Monday, September 22, 2014

Report on Gender Diversity in Corporate Boards

The issue of board diversity has acquired considerable prominence in recent times. Although there can be various hues to the concept of diversity, one manifestation relates to gender diversity and the requirement for women directors on corporate boards. What began as a useful management strategy has acquired regulatory overtones. Several countries have incorporated gender diversity into their corporate governance regimes. Some, Norway being at the forefront, have sought gender diversity as a mandatory requirement under the corporate governance norms. Others have either required disclosures and transparency measures or even extended to “comply-or-explain” mechanisms to usher in gender diversity in corporate boards in their respective jurisdictions.

Under the Companies Act, 2013, India has adopted the mandatory approach to gender diversity. Section 149(1) provides that certain classes of companies must have at least one woman director. According to the Companies (Appointment and Qualification of Directors) Rules, 2014, this requirement applies to listed companies as well as to other companies having a paid-up share capital of at least Rs. 100 crores or turnover of at least Rs. 300 crores. The implementation is expected to occur in a phased manner. Although this requirement was also incorporated into the revamped clause 49 of the listing agreement prescribed by SEBI, the implementation of the gender diversity provision has been postponed until April 1, 2015.

In this background, a recent study entitled “Women on Boards: A Policy, Process and Implementation Roadmap” conducted by Biz Divas and Khaitan & Co. provides useful discussion, analysis as well as some empirical findings about gender diversity in Indian corporate boards as compared with developments on the global scene. The report may be accessed here (registration required, which is free) and some discussions/ analyses are contained here and here.

While the introduction of gender diversity in India is welcome, providing a legislative mandate is on part of the solution, and much lies in its actual implementation. Matters such as diversity extend beyond regulation and must percolate into the culture and DNA on the business organizations. A few thoughts come to mind (and they are by no means exhaustive).

First, gender diversity must be accepted in spirit and not just as a matter of law (that usually evolves into a mechanical “check-the-box” requirement). There is a need to guard against tokenism. It is not sufficient to merely appoint a woman director for the sake of compliance. What is required is a careful scrutiny and analysis of the strengths and contributions an individual woman director brings to the board. The nominating committees must take note of these aspects in a transparent manner and induct the most appropriate individuals to the job. One might go to the extent of adding that (although not strictly the legal requirement) the woman director ought to be an outside director with minimal association with the company or its promoters so as to bring to bear an independent perspective that will aid a more sustainable business outlook for the company so as to benefit its shareholders (in the long term) as well as its stakeholders.

Second, once the appropriate individual is appointed, the woman director’s contribution must be valued and duly harnessed by the company. Again, it would depend upon the board dynamics in individual companies and also the approach adopted by the chairman and the management. Here too, tokenism must be guarded against.

Third, a question remains whether a single woman director on a large board is likely to have any impact. Other countries (prominently Norway) have adopted the approach of requiring a larger number of women directors. This is with a view to ensure that gender diversity has the required impact on the boards. Empirical evidence discussed in the abovementioned report suggests a robust build-up of board diversity in Norway with nearly 40% directors comprising women. Hence, while the requirement of one woman director can be considered to be the beginning of the progress towards gender diversity, the issue may have to be revisited over a period of time to explore if changes are required so as to provide for a greater number of women directors. Of course, in such a case the availability of the requisite number of women directors would also have to be considered.

In all, the move towards gender diversity on Indian corporate boards is an important one. At the same time, other forms of diversity would also have to be taken into account. Although it is not possible to legislate for all forms of diversity, boards of companies and their nominating committee must work towards gaining an appropriate mix that maximizes the strategic and monitoring roles that modern corporate boards play.

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