MGT 237 CORPORATE GOVERANCE

Response Paper 1

Name: Dhairya. Vikas. Shah

Roll No: AU1813069

Section: 1

Date: 20/2/2020

Submitted To: Prof. Nimit Thaker

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Introduction: The article revolves around the idea of separation of Chairperson and CEO. The
topic of the article says that if a person is given a medicine for his/her cure but medicine don’t
work for their diseases so it is called medicine without an ailment. Same way if the company gives
position of CEO to one person but on CEO one chairperson is put on then the power of the that
CEO position is no more in the company. So the SEBI has passed on statement that from April
2020 both Chairperson and CEO should be different entities. For better understanding two theories
of Corporate Governance are written in the article.

1) Agency Theory- In this theory let take example of Board of director and Shareholder.
This theory says that there is no control on board of director by the shareholder so board
of director works for their personal interest not for the company collective interest. So, if
there is two different position of CEO and Chairperson in the company there will be no
personal interest because the Chairperson can supervise the work of the CEO and the
shareholder and company will get collective interest.

2) Stewardship Theory- This theory is completely opposite of the agency theory. In this
theory the shareholder makes trust on the Board of director that they will work for the
companies benefit not for their personal interest. So, they suggest that position of CEO and
Chairperson should be same only because they either way will work for the collective
interest of the company.

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My arguments are in the favor of the SEBI that CEO and Chairperson position should be different.

1) The basic work of the CEO is to execute the work that also includes making corporate
decisions. CEO is the person who is main communicator between the board of director and
the corporate. They are only who is answerable to the shareholders. There main work is to
execute or managing overall operations and resources of the company. Whereas the
Chairperson is the supervisor of the company. CEO of the company has to report to the
chairperson. So, in some companies chairperson also plays the role of CEO so there will
be no difference between both the position and for the verification of the work of CEO
there will be no independent person available for the good collective interest of the
company.

2) In companies CEO salary is decided by the corporate board. So, in the company board
chairperson position is similar to CEO the person may influence his personal interest on
getting the salary because the chairperson the member of the corporate board who decides
the salary of CEO. So, its good for the company to have both different position so that CEO
salary is done by the Chairperson. And because of that there will be no personal interest
from any of these two positions from salary point of view.

3) CEO is the person who regulates all operation of the company and also satisfies the wishes
of the shareholder. For example if the company is in good progress then the shareholders
are excepting good dividend from the company but if the CEO don’t complete their wish
or because of his personal interest don’t provide appropriate amount of dividend there will
be person (chairperson) in the company who will ask question to CEO that why wish of
shareholders are not satisfied if here both position where same there will no one to ask
question to CEO about not satisficing the need of shareholder. This is additionally
confused by the way that the CEO is enlisted and terminated by the board. An autonomous

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 Chairman of the Board can make a free wellspring of power with unmistakable position to
address the worries of the board. This autonomous viewpoint makes an open door for the
board to all the more adequately address any maltreatment that may happen, and to address
any worries about the presentation of the CEO. In any case, when a free Chairman of the
Board needs data, authority or regard of the administration, any apparent incentive in
autonomy for the good of independence reduces. An autonomous executive may have less
access to the realities and inadequate industry information or institutional regard on
account of his absence of everyday association in running the partnership, in this way
impinging on the capacity to give educated, compelling criticism and oversight.

4) These two-position main responsibility is of decision making. The position of CEO and
the Chairperson is different then there will be flexibility in decision making. In many
companies it is seen that there is domination of decision making so if the CEO and
Chairperson have same position companies have rubber stamp board members who
dominates the board of company to except their decision. Because if they have heavily
invested in the company they will thought for their personal interest. So, if there is two
different position the Chairperson may oppose the decision so that domination of the CEO
on the board of company not leads to companies loss. So, two position maintains
flexibility in decision making.

5) The Company should have one audit committee on board which is under the control the of
Chairperson. So if the CEO and Chairperson position is the same, the CEO executes the
work and CEO only check audit works of the company so there will be no transparency in
the work of the committee if there is no higher authority to check. So if the CEO and
Chairperson both are the same there will be conflict of interest and collective interest of
the company will decrease so it is better to have two position.

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 Conclusion: The SEBI has taken the right decision for all the companies that both the
position of CEO and Chairperson should be different because of that there will be no
personnel interest, flexibility in decision making, satisfying shareholders wishes etc. For
the better growth and collective interest of the company.

Bibliography:
Mohr, A. (2020, January 29). 3 Reasons to Separate CEO and Chairman Positions. Retrieved
from https://www.investopedia.com/financial-edge/0912/3-reasons-to-separate-ceo-and-
chairman-positions.aspx

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