Gender Diversity in the Boardroom

-Mahak Agarwal | corplaw@vinodkothari.com

Diversity in the Boardroom, specifically gender diversity is in the limelight owing to the general awareness for breaking gender stereotypes and adopting a gender neutral board structure. While the Companies Act, 2013 and SEBI LODR Regulations have already taken their first steps towards implementing the same, considering the progress in global perspective, India still has a long way to go in increasing women participation in corporate boards  . This article discusses the concept of Board diversity, specifically  gender diversity,  and the ways in which Indian corporate laws could take their next step in achieving a gender-diversified Board.

What is Board diversity?

The term ‘diversity’ literally means the state of being diverse or varied. In a boardroom, diversity may take several forms: ensuring the Board is equipped with an optimal mix of skills, expertise, experience and knowledge, ethnicity diversity with a mix of individuals form various racial, cultural and religious backgrounds, age diversity concerned with having a balance between younger and older personnel, geographic diversity for equipping the Board with individuals from various geographical locations, and gender diversity pertaining to having a gender-balanced boardroom.

Relevance of Gender Diversity in Indian context

For a very long time, Indian society has largely been patriarchal. A wide variety of literature available on this subject highlights the stigma attached with appointing women at leadership positions in India. While the same is, without doubt, on a continuous trend of improvement with India ranking 127 out of 146 countries in terms of gender parity^[1] in 2023, an improvement of 8 places since 2022, and 142 in terms of economic participation and opportunity, an improvement of 1 place since 2022, a large part of the socio-cultural population of India still looks at women only in the light of ‘great mothers’ and ‘home-makers’.

Gender diversity, in addition to being a persistent issue in the country, is also the topic of the hour as women across the country today are breaking the barriers of gender stereotypes and emerging as strong leaders, not just in personal roles but also in corporate leadership.

In an effort to catalyze such a shift and increase women participation on corporate Boards, the SEBI (Listing Obligation and Disclosure Requirements) 2015 (Listing Regulations) had also undergone change to adhere to the spirit of gender diversity.

Concept of Woman Director under SEBI LODR

Historically speaking, Board rooms in India have largely been a male consortium. As per Deloitte Globals’s Report on ‘Women in the boardroom’ only about 17.1% of the Board seats in India are held by women. Further, according to a study by Prime Database, there are only about 2,350 females and 10,356 male board directors in India’s listed companies.

With a motive to steer away from such a male-centric structure, regulation  17(1)(a) of the SEBI LODR Regulations, 2015 (which is also in line with the Companies Act, 2013) required all listed entities to appoint at least one woman director. While the motive behind the same was to ensure female candidature on the Board and gender diversity in decision making, it was observed that the due to the patriarchal and family dominated structure of companies in India, companies started appointing women directors just for the sake of the letter of the law and ensuring compliance with the same, to avoid the fine that may otherwise be imposed.(fine under Section 172 of the Act which shall not be less than 50,000 but which may extend to 5,00,000). The law was not being complied in spirit and as a jugaad, the promoters were appointing their own female relatives on the Board. Furthermore, these women were mostly unqualified women being appointed as mere tokens who had no real say on the Board, in fact, barely any time to devote or participate in the decision making of the Board. Such namesake women directors did no good due to lack of  independence on their part in taking important decisions.

To turnaround this shortcoming, vide SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2018 following the recommendations of Kotak Committee, w.e.f. 1st April, 2020, SEBI notified that the top 1000 listed entities on the basis of market capitalization are required to appoint an independent woman director on their board. While MCA was not in complete favor of the same, and suggested that the issue could be addressed by inserting provisions for appointing a woman director on the Board who is not a relative, SEBI adopted a phased implementation approach on the basis of market capitalization. On the basis of an analysis on the existing position of appointment of woman directors/ woman IDs on the board of directors of listed entities categorized on the basis of market capitalization, it was thought appropriate that the same be made applicable to top 500 listed entities w.e.f. 1st April, 2019, to be further extended to top 1000 listed entities w.e.f. 1st April, 2020.

