T Thomas: Chairmen: Executive vs non-executive

Will Mr Mittal invite some truly independent and active business managers to join his board as non-executive directors.

It is the accusation some time ago by Guy Dolle, then CEO of Arcelor, that L N Mittal liked to concentrate too much power in himself by combining the role of chief executive officer (CEO) and chairman of the company, which has prompted me to share some of my thoughts on the roles of CEO, chairman and the combined entity. My observations are based on my own experience as the CEO and chairman of India's largest FMCG company (Hindustan Lever), non-executive chairman of India's largest pharmaceutical company (Glaxo) and more recently as the main investor and chairman (not CEO) of four medium-sized hi-tech companies in which I am the majority or sole shareholder and each of which has its own CEO.

In the final analysis the shareholders of a company are interested in the profitability and growth of the company and they elect a board of directors, who have the responsibility for achieving what the shareholders expect. The board then elects a chairman. Whether the chairman is executive or non-executive, the shareholders and the public associate him with the company. For example, even when J R D Tata was not the CEO of Tata Steel, he was seen by the shareholders of the company as being responsible for the performance of the company. He had to face them at least once a year at the annual general meeting (AGM) and respond to all their questions. This can be a demanding task, especially at AGMs in Mumbai, where there is a very competent cadre of active shareholders who prepare meticulously by analysing the company's balance sheet and come to the AGM with very intelligent questions and observations. They seem to enjoy challenging the chairman as if they want to assess how competent he is. The AGM is their only chance to do so""that too in public where the Press also is present. Many of them enjoy the importance and attention they receive on these occasions. If you are the CEO as well as the chairman, you are expected to answer all such questions as I used to do at AGM meetings of Hindustan Lever, each of which lasted for almost three hours because we never closed the meeting till the shareholders themselves got exhausted and some among them proposed that the meeting be ended. This was allowed although I sat there with proxy for the majority shareholder and could have proposed a closure much earlier. We felt that it was good that shareholders had the opportunity to ask all the questions they would. After a few years, some of them became good friends.

When I returned to Mumbai after spending 10 years in London with Unilever and then took up the non-executive chairmanship of Glaxo (India), I found that the same set of shareholders came to that company's AGM and it was like meeting old friends! The sparring continued. If you delegate the task of answering questions at the AGM to the finance director, the shareholders may feel that the chairman is not up to the mark. Therefore, one has to prepare meticulously for the AGM. For a chairman like me who does not have formal financial training, it can be an even more demanding task. Fortunately for people like me, we soon discover that most of accountancy is essentially an exercise in arithmetic with various conventions and special provisions for taxation, etc. If one sets one's mind to it, mastering it is not very difficult. One can always call upon the finance director to supplement one's effort if it becomes necessary, but in my experience it is better to avoid that temptation. The shareholders' faith in the chairman is enhanced if he is able to answer the questions himself.

While the chairman has to face shareholders normally only once a year, he has to face the Press (and through it the public) more frequently""the frequency depending on the size and reputation of the company, and developments in the company. His statements and responses result in creating a reputation for the company. The AGM speeches of the chairman of Hindustan Lever did help to create a reputation for the company, not only among shareholders but also in the wider public and other constituencies like the state and central governments and academia. They also affect the perception of investors and hence the market value of the company. If the chairman is or represents the major shareholder, as in the Mittal case, the perception of the investors and of the market has a direct bearing on his own wealth. This perception of the investor and the stock market becomes even more crucial if the company has substantial borrowings, as in the Mittal case. Therefore, it is but natural for a major shareholder like Mr Mittal to be the face of the company. That is best served if he is the chairman. At the same time, he has to ensure that the company meets its targets for growth and profitability. For achieving that he may have to assume the role of chief executive also. Mr Mittal is fortunate to have a son who can take on the role of chief financial officer.

The acid test for Mr Mittal's style of managing the company will be the type of people he would invite to join the board of his company as non-executive directors. In India as well as in the West, many family-controlled businesses have preferred to have retired government officers and people from their own community as non-executive directors as they will not raise awkward questions or rock the boat in any way. There is a class of such "harmless" people who are available to fill such jobs. They enjoy the perks and the reputation of being on the board of a company. They can be counted upon by the family to stand with them on any issue. Will Mr Mittal pack his board with such people or will he invite some truly independent and active business managers to join his board as non-executive directors? Fortunately in India, there are today a large number of heads of successful business enterprises in the private sector as well as public sector from whom he can choose a few. One hopes he does so and silences critics like Mr Dolle.