Govt advises companies to split offices of chairman, CEO

New Delhi: In an order to strengthen corporate governance, Indian government has come out with voluntary guidelines, advising corporate houses to separate the offices of chairman and CEO and a cap of seven on the number of directorships an individual can accept, reports Economic Times.

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.

Union Minister of Corporate Affairs Salman Khurshid said that 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," says Khurshid at the concluding event of 'India Corporate Week'.

The proposal of separating chairman and CEO's office seems to be tricky as most of the Indian companies are controlled by promoters, who hold over 50 percent 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," said the guidelines. On reducing the cap 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 also asked to fix six-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," said the guidelines. On the rotation of 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.