Boardroom Gender Diversity: Assessing the Effectiveness of Mandatory Quotas
In the epoch of Covid-19, where work is solitary, the need for an inclusive and diversified culture in an organization is indispensable. Organizations ingraining a diversity-friendly culture are greatly benefiting from such initiatives. As found in McKinsey’s report, companies employing a diversified workforce are much likely to take better and braver decision. Thus, hiring a key asset in times of crisis.
In India, the Companies Act, 2013 and SEBI regulations mandate the presence of at least one woman on the Board of Directors in certain companies. Even though India has laws and policies to promote gender diversity and inclusion (D&I), the primary object seems eluded. For Instance, according to the ILO report, many Indian companies have taken only tokenistic actions by appointing only one female director to fulfil the quota criterion and evade penalty.
India, a major emerging economy and among the worst affected countries in the pandemic needs effective D&I policies and implementations to boost creativity in corporate decision-making positions. Here it becomes pertinent to assess the effectiveness of gender diversity and inclusion initiatives in Indian corporates.
The article highlights the prevailing legal framework and practices, thereby unveils the factual state of D&I initiatives in India. Further, the article explores probable solutions to increase the effectiveness of D&I initiatives.
Prevailing Legislative Policies: India and Abroad
India’s Companies Act of 2013 requires at least one woman director on the Board of a specified class of ‘Companies’.
According to “Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014“, these companies include:
Any listed company;
Any public company with a paid-up share capital of Rs. 100 crore or a turnover of Rs. 300 crores.
The non-compliance of which may result in a fine of Rs. 50,000 and may extend to Rs. 5,00,000 as mentioned in section 172 of the Companies Act, 2013.
Moreover, as per “Regulation 17 of the SEBI (Listing Obligations and Disclosure Requirements) 2015 (Amended on January 10, 2020)”, any listed company must have at least one woman director. It also requires that at least one independent female director be appointed to the ‘Boards of directors of the Top 500 and 1000 companies’, as determined by market capitalization.
Though India only mandates one female director, several other countries have set higher quotas for women in the boardroom. Norway mandates that women make up 40% of the Board of Directors, while Italy has placed their requirements at 30%.
Besides increasing women’s quotas in executive leadership positions, one of the most important ways to improve gender equity and inclusion is for businesses to make mandatory diversity disclosures. According to the UK Corporate Governance Code, all premium listed companies must state their diversity and inclusion agenda, its aims and relation to the business plan, how the application is made, and progress in achieving these goals in their annual report. Companies would have to develop plans to improve gender balance and implement inclusion strategies within the organization if they took this path.
Furthermore, as per “Article 11 of the UN Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW)”, men and women have fair rights to jobs, advancement, and equitable care in respect of work of equal importance.
Rationale of Boardroom Gender Diversity Laws
Here it becomes important to understand the objective gender D&I laws seek to achieve. Cognitively and demographically diverse directors enhance a company’s ability to perform its obligations. Following are five major reasons for incorporating gender D&I policies in boardrooms.
Enhanced decision making and business performance:
The International Corporate Governance Network (ICGN), believes that corporate boards need to generate effective debates and discussions around present business activities, potential threats and possible developments for which a mix of relevant skills, competence and diverse perspective is necessary. Gender diversity ensures this needed mix in corporate boardrooms. Thereby, significantly improving a company’s financial performance, leadership quality, brand reputation, and governance efficiency.
Improved business understanding:
Studies also show that an improvement in demographic diversity on a board expands the knowledge base of a business because of new insights that gender, racial, or ethnically diverse directors contribute. As these diverse directors bring in new business backgrounds, talents, and connections to share helpful expertise in the boardroom and provide the organization with beneficial means, are more successful in extending the board’s knowledge base and business understanding.
Diversity in boardrooms decreases the ties of management with the owners of a business. Resulting in an independent board that is fully capable of making rational decisions and monitoring business activities rationally.
Enhancing cognitive diversity can improve a Board’s capacity to execute its supervisory roles by increasing the possibility of knowledgeable and committed managers who had previously no association with shareholders or other directors of the company.
Healthier financial returns:
Data shows that in the year 2014 when only 5% of CEOs in the fortune 1000 companies were women, they contributed about 7% of the total revenue of these 1000 companies. It was also revealed that companies run by women in leading roles tend to generate higher returns. As companies with female leaders generated a return of 103.4% in their tenure as compared to an average return of 69.5%.
Better social acceptability:
In a world of increasing consumer awareness and demanding financial markets, a business must have a positive social image. An important factor affecting this is a company’s gender D&I policies.
A diverse board can take into consideration different perspectives and develop products suited for different genders. Thus, increasing its customer satisfaction and market share. An inclusive recruitment policy sends positive signals to the labour union and labour markets, aiding a company by attracting skilled and competent personnel.
To achieve the objectives that various gender D&I laws seek to realize there needs to be proper implementation of these laws by the government as well as by individual companies. Studying the prevailing practices of gender D&I laws in India will reflect their effectiveness in achieving the said objectives.
Prevailing Practices in India
The existence of laws promoting D&I in India and around the world has largely remained ineffective in India. The creation of “at least one” quota has led to many companies employing only one female director resulting in gender tokenism. Thereby, nullifying all the efforts for proper implementation of D&I policies.
