[Harsh N Dudhe & Pranay Bhardwaj are III year BA LLB (Hons) students at NALSAR, Hyderabad. The authors would like to thank Dr. Akshaya Kamalnath for her comments on the post]
On August 6, 2021, the U.S Securities and Exchange Commission (SEC) approved a proposal by the Nasdaq Stock Market LLC (Nasdaq), which aims to enhance the corporate board diversity for Nasdaq-listed companies. This particular measure does not restrict itself to the representation of women in the boardroom but goes one step further to include at least one director who self-identifies as an under-represented minority or LGBTQ+. However, the proposal is a ‘comply-or-explain’ provision, requiring companies to provide an explanation if they fail to meet the criterion.
Taking Nasdaq’s example, this post makes a case for transplanting this measure in India, albeit in a different form. However, a soft-law approach of this measure, as taken by Nasdaq, is considered undesirable, as the authors believe, and will substantiate, that it will not work in the Indian scenario.
The listing rule 5605(f), sanctioned by the SEC on August 6, 2021, requires Nasdaq-listed companies to have at least one director who self-identifies as Female; and at least one director who self-identifies as an Underrepresented Minority or LGBTQ+, failing which they would have to explain the reasons for the same. Also, this rule will require companies to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule. The timeframe to meet the minimum board composition expectations outlined in the proposal will be based on a company’s listing tier.
India’s attempts to break the glass ceiling in corporate boardrooms began not long ago. With the introduction of section 149(1) of the Companies Act, 2013 (Companies Act), listed public companies with a share capital of INR 100 crores or a minimum turnover of INR 300 crores were mandated to appoint at least one woman director. This is a ‘hard quota’, attracting penalties on failure. Thereafter, in 2017, the Securities & Exchange Board of India (SEBI), on the lines of the recommendations by the Kotak Committee Report, decided to implement the requirement of at least one woman independent director in the top 500 listed entities (by the market capitalization) by April 1, 2019, and in the top 1000 listed entities by April 1, 2020, by the virtue of the Regulation 17 of the SEBI (Listing Obligations & Disclosure Requirements), 2018. However, India’s attempts to diversify corporate boards are limited to gender diversity.
Nasdaq’s measure provides representation not only for women but also LGBTQ+ individuals and underrepresented minorities, taking a holistic view of representation. However, as mentioned above, the boardroom diversity rules of SEBI and the Companies Act apply only to women, and take a restricted view of representation.
Nasdaq mainly uses the “business rationale” to justify its gender diversity requirements, emphasizing that gender diverse corporate boards increase shareholder value and lead to improved financial performance, while also indirectly acknowledging the recent social justice movement in the US as a catalyst for action. The business rationale for gender diversity has been disputed by several studies, while also being supported by many studies. Along similar lines, SEBI’s stated goal for their gender norms focuses on improved corporate governance and financial performance, along with the “social significance” of the action. However, the authors believe that the goal behind these provisions should be the prevention of discrimination against underrepresented communities, and to treat representation as an ethical end in itself, rather than an instrumentality towards achieving other objectives.
If increasing the representative character of corporate boards and preventing discrimination is the correct objective of having a mandatory quota for women in Indian corporate boardrooms, then measures towards increasing representation should include more groups within its ambit rather. Following Nasdaq’s example, India should make LGBTQ+ individuals eligible for the boardroom quota, and potentially include other underrepresented groups such as Scheduled Tribes, Scheduled Castes, Other Backward Castes, and the differently abled within its ambit. This will enable a more holistic representation in boardrooms. Moreover, increasing legal remedies for women and other underrepresented groups encountering obstacles in advancement, broadening the definition of sexual harassment, and increased penalties and remedies for the same can go a long away in preventing discrimination.
However, we do not make a case for the implementation of the ‘soft-law’ approach, as opted by Nasdaq, in implementation of this listing rule, particularly in the Indian context. This is because first, discrimination on the basis of caste, sexual orientation & other grounds, is still extremely prevalent in India. Such discrimination has found ways to percolate not only in the Indian corporations, but also where Indians are working abroad. Second, mandatory provisions yield better results from a compliance perspective. Soft-law or ‘comply-or-explain’ models have proven to be ineffective around the globe, as described below.