Benefits of gender diversity in the Boardroom

Increasing women participation on the Board does more than just dodging the fine which would otherwise be imposed on the company. There is a lot of literature available on the impact of women participation on the growth of companies. Women on Boards have been seen to contribute to strong financial performance, expanding the talent pool, taking better decisions and improving the Board culture. Further, engaging women on Boards will introduce new and fresh strategies of problem solving by mobilising the talent and skills of the nearly 50% of the untapped population.

According to a report titled Women on Boards published by the International Labour Organiszation^[2], advancing women’s equality in business would increase the global GDP by US$ 5.8 trillion by 2025. The report suggests the following benefits of having women on board:

• Strengthen financial performance
• Better decision making
• Enhance consumer insight
• Improve corporate governance
• Build and cultivate talent

The discussion above is likely to raise the question as to why women improve business performance. The same has been discussed in a report by New Zealand titled Women On Boards:

• Women bring fresh perspective to the Board: Typically, most of the consumer decisions in a household are taken by women indicating their depth of customer understanding. They are likely to bring such understanding to the commercial Boards which will result in commercial decisions that are more in touch with customer needs.
• Women provide effective leadership: Women are more likely to be effective leaders particularly in areas of innovation and staff management. They may contribute to diversity in decision making.
• Women as role models for other women: Women on boards can prove to be positive role models for other women and encourage further participation.

Apart from this, women are likely to give greater focus on long term solutions as opposed to short term and their decisions are likely to be a result of well-thought analysis. Further, female board participation can also improve corporate brand reputation. As per the FRC report, other positive impacts of having women representation on board include less opposition to resolutions put forward by the board before the shareholders. In addition to superior financial returns, having a gender diverse board results in better transparency, accountability and increased innovation.

In the context of corporate governance, women representation can help strengthen the same in the following ways:

• The presence of women on boards could enhance transparency and accountability, because of their contribution to mitigating fraud.
• Informed women board members could lessen inconsistent CEO payment and the probability of a financial anomaly.
• Women directors decrease the risk of impression management policies in sustainability reporting.

In addition to the above qualitative contributions, women on boards also contribute to enhanced profits for companies. According to a 2021 report on Board Diversity and Effectiveness in FTSE 350 Companies by FRC, the FTSE 350^[3] companies that have at least one woman on their Board on average have three to five percentage points higher EBITDA margin over the next four years. A research paper titled “Female Board representation, corporate innovation and firm performance”^[4] provides evidence that board representation is associated with greater innovative success, and thus enhances firm performance in innovation-intensive industries.

A research paper titled “Female Board representation, corporate innovation and firm performance”^[5] provides evidence that board representation is associated with greater innovative success, and thus enhances firm performance in innovation-intensive industries.

State of gender diversity in boardrooms in India

An EY Report on ‘Diversity in the Boardroom: progress and the way forward’^[6] published in October, 2022 provides insights on the state of gender diversity in the boardroom in India. The Report highlights a rapid increase in women representation from 6% in 2013 to 13% in 2017, and at a slower pace at 18% in 2022. Women representation in executive and non-executive positions accounted for 7.2% and 21.4% respectively. Over the years, positive changes are being witnessed as companies (more than 40%) have gone beyond the regulatory mandate and appointed women directors higher than the regulatory minimum.However, women representing as Chairpersons continues to remain an area of improvement with less than 5% of companies having women as chairpersons.

Global principles on Gender Diversity of the Board

Several global principles emphasise the need for diversity of the Board, a few of which are listed below:

OECD Principles on Corporate Governance

The OECD Principles on Corporate Governance recommend that boards should evaluate and assess the existence of gender and other forms of diversity. The principles require companies to consider additional and complementary measures to strengthen the female talent pipeline throughout the company.

UK Corporate Governance Code

Principle J of the UK Corporate Governance Code suggests promotion of “diversity of gender, social and ethnic backgrounds, cognitive and personal strengths” in the context of “appointments and succession plans”.

Code of Corporate Governance in Singapore

The provisions of the Code of Corporate Governance in Singapore elaborate on  the appropriateness and diversity of the Board recommending various aspects of diversity including gender.

