Can a CEO under Companies Act be a member of the Board?

This article will discuss the meaning of CEO under Companies Act 2013, the role of CEO. This article will also talk about the concept of key managerial personnel and their appointment. In this article, the issue of whether the CEO can be a member of the Board or not will also be addressed.
Estimated Reading Time: 9 minutes

Introduction

Chief Executive officer (CEO) is the face of the company before the public, for example, Mark Zuckerberg is the public face of social networking site Facebook. A CEO is responsible for executing the decisions made by the Board of directors of the company. He is the high-ranking executive officer of the company holding the top position in the company. He is answerable to the Board of directors on the performance of the company. A Chief Executive Officer is a paid officer of the company, it would be inappropriate to include them in the Board of directors which determines the interest of those officers only. This article will discuss the meaning of CEO under Companies Act 2013, the role of CEO. This article will talk about the concept of key managerial personnel and their appointment. In this article, the issue of whether the CEO can be a member of the Board or not will also be addressed.

Meaning of the Chief Executive Officer

The Indian Companies Act 2013 under section 2(18) defines the term ‘Chief Executive Officer’ as an officer appointed and designated as a chief executive officer by the company. This act considers the CEO as key managerial personnel under section 2(51). The Companies act 1956 though not defines this term but, under section 581W it provides for the appointment of the chief executive officer and its functions for a producer company. CEO acts as a leader in the organization and support the motivation of the employee for better productivity. He is a channel of communication between the employee and the Board. The CEO represents the company in the community, today most of the company are known because of their great CEO such as Elon Musk is a visionary CEO of Tesla. A visionary CEO is required to make policy and grab future opportunities. We have real life examples of visionary CEOs who have helped some big organisations to achieve huge success. Decision-making and developing policiesare in the hands of the CEO, he presents the policies to the Board for their approval. He is entrusted with the task of implementing the plans, oversee the operations of the company. He determines the values and standards of the company according to the competition in the market. CEO also manages the human resource for the company; he guides the process of hiring and firing of employees. He reports entire information of the company to the Board of directors.

Can a Chief Executive Officer be included in Board of Directors

The chief executive officer is an officer of the company. He withdraws salary for the work he does from the company. He is appointed by the Board to conduct the operations of the company to maximize the profit. Now when we talk about the Board, we know it is a group of directors who manages the affairs of the company and represents the interest of the shareholders. So, if a CEO under Companies Act is given a place on the Board of Directors then we can see a possible conflict of interest for the chief executive officer. Few roles served by the Board are the evaluation of the performance of the key managerial personnel and payment of remuneration to them, Hiring and Firing of an employee, budget allocation. If a CEO is a member of the Board then there can be a potential conflict between him and the Board of directors on the above-mentioned issues. Also, where a CEO under Companies Act is given a place on the Board of Directors along with the voting rights, he may exercise this power in his interest. Chief Executive Officer is an officer of the company devoting his skills and labour for the maximization of profit in return he receives remuneration. So, if they are a part of the Board of directors along with the voting rights then he can turn decisions regarding the remuneration in his favour.

The legal provision restricting the CEO under Companies Act from being a member of the Board of Directors

Regulation 17 sub-regulation (1)(a) of Security Exchange Board Of India(Listing obligations and disclosure requirements regulations),2015 provides that Board of directors shall have an optimum number of executive and non-executive directors and one women director. Also, not less than 50% of the Board of directors shall be Non-executive directors.[1] Here we can see that SEBI is prescribing to include the executive directors i.e., chief executive officer in the Board of Directors because the CEO has a great deal of knowledge about the human resource, plan and policies, competition, consumers, etc. Therefore, it is essential to allow the CEO to attend the meetings of the Board in order to get a valuable insight of the company and an expert’s opinion. Also, to ensure the credibility of the Board number of non-executive directors is prescribed to be more than the number of executive directors.

But the sub-regulation 1B of Security Exchange Board of India (Listing obligations and disclosure requirements regulations), 2015 prohibits the listed companies to make the CEO the chairperson of the Board. It states the chairperson of the listed companies shall be a non-executive director and not be related to the Managing Director or the Chief Executive Officer.[2] The intention behind this regulation is to involve the CEO on the Board of directors. At the same time limiting their participation will help to avoid the conflict of interest. This separation provides a more balanced governance structure, which eliminated a potential conflict of interest if one person occupies both the CEO and chairperson roles, especially for the larger promoter-led companies.[3]

Meaning of Key Managerial Personnel

Key managerial personnel refer to a set of officers of the company who are in control of the management of the company. They are the people who work on the plans determined by the Board. They are the channel of communication between the company and the shareholders.This concept has been added to the companies to act with an aim to boost the accountability of the company and maintain standards of corporate governance.In the earlier Companies Act of 1956, there was no concept of Key Managerial Personnel. Act of 1956 only considered Managing Director, Whole-time Manager, and Manager as the Managerial Personnel. But Indian Companies Act 2013 consists of the concept of Key Managerial Personnel which includes various kinds of officers under an exclusive category. As per section 2(51) of the Indian Companies Act, 2013 ‘Key Managerial Personnel’ in a company means the Chief Executive Officer or the managing director or the manager; the company secretary; the whole-time director; the Chief Financial Officer and such other officer as may be prescribed.

