Over the last few
days, the financial press has been abuzz with the efforts of listed companies
in India to recruit at least one woman director on their board in order to
comply with the requirement under clause 49 of the listing agreement that takes
effect today. This requirement also emanates from the Companies Act, 2013. In a
last-minute scramble, it is estimated
that as many as 250 companies appointed women directors yesterday, and hundreds
more did so the day before that, and so on in the preceding days. While gender
diversity on corporate boards is desirable, the manner in which it is being
accepted and implemented in India raises questions regarding its effectiveness
in Indian corporate governance, some of which are discussed below.
days, the financial press has been abuzz with the efforts of listed companies
in India to recruit at least one woman director on their board in order to
comply with the requirement under clause 49 of the listing agreement that takes
effect today. This requirement also emanates from the Companies Act, 2013. In a
last-minute scramble, it is estimated
that as many as 250 companies appointed women directors yesterday, and hundreds
more did so the day before that, and so on in the preceding days. While gender
diversity on corporate boards is desirable, the manner in which it is being
accepted and implemented in India raises questions regarding its effectiveness
in Indian corporate governance, some of which are discussed below.
First, this episode has somewhat of a
positive signaling effect. After one round of extension granted last year for
the implementation of norms on women directors, SEBI has displayed its
reluctance to relent, and has threatened non-compliant firms with strict
enforcement action. This triggered the rush to appoint women directors before
last night’s deadline. Under section 23E of the Securities Contracts
(Regulation) Act, 1956, any non-compliance with the provisions of the listing
agreement could result in a potential penalty of up to Rs. 25 crores. In the past,
SEBI has enforced some important provisions in a similar way. Readers may
recall a similar instance when SEBI issued
an order against hundreds of non-compliant firms within days of the effectiveness
of the new norms relating to public float. A similar effort by SEBI to firms
not complying with gender diversity norms on corporate boards would be in
order, and it would be reasonable to expect SEBI’s action in the near future.
positive signaling effect. After one round of extension granted last year for
the implementation of norms on women directors, SEBI has displayed its
reluctance to relent, and has threatened non-compliant firms with strict
enforcement action. This triggered the rush to appoint women directors before
last night’s deadline. Under section 23E of the Securities Contracts
(Regulation) Act, 1956, any non-compliance with the provisions of the listing
agreement could result in a potential penalty of up to Rs. 25 crores. In the past,
SEBI has enforced some important provisions in a similar way. Readers may
recall a similar instance when SEBI issued
an order against hundreds of non-compliant firms within days of the effectiveness
of the new norms relating to public float. A similar effort by SEBI to firms
not complying with gender diversity norms on corporate boards would be in
order, and it would be reasonable to expect SEBI’s action in the near future.
Second, the scramble may also signal
some negative attitudes. Despite the several months available for companies to
appoint women directors, the effort do so only in the last few days suggests a “check-the-box”
attitude on the part of the companies. Also, it raises questions on the nature and
intensity of the nomination process that was undertaken if decisions were made
so quickly.
some negative attitudes. Despite the several months available for companies to
appoint women directors, the effort do so only in the last few days suggests a “check-the-box”
attitude on the part of the companies. Also, it raises questions on the nature and
intensity of the nomination process that was undertaken if decisions were made
so quickly.
Third, related to the aforesaid issue,
is whether gender diversity is beginning to take on the tone of “form over
substance”. Of course, gender diversity has been mandated for a reason, as it
is expected to enhance the governance as well as performance of companies
through a diversity of views placed before the boards. Such an approach also
requires women directors to carry the requisite qualifications and experience.
In the present case, no such requirement exists. It is no surprise that newspaper
reports indicate that nearly half of the women director appointment in the
current round involved family members of the promoters. This is arguably a
retrograde step and does not enhance governance in the manner intended by board
diversity. It would make boards more insular rather than diverse.
is whether gender diversity is beginning to take on the tone of “form over
substance”. Of course, gender diversity has been mandated for a reason, as it
is expected to enhance the governance as well as performance of companies
through a diversity of views placed before the boards. Such an approach also
requires women directors to carry the requisite qualifications and experience.