A study found that around 303 companies listed in NIFTY 500 in 2013 had no women as board members. However, 82.8% of these non-compliant companies had appointed a single woman director by 2017, and only 13.6% of these firms had appointed two or more woman directors.
However, around 70.4% of the woman appointed to the BoD after the mandate was “independent” and not related to any board members or shareholders. They were superior in education and experience in comparison to their male counterparts. But they were doubtful to be a member of any crucial board committees like finance or nominations.
Similar to the 33 % reservation for women in local self-government institutions, which took women to the forefront of India’s political and social sphere, but reduced most of them to stooges in the presence of male relatives, proponents could exploit this quota to ensure their family’s dominance and power.
Reliance Industries Limited, according to reports, appointed Nita Ambani, the wife of Chairman Mukesh Ambani, as a director, and other firms, such as Godfrey Phillips India (Bina Modi, the wife of K.K. Modi), have promoted family members as directors to comply with the Act’s specifications.
Though the mandatory quota has helped woman representation in BoD to a marginal extent, it has failed to achieve the desired results. We believe the mandatory quotas are ineffective to a substantial extent.
Solutions and Policy Recommendations
Given the Indian corporate landscape, we recommend four solutions to address the ineffectiveness of the quota system.
Harmonizing profit motive and gender diversity:
Shareholders are the company owners, and they act through their agents, i.e., Directors of the company. It is believed that the purpose of the Board of Directors is to advance the profit-maximizing goal of the shareholders. Furthering this line of reasoning, it is argued that the concept of gender diversity is irrelevant to the objective of profit maximization. However, research findings are contradictory to this notion. McKinsey’s report states that a value of $12 Trillion can be added by 2025 just by increasing gender diversity in decision-making positions.
According to a Randstad review of Return on Equity (ROE) data from the top 100 Indian firms, a private sector company’s Board of Directors, led by a competent Chief Executive Officer and a combination of men and women, helped ROE grow by 4.4%.
In comparison, a close corporation with a Board of Directors made up entirely of men saw the ROE increase by 1.8% over the same time frame. Thus, shareholders and directors must understand that board rooms’ profit motive and gender diversity are in harmony.
Ingraining D&I in Corporate Governance:
As stated earlier, in most cases, only one female director is being recruited to abide by the law and avoid penalty. It should be the duty of the corporate decision-makers to address the issues of gender tokenism and address the spirit of gender equality and diversity in BoD. To ensure proper implementation of D&I policies, the board should consider making a dedicated committee to promote and enforce gender equality norms not only in the BoD but also at all levels of management and workers.
The governance board should also follow the shifting societal norms and market trends towards Gender D&I. It should abide by the mandatory disclosures with the spirit of promoting gender diversity.
Following Progressive International Standards:
It is beyond time for lawmakers to put Article 11 of the CEDAW into practice and ensure women’s participation in corporate boardrooms. It is essential to consider social considerations, as women’s rights are influenced by sociological and cultural factors unique to each region.
Activists have pushed for the integration of the LGBTQ community, but seeing it to fruition would necessitate a concerted initiative on the part of the government.
Recently in the USA, Nasdaq Inc. decided that at least one woman and a director of an ethnic minority or one who sees himself as gay, bisexual, transgender, or queer should become an essential requirement of the listed firms. Companies that fail to comply with the norm must clarify the reasons for not complying with the same.
India’s policymakers need to address the international trends in promoting gender diversity in Board rooms and acknowledge the benefits of such diversity by encouraging corporates to strive for a diversified Board.
Breaking Gender Stereotypes:
A popular belief that all women must respect their traditional position of a caretaker and stay-at-home as mothers. Women’s family responsibilities are considered as an inability to contribute to the corporation’s productive existence.
For Instance, in the case of C.B. Muthamma v. UOI (1979),[i] it was found that the petitioner being a woman was denied promotion in the Ministry of External Affairs. The rule stated that a married woman was not fit for promotion, whereas a married man can be promoted. This was prima facie evidence of gender-discriminatory policy in India based on antique stereotypes. Thus, it is necessary to dispel assumptions and assist in transforming stereotypical task distribution.
Telecommuting is an alternative for pregnant women as seen in the United States, and several corporations have on-site day-care.
Some employers also include paternity leave for men, allowing the parents to share the role of a caregiver. These types of interventions will be a great addition to any steps taken to enable women to hold decision-making roles on corporate boards.
In a world of super-competitive markets where business firms have to strive to ensure their survival, often they do not pay attention to the basic needs of their business and society. For this ignorance, many firms do not implement proper gender D&I policies. This results in tokenistic employment of women into the BoD to avoid legal penalties. Thereby effectively nullifying the motive of implementing gender-based quotas.
Although, the gender-based quota system was a step in the right direction it didn’t go the desired distance. To make the system more effective various solutions should be explored at different levels. This includes harmonizing profit motives and gender diversity, ingraining D&I in Corporate Governance, following progressive practices and breaking stereotypes.
[i] C.B. Muthamma v. Union of India, (1979) 4 SCC 260.
This article has been authored by Vidisha Mishra and Utsarga Dash, students at KIIT School of Law. This article is part of RSRR’s Corporate Governance Blog Series.