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Boardroom Gender Diversity: Are Mandatory Quotas Effective?

The present article examines the relationship between gender diversity in boardrooms and the mandatory quotas instituted for it. It addresses the problems that cause a disproportionate gender ratio on corporate boards. There are various ways in which a woman enhances the corporate performance of a firm like adding a different viewpoint on the table or ensuring stability in the organization.

In India, the Companies Act, 2013 recognizes the importance of gender diversity and has mandated certain legislative quotas for the same. How have these quotas impacted the corporate scene in Indian boardrooms and their advantages and disadvantages have been discussed further in this article.

Introduction:
According to the definition by Adrian Cadbury, Corporate governance is the system by which companies are directed and controlled. It refers to the set of rules, policies, and protocols laid down to ensure efficient and structured corporate behavior. Good governance is a symbol that shows a firm's business integrity and transparency towards its investors, shareholders, and society at large and helps build their trust in the organization.

There are several aspects of boardroom diversity like background, age, nationality, experiences, and perspective but gender diversity is a relevant subject at present that is particularly gaining traction in the global corporate governance arena.

Gender inequality has been a problem for many years and it continues to exist to date. Women all over the world are fighting discrimination at the workplace at different levels and to address this issue and promote equality, gender quotas have been introduced on corporate boards. Following extensive research on this issue, it has been concluded that having a more gender-diverse board positively impacts a company's performance and improves its efficiency.

In India, the Companies Act, 2013 recognizes the importance of gender diversity and requires that at least one woman director be appointed in listed and other specified classes of companies. The significance of ensuring gender balance on corporate boards is being increasingly recognized around the world with many countries enacting legislative action and imposing quotas in this regard.

Gender Diversity On Corporate Boards

The initiative to promote gender equality at the workplace began in 2003 when Norway became the first country to institute a 40 percent quota for women on its corporate boards. This was followed by other nations like Spain, Finland, Iceland, France, Israel, Kenya, Italy, Belgium, Portugal, Germany, and Austria by instituting their own legislative quotas for women.

Despite all the efforts by the countries around the globe to promote gender equality, women are still under-represented in boardrooms globally, especially in the Asia -Pacific region. Even today only one in five people in positions of leadership is a woman. Major international organizations like The International Corporate Governance Network (ICGN) believe that having gender-diverse boards ensures progress in financial performance, effective governance and increases an organization's reputation.

What leads to the underrepresentation of women on corporate boards?
The underrepresentation of women on corporate boards is a global concern.

There are various reasons that act as a barrier for women on boards:
  1. The male-dominated boardrooms and disproportionate gender ratio in the corporate arena is an indirect consequence of the orthodox thinking that prevails in the society which promotes discrimination and holds women back from competing for equal rights and opportunities. Male-dominated boards tend to appoint more male members or directors and this creates a perpetual cycle.
  2. Due to lack of acknowledgment and acclamation, women feel underconfident and shy to put themselves forward for higher-level board positions. Also, a lot of women prioritize their family and personal lives and end up sacrificing their career and work life.
  3. Most of the organizations lack a formal process for recruiting a board of directors and hugely rely on the network made in their personal capacity which eventually makes it even more burdensome for deserving female employees to be recognized and appointed.
  4. People are still oblivious to the advantages of having a gender-diverse board and don't realize the importance of having equality regarding the same and continue their bias by consciously disregarding this issue.

Does female representation on boards enhance corporate performance?
As per a research published by McKinsey and Co., companies that are higher on the list of gender diversity are 15 percent more likely to be financially efficient and better than the ones at the bottom. According to a survey by the International Journal of Business Governance and Ethics, an institution can reduce its bankruptcy rate by one-fifth if it has a women director on board.

Vĕra Jourová, commissioner in charge of justice and gender equality for the European Union said:
"Women have a very good talent for long-term, sensible spending [and] for crisis-solving because they can come up with proposals for negotiation and compromise. It is a necessary balance to the approach of men: attack and escape." One of the advantages of having a gender-diverse board is that it ensures a better understanding of the customer's interests which leads to more informed decision making.

After extensive research and analysis, it has been concluded that having a woman on board establishes stability, improves the governance of the company, ensures a balanced style of leadership, and helps in framing better strategies in the best interest of the organization.

Gender Diversity In Indian Boardrooms And The Mandatory Quota Established By The Companies Act, 2013 And SEBI

One of the first instances of gender quotas being introduced in Indian corporate boards was in 2003 when The Companies Act, 1956 was proposed to be amended and specified classes of companies were required to appoint a particular number of women directors as prescribed by the Ministry of Corporate Affairs.

The proposed bill received criticism and backlash from the industry groups and experts and eventually, it had to be withdrawn. Then finally a provision was added in section 149(1) of The Companies Act, 2013 where every listed company or any other public company having a share capital of one hundred crore rupees or more or a turnover of three hundred crores rupees shall have to mandatorily appoint one women director on board.

