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King without a crown

The post of chairman has no statutory recognition under the Companies Act, though there is a craze for it as a status symbol, says N. R. Moorthy.

THE TERM ``company chairman'' is an anachronism. Without meaning any offence or affront to the august office, the legal provisions as existing now will reveal unmistakably that at best such a person can only be regarded as a ceremonial head.

A semblance of recognition is sought to be given to this post under the Kumaramangalam Committee's code of corporate governance. The code came into force from March 31, 2000, for select public-listed companies, and is to be followed by others in a phased programme. The committee, in its report, says that the role of the chairman is to ensure that the board meetings are conducted in a manner which secures the effective participation of all directors, executive and non-executive alike, and encourage all t o make effective contribution, maintain a balance of power in the board, make certain that all directors receive adequate information well in time and that the executive directors look beyond their executive duties and accept full share of the responsibi lities of governance. The chairman's role should in principle be different from that of the chief executive, though the same individual may perform both roles.

It further makes a non-mandatory recommendation that the chairman should be entitled to maintain a chairman's office at the company's expense and should also be entitled for reimbursement of expenses incurred in the performance of duties. The code which mandates the constitution of an audit committee (a core set-up) stipulates that an independent director within the meaning assigned under the code should be the chairman of the committee who should be present at the annual general meetings (AGMs) of the company. Such a mandate is neither here nor there, for there is no provision in the Companies Act, 1956 obligating the appointment of a chairman of the company or assigning the role and responsibility of such person.

Under this code, there will be present at the AGM two chairmen and it will, however, be the prerogative of the chairman of the board to preside over the general meeting. Curiously there is a prevalent practice of appointing the managing director as the c hairman of the board and such a managerial personnel styles himself as chairman and managing director and as may be convenient (or inconvenient) such person drops his cap -- `chairman' or `managing director' -- as the case may be. This is not all. Some c orporates appoint a superannuated ex-chairman or managing director as `chairman emeritus' though such a person may not even be a director of the company. Such a glorified post is, perhaps, akin to `Bhishmapitamaha' in the Mahabharat.

What a craze for status symbol?

Predictably, sans legal sanction, a chairman of the board who presides over general meetings also wears an uneasy crown, as such office is devoid of executive powers, unless of course such chairman holds an executive post in the company. The legal positi on is that there is no statutory provision in the Companies Act for every company to have a chairman. The board may elect a chairman for every meeting or for a specified period.

There is yet another anomaly in the Act. The articles of association (AoA) of most companies provide that a director need not hold any qualification shares in the company, which means a person who has no stake and who is not a member can preside over the meeting of members. This situation is an anti-thesis to corporate governance and corporate democracy.

Legal position

Under Sec. 269 of the Act, companies having a paid-up capital of such sum as may be prescribed (at present, Rs. 5 crores) must have a managing director, whole-time director or manager.

Sec. 252 mandates that every public company other than a public company which has become `deemed public' pursuant to the provisions of the Act, must have a minimum of three directors and every private company should appoint two directors.

Sec. 383A mandates the appointment of a whole-time company secretary.

Sec. 224 obligates every company to appoint an auditor.

There is no such provision in regard to the appointment of a chairman.

Unlike the terms `director', `manager', `secretary', and so on, `chairman' is not defined under the Act . The Companies (Amendment) Bill, 2000, which is currently before Parliament, has not made any alteration or suggestion to encompass the appointment o f a chairman. Experts have not felt the need to interfere with the existing legislation, except that the 1997 Bill additionally contained a provision to make the appointment of a chief accounts officer compulsory.

Table A of the Act (under Regulation 76(1)) says that the board may elect a chairman of its meetings and determine the period for which he is to hold office and if no such chairman is elected, or if at any meeting the chairman is not present within five minutes after the time appointed for holding the meetings, the directors present may choose one of their members to chair the meeting.

Some companies appoint such chairmen on rotational basis or until otherwise resolved. Regulation 56 of Table A provides, ``The chairman, if any, of the board shall preside as chairman at every general meeting of the company.'' In the support that it is t he prerogative of the directors to elect a chairman of the board, it is pertinent to refer to a case law where it was held ``that mere appointment of a permanent director as chairman does not entitle him to remain chairman as long as he is a director (Fa ster vs Faster -- 1916 I Chancellor 532).

Regulation 51 of Table A reads, ``If there is no such chairman or if he is not present within fifteen minutes after the time appointed for holding the (general) meeting or is unwilling to act as a chairman of the meeting, the directors present shall elec t one of their members to be chairman of the meeting.

Regulation 52 concerning general meetings reads, ``If at any meeting the chairman of the Board is not present and no director is willing to act as chairman or if no director is present within fifteen minutes after the time appointed for holding the meeti ng, the members present shall choose one of their number to be chairman of the meeting.

Section 175 of the Act empowers the members present at a general meeting to elect a chairman and this has application only if there is no chairman of the board, no director is willing to chair the meeting, if no director is willing to chair the meeting, if no director is present, or if the shareholders have no confidence in such a chairman and want someone else to preside over the meeting.

Summing up, it can be safely concluded that the chairman of the board who has been elected by the directors can be removed or replaced by the board. He holds office only at the behest of the directors unless the AoA of the company provide otherwise or sp ecifically provide for the post of a company chairman.

(To be concluded)

(The author is a Pune-based company secretary.)