Corporate Board Diversity: A Critical Examination of Mandatory Inclusion of Women Directors

[Tanvi Apte and Nishtha Goyal are students at NALSAR University of Law.]

 

In the last decade, there has been a global push towards mandating or encouraging reservations for women on boards of companies.[1] India is no alien to this push. Specifically, under Section 149 of the Companies Act 2013, all listed and certain specified public companies must appoint at least one woman director. Further, the Securities and Exchange Board of India has also made it mandatory for certain companies to have at least one woman independent director by April 2020 at the latest. 

 

The Rationale Behind Quotas – Corporate Board Diversity 

 

The broader rationale behind such quotas is the latest buzzword – “corporate board diversity”, which as the name suggests, refers to heterogeneity on the board of a company. Gender diversity is one subset of corporate board diversity. Arguments in favour of such gender diversity are broadly ethical or economic.[2] While the former sees diversity as a means to combat systemic discrimination and low representation of women on corporate boards, the latter seeks to build a “business case” for diversity on corporate boards. Specifically, proponents of the latter economic argument often argue that more women on boards leads to diverse perspectives, better decision making and greater profits, more so for companies with a female consumer base. Additionally, companies with higher female representation are also understood to have a better brand image and higher female employee productivity.

 

Though a few researchers have statistically attacked the economic argument by claiming that there is no correlation between diversity and company performance,[3] their findings have been countered by a plethora of studies that  establish a direct correlation between gender diversity and profits. McKinsey’s Delivering Through Diversity Report and  Anita Borg Institute of Women and Technology’s study are just a few prominent examples of diversity-affirming studies. All in all, while not entirely uncontested, there is also ample statistical evidence to support gender diversity over and above the compelling ethical and policy arguments in its favour. 

 

For these reasons, corporate board diversity is indeed a goal worth aiming for. Thus, the rationale behind the introduction of gender quotas is sound. The question now is, are quotas an effective way to bring about much-needed gender diversity?

 

Mandatory Gender-based Quotas – Hit or Miss?

 

Quotas are one of several measures that find their basis within the group subordination theory of equality, which believes in providing an added push to certain groups in society like Dalits and women who have faced historical injustice and systemic discrimination. Keeping in mind this theoretical justification, the efficacy of mandatory quotas for companies and for the women themselves has been evaluated below.

 

A. Companies

 

First, to meet the regulatory requirements regarding quotas, companies usually end up appointing either under-qualified women or women who are already established in the market. In the former case, the under-qualified women so appointed are either family members of the promoters or those appointed owing to lack of availability of women in senior positions; in both these scenarios, the appointees possess a minimum or inappropriate experience and cannot contribute effectively. In the latter case, already-established women figures are often present on multiple boards due to the mandatory requirements and are, therefore, not able to devote sufficient time to all the companies where they are so appointed. Thus, in both these scenarios, companies suffer economically because they cannot avail the complete benefit of a human asset.

 

Second, even if qualified women are appointed, the question of inclusivity is often brushed under the carpet. Women often carry the burden of being appointed through reservation and being the only woman on the board further adds to their unease. They often find it difficult to confidently express their views or take a stand. Furthermore, they are often perceived as less deserving and their opinions are not valued as much. They struggle to assimilate into the company. In this manner, companies again miss out on a resource and fail to appreciate the perspectives brought by the woman.

 

Finally, it is also an apprehension that gender quotas could open the floodgates for other quota-based appointments based on ascribed status such as caste, class, and religion. Companies will be forced to appoint people just to tick off boxes. Instead, the focus should not only be on diversity but also on credibility and capability.

 

B. Women

 

In addition to not substantively benefiting companies, mandatory quotas might actually militate against the actual growth of women too. This is because in order to mechanically meet the statutory compliances, mentors are moulding women to seamlessly fit in the boardroom rather than to challenge established beliefs and provide fresh perspectives. They are placing women to the boards who actually do not have the skills to call out the board or make judgment calls. In other words, mentors are just producing ‘board clerks’ who know board procedures instead of skilled directors capable of making real contributions by using board procedures to voice their perspectives and bring a change. This further ensures that men will always be better at their work since they have the requisite experience and training to be directors, which women lack. This also creates a hoax about diversity where all that is actually achieved is the creation of individuals who think exactly like the rest of the board. In turn, this also reinforces the stereotype that women have substandard merit and affects how female contributions are valued and weighed. Eventually, sub-standard training encouraged by quota appointments acts as a barrier in women’s growth and prevents them from moving up to the top levels of management and bringing a change.

