How is CEO appointed and chosen?

This article discusses the company's Chief Executive Officers; they are considered the head of the management team who supervise, control, and manage its governance affairs.
Estimated Reading Time: 9 minutes

Introduction

In many cases, corporate governance is considered the lifeblood of a console; it is always an excellent fortune for business development compared to other activities taking place in the company. The corporate sector can enhance economic growth, which requires prudent development and new branches established in different sections within the company, building a great business capable of absorbing investors and other stakeholders. In giant companies where multiple stakeholders are involved requires a complex managerial arrangement to maintain effective corporate governance. It made an import tent city separate ownership and management to strengthen its relationship with a distinct legal entity and the shareholders through a complex contractual arrangement that provides a robust corporate governance structure.

These managerial concerns became one of the main reasons for various executive officers’ appointment in administrative positions. The evolution of public companies owned by shareholders created a need for separation between ownership and management, which all the publicly traded global exchange companies maintain. It attempts to create a corporation where the interest of the shareholders and its development are considered the two most important concerns. This organizational system formed a two-tire corporate hierarchy in which the first tier was composed of the Board of directors. The second tier was composed of the management team’s management team or the managing director.

The management team led by the chief executive officer is directly responsible for the companies everyday operation and profitability; they supervise and manage the entire operation and report it to the Board of directors and the chairman; they are also responsible for the implementation of the board decisions taken in the annual general meeting and to maintain a smooth operation within the firm and with the other outside stakeholders.

WHO IS A CHIEF EXECUTIVE OFFICER?

Chief executive officers are deliberated with various definition about their roles and responsibilities; the US Legal defines CEO as,

“A chief executive officer of a corporation is the officer responsible for carrying out the strategic plans and policies as established by the Board of directors. In a corporation, the chief executive reports to the Board of directors. In the form of business that is usually without a board of directors (sole proprietorship, partnership, etc.), the “chief executive officer” is typically the member that sets the direction and oversees the operations of an organization”

They are the highest-ranking executive in a company elected by the Board and its shareholders with a prime duty to manage everyday activities and make major corporate decisions; they are the key actor in maintaining the corporation’s operations and resources below the Board of directors. They also fill up the communication gap between the Board and the shareholders and act as the corporation’s face in managerial affairs. They will also be considered as the company’s president operating within the management team.

CEO TO BE THE KEY MANAGERIAL PERSONNEL

Under section 2(51) of the Companies Act 2013, the definition of key managerial personnel has been provided. According to the section, key managerial personnel concerning 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 officers may be prescribed under the act. Every company belonging to a class or classes of companies as defined should have the following senior time key managerial personnel. Companies carrying out multiple businesses may appoint one or more chief executive officers for each business and notify the central government.

They acted like the whole time Key managerial personnel designated through the board’s resolution and regulated through specific terms and conditions. These personals or not allowed to hold office in more than one company except it to be a subsidiary company of the same.

WHY ARE THE CHIEF EXECUTIVE OFFICER APPOINTED?

Business and trade are the most important and significant factors of the economic development of a country. It requires every organization to play a significant role in enabling its growth, maintaining its income stability, and supporting the gross product’s evolution. The organization’s development is measured using the governance structure adopted internally and externally, among the governance structure or the chief executive officer, chief financial officer, chairman, director and the president; these persons form the basic structure of corporate governance they said to possess individual authorities and a crucial role in the governance of the corporation.

The chief executive officer is an individual with executive power in policy-making and management in the organization who oversees the organizations’ activities, ensuring that the policies and the obligations are well implemented. The company has been added in the right direction in achieving its objectives. To maintain the separation of power management and ownership in a corporation that shit executive officer said to play a primary role in the managerial position; this is the main reason for appointing a chief executive officer in a company.

DUTIES AND RESPONSIBILITIES OF A CHIEF EXECUTIVE OFFICER

  1. To act as a communication mechanism between the company and the Board, the shareholders, governmental agencies, and other stakeholders
  2. To perform the strategical plans of the corporations, both short-term and long-term
  3. To ensure the compliance of the legal obligation of all the management affairs
  4. To evaluate the works of executive committees and other boards comprising the directors, presidents and vice-president.
  5. To act in accordance with the objective of the corporation and implement the mission and vision of the organization effectively
  6. To assess the future market risk, monitor, minimize and implement necessary risk mitigation strategies
  7. To make sure that the company follows all the norms of corporate social responsibility for sustainable development.
  8. To exert significant leadership qualities in maintaining the corporate governance norms within the corporation
  9. To possess an awareness of the competitive market structure, expansion and diversification opportunities, industry developments, etc.
  10. To represent the management team’s activities, strategies, goals and reports in the general meeting
  11. To adequate take measures in implementing and executing the board resolutions and the proposed schemes within the corporation
  12. To represent the corporation in public meetings, conferences and community interactions
  13. To manage the company resources and ensure their proper usage in business and trade
  14. To maintain the financial handlings and produce required details to the audit committee for assessment
  15. To supervise the managing director’s team and executive team
  16. To take measures in enhancing the shareholder value through proper market participation
  17. To make top-level strategic decisions to guide the company’s development on a global scale.[1]

WHAT IS THE PROCESS OF APPOINTMENT OF CEO

As per section 203 of the Companies Act, 2013; Every listed company and every other public company having paid-up share capital of ten crore rupees or more shall have the following whole-time key managerial personnel—

  1. Managing director, or Chief Executive Officer, or manager, and in their absence, a whole-time director;
  2. Company Secretary; and
  3. Chief Financial Officer

Provided that an individual shall not be appointed or reappointed as the chairperson of the company, as well as the managing director or Chief Executive Officer of the company at the same time unless—

  1. the articles of such a company provide otherwise; or
  2. the company does not carry multiple businesses.

