Concept of Senior Management & Its Disclosures in Annual Report for FY 23-24

What is meant by senior management?

It is not exactly defined what is meant by senior management, but SEBI LODR enumerates who can be senior management and provides criteria for identifying senior management.

As per regulation 16(1)(d) of SEBI LODR, the senior management shall mean:

1. The officers and personnel of the listed entity who are members of its core management team, excluding the Board of Directors,.
2. All the members of the management are one level below the Chief Executive Officer, Managing Director, Whole-Time Director, or Manager (including the Chief Executive Officer and Manager, in case they are not part of the Board of Directors).
3. Functional heads, by whatever name called.
4. The company secretary.
5. Chief Financial Officer.

Who falls under the Core Management Team?

To further understand who shall fall under the ambit of core management, it is important to take into account the individual's accountability and conduct. The list may include CEO, CFO, Chief Risk Officer, Chief Operating Officer/Head of Operations, Chief Information Officer/Chief Technology Officer/Head of Information Technology, Chief Information Security Officer/Head of Information Security, Chief Data Officer, Chief Regulatory Officer, Heads of Business Functions, Head of HR, Head of Compliance, Head of Financial Crime Prevention, and Head of Internal Audit.

What is meant by functional heads?

Business functions are the activities carried out by an enterprise; they can be divided into core functions and support functions. Core business functions would mean those functions that yield income for an enterprise, and these functions generally make up the primary activities of the enterprise. These would normally include operations, marketing, finance, and compliance and could otherwise vary based on the nature of the enterprise. Support business functions are ancillary (supporting) activities carried out by the enterprise in order to permit or facilitate the core business functions, its production activity. These activities may include distribution and logistics, IT services, technical services, etc.

The Companies Act 2013 and SEBI LODR Regulations 2015 do not define who will be treated as "functional heads." As per 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.

However, in the context of defining SMPs, what shall be relevant are the heads of the core functional departments of the company who report directly to the MD or WTD, and the ancillary or supporting heads shall be disregarded while interpreting the definition of senior management.

On the joint reading of the aforesaid discussion on core management as well as functional head, it becomes clear that senior persons from ancillary or support services may form part of the core management; however, the same need not be categorized under functional head for the purpose of these regulations.

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.

What are the recent changes in the definition of senior management?

SEBI, vide its amendment dated January 17, 2023, had inserted the position of functional heads under the definition of senior management. What is meant by functional heads is not defined by Sebi Lodr. But it can be interpreted to mean individuals heading various functions or departments in the company.

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.

Where and what are the disclosures required to be given pursuant to senior management as per SEBI (LODR) for FY 23–24?

SEBI, vide its SEBI LODR (Second Amendment) dated July 15, 2023, requires listed companies to provide details of senior management in corporate governance reports, comprising part of the annual report for FY 2023–24.

SEBI LODR asks listed companies to provide particulars of senior management and changes in senior management since the previous year. These details have to be provided for the entire financial year, not at the end of the financial year.

Particulars of senior management mean details of senior management, viz., name and designation.

Changes in senior management mean people who have newly joined senior management, who have been promoted to senior management, and details of persons who have resigned or retired from the position of senior management.

There is no format prescribed for disclosure of particulars and changes in senior management. Hence, companies are free to decide the format of disclosures by senior management.

Which companies are required to give this disclosure relating to senior management?

Disclosure of senior management is required to be given pursuant to Schedule V, Part C, and Point 5B of SEBI LODR. This section is applicable to equity-listed companies to whom the corporate governance provisions of SEBI LODR are applicable and also to high-value debt-listed companies.

Disclosures relating to senior management shall not be required to be given by the following companies:

1. Main board-listed companies to whom corporate governance provisions are not applicable
2. SME-listed companies

What would be the ideal format for the disclosure of details about senior management?

Anamolies

It is being observed that companies that have made disclosures in their annual report for FY 23–24 have not disclosed the details of senior management who have resigned or retired from the position of senior management during the financial year. E.g., if Ms. A has joined the organization as Chief Technology Officer, then it needs to be mentioned as to who was the Chief Technology Officer earlier. Has he resigned or retired on superannuation? The wording of the provisions of clause 5B makes it clear that details of changes in senior management shall also be disclosed. So, change here means who was heading the position earlier and who would now be heading the position.

Conclusion

Senior management is a crucial position in any organization. Looking at the definition above, it is clear that it comprises senior personnel within the organization. These senior personnel are crucial for running the business of the company. The constant change in these personnel highlights serious issues in the management of the company. Disclosure regarding changes in senior management would give an impression about the governance aspect of the company.