 

Moreover, government efforts are not able to reach the women who need it the most and, in the process, women often become victims of tokenism. The appointment of female family members is not an unobvious outcome given that India has the third highest family owned listed companies. Furthermore, as mentioned earlier, the appointment of established women results in the same pool of women circulating on multiple boards. As a result, women for whom quotas are intended get sieved out. Women as a group do not benefit.

 

Furthermore, even if numbers change mindsets do not. As mentioned above, the tag of being a quota appointment continuously haunts women appointees. Even if females are as qualified as males, they are generalized as a quota appointment, their individual achievements are snatched away, and there is constant pressure on them to perform. Additionally, they are perceived to be less deserving and attributed with providing only stereotypical benefits like better attendance records, better skills at working out compromises, honesty, ethical soundness, etc. Moreover, a study has also proved that men react negatively to diversity and desperately clutch on to the power they possess in the organization. This further creates unhealthy perceptions and a competitive environment for women who remain outsiders to the male bastion and have to endlessly struggle to establish their credibility that is shielded from scathing generalizations.

 

The above-mentioned fallacies continue to ensure that even though quotas increase numbers, substantive representation remains a distant dream. Instead, such quotas provide only a superficial semblance of increased representation, being a mere window dressing that can be used to dismiss gender discrimination claims in companies. Additionally, at a time when private sector job reservations are not existent in India, mandatory quotas are an affront to the autonomy of profit-making companies to determine their own operations. Overall, mandatory quotas are a step in the right direction however; they are not necessarily the right step. They target only the symptom but not the disease. A search for alternatives is thus necessitated.

 

Other Measures to Ponder Over

 

Voluntary systems can serve as a short-term substitute for mandatory quotas. For instance, the UK allows companies to formulate their own diversity policy, set targets, and disclose outcomes.[4] Similarly, companies in Australia and the Netherlands have to either comply with broad diversity targets or justify non-compliance.[5] Though such voluntary systems suffer from some of the same issues as quotas, they do provide companies greater flexibility and autonomy than quotas,[6] and are worth exploring.

 

Simultaneously, renewed focus towards long-term changes is imperative. First, the abysmal representation of women in business schools can be corrected to achieve better capacity building. Second, appointment processes for company boards can be made more objective to break the systemic bias induced by the traditional appointment male-male networks.[7] Third, better workplace policies can be initiated. For instance, as already implemented by several multinational companies, paternal leaves can be provided on the same terms as maternal leaves to give females the option to work post childbirth. In tandem, in-office subsidised day-care and flexible hours will help increase retention and consequently ensure bigger director appointment pools. Overall, there are no shortcuts to structural changes.

 

Thus, in addition to finding short-term fixes, innovation for implementing structural changes is also needed. The lack of easy answers to these questions in itself does not make quotas perfect. Rather, the search for a suitable system continues.

 

 

[1]Sandeep Gopalan & Katherine Watson, An Agency Theoretical Approach to Corporate Board Diversity, 52 San Diego L. Rev. 1, 23-48 (2015) [hereinafter “Sandeep Gopalan & Katherine Watson”].

[2]Sonja Carlson, A Term of Art Showcasing the Need for Meaningful Gender Diversity on Corporate Boards, 11 Seattle J. Soc. Jus. 337, 339 (2012) [hereinafter “Sonja Carlson”]; Yaron Nili, Beyond the Numbers: Substantive Gender Diversity in Boardrooms, 94 Ind. L. J. 145 (2019).

[3]Deborah Rhode & Amanda Packel, Diversity on Corporate Boards: How Much Difference does Difference Make, 39 Del. J. Corp. L. 377, 387-389 (2014); Jean du Plessis et. al., Board Diversity or Gender Diversity: Perspectives from Europe, Australia and South Africa,17(2) Deakin L. Rev. 207, 244 (2012) [hereinafter “Jean du Plessis, Board Diversity”].

[4]Stephanie Shelter, Women on Corporate Boards: Non-Quota Initiatives to Increasing Board Gender Diversity in the U.S., 5 Grove City C.J. Pub. Pol’y 13, 37-38 (2014) [hereinafter “Stephanie Shelter”]; Jean du Plessis, The Case for and Against Mandatory Gender Quota Legislation for Company Boards, 20 Deakin L. Rev. 1, 6 (2015) [hereinafter “Jean du Plessis, Gender Quotas”].

[5]Sonja Carlson, at 362, 263; Jean du Plessis, Board Diversity, at 230; Jean du Plessis, Gender Quotas, at 13.

[6] Sandeep Gopalan & Katherine Watson, at 64-66.

[7]Stephanie Shelter, at 40; Sonja Carlson, at 363. 

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