Gender Diversity in Boards
In December of 2003, the Norwegian Parliament passed an unconventional law that required all the public-limited organizations to increase the women representation on their boards to a minimum of 40% by July of 2005. This was a substantial increase from 9% women representation prevailing at that time. Since voluntary compliance failed, the law became mandatory on January 1, 2006. Spain too passed guidelines in 2007 to have 40% female directors on board by 2015. Similar laws are being enacted in other countries such as Australia, Germany, Belgium, Italy, Netherlands and the UK who have asked companies to set voluntary boardroom gender quotas.
As far behind as India is in acknowledging the gender diversity, introduction of the Companies Act, 2013 (the Act), has rejuvenated the existing corporate legal mechanism and given boardroom gender diversity the much-needed importance in the country. Section 149 (1) of the Act requires every listed company or public company with a minimum paid-up capital of Rs.100 crores or a minimum turnover of Rs.300 crores to have at least one-woman director in the Board of Directors. The Security Exchange Board of India (SEBI) vide its circular dated 17.04.2014 made it mandatory for all the listed companies to appoint at least one woman director on their Board of Directors by 31.03.2015 in alignment with the requirement of the Act. Furthermore, SEBI on 08.04.2015 issued a circular bearing no. CIR/CFD/CMD/1/2015 and subject as “Fine structure for non-compliance with the requirement of clause 49(II)(A)(I) of Listing Agreement”. SEBI also notified that compliance with the mandatory norm on or after 01.10.2015 would make the companies liable to pay Rs.1,42,000/- along with an additional charge of Rs.5,000/- per day till the date of compliance.
In a rush to meet SEBI’s deadline Indian companies took the easy route as women from immediate or extended family were appointed as a mere formality. This was done merely to comply with the quota regulations, rather than recruiting the best persons for the job. Such a move although were done to meet the mandatory gender diversity requirements, however, it shall not benefit the companies in the long run. Any post filled up as a mere formality cannot ensure effective performance. This is because appointing relative on boards does not ensure diverse opinions, which is being sought by SEBI. A board built on a handful of relationships has the inherent risk of insularity, which can be a hindrance to an increasingly dynamic environment.
Diverse leadership and governance leads to stronger business outcomes and corporate social performance. In addition to this, balanced boards bring “…better understanding of customers and stakeholders, fresh perspectives, new ideas, vigorous challenge and broad experience. This in turn leads to better decision making.” Besides this woman ask awkward questions and perform in the non-executive director roles more sincerely. Studies show that companies having more women on their boards were found 40% ahead in sales from their competitors. Having said that the need to have women directors in India hasn’t been truly felt across boardrooms. The proportion of senior management roles held by women in India (15 % in 2015) was among the lowest in the world. A McKinsey Global Institute report in 2015 suggested that India’s gross domestic product has the potential to boost to 60% (around $2.9 trillion approx.), if it were to utilize its full potential of women in its workforce. However, India has a long way to go to reap the benefits of this gender parity. For now it has to acknowledge this discrimination, while taking a step towards it comes later.
Through this article we shall look at the key advantages and disadvantages gender diversity brings to the table and how it impacts the boards. We shall further make recommendations regarding steps India needs to take to reap the full benefits of this gender diversity.
ADVANTAGES OF A DIVERSE BOARD
Diverse perspectives lead to more innovative and robust solutions. Gallup study is perhaps the best proof of the advantages that gender-diverse business units bring to the table. The study suggested that “gender diverse business units in the retail companies have 14% higher average comparable revenue, and hospitality companies have 19% higher average quarterly net profit in comparison to the less diverse units.” It helps a company realize its full potential and maximize financial benefits. It further aims to nurture a broad spectrum of demographic attributes and characteristics in the boardroom. Companies with women directors tend to deal more effectively with risk. Most importantly, it is beyond any reasonable doubt that women directors tend to understand women needs better in comparison to men and hence brings the requisite diversity a board seeks. After considering the above let us take a look at some of the broad benefits of board diversity:
Effective Decision Making
Gender diverse boards tend to make more effective and efficient decisions. This is because they cater to the needs of a large divergent group of consumers. Combining contributions from woman directors who naturally possess different personal characteristics would lead to multiple-perspective analysis of problems. This fosters creativity in delivering solutions to problems and further enhances companies operations to a wide range of possible risks. Gender diverse boards offer depth in perspective and experience to organizations that non-diverse boards simply cannot.
Good Corporate Governance
Diversity in perspective brings in a broad range of collective outlooks towards a particular issue, which helps the board in fulfilling its responsibilities diligently and effectively. Empirical evidence suggests that boards with three or more women perform significantly better in terms of corporate governance than all male boards, which might be a result of improved risk management, monitoring systems and performance evaluation. Further, women anticipate and consider the concerns and perspectives of all key constituents of an organization better in comparison to their male counterparts. Females are also said to value their responsibilities as directors higher, which furthers the ends of effective corporate governance. Therefore, while staffing a board, it is best to think of gender diverse individuals contributing different pieces to the total picture that it takes to create an effective board. A heterogeneous board can also enhance corporate reputation before the stakeholders.
Increased Financial Performance
Gender diverse boards are in conjunction with increased financial performance of the company. Credit Suisse’s recent report, The CS Gender 3000 – women in senior management reflects:
“…companies with greater board gender diversity display excess stockmarket returns. In Asia Pacific, the compound excess return since 2005 of companies with a market capitalisation of less than US$10 billion with at least one woman on the board on a sector-neutral basis was 55 per cent.”
