Gender Diversity in Indian BoardroomLegal Aspects of Business (LAB)Term - I

Under the guidance of Prof. C. L. Bansal

Submitted byPGPM (2013-15), Section A

Anirudh Krishnan (13P006)Deepak Sasikumar (13P019)Piyush Rathi (13P033)Sandeep Banthia (13P042)Suhail Sabharwal (13P049)Sunanda Mohanty (13P051)

Introduction

Companies Bill, 2012 provides for at least 1 woman director in the prescribed class or classes of companies. But, was this step necessary in the Indian context? What is the bearing of the law on the respective companies, Indian corporate scenario and the working women? We try to answer these questions by analysing the law in the Indian and global context, and provide the justifications, criticism and recommendations for the same. The concept of having a permanent women director comes from the growing sense of providing inclusivity to women. History tells us that around the world, and especially in India, women have struggled to stay on par on all walks of life with their male counterparts, even though they make up fifty percentage of the population. The corporate boardrooms are a simple reflection of this fact. The numbers clearly indicate the wedge in gender diversity. This has culminated in the provision for one director to be a woman in a certain class or classes of companies. Here we are faced with two major questions. 1. Do we need to have a mandatory woman member if the numbers are stacked against it? 2. Are the reservations or quota system the best solution of this problem?

Need for women directors

A critical reason to include women in corporate boardrooms is for Ethical reasons. Women being excluded from boards are immoral on the grounds of gender. Including them in the same help us achieve Equity. Equity means being impartial and fair. Every corporate should try to achieve the same. Other than this, every corporate should try to achieve Equality - the state of being the same in quantity, size, degree, value or status. Most important to all of this is respecting the womens Parity with men. Today there is no task, no chore or no job that is classified as only for men. Women have made forays in to what is termed as traditional male roles, which is commendable and significant. It is interesting to note that studies indicate that rates of corporate return on equity is comparatively higher in firms that have more women in executive roles[footnoteRef:2]. Another statistic is that companies with the highest percentage of women on their boards outperformed companies with the least number of women on their boards by 53% on return on equity, 42% on return on sales and by 66% on return on invested capital[footnoteRef:3]. [2: Vinnicombe et al., The Female FTSE Report 2004, Center for Developing Women Business Leaders, Cranfield School of Management (2004)] [3: Catalyst, The Bottom Line: Corporate Performance And Womens RepresentationOn Boards (2007)]

There are further studies which relate better financial results for companies which have more number of women in their board[footnoteRef:4]. [4: Gender Diversity in the Boardroom and Financial Performance Kevin Campbell & Antonio Mnguez-Vera, Journal of Business Ethics (2008) 83:435451]

The above mentioned learning bode well with the idea of board diversity. It is said that the task of the board of directors is to advance the financial interests of the owners. The objectives of a board shall come under one of the following Wealth creation Advice for the management Control operations Asset and wealth protection

To fulfil these, the board would require a large skill-set. Hence, to be a successful company, the board would need a team which is large and diverse in its competencies. Thus, Diversity in boardrooms comes into prominence. In the early mentioned case, the gender diversity is one of the reasons. The diversity may be in terms of ethnicity, age, experience and known disciplines as well. In India the diversity maybe in caste and gender while in US it might be ethnicity or race.

The issues of gender diversity has been best summarised by the Cadbury Committee[footnoteRef:5] 2002, who concluded that [5: Cadbury Committee Report, http://www.jstor.org/stable/2697846, 2002]

The responsibilities which many women carry in voluntary organizations and public life will have given them a different type of experience from executives; as a result, they can bring a particular kind of value added to a board...They [boards] will gain from having directors with a wider spectrum of viewpoints than in the past, in line with the wider interests which they are now being called upon to take.

There have been multiple other studies which agree to the same theory. Some of them are Female directors enhance board independence (Fondas & Sassalos, 2000) Women take their non-executive director roles more seriously, and are better prepared for meeting (Izraeli, 2000) Women ask the awkward questions more often which helps board think more about their decisions (Huse & Solberg, 2006) Women bring different perspectives and voices to the table, to the debate and to the decisions (Zelechowski & Bilimoria, 2004)Equal Opportunity is another important factor when it comes to board room appointments. Wherever there are opportunities, every one eligible and qualified must receive fair and unbiased consideration. This also implies taking the task seriously of ensuring that everyone willing and able is appropriately equipped to qualify and be eligible for such consideration. But, this equality in opportunity hardly exists in the corporate world. Women give up their chances to ensure that they spent more time with their families and in bringing up their children. The selection processes are mostly dominated by men, which could result in biases against women. Mentorship and sponsorship for women in many of the companies fail as these positions are usually men; the social taboo and disapproval usually works against women.Thus, it is clear that there is a need to have sufficient number of women in board rooms, which have to be given the opportunity to ensure the parity, equity and equality so that the boardrooms have the right diversity.

