Monday, March 8, 2010

Board Diversity and Women Directors

On the occasion of the International Women’s Day, it is apt to consider the role of board diversity, particularly the participation of women directors, in corporate governance. A discussion in the Hindu Business Line finds that women in corporate boardrooms continue to be an exception rather than the norm. Some countries have addressed this concern by imposing specific requirements for women directors in their corporate governance norms. Several European countries have taken the lead in this direction. For example, Norway imposes a mandatory requirement to appoint women directors on its companies, and is the first country to do so – the Financial Times has an extensive report titled Skirting the Board, which analyzes Norway’s experience. Other countries that have taken (or are in the process of taking) similar steps are France, Germany and Spain.

There is also some empirical evidence that supports the role of board diversity. One study finds “significant positive relationships between the fraction of women or minorities on the board and firm value”. Another study by Renee B. Adams and Daniel Ferreira establishes other benefits of women directors, but raises some doubts as to their contribution towards firm value; the abstract states:

We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that CEO turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.
As far as Indian corporate governance is concerned, the issue of board diversity is yet to gain sufficient recognition. There has been very little discourse on this topic, including as to the requirement for women directors. Existing norms and proposals on corporate governance do not provide any coverage of this topic. Since board diversity does have some benefits, it is perhaps worth considering the issue at a policy level. Such consideration should keep in mind the relevant factors that are in operation in India, including the availability of types of individuals who would be suitable to occupy board positions, as well as various economic and cultural factors. It appears premature at this stage to impose a mandatory requirement of appointing minimum number of women directors in India, especially because the available empirical evidence is not clear, but it is certainly worthwhile for companies and their nomination committees to lay down parameters regarding board and gender diversity that may be applied while making board appointments. It is possible that a handful of blue-chip companies are already following such an approach, but that needs to be reflected in a widespread fashion.

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