Employees who are at the highest level of authority in an organization and are responsible for the material decisions taken in the ordinary course of business are described as senior management. They can be described as the top management of an organization who have higher responsibility, and with their vast experience, they supervise department managers and team leaders.
Over the years, the position of senior management has gained importance, with their position getting regulated under the provisions of various applicable laws. In this article, we have dwelt on the regulatory framework surrounding “Senior Management”.
The concept of Senior Management was first reported in N. R Narayana Murthy Committee Report which was published on February 08, 2003, wherein the emphasis was given on the term “senior management” which shall mean personnel of the company who are members of its management / operating council (i.e. core management team excluding Board of Directors). Normally, this would comprise all members of management one level below the executive directors. Further, the Jamshed J. Irani Committee Law Report which was published on May 31, 2005, expanded the definition of Senior Management by including all the functional heads under the purview of Senior Management.
Thereafter, the concept was also highlighted in the Twenty–first Report of the Standing Committee on Finance on The Companies Bill, 2009, where reference was given to the position of Senior Management. The report also emphasized the role of the Nomination and Remuneration Committee (NRC) towards their appointment and removal.
As a result of the report on Companies Bill, 2009, the concept of Senior Management was first introduced in Section 178 of the Companies Act 2013. Senior management was defined as personnel of the company who are members of its core management team, excluding the Board of Directors, comprising all members of management one level below the executive directors, including the functional heads.
Subsequently, a similar concept was introduced under the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015.
The Uday Kotak Committee Report on Corporate Governance, published on October 05, 2017, recommended to expand the definition of senior management and regulating their remuneration by way of approval from NRC.
As a result of the aforementioned recommendation, the definition of senior management was substituted by SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 stating “Senior Management shall mean officers/personnel of the listed entity who are members of its core management team excluding board of directors and normally this shall comprise all members of management one level below the chief executive officer/managing director/whole time director/manager (including chief executive officer/manager, in case they are not part of the board) and shall specifically include company secretary and chief financial officer”. By way of this amendment, functional heads were kept outside the ambit of senior management. Further the NRC was entrusted with the task of recommending remuneration of Senior Management in order to promote transparency, consistency, and good governance practices within the organization.
SEBI recently, through SEBI (Listing Obligations And Disclosure Requirements) (Amendment) Regulations, 2023, included functional heads within the ambit of senior management, which they had excluded earlier. Though no express rationale of doing so has been outlined but it may be either to re-align the definition with that of the Companies Act or due to sudden realization of importance of functional heads or both.
So currently “senior management” shall mean the following:
- officers and personnel of the listed entity who are members of its core management team, excluding the Board of Directors;
- all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Board of Directors);
- Functional heads, by whatever name called; and
- Company Secretary and the Chief Financial Officer.
While defining the term ‘Senior Management’, officers & personnel forming part of core management and those one level below MD/WTD/CEO have been kept separately. The core management team would generally comprise of the president, chief operating officer etc., who work closely with MD/WTD/CEO in strategic planning but they shall also fall amongst those who are one level below the MD/WTD etc., and therefore it is difficult to visualize the situation, where these two levels will have different set of personnel. So far functional heads are concerned, they can exist independently or as part of the core management team or team one level below MD/WTD etc.
While ascertaining senior management personnel, it is also important to mention that just because an employee reports to the MD/CEO, will not make him a part of the senior management. The importance of his position and role played by him in the overall management shall also be considered.
The Companies Act and SEBI LODR Regulations do not define as to who will be treated as "Functional Heads". As per the general understanding, individuals who are responsible for managing specific functions or departments within an organization are known as functional heads. These individuals are typically in charge of a particular area of expertise or operational division and oversee the activities and performance of that specific function.
In a nutshell, it can be exemplified that Functional Heads are experts in their respective fields and possess specialized knowledge and skills related to the function they oversee. They are responsible for setting strategic goals, formulating plans, and ensuring the effective execution of activities within their departments. For example, the head of the finance department would be responsible for managing financial planning, budgeting, and reporting activities. The head of the marketing department would oversee marketing strategies, campaigns, and brand management. Similarly, functional heads in areas like operations, human resources, legal, technology, and others have responsibilities aligned with their specific areas of expertise.
The objective behind specifically covering the ‘functional heads’ within the regulatory ambit of senior management, is on account of their important role in key decision making.
The reintroduction of ‘functional heads’ has broadened the scope of senior management and considering the compliances associated with them, companies will have to identify individuals who shall be referred as Functional Heads. Due to complex organization structures these days, companies may face challenges in determining which positions qualify as functional heads and in ensuring consistency in their categorization. It is essential for organizations to thoroughly understand the implications of the amendment and how to identify Senior Management. As, by virtue of this amendment, all the functional heads of the Companies shall be under the purview of Senior Management which further prompts that it shall be obligatory to obtain the recommendation of NRC for their appointment, removal and payment of remuneration, they being part of Senior Management. The lack of clear guidelines or criteria for determining functional heads can lead to inconsistencies and difficulties in identifying which roles qualify for this classification.
