Can A CEO Be A Member of The Board?

Introduction

As per Merriam Webster dictionary[1], Chief Executive Officer is defined as “the person who has the most authority in an organization or business.” It defines a CEO as, “the executive with the chief decision-making authority in an organization or business.” The article discusses the provisions related to CEO and if he is eligible to be a member of the board.

Statutory provision

The Companies Act 2013 defines a Chief Executive Officer, as per Section 2 (18) “Chief Executive Officer implies an officer of a company, who has been designated as such by it;”

It can be inferred from the above given definition and that a Chief Executive Officer or CEO is a person who supervises the functioning of the entire business or organization or company. The post of the CEO is the top post in the hierarchy of the company. The CEO has the power and authority to make decisions in the company. However, with great power comes great responsibility, hence the CEO is responsible for coordinating effective operating, marketing, financial, cultural, and legal strategies that maximize shareholder value. These include the executive functions as well as the management of the entire company. Therefore, a Chief executive officer is the one peerless role of a company.

The concept of introducing the word CEO was borrowed from the United States of America. The Companies Act 2013, has defined the word ‘CEO’ for the first time as the Companies Act 1956 did not provide a proper definition for the same, it however provided for the appointment of the CEO under Section 581W of the act.

Key Managerial Personnel

The Companies Act, 2013 introduced a new concept of Key Managerial Personnel (KMP). This term ‘personnel’ here refers to a small group of people working together. It is used to define the executive management of the company who work together as a group and not an individual person. The KMP consists of such members that act as the first point of contact between the organization and its shareholders. They are responsible for formulating and implementing policies as well as strategies. They have the authority and responsibility for planning, directing, and controlling the activities for the smooth functioning of the organization and to set and achieve goals.

Key managerial personnel under the Companies Act, 2013

As per Section 2(51) of the Companies Act 2013, “Key managerial personnel, in relation to a company, means-

(i)  the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary[2];

(iii) the whole-time director[3];

(iv) the Chief Financial Officer;[4] and

(v) such other officers may be prescribed.”

Appointment of the key managerial personnel

Section 203 of the Companies Act 2013, talks about the appointment of the key managerial personnel. According to this section it is mandatory at all times for a company to appoint the key managerial personnel and that it should have a paid-up share capital of rupees ten crores or more in order to appoint the following personnel:

1. MD (Managing Director), or CEO (Chief Executive Officer) or manager in their absence, a whole-time director.
2. Company Secretary
3. Chief Finance Officer

The key managerial personnel of an organisation have to be appointed by the process in which a resolution of the Board consists of the terms and conditions regarding the appointment and the remuneration. The Board of Directors have the responsibility to fill any vacancies in the Key Managerial Personnel within a period of six months.

However, there is a clause that individuals are not to be appointed or reappointed as the chairperson, managing director or the chief executive officer of the organisation, provided the articles of the organisation provide otherwise or if the organisation does not carry multiple businesses.

According to clause 3 of this section[5] a whole time key managerial personnel should not hold office in multiple companies, except in cases where it is a subsidiary of the same organisation. When the personnel are holding an office, he is free to choose one company within six months of such commencement, in which he wants to continue to hold office.

It is not necessary that a Chief Executive Officer has to be a director of the company. He can be an employee or any officer of the company as well and they can be appointed as the Chief Executive Officer of the organization. Also, in cases where the Chief Executive Officer is not a director, it can be appointed by the Board of Directors. In which case, getting shareholder’s approval is not an essential requisite. Therefore, the Chief Executive Officer of a company can be a member of the Key Managerial Personnel who can be a managing director, chairman, director or merely an employee.

Role of the CEO

The KMPs are responsible for the smooth functioning of the company. The roles of the Chief Executive Officer are as follows:

• They have to do the planning, implementing, developing, and directing the company and its operation.
• They also have to take care of the monetary function and performance of the organisation.
• They communicate with other companies and their Board of Directors.
• They have to analyse the risk and ensure that the required steps are taken to curb that risk.
• To guide, encourage and mentor their employees so that they strike towards their goals.
• To evaluate the organization’s financial, along with evaluating the structure of sales and marketing in order to increase the efficiency.
• Another role of CEO is not only to form policies but enhance and execute them in the organization in order to improve the operational and financial efficiency of the company.
• One of the major roles of CEO is to maintain proper account books, where they  prepare annual accounts and audit them as well. Apart from this they present these audited books of accounts before the Board of directors and in the annual general meeting of the Members.
• Advise the Board with respect to legal issues regarding the future and on-going activities and take necessary action in respect.
• Make arrangements for safe custody of cash and other assets of the Producer Company.
• Sign such documents as may be authorised by the Board, for and on behalf of the company.
• As per Section 102(4) of the act if a proper disclosure has not been made then the Chief Executive Officer will hold benefit in trust for the company, and will, without prejudice to any other action being taken against him under this Act or under any other law for the time being in force, is liable to compensate the company to the extent the benefit received by him.
• Also, according to Section 102(5) CFO/CEO in default shall be punishable with fine which may be extended to Rs. 50000/- or five times the amount of benefits accruing to the promoter, director, manager or other KMP or any of its relatives, whichever is more.