However, Indian male-dominated boardrooms started appointing one women director just for complying with the prescribed regulations and defeating the very purpose of the legislation. Women were appointed just to avoid the strict penalties and they hardly had any say in the decision-making of the company.

If the companies really intend to attain a gender-diverse board they need to accept well-educated and qualified women on board and be open to their valuable perspectives. Later in 2018, SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulation, 2018 was enforced wherein it was made compulsory for all the top 500 and top 1000 listed companies to appoint at least one independent women director by April 2019 and April 2020 respectively.

Mandatory quotas: A Success or Failure?
In the early stages of the introduction of the mandatory provisions for appointing women directors, the male-dominated Indian boardrooms found it difficult to give seats to their female counterparts. Nevertheless, following the regulations laid down by SEBI in 2018, there was a visible increase in the representation of women on boards. It has been observed as of 31st March 2019, there has been a 20 percent rise in the number of women directors in India.

As per NIFTY 500, female representation was at 5% as of March 2012, which increased to 13% as of March 2017 and according to a recent survey, as of March 2020, there are 777 women directors out of 4657 directors in 500 companies, leading to 16% women representation on boards. There are various companies in India like Godrej, Apollo Hospitals, India Cements Limited etc., that have five female members on their board. Approximately 44% out of 500 companies have two or more women directors on their boards.

Despite complying with all the regulations and a rising graph denoting higher representation of women on Indian boards there are still a lot of problems that need to be addressed and appropriate measures required to be taken regarding those issues. As mentioned earlier, most companies appoint women directors just to comply with the norms and not in the spirit of gender equality. Often company leaders appoint female members from their own family leading to a high incidence of tokenism.

It is expected from companies to appoint women based on their merit and qualification and not treat them merely as quota fillers. Countries like Norway, Germany, Belgium, Italy etc. have mandated a particular percentage of seats for the minority gender on corporate boards whereas India has reserved only one seat for women on boards regardless of the total composition of the board.

Although a single woman director in authority can also make substantial changes in the organisation, she can still be a victim of stereotyping and be considered less efficient and useful by other male members on board. Hence, Indian boards need to have the "critical mass" criterion, which will ensure more female members on boards and better corporate governance.

Conclusion
It is unusual and unique that on one hand, we have companies like Godrej, Apollo, and PepsiCo where women are at the highest position of authority and on the other hand, if we look at the data on women's participation on corporate boards it is dismally low. India follows the legislative approach also known as the quota approach following the footsteps of countries like Norway and Germany for ensuring gender diversity on boards.

Indeed, the quota approach has its benefits like an increase in female representation on Indian corporate boards from an initial 5% in 2012 to 16% in 2020 but there's still a long way ahead. To ensure a gender-neutral corporate environment we need to address the issues of tokenism, discrimination, and harassment of women at the workplace, lack of critical mass, etc.

Shareholders, male board of directors, and industrialists need to understand that the appointment of women on boards is not merely about complying with the stipulated norms and it represents a larger cause of gender equality and a safe workplace environment for women where they don't experience any sort of stereotype and can express their opinions and perspectives freely on boards where they are valued by other members.

References:
Internet Sources/ Journals/Blogs
  • https://ecgi.global/code/cadbury-report-financial-aspects-corporate-governance
  • https://www.cgi.org.uk/knowledge/governance-and-compliance/features/boardroomdiversity
  • https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
  • https://hbr.org/2021/02/what-happened-when-india-mandated-gender-diversity-on-boards
  • https://www.businesstimes.com.sg/opinion/gender-diversity-key-to-improving-corporategovernance
  • https://www.mckinsey.com/featured-insights/diversity-and-inclusion/women-in-theworkplace
  • https://www.worldscientific.com/doi/abs/10.1142/S1084946706000350
  • https://www.livemint.com/opinion/online-views/opinion-gender-diversity-aids-corporategovernance-11570985393382.html
  • https://fortune.com/2017/11/20/women-on-boards-eu-gender-quota/
  • https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_ data/file/31480/11-745-women-on-boards.pdf
  • https://www.icsi.edu/media/webmodules/companiesact2013/Gender%20DiversityLatest20012015.pdf
  • https://www.sebi.gov.in/legal/regulations/may-2018/sebi-listing-obligations-anddisclosure-requirement-amendment-regulations-2018_38898.html
  • https://journals.sagepub.com/doi/full/10.1177/0974686220930839#bibr24- 0974686220930839
  • http://www.primedatabasegroup.com/primegroup_logo/Women%20Directors%20In%20I ndia.pdf
  • https://www.livemint.com/companies/news/regulatory-nudge-brings-in-gender-diversityin-board-rooms-iias-11590406703442.html
  • https://timesofindia.indiatimes.com/business/india-business/companies-with-womenboard-members-make-more-money/articleshow/44943363.cms

Written By: Prime Legal Law Firm
Off Address: 39/2, 2nd floor, K G Road, Bengaluru, Karnataka-560001
Phone no: +9986386002, Email: [email protected]

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