Global scenario

The topic of diversity at the workplace long standing and one which has invoked a wide variety of responses from all around the world. Whether it is in the form of voluntary efforts or in the form of rules or laws, one thing is for sure, gender diversity is an extremely important topic in the global scenario at the moment. The initiatives taken by different countries vary from recommendations to laws with strict compliance measures and all these steps have resulted in varying results. In 2010, a United Nations publication Womens Empowerment Principles: Equality means business stated that participation of women in decision-making and governance at all levels was a means to empower women worldwide. Over 100 CEOs came out in support of this, signing the CEO Statement of Support for the Principles. Given below are some of the steps taken by different nations around the world[footnoteRef:6]. [6: Women in the boardroom ,A global perspective, Deloitte,http://www.deloitte.com/assets/Dcom-Tanzania/Local%20Assets/Documents/Deloitte%20Article_Women%20in%20the%20boardroom.pdf]

Countries like Australia, China, Canada, New Zealand, Singapore, Hong Kong, United States of America and the United Kingdom did not have any mandatory quotas for gender diversity but in countries like Australia, New Zealand and Canada, steps were being taken towards improving the level of diversity. Also, Lord Davies recommended that UK listed companies in the FTSE 100 should be aiming for at least 25% gender diversity by 2015. Following this the UK Financial Reporting Council issued a consultation on amendments to the UK Governance code to require listed companies to provide detail about their board diversity policies. In countries such as China, Singapore and Hong Kong gender was not mentioned as a desirable quality when it comes to criteria board candidates or senior managers. In 2009, The United States of America approved a policy where disclosure about how diversity was being considered in identifying nominees for the post of director. The European Union and countries like India and Malaysia are taking steps towards improving the gender diversity in the work places with certain quotas being in effect under some conditions. For example, in India the Ministry of Corporate Affairs submitted a proposal in 2009 to make it mandatory for companies having five or more independent directors on a board to have at least one female independent director. On June 27 2011, Prime Minister of Malaysia Datuk Seri NajibTunRazak and his cabinet approved legislation where companies must achieve at least 30% representation of women in decision-making positions in the private sector to generate gender equality. Viviane Reding, the European Commissioner, has proposed legal legislation requiring 30% gender diversity in the European Union by 2015, with that figure rising to 40% by 2020.

Indian Scenario

A study of 30 companies in Bombay Stock Exchange (BSE) and 50 companies in Nifty was done[footnoteRef:7]. An analysis of the number of women directors is the same was done. It is as follows. [7: Gender Equality Inclusivity and Corporate Governance in India, Journal of Human Values 2013 19: 15, N. Balasubramanian]

Bombay Stock Exchange (BSE) Total directors - 1112Women directors - 59 (5.9%)Executive women directors - 8Family based boards - 13Women in family based boards - 4Female board chain - 1 (from family based board)

NiftyTotal directors - 718Women directors - 32 (4.5%)Executive women directors 4

This above study clearly shows the very low percentage of women in India boardrooms. As mentioned earlier, diversity in boardrooms is beneficial for the well-being of any company.

Reservation for Women Directors

The Companies Bill 2012 provides for a woman director in the prescribed class or classes of companies. But as The Economist magazine had pointed out much earlier[footnoteRef:8] [8: The wrong way to promote women, The Economist magazine, http://www.economist.com/node/18988506]

Quotas are too blunt a tool. The women companies are compelled to put on boards are unlikely to be as useful as those they place there voluntarily. Quotas force firms either to pad their boards with token non-executive directors, or to allocate real power on the basis of sex rather than merit. Neither is good for corporate governance. Norway started enforcing quotas for women in 2006. A study by the University of Michigan found that this led to large numbers of inexperienced women being appointed to boards, and that this has seriously damaged those firms performance.A quota or a reservation system ends promoting an unsuitable candidate in the name of compliance. Giving the right opportunity to interested women, but the chances of just making up the numbers are very high. The focus should be on bringing about diversity through equality of opportunity. Women should have a sense of being included in the process and earned the membership by virtue of their competence, skill and success. A quota or reservation system as brought about by the Companies Bill 2012 does not achieve this, it imposes women participation. This would, in the long run, prove to be dysfunctional.Although Norway has achieved more than 40% women in boardrooms in a time period of five years given to comply, the approach has been highly criticized[footnoteRef:9]. The media calls these professionals as 'golden skirts'. There are women who serve on multiple boards, mostly in non-executive roles. The so called glass ceiling has stayed intact, preventing natural growth from the management to the board rooms for aspiring executives. [9: Why gender diversity is important in the boardroom?, Forbes magazine, http://forbesindia.com/article/ie/why-gender-diversity-is-important-in-the-boardroom/30702/1]

A more wholesome approach is the one provided by the UK Corporate Governance Code[footnoteRef:10]. [10: UK Corporate Governance Code, http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-September-2012.aspx]

A separate section of the annual report should describethe boards policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives

In the United States, it is required for the factors of diversity in considering candidates for board of directors, and the company's effectiveness in achieving diversity. Although such approaches provide loopholes which could be easily side-lined, a careful implementation of the same, along with the provisions to ensure that each corporate follows the principle of equity, equality, parity, diversity and would help in achieving the ulterior goal of having more women in the boardrooms who would have a feeling of rightfully earning their place rather than just making up the numbers.

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