Office in default and CEO

As per Section 2(60) of the companies Act 2013 ― “officer who is in default, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

• whole-time director;
• key managerial personnel;
• where there are no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;
• any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;
• any person in accordance with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;
• every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;
• in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer.”

As we know that Key Managerial Personnel is a whole-time employee, that is also referred to as ‘officer in default’ in section 2(60) of the Companies Act. There are numerous companies which are joint venture companies and are subsidiaries of the parent company. Also, there are companies where parent companies and its subsidiary companies are listed entities. Additionally, a parent company has a series of subsidiaries, horizontally and vertically. In situations where the notion of whole time Key Managerial Personnel is also broadened to include all the subsidiaries, it will influence the work of the whole time Key Managerial Personnel and the chances of his devoting time and attention will get affected. He should not be held responsible and therefore should not become officer in default for the non-compliances of more than one company.

It can be inferred from the above given section that as Chief Executive Officer comes under the ambit of Key Managerial Personnel, it is also an officer in default. That is, he will be the officer in default for any non-compliance with any provision given in the act.

Practises of Major CEOs

In a study conducted by McKinsey & Company, some of the mindsets and practises that have been adopted by major CEOs and been proven beneficial, worldwide had been combined and presented in an article. In that article, it was found that the role of a CEO can be divided into six main elements. These include, sitting the strategy, aligning the organization, leading the top team, working with the board, being the face of the company to external stakeholders, and managing one’s own time and energy. After conducting an extensive study through surveys and interviews, the following practices and efforts have been found that are followed by major successful CEOs that help them in achieving their goals and fulfilling their responsibilities.

The first practice that was observed was focusing on beating the odds in the corporate strategy element. To achieve this some of the practices followed by major CEOs is reframing what winning means by evaluating their relative strengths, goals, opportunities, and trends; By making bold moves that is, shifting 30% more than industry median, these moves can be helpful in resource reallocation, programmatic mergers, acquisitions, or capital expenditure.

The next element is to manage performance and health with equal rigor in the sphere of organizational alignment.  The first practice followed in this domain is to take a methodical approach to match talent with roles in order to create more value. Another practice that is widely followed is to go beyond employee engagement.

The third element deals with team and process where it can be observed that the dynamics of a top team can strongly influence a company’s success. The practice that they follow to achieve this is defending against biases.

And lastly help the board’s mission on behalf of the shareholders to manage efforts to create value. This practice helps in the domain of board engagements.

Conclusion

The concept of Chief Executive Officer has been defined for the first time in the Companies Act 2013. However, in the Companies Act 1956, Section 581 does mention Chief Executive Officer and its functions, yet it does not provide a definite definition for the same. The Chief Executive Officer is a part of the Key Managerial Personnel along with the Managing Director, Company Secretary, whole time director and Chief Finance Officer.

In the Companies Act 1956 it was specifically mentioned that the Chief Executive Officer cannot be a member of the board, however under Section 134(1) of the Companies Act 2013[6], it can be inferred that a member of the Board can be the Chief Executive Officer. Apart from this, the reason major CEOs like Sundar Pichai, Bill Gates, Jeff Bezos and many more have achieved the level that they have is because of the innovative and out of the box practices and mindsets followed by them.

As Indra Nooyi rightly said, “The one thing I have learned as a CEO is that leadership at various levels is vastly different. As you move up the organization, the requirements for leading that organization do not grow vertically, they grow exponentially.”

References:

[1] Merriam Webster, Merriam-Webster’s Dictionary (Linda Picard Wood, J.D.).

[2] The Companies Act 2013, Section 2(24): “company secretary or secretary means a company secretary as defined in clause (c) of sub- section (1) of section 2 of the Company Secretaries Act, 1980 (56 of 1980) who is appointed by a company to perform the functions of a company secretary under this Act;”

[3] The Companies Act 2013, Section 2(94): “whole-time director‖ includes a director in the whole-time employment of the company;”

[4] The Companies Act 2013, Section 2(19): “Chief Financial Officer means a person appointed as the Chief Financial Officer of a company;”.

[5] The Companies Act 2013, Section 203(3): “A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time:

Provided that nothing contained in this subsection shall disentitle key managerial personnel from being a director of any company with the permission of the Board:

Provided further that whole-time key managerial personnel holding office in more than one company at the same time on the date of commencement of this Act, shall, within a period of six months from such commencement, choose one company, in which he wishes to continue to hold the office of key managerial personnel:

Provided also that a company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company and such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India.”.

[6] The Companies Act 2013, Section 134(1): “The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.”