Wednesday, April 1, 2015

Gender Diversity on Corporate Boards: The Need to Move Beyond Rhetoric

Over the last few days, the financial press has been abuzz with the efforts of listed companies in India to recruit at least one woman director on their board in order to comply with the requirement under clause 49 of the listing agreement that takes effect today. This requirement also emanates from the Companies Act, 2013. In a last-minute scramble, it is estimated that as many as 250 companies appointed women directors yesterday, and hundreds more did so the day before that, and so on in the preceding days. While gender diversity on corporate boards is desirable, the manner in which it is being accepted and implemented in India raises questions regarding its effectiveness in Indian corporate governance, some of which are discussed below.

First, this episode has somewhat of a positive signaling effect. After one round of extension granted last year for the implementation of norms on women directors, SEBI has displayed its reluctance to relent, and has threatened non-compliant firms with strict enforcement action. This triggered the rush to appoint women directors before last night’s deadline. Under section 23E of the Securities Contracts (Regulation) Act, 1956, any non-compliance with the provisions of the listing agreement could result in a potential penalty of up to Rs. 25 crores. In the past, SEBI has enforced some important provisions in a similar way. Readers may recall a similar instance when SEBI issued an order against hundreds of non-compliant firms within days of the effectiveness of the new norms relating to public float. A similar effort by SEBI to firms not complying with gender diversity norms on corporate boards would be in order, and it would be reasonable to expect SEBI’s action in the near future.

Second, the scramble may also signal some negative attitudes. Despite the several months available for companies to appoint women directors, the effort do so only in the last few days suggests a “check-the-box” attitude on the part of the companies. Also, it raises questions on the nature and intensity of the nomination process that was undertaken if decisions were made so quickly.

Third, related to the aforesaid issue, is whether gender diversity is beginning to take on the tone of “form over substance”. Of course, gender diversity has been mandated for a reason, as it is expected to enhance the governance as well as performance of companies through a diversity of views placed before the boards. Such an approach also requires women directors to carry the requisite qualifications and experience. In the present case, no such requirement exists. It is no surprise that newspaper reports indicate that nearly half of the women director appointment in the current round involved family members of the promoters. This is arguably a retrograde step and does not enhance governance in the manner intended by board diversity. It would make boards more insular rather than diverse.

This instance can be compared to the manner in which board independence was introduced at the outset. There was no requirement of specific qualifications or experience for a person to be appointed as an independent director. The role of such a person was dismally unclear. There were also fears that a person would be appointed to the board “only to keep the seat warm” without significantly contributing to the governance or performance of the company. It is possible we are witnessing the same characteristics at the time that gender diversity is being introduced. Fortunately, with the Companies Act, 2013 and the revised clause 49 of the listing agreement, the concept of board independence has been shaken up considerably and the institution of independent directors has acquired more solidity. The qualifications, roles, functions and liabilities of persons occupying the position are clearer, thereby attributing greater deference to the institution. It is hoped that further reforms would take place in the case of gender diversity as well. For example, I would argue that women directors appointed on the boards to satisfy gender diversity requirements must themselves comply with the test of board independence. In other words, diversity and independence ought to go hand in hand. This would ensure that women directors are indeed outside directors who are appointed for their qualities and contributions to the operations and governance of the company, and it would avoid insiders and family members being appointed for the purpose. This is particularly important in the context of substantial number of Indian companies (including those listed) being family owned. It is hoped that the diversity requirement introduced moves beyond rhetoric and that SEBI will introduce further reforms and clarity to the expectations from women directors and the value and benefits of gender diversity such that there is a difference in reality and not in form.

Finally, as often happens, indications are that a large number of public sector enterprises are yet to comply with the requirement of appointing a woman director. This is again a signaling issue whereby non-compliance by government-owned companies does not augur well for overall compliance, particularly when privately-owned companies are being compelled to comply with those norms.

It is hoped that today marks an important beginning in the progress towards diverse boards, both in form and substance, and not just a milestone to ensure paper compliance.


vswami said...

The utmost need of the hour, -if were to be differently viewed,- is not simply to move beyond rhetoric, but towards proving that, as is made to believe, human being is the only creation living on earth endowed by nature with 'rational' thinking and equally rational attitude to life.
Lately, there has been loud protest(s) heard over the ignominy attached to/associated with April 1; urging to be divorced of the conventionally prevailing thinking of it being related to and regarded a ‘fools day’, whatever meant . Whether one likes it or not, thinking aloud, one is provoked to wonder whether that day of 2015 seldom has provided some justification to believe or say so.
Among others, to individually accord some serious thoughts, some of the recent developments may provide food - or help as a catalyst; for instance, in the realm of legislation, the new company law itself, which according to views aired in learned but unbiased legal circles, has not been a well thought out enactment ; instead, has the obviously striking potential to prove a half-baked law and consequently further muddle the extant state of affairs in corporate world; and, in turn, impact not merely the stakeholders but the entire society, directly or indirectly, as well . And like critique has been floating around in respect of certain others- e.g. some of the 2015 amendments of the extant fiscal and social welfare laws as well e.g on income-tax, insurance.

As impliedly underlined, the one concept or idea that has been slowly but steadily catching up, but in one’s view dangerously so, is the preference to ‘substance’ over ‘form’ ; and not only for making or understanding / interpreting any law, but also even any contract agreement between two parties.
To be contd.

vswami said...

Historically, the common experience has, in brief, been these:
1. As largely perceived, there has been always a yawning gap between, on the one hand what the men in power and the coterie (inclusive of its empowered authorities) proclaim openly to the public, -in particular, the taxpayers’ as a community, - and on the other how it comes to be actually translated into action.
2. Likewise, there has always been a divergence between ‘accounting’ for all other purposes and for the purpose of taxation. To be precise, what is considered and accepted as fair / good for accounting for every other purpose is not treated so for taxation.
3. Some of the related areas covered in the ever ongoing deliberations for so long are: -

Simplification of the law so as to endeavour and make it taxpayer friendly;

Transparency and Accountability (on the part of the empowered authorities in the realm of administration of the law);

Removal /dispensation of the harassment faced by taxpayers because of the uncertainties galore; and the resulting instability / irresolute problems confronted with in the tax regime.

A recently reported move by the central government is an instance and case on the last mentioned point. Read:
Now, in the previously posted comment on the write-up herein, among others, the points principally focused on are:
Why the dire need of the hour is to make a sincere move in the direction of ‘rationalisation’; instead of more and more deviating / straying away mindlessly ; and
the inherent potentials for harassment should a basically unprincipled preference be given to, - ‘substance’ over ‘form’ .
However, yet another development has come as a rude shock, so as to belie even the remote hope on hopes anyone may have been nurturing in own mind and chosen to presently live with. The reference is to the reported CBDT Notification (No. 32/2015, F. No. 134/48/2010-TPL, dated March 31, 2015). For a closer view and better appreciation, recommend to go through its full text. The “Comparative study of Accounting Standard issued by ICAI, Draft TAS and notified TAS” given there under provides a gist; of which, the Items E. Substance over form, F. Prudence and G. Materiality require to be consciously gone through for a careful appraisal of the far reaching ramifications in store.