In the present case, no such requirement exists. It is no surprise that newspaper
reports indicate that nearly half of the women director appointment in the
current round involved family members of the promoters. This is arguably a
retrograde step and does not enhance governance in the manner intended by board
diversity. It would make boards more insular rather than diverse.
This instance can
be compared to the manner in which board independence was introduced at the
outset. There was no requirement of specific qualifications or experience for a
person to be appointed as an independent director. The role of such a person
was dismally unclear. There were also fears that a person would be appointed to
the board “only to keep the seat warm” without significantly contributing to
the governance or performance of the company. It is possible we are witnessing the
same characteristics at the time that gender diversity is being introduced. Fortunately,
with the Companies Act, 2013 and the revised clause 49 of the listing
agreement, the concept of board independence has been shaken up considerably and
the institution of independent directors has acquired more solidity. The
qualifications, roles, functions and liabilities of persons occupying the
position are clearer, thereby attributing greater deference to the institution.
It is hoped that further reforms would take place in the case of gender
diversity as well. For example, I would argue that women directors appointed on
the boards to satisfy gender diversity requirements must themselves comply with
the test of board independence. In other words, diversity and independence ought
to go hand in hand. This would ensure that women directors are indeed outside
directors who are appointed for their qualities and contributions to the operations
and governance of the company, and it would avoid insiders and family members
being appointed for the purpose. This is particularly important in the context
of substantial number of Indian companies (including those listed) being family
owned. It is hoped that the diversity requirement introduced moves beyond
rhetoric and that SEBI will introduce further reforms and clarity to the expectations
from women directors and the value and benefits of gender diversity such that
there is a difference in reality and not in form.
be compared to the manner in which board independence was introduced at the
outset. There was no requirement of specific qualifications or experience for a
person to be appointed as an independent director. The role of such a person
was dismally unclear. There were also fears that a person would be appointed to
the board “only to keep the seat warm” without significantly contributing to
the governance or performance of the company. It is possible we are witnessing the
same characteristics at the time that gender diversity is being introduced. Fortunately,
with the Companies Act, 2013 and the revised clause 49 of the listing
agreement, the concept of board independence has been shaken up considerably and
the institution of independent directors has acquired more solidity. The
qualifications, roles, functions and liabilities of persons occupying the
position are clearer, thereby attributing greater deference to the institution.
It is hoped that further reforms would take place in the case of gender
diversity as well. For example, I would argue that women directors appointed on
the boards to satisfy gender diversity requirements must themselves comply with
the test of board independence. In other words, diversity and independence ought
to go hand in hand. This would ensure that women directors are indeed outside
directors who are appointed for their qualities and contributions to the operations
and governance of the company, and it would avoid insiders and family members
being appointed for the purpose. This is particularly important in the context
of substantial number of Indian companies (including those listed) being family
owned. It is hoped that the diversity requirement introduced moves beyond
rhetoric and that SEBI will introduce further reforms and clarity to the expectations
from women directors and the value and benefits of gender diversity such that
there is a difference in reality and not in form.
Finally, as often
happens, indications are that a large number of public sector enterprises are
yet to comply with the requirement of appointing a woman director. This is
again a signaling issue whereby non-compliance by government-owned companies
does not augur well for overall compliance, particularly when privately-owned
companies are being compelled to comply with those norms.
happens, indications are that a large number of public sector enterprises are
yet to comply with the requirement of appointing a woman director. This is
again a signaling issue whereby non-compliance by government-owned companies
does not augur well for overall compliance, particularly when privately-owned
companies are being compelled to comply with those norms.
It is hoped that
today marks an important beginning in the progress towards diverse boards, both
in form and substance, and not just a milestone to ensure paper compliance.
today marks an important beginning in the progress towards diverse boards, both
in form and substance, and not just a milestone to ensure paper compliance.