The Chief executive officer or Managing director or Manager is responsible for the management of affairs of the company. They oversee the day-to-day functioning of the company. Company Secretary ensures that all the statutory requirements are complied with. He oversees the implementation of the strategy and targets of the company. A company secretary plays both the role of an administrative officer and managerial officer. A whole-time Director is a full-time employee whowithdraws a salary from the company. He is involved in the everyday functions of the company. Chief Financial Officer manages the financial affairs of the company which includes evaluation of the financial status, preparation of financial reports, management of financial risk, etc.

Appointment of Key Managerial Personnel

Section 203 of Indian Companies Act read with Rule 8 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014provides that every listed company and every other public company having a paid-up share capital of ten crore rupees or more shall have whole-time key managerial personnel.

The following key managerial personnel is to be appointed by such company:

  1. Managing Director or Chief Executive Officer or Manager and in their absence, a Whole-time Director
  2. Company Secretary.
  3. Chief Financial Officer

A person cannot be appointed or reappointed as the chairman of the company as well as the managing director or CEO under Companies act of the company at the same time unless the article of association of the company permits or the company does not have multiple businesses.

The Whole-time Key Managerial Personnel shall be appointed by the Boardthrough a resolution containing the terms and conditions of the appointment and remuneration. They cannot hold the same office in more than one company except in its subsidiary company at the same time. They can be appointed as a director in any other company with the permission of the Board. If the office of the key managerial personnel is vacated, then it shall be filled in within six months by the Board at a meeting.

If a company violates any of the provisions contained in section 203 then it shall be punishable with a fine of one lakh to five lakh rupees and every director and key managerial personnel shall be liable to a fine of five thousand rupees.

A company may appoint or employ a person as its managing director, if he is the managing director or manager of not more than onecompany and such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all thedirectors 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.[4]

Officer in Default

Now another provision of Companies Act 2013 provides that officer in default shall be held liable for any default committed in the name of the company. As per section 2(60) ‘officers who are in default’ means

  1. Whole-time director, key managerial personnel, share transfer agent, registrar, and merchant bankers. Every director who is aware of the contravention of the provision of this act.
  2. Where a company does not have any key managerial personnel, then the Board is required to appoint a director or directors for such purpose.
  3. Any person who is authorised by the Board and charged with maintenance or filling or distribution of book of accounts or records and has knowingly permits or participates or knowingly failed to stop the default.

The purpose behind including this provision in the Companies Act 2013 is to ensure that the officers of the company are acting with reasonable care and due diligence. Due to this provision the officers are more responsible in executing their functions. This provision also helps in keeping on check that the officers are acting in the best interest of the company and the shareholders.It is recommended to have an Officer in Default who will be answerable for any non-compliance and will bear the punishment for such default imposed by the adjudicating authority.

Conclusion

So now we know that accountability is essential for good corporate governance. It means the employee, the management, and the Board, all of them should know their job and perform their role. The Board has the job of outlining the goals and plans. The management has the duty to implement those plans and direct everyday operations. So, it can be concluded that the Chief Executing Officer and the Board have different roles but the CEO under Companies Act is involved in the Board because of his knowledge about the tiny details of the company. Therefore, Chief Executive Officer can be the member of the Board but he cannot be the chairperson of the Board. The participation of the CEO under Companies Act in the Board of Directors is necessary because they know most about the human resource, financial status, and consumers. Their advice can be valuable for the Board in making major decisions about the fate of the company. CEO or Managing director, Company Secretary, Chief Financial Officer is known as Key Managerial Personnel. They are appointed to enhance professionalism in corporate affairs. The whole-time director and key managerial personnel are the officers who are in default as per section 2(60) of Indian Companies act. The aim behind this provision is whenever any wrong is committed; it is committed by an officer of the company and not the company itself.

Also read Statutory Company under the Companies Act, 2013


[1] Regulation 17(1)(a) of SEBI (Listing obligations and disclosure requirements regulations),2015.

[2] Regulation (1B) of SEBI (Listing obligations and disclosure requirements regulations),2015.

[3] SEBI defers the timeline for separation of the roles of non-executive chairperson and MD/CEO by two years, https://home.kpmg/in/en/home/insights/2020/01/firstnotes-sebi-chairperson-md-ceo-defer.html

[4] Section 203 subsection 3 proviso 3 of Indian Companies Act 2013.

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