Urja Dhapre (III Year, B.Com. LL.B. (Hons.),Institute of Law Nirma University, Ahmedabad)
In recent years, diversity in the board of directors has been a pivotal avenue of research for companies as a valuable instrument of enhancing corporate governance and social responsibility. With the directors holding multiple positions as a trustee, agent or manager, it becomes imperative for a company to have the optimal blend of expertise, skills, and experience on its board.
In today’s scenario, the companies across the globe are confronting the daunting degree of disruption created by the COVID-19 pandemic, and are pressing on their most basic needs- such as adjusting to new working conditions; consolidating the capacity of workforce; maintaining productivity; and a sense of belonging with the mental and physical health of their employees. The aspect of boardroom diversity, in such circumstances, is receding as a strategic priority for companies.
This post argues that innovation and resilience, the two major qualities of a diverse board, will act as a catalyst for companies to better position themselves when the pandemic subdues. To that end, this article highlights the need for Indian companies to have a diverse board, and emphasizes the scope of such diversity. Further, it also suggests a new array of changes required for a company to equip robust corporate governance practices.
Expanding the perspective of diversity
In India, the interplay of diversity and board composition has been progressive. The Companies Act, 2013 [‘Act’], mandated that listed companies have at least one-woman director on their board [Section 149(1) proviso 2]. This proviso came in the light of the government encouraging more woman participation at different levels. This was followed by the Securities and Exchange Board of India [‘SEBI’] amending the Listing Obligations and Disclosure Requirements, 2015 [‘LODR Regulations’] mandating the top 1000 listed companies to appoint at least one woman independent director on a company’s board with effect from April 1, 2020 [Regulation 17(1)(a)]. SEBI’s report on corporate governance noted the rationale behind this provision was to improve gender diversity and sequentially to create a positive impact on the decision-making process of the boards. The LODR Regulations further incorporated a governance policy on diversity, leaving it open for the companies to have an internal diversity policy [Regulation 19(4)].
As these regulations in India are driving the dialogue on gender diversity, the Institutional Investor Advisory Services has released a study [‘IiAS Study’] on the composition of women in Indian boards. The study states the Nifty 500 companies have 17 % women directors  out of the total number of directors [4,657] as of March 30, 2020. Of the 777 directorships, 71% are independent directors . This portrays a significant increase in the female representation on boards in Nifty 500 companies elevating from 5% in 2012 to 17% in 2020.
Although the broad reaction of corporate India on having to inculcate at least one woman on every board has been substantially positive, a key question which arises here is whether the concept of diversity is only limited to gender?
Market trends have shown that diversity takes various forms and can be broadly classified into two elements: one is social diversity (e.g., gender, ethnicity/race and age diversity) and the other is professional diversity (cognitive diversity). Across the globe, diversity in the boards has been an upward trajectory, gradual but progressive (see here, here and here). Their boards are advancing on the fronts of gender diversity but have not embraced other forms of social or professional diversity to the same extent. In almost all jurisdictions, the concept of diversity has attenuated to gender diversity.
In this regime where the contemporary regulations have revitalized the focus of gender diversity in boardrooms, there still exists an ample room for progress in efficiently recognizing and incorporating all the tangents of diversity.
Corporate governance and Diversity
The layout of corporate governance in a company is established on four strong pillars of Transparency, Accountability, Fairness and Responsibility. The composition of a company’s board is positively co-related to these principles. Contemporary studies have justified that diversity increases development, with the IiAS Study recognizing diversity as a key component to channel the company’s innovation towards growth.
In a report prepared by McKinsey and company, it was observed that the board of directors bears the preponderance of direct influence on operations and on driving business outcomes. Companies with a diverse board are likely to have a higher financial performance because of an in-depth consumer insight and strengthened employee engagement.
The co-relation of diversity and governance can be witnessed by Section 166(2) of the Act which casts a fiduciary duty upon the directors to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This section displays a shift in the Indian corporate governance structure from shareholder primacy model towards a stakeholder centric model. This structure is strengthened with a diverse board by catering to the needs of stakeholders to effectively recognize their interests. The top-level management comprising different demographic backgrounds further helps the stakeholders to better connect with the company because of a sense of belonging.
Diversity enriches the availability of information, variant perspectives, and the greater chance for debates smoothens the quality of business judgment and the results of board deliberations. Dr. Yılmaz Argüden, a leading strategist has rightly commented ‘if everybody thinks in the same way, what is the need of a board? It may as well be a one-man show. It is the combination of complementary talents and experiences of the members that enables boards to steer the company toward success and long-term stability.’
In a company’s constant quest for growth, an egalitarian culture with a heterogeneous group of individuals at the board will aid the company to achieve the fundamentals of corporate governance.
What causes a problem in India: Lack of will or skill?
One of the major impediments lies in the construction of the Indian boards, which is not as diffused as other countries, but rather adopts the prevalent nomenclature of a family-centric composition. According to the PrimeData report, out of the 1,723 companies listed on the National Stock Exchange, 425 companies have women directors appointed from a promoter group or their own family. Moreover, as per the IiAS Study, there are 16 directorships held by directors under the age of 30, all of whom belong to the promoter group.
A board’s weak composition in India can be further witnessed by the fact that the long-tenured directors have personal or business ties with the Chief Executive Officer. It moreover, suffers from board pathologies such as groupthink or low-effort norms. This negatively impacts the board performance and oversight by deteriorating the independence of board members and the possibility of them expressing their variant views.
Another issue which arises is the requirement of only one-woman director on the board leading the majority to exert more influence on the group. These under-represented women are seen as tokens where the only value they are supposed to bring on-board is the fact that they are women.
Although the existing regulations in place embodies a step in the right direction, a statutory compulsion for companies for a palpable concept like diversity might be counterproductive. A required outcome might not be achieved as companies can pay lip service to the provisions by appointing their related parties on the board (particularly in promoter led companies) thereby diluting its effect. So, are companies adhering to the regulatory push only for the purpose of checking the box as a formalistic requirement?
The critical fix which corporate India needs is for companies to appreciate the merits of diversity and follow the spirit of the regulations. The need for distinct perspectives around the boardroom table has never been more evident. Companies need to respond rapidly to a raft of challenges with escalating customer expectations and advancing technologies as well as more current challenges presented by the pandemic. For companies to be successful tomorrow, a greater level of alignment will be required between the board, employees, consumers and the community. This can be achieved if the members of the board are diverse across various metrics (like skill, age, experience etc) rather than just gender.