To identify Functional heads, every Company shall need to evaluate its various departments. It is also immensely important to note that the categorization of employees as "Senior Management" may vary across different organizations, and different companies can establish its own criteria for this classification. If an organization has identified specific core functions and has designated employees to head each of these functions, the employees heading those functions should be referred to as "Functional Heads." This categorization is irrespective of their reporting level and emphasizes the importance of all functions that contribute to the core business of the organization. To be more precise, if a Head of Department/ Project head is heading any core function in the Organization then, he shall be categorized as Senior Management irrespective of his grade and reporting structure. However, if in case Head of Department resigned consequent to which reporting of any employee has been shifted to MD/CEO, then such temporary arrangement shall not categorize such employee under the purview of Senior Management.
Please also keep in mind that functional heads need to be head of the functions of a company and not any of its divisions. Divisional functional heads shall not be considered for the purpose of senior management personnel.
The categorization of employees as "Senior Management" can vary from one company to another based on their own practices and organizational structure. In short, those individuals which hold significant decision-making authority and are responsible for the overall management and strategic direction of the company shall be referred as “Functional Heads” and shall be considered under the purview of Senior Management. Moreover, this approach ensures that all key functions contributing to the core business of the organization are under the ambit of Senior Management.
Regulatory framework governing Senior Management
Section 178 of the Companies Act read with Part D of Schedule II of SEBI LODR Regulations, provides that the appointment and remuneration of personnel forming part of senior management shall be recommended by the NRC. The NRC shall evaluate the qualifications, experience, and suitability of candidates for senior management roles and may also consider recommendations and referrals from various sources.
Further, the aforesaid provision also provides that the appointment of senior management shall be done by the board of directors of a company.
With respect to remuneration, there are different views as to whether increments or bonuses shall also require the approval of NRC and the Board. Though neither the Companies Act nor SEBI LODR carves out any exception for the same, both increments and bonuses shall require approval of NRC and the Board, but considering the practical challenges, the Board and NRC may, to some extent, delegate the said functions by setting up a broader framework.
SEBI LODR Regulations lays downs the following key obligations on part of the senior management personnel:
- Compliance with Code of Conduct: Senior management personnel are required to affirm compliance with the code of conduct on an annual basis. This provides a mechanism to the company to assess and monitor compliance with the code of conduct and take appropriate action if any violations or concerns arise. (Regulation 26(3) of SEBI (Listing Obligations and Disclosure Requirements) 2015)
- Disclosure of conflict of interest: Senior management personnel are required to disclose their personal interest to the Board of Directors relating to any material, financial, or commercial transactions which can potentially create a conflict with the interests of the listed entity as a whole. (Regulation 26(5) of SEBI (Listing Obligations and Disclosure Requirements) 2015)
- The senior management personnel shall conduct themselves so as to meet the expectations of operational transparency to stakeholders while at the same time maintaining confidentiality of information in order to foster a culture of good decision-making. (Regulation 4(2)(f) of SEBI (Listing Obligations and Disclosure Requirements) 2015)
- The senior management personnel shall facilitate the independent directors to perform their role effectively as a member of the board of directors and also a member of a committee of board of directors. (Regulation 4(2)(f) of SEBI (Listing Obligations and Disclosure Requirements) 2015)
Taking the importance of senior management personnel a step notch further, SEBI has recently amended Regulation 30 of the SEBI LODR Regulations to mandate disclosure to the stock exchange(s) of any change in the senior management personnel. This may further complicate the compliance regime, especially for listed entities having a large number of senior management personnel. In case of resignation by senior management personnel, a copy of the resignation letter is also required to be submitted to the stock exchange(s).
With respect to change in senior management, a question arises whether transfer or promotion within senior management personnel will required to be disclosed. In our view, considering that the said transfer or promotion doesn’t result in any change within the senior management personnel, no separate intimation is required. In case of transfer or promotion, if any individual becomes part of the senior management personnel for the first time, then disclosure is required.
Officers and personnel forming part of the Senior Management, play an important role in the organizational hierarchy in a listed entity. They establish the organizational structure, hire competent personnel, and provide guidance to achieve strategic goals and objectives.
Recognizing the importance of role, SEBI has been strengthening the regulatory regime to ensure that right candidates are appointed in the senior management but while doing so , it may also have made the process cumbersome, as it’s not easy to have meetings of NRC or board of directors and appointments at such key positions, can’t wait too long.