Experiences Around the Globe
Initially, Norway also tried to adopt a soft law voluntary approach to gender diversity in board rooms. It adopted a legislation setting a voluntary gender diversity target of 40% in 2003, as opposed to harsher mandatory measures. This approach failed to reach the target by a large margin. Thereafter, in December 2005, Norway passed a law requiring that women mandatorily must make up a minimum of 40% of corporate boards. Corporations had a 2 year-window to comply with this law. To facilitate this change, the Norwegian government created a database of female candidates for corporations to evaluate the qualifications of potential women leaders. Furthermore, the penalties for non-compliance were harsh – potentially resulting in closure of the companies who fail to comply. Additionally, any company board registration was prohibited if the requirements of representation were not met. As a result of the law, the fraction of women directors went from 5% in 2001 to 40% in 2008.
France is one of the few countries receiving top marks for its legal infrastructure on the Women, Business and Law Index of the World Bank. In addition to establishing quotas in many areas, it has also increased legal remedies for women encountering obstacles to advancement, broadened the definition of sexual harassment and increased the penalties and remedies for the same. As of 2017, France required 40% representation of women on boards of all publicly-traded companies, all companies with more than 500 employees (250 after 2020), and companies with net sales or total assets of at least €50 million. The penalty for failure to comply includes an invalidation of the appointment, and a loss of fees for directors on non-compliant boards. The targets were met before the deadline.
In 2014, securities regulators in Canada implemented amendments to Form 58-101F1 Corporate Governance Disclosure in order to address gender diversity. This measure basically implemented a ‘comply or explain’ model whereby companies must “comply” by implementing and disclosing mechanisms, policies, considerations, and targets for promoting gender diversity in the boardroom and in executive positions. The Diversity Disclosure Rules also state that if an issuer has not adopted these measures, the issuer is required to “explain its reasons for not doing so”. Four years after the Diversity Disclosure Rules were implemented, only 16% of issuers have set targets for women on boards and only 4% have set targets for women in executive officer positions. In addition, 57% of those who have targets have already achieved their stated target because issuers tend .
Overall, countries with legally required Board Gender Diversity (BGD) have double the percentages of women on boards than countries without such requirements. In fact, after reviewing the statistics from member states with and without BGD legislation, the European Union Commission concluded that “legal instruments to enforce quotas are effective and fast means of achieving change”.
Quotas for the varied classes in the Indian society are given for the purpose of representation and removal of inequality. On that premise, people from the said backgrounds are given quotas in the education sector and government employment among other avenues of social life. On the same principle, we argue for the introduction of a mandatory inclusion of people from the aforementioned communities in corporate boards. When the Standing Committee on Finance introduced mandatory quotas for women in boardrooms, it hoped that such a provision would “encourage women’s participation in decision making at every level in the society”. This clearly signifies the intention and goal of the said provisions in India. The authors argue that this intention be extended to people from the depressed classes since they also lack equal opportunities for decision making within corporations. We do not argue that this measure alone would resolve the issue of discrimination against the said communities, but are of the view that introduction of such a regime would be a step towards inclusive boardrooms. However, in addition to the quota for depressed classes, we endorse the transplantation of the legal remedies adopted in France to India, for people who are being denied equal opportunity or face harassment on the basis of their background.
The authors believe that the primary of the goals of making mandatory quotas for women in the corporate boardrooms in India and around the world should be to provide representation for people who are not given equal opportunities for growth. Diversity should be an end in itself, rather than merely instrumental to some other objective. Nasdaq has extended its diversity provisions to LGBTQ+ Americans and other underrepresented groups, along with women, albeit according centrality to the business rationale. In the Indian context, the category of such people in need of representation is also not restricted to women, and may extend to other identities such as caste & sexual orientation among others. To give statutory quota to individuals from the said communities would be a positive first step that diversifies the boardroom and implements the intention of representation in a true sense in India.
Harsh N Dudhe and Pranay Bhardwaj