Higher gender diversity at the Board levels contributes to stronger financial performance. Statistical evidence suggests that Fortune 500 companies with the highest representation of women board directors attained higher financial performance than other boards. The catalyst report stated that boards with highest women directors on board outperformed those with the least by 53% in return on equity, 42% in return on sales and 66% in return on invested capital. It is believed that women possess greater analytical skills, coordination in activities, higher engagement, better retention of a more diverse workforce, better thought integration, greater team performance, social sensitivity and emotional intelligence. These factors boost financial performance of an organization.
DISADVANTAGES OF GENDER DIVERSE BOARDS
Despite the aforementioned benefits that gender diverse boards may have, all authors do not support gender diversity. Hambrick stated that, “heterogeneous groups are more likely to disagree, which weakens team consensus”, while Knight indicated that, “decision-making in heterogeneous groups may be more time-consuming, which ultimately reduces team performance.” In furtherance to this, too much gender diversity may also lead to conflicts and lack of cooperation. Hiring women on board to meet the mandatory statutory requirements may not add up to the companies efficiency and financial performance, as the directors might lack the requisite market knowledge, which may result in bad governance and business failures. Affixing a mandatory requirement to diversifying a board may make corporate boards instruments of social change, but it may hamper effective performance of the operations of the company and may not lead to a clear economic benefit as the companies may hire women directors who are unqualified and lack the necessary experience to simply meet the statutory requirement. Such a situation coincides with the current scenario in India wherein the companies are hiring family members on board to meet the mandatory statutory requirement. Therefore, for gender diverse boards to function efficiently, governance regimes should balance board diversity and the cohesion that best serves the firm’s purpose.
Any form of discrimination on the ground of gender is violative of fundamental freedoms and human rights. Gender equality is not only a fundamental right guaranteed by the Constitution of India but also a universally recognized human right. Discrimination on the ground of sex is anathema to the constitutional philosophy of equality among men and women. Gender equality is a fundamental pre-requisite for social justice. In ‘C.B. Muthamma v. Union of India’ AIR 1979 SC 1868, the Apex Court inter alia observed:
“We do not mean to universalise or dogmatise that men and women are equal in all requirements of particular employment, the sensitiveness of sex or the peculiarities of social sectors or the handicaps of either sex may compel selectivity. But save where the differentiation is demonstrable, the rule of equality must govern.”
History over the years has proved that women are as competent as men and any job cannot be considered as monopolized by men anymore. However, work places in India still tend to be guided by the traditional conservative social inhibitions to a certain extent. India is a straggler when it comes to appointment of women on board directors with only 4.7% of India’s corporate directors being women. SEBI’s directive made nearly 57% of listed companies on the National Stock Exchanges companies hurriedly appoint wives, sisters, daughters etc. to their boards, which has clearly undermined the importance of gender diversity. However, companies with good corporate governance have taken advantage of this to appoint women who can contribute and not just be silent spectators at boardrooms. For SEBI to ensure effective compliance of its mandatory legal requirements, it is important for them to emulate best compliance practices themselves. Appointing a woman board member as late as March 2015 does not give the best impression of compliance by SEBI. A Randstad study of the top 100 companies (BSE 100) showed that companies with women on board performed better. Taking a private sector company with a mix of both men and women, helped return on equity rise by 4.4% in 2014 in comparison to a similar company with a men-only board that saw a rise by a mere 1.8% in the same period.
For India Inc. to fully embrace gender diversity it needs to manage it by establishing systems, processes and culture that allow expression of different viewpoints, encourage transparency and set targets for such diversity measures that encourage such corporations to function more efficiently. Further, India Inc. needs to focus more on long-term goals instead of short-term financial results and make additional investment in training and mentoring. The sooner India Inc. acts upon reducing this management gender gap, the sooner it will understand the true potential of gender diversity and grow accordingly. Another ideal scenario would be to try a voluntary approach instead of a mandatory legislative approach. The shareholders ought to put pressure on companies to voluntarily diversify their boards for which they need to be made aware of the benefits that such diversification provides. It is expected that with more favourable governmental policies and initiatives, 2016 shall see women being more empowered with financial, technological and infrastructural support that can help them contribute to the Indian economy.
Summarizing the studies and reports measuring the relationship between gender diversity and boards provides us an insight into the importance of women directors on board. Having women on corporate boards is a diversity measure justified on the basis of both social equity and business consideration. Female directors fulfill leadership roles in a more transformational way in comparison to their male counterparts. However, it is not the sole factor that may positively impact the firm’s financial performance. Gender diversity does not reap benefits on its own; it will require a reconsideration of experience requirements and recruitment process. For maximizing female contribution to the board, it is important that women possessing the requisite qualification, the market experience and expertise are hired on board. Until such women are found in India’s male dominated society, mandatory requirements forwarded by SEBI may not serve the desired purpose. Having said that law is the starting point for any substantial change and gradually companies have started accepting the SEBI directive as a positive move. The career aspirations of the new generation women may increase gender diverse workplaces in the coming years..
Disclaimer: The views and opinions expressed in this article are based on extensive and thorough research. In no way does the author or the law firm claim ownership of the ideas and concepts presented in this paper. Information so provided is to be strictly considered for general reference of the subject matter, which has been adequately referenced. Specialist advice should be sought about any specific circumstances directly from the law firm.
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