around.

It is ironic that in this day & age, many senior leaders mention that they are “Chairperson & CEO of a company”. The finer detail would show that they are actually 

  1. Chairperson of the Board of Directors of that company (and not chairperson of the company) & 
  2. CEO of that company. 

Both these tags are different roles and have different responsibilities. 

The Promoters / Founders in India do recognise the need for professional management. However, some of them could expect ‘loyalty exclusively to them’, rather than the interest of the stakeholders. That is where the conflicts of professionalisation begins.

The Indian regulatory move to split the role of being the Chairperson and the Chief executive of the firm has been much awaited and hopefully would be enforced without further relaxations. We pitch India as an investment destination & we proudly showcase our young demographics and the leadership-factory that India Inc has. Yet the same statistical-stand fails us in our search for business leaders who could replace promoters’ role as the chief executive !

The ancient Indian society has taught us the virtues of retiring at a specific age and to use the wisdom learnt over the years, to groom the next generation. However in the modern materialistic world, we seem to struggle with that concept of “when to retire” and seem to hold onto the “seat / power / position”, until regulations tells us otherwise ! Hopefully the younger generation Indians will pick up hobbies and other non-work passion that can keep them in good mental / physical / emotional shape and be an incentive to retire, when it’s time! After all, they should do better than the current and previous generations. 

We accept when the ageing business leaders don’t retire just because their enterprises have created (material) value for the shareholders &/or they have shareholder-voting-heft to renew their (own) contracts. Some of the tall business-stalwarts we have celebrated &/or continue to celebrate, have shown us examples of “holding onto the seat”. This surely is not a pleasant ad-material for a Fevicol spoof-ad!

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Srinath Sridharan

The author is Independent Markets Commentator

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