Every whole-time key managerial personnel of a company shall be appointed through a resolution of the Board containing the terms and conditions of the appointment, including the remuneration. They shall not hold office in more than one company except in its subsidiary company at the same time. However, they were having then, within six months from such commencement, choose one company in which he wishes to continue to hold the office of Key managerial personnel if the office of any whole-time key managerial personnel is vacated. In that case, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within six months from the date of such vacancy.[2]

Provided further that the above proviso shall not apply to the following class of companies; public companies having:

  1. paid-up share capital of rupees one hundred crores or more and
  2. annual turnover of rupees one thousand crores or more
  3. Provided the following conditions are fulfilled:
  4. The company is engaged in multiple businesses and
  5. Companies that have appointed Chief Executive Officer for each such business

The Chief Executive Officer being the whole-time key managerial personnel of a company, shall be appointed utilizing a resolution passed by the Board through a meeting containing the terms and conditions of the appointment, including the remuneration. They will be appointed for a fixed period on a contractual basis, which does not exceed more than a period of 5 years at a time. Whereas the CEO may be appointed permanently, or the appointment is limited for a specific period.

PROCEDURE FOR APPOINTMENT

  1. The notice for calling a general meeting will be prepared; it consists of the resolution details, the terms and conditions of the appointment, and the candidate’s qualifying conditions as Chief Executive Officer.
  2. The notice will be sent to the Board of Director and other significant shareholders; the Board consists of independent and non-independent directors, audit committee director, supervisory board members to pass an impartial selection
  3.  The meeting agenda will be intimated with relevant details and considerations
  4. The Board meeting will be convened on the fixed date; there, the board members debate and deliberate on the appointment and cast support for the Chief executive officer’s appointment. The chairman of the Board provides a detailed explanation on the selection, including reasons for choosing the relevant candidate
  5. After making deliberations, the Board unanimously pass the resolution for the appointment of the Chief executive officer and fix other terms and conditions
  6. Concerning the listed corporations, the minutes of the meeting will be recorded, and discussions and the decisions will be sent to the stock exchange within 30 minutes from the conclusion of the meeting
  7. The letter of appointment will be issued to the candidate chosen for the position of Chief Executive Officer.
  8. The e-Form MGT-14, MR-1, and DIR-12, along with other required attachments (as the memorandum suggests), will be filed with the Registrar of Companies.
  9. The relevant forms regarding the appointment of the Chief Executive Officer should be filed within thirty (30) days from the resolution and appointment as Chief Executive Officer
  10. The appointment letter will be sent to the company management to enter the company register and minutes book.
  11. Contravening the provision, the company will be held liable with a fine not less than Rs. 1,00,000 extending up to 5,00,000.

Documents required to be filed for the Chief Executive Officer

  1. Letter of intimation to the stock exchange on the appointment of the Chief Executive Officer
  2. A brief profile of the candidate proposed for the position of Chief Executive Officer
  3. The resolution copy passed and authorized in the Board meeting concerning the appointment of the Chief Executive Officer
  4. The consent letter drafted and signed by the proposed Chief Executive Officer
  5. The appointment letter which the Board of directors provided
  6. The forms MGT-14, MR-1, and DIR-12, duly filled and signed by the Chief Executive Officer
  7. Any other documents as required by the statutes, rules or regulations of the corporation should also be provided.

Qualifications for the appointment of CEO

  1. Dignity and quality concerning leadership and managerial skills in par with members of top management.
  2. Free from mental and physical health problems
  3. Strategic decisionmaking and leadership skills
  4. Easy adaptability to the changing market conditions and capable of taking relevant steps for development
  5. Willingness in taking responsibilities and promote the growth of the management team proactively.
  6. Capable of expanding and diversifying the corporation to the global level

CONCLUSION

Chief Executive Officers play a pivotal role in managing and developing the companies. They are the citadel for constructing more significant strategic decisions from its sustainable growth and development perspective. CEOs are demanded to follow all the corporate value and legal obligations to enhance the company profile in the general public eyes. They are expected to perform their duties more efficiently to attain both short-term and long-term development.

As per law, it is a mandatory obligation of the company to appoint a Chief Executive Officer. Failure to comply with it will result in a penalty of rupees one lakh extending to five lakh rupees. Every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.

The ultimate goal of improving the corporate governance and enhancing the shareholder value will be achieved by the key managerial personnel comprising the directors, managers, chief financial officer and the chief executive officer.


[1] CEO – Understanding the Roles and Responsibilities of a CEO. https://corporatefinanceinstitute.com/resources/careers/jobs/what-is-a-ceo-chief-executive-officer/

[2]CEO & their Appointment under Companies Act 2013. https://taxguru.in/company-law/ceo-appointment-companies-act-2013.html

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