ASX Corporate Governance Principles and Recommendations

The ASX Corporate Governance Principles recommend companies to disclose a diversity policy and to set measurable objectives for achieving gender diversity in the composition of its board, senior executives and workforce generally.

NZX Listing Rules

The NZX Listing Rules recommend companies to have a policy on diversity of the Board and to have a target for achieving board gender diversity which is to have at least 30% of its directors being persons who self-identify as male and at least 30% of its directors being persons who self-identify as female, over a specified period which the company may determine. These numerical targets will help a company in improving gender diversity effectively.

Concluding Remarks: Way ahead

In several countries there are various gender diversity laws, some of which are soft laws and some hard laws. Several European countries have tried to tackle the problem of under-representation of women on Boards by introducing gender quotas (hard laws). The European Parliament has adopted a new law on gender balance in the corporate board wherein, by 2026, companies will need to have 40% of the underrepresented sex(generally women) among non-executive directors or 33% among all directors.^[7]A similar concept could also be adopted in India to ensure wider women participation on the Board and to ensure that their appointment is not a facade, restricted to complying with the letter of the law only. However, such quotas have their own unintended consequences. One such consequence would be the appointment of unskilled personnel regardless of their qualifications, merely to meet the statutory limits. Further, it could appear as an exercise of charity as opposed to an honest effort in reducing the gender divide.

Another challenge here is that women representation on Indian Boards has for a very long time been limited to leadership positions in Grievance and CSR committees. An EY Report on ‘Diversity in the Boardroom: progress and the way forward’ published in October, 2022^[8] shows that there is a general trend of improvement across NIFTY500, wherein the Nomination and Remuneration Committee (NRC) and Audit Committee, customarily reserved for male Board members, having 13% and 12% women Board members respectively in 2017 had increased to 18% and 16%, respectively in the year 2020. In addition to this, women as chairpersons is another area requiring significant improvement with less than 5% of women being appointed in such role.

While the Listing Regulations mandating the appointment of women directors on the Board is a step forward towards achieving gender diversity on the Board, India still has a long way to go in this regard. While gender quotas have their own drawbacks as discussed earlier, to begin with, India could adopt a quota based approach specifying a minimum proportion of the Board to comprise women directors. To ensure such quotas are effective, certain minimum qualification criteria for such appointments could also be laid down by law. Moving ahead, as the appointment of women on Boards is regularized as a general practice, such quota restrictions could be relaxed. Furthermore, to increase women inclusion in prominent committees, committee specific quotas could also be introduced coupled with minimum qualification criteria.

While the above are recommendations in the nature of hard laws, it cannot be disregarded that the practice of appointing women on Boards will continue to be more about the attitudes and apprehensions of people and cannot be strictly guided by law. However in light of the prevailing scenario, a comply or explain and sanction looks like the best way to go about it.

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^[1]Global Gender Gap Report,2023:  https://www3.weforum.org/docs/WEF_GGGR_2023.pdf

^[2] https://www.ilo.org/wcmsp5/groups/public/—dgreports/—gender/documents/briefingnote/wcms_410200.pdf

^[3] https://www.frc.org.uk/getattachment/3cc05eae-2024-45d8-b14c-abb2ac7497aa/FRC-Board-Diversity-and-Effectiveness-in-FTSE-350-Companies.pdf

^[4] Chen, Jie and Leung, Woon Sau and Evans, Kevin P., Female Board Representation, Corporate Innovation and Firm Performance (July 18, 2018). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2607295  or http://dx.doi.org/10.2139/ssrn.2607295

^[5] Chen, Jie and Leung, Woon Sau and Evans, Kevin P., Female Board Representation, Corporate Innovation and Firm Performance (July 18, 2018). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2607295  or http://dx.doi.org/10.2139/ssrn.2607295

^[6] https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/topics/women-fast-forward/2022/09/ey-dei-report.pdf

^[7] https://ec.europa.eu/commission/presscorner/detail/en/statement_22_7074

^[8] https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/topics/women-fast-forward/2022/09/ey-dei-report.pdf