Board Diversity
The board of directors of a company plays the pivotal role in making strategic business decisions. To make their decisions more effective, boards need to be diverse and have a more egalitarian approach — one that encourages different voices and opinions, integrates contrasting insights into its decisions and respects diverse background w.r.t. age, gender, culture and profession. In order to be more effective, board discussions need a breadth of perspective which essentially comes from diversity of composition. In this article, I will take up the diversities one by one.
Gender Diversity
While apparently it might seem so, but worldwide gender parity is not at all recovering, the least of all in India. This is evidenced by the Global Gender Gap Report 2022 issued by the World Economic Forum. The Report states that it will take another 132 years for the world to close the extant global gender gap. In this context it needs to be mentioned that the Global Gender Gap Index benchmarks the current state and evolution of gender parity across four key dimensions: (i) Economic Participation and Opportunity, (ii) Educational Attainment, (iii) Health and Survival and (iv) Political Empowerment. The index has been tracking the progress of different countries of the world towards closing the gender gap in these dimensions since 2006.
In the index that lists 146 countries providing a strong cross-country comparison, India occupies the very disappointing 135th position ahead of Afghanistan and Pakistan, but much behind our other neighbours like Nepal (96), Myanmar (106), Srilanka (110) and Bhutan (126), and way behind Bangladesh (71). The Index measures scores on a 0 to 100 scale, where the scores indicate how close a country has moved to closing the gender gap. The cross-country analysis helps identify the most effective policies to close gender gaps.
Worldwide Gender Diversity
While no country in the world has achieved 100% gender parity till date, the list in Global Gender Gap Report 2022 is topped by Iceland (90.8% parity), followed by Finland (86%), Norway (84.5%) and New Zealand (84.1%). As against these parity percentages, India has achieved only 62.9% gender parity in all those years. The silver lining is that this year India has closed the parity gap by 0.3% over last year. In the 2021 index India stood at the 140th position out of 156. But the more discouraging fact is that in 2006, when the gender gap index was first released, India ranked 98th among 115 countries and the best rank the country has held in the recent years with greater participation of countries was in 2012 when it was placed 105th out of 135 countries.
Gender gaps in the workforce as well as leadership roles are driven by many factors. Some of these are societal expectations, gender-biased employer policies, social infrastructure, prioritizing family and caregiving, health, traditionally existent structural barriers, education gap and so on. In the 2022 Report it has been seen that the countries that have fallen behind in the list, the parameters in which they have lacked are essentially (i) and (iv) mentioned above, i.e. (i) Economic Participation and Opportunity and (iv) Political Empowerment. With more women in political and industry leadership, there is not only the benefit of a powerful role model effect but decisions taken also represent broader section of the population.
Gender Diversity in India
The principle of gender equality has been enshrined in the Constitution of India in its Preamble, the Fundamental Rights, Fundamental Duties and Directive Principles of State Policy. But despite such unambiguous equal rights given to men and women, the Indian society has remained largely male dominated. The workplace is one area where gender inequalities are easily noticed. These are manifested largely through share in workforce, difference in pays for equal work and difficulties of working condition. However, there are a series of new legislations that seek to improve this situation.
Board Gender Diversity
The gender diversity in boardroom has several benefits and implications. Studies conducted around the world and the resulting growing literature on this links the composition of the board of directors to business outcomes. Surveys have shown that boards and senior management with board diversity perform better and have higher Return on Equity and Return on Capital Employed. Further diversity in board brings diversity of thought patterns. Women are known to be more democratic in their leadership style, they are good listeners, they encourage participative decision-making, they are proactive in anticipating risks and hence, can help strengthen risk management, they are better inclined towards CSR, they are generally more compassionate and so on.
Legal position
Worldwide, in the recent years, the corporations have come under great public pressure to increase the gender diversity on their boards and as a consequence, countries like Belgium, Spain, France, Iceland, Norway and Italy have passed legislations mandating more female representation in the board. Laws for listed companies in Norway, Spain, France and Iceland require a minimum of 40% representation in the board. In the US, there is no such law in general, but in California, law was passed recently requiring all locally headquartered public listed companies to have at least one female director by 2020.
In India the following companies are required to have at least one Woman Director:
- Every listed company
- Every other public company having
(i) Paid-up share capital of INR 100 crore (1 billion) or more, or
(ii) Turnover of INR 300 crore (3 billion) or more.
[Paid-up share capital or turnover is as per the last date of the latest audited financial statements]
On fulfilment of any of the above conditions the Board must appoint a woman director within six months of the date of fulfilment or criteria. This is a truly revolutionary step initiated by the legislature for ensuring gender neutral nature of Board in the corporate world and seeks to recognize the important role of women in promoting economic welfare of the country. However, in a majority of companies to which this rule applies, woman directorship has largely been reduced to a token position. This narrative must change if the benefits of board diversity is to be reaped in the greater sense.
Expanding the view of Board Diversity
What indisputably follows from the above discussion is that Board diversity is very important. But the above discussion was largely focused on gender diversity alone. But Board diversity as a term has much bigger connotation and includes many types of diversity. One of its components is gender diversity for sure, the others are age diversity, professional diversity and cultural diversity. The impact of a diverse board on business are far-reaching, but concentrating on only one form of diversity is not sufficient. All these types of diversities increase the diversity of perspectives represented at the board level.
Achieving gender parity has been the top priority worldwide, although as per the recent indices mentioned above, the world has a long way to go even in that regard. But imagining that with all regulatory and social pressures, gender diversity is achieved faster; even then just achieving this will not help the board of a company reach its full potential. The other types of diversities must be introduced and maintained. And this, should ideally be, in spirit and not just in letter, i.e., not just for the sake of mandatory compliance. For this, the company managements must come out of the ‘checking the box’ approach and spend time and energy towards achieving ‘real’ board diversity. Introducing a member of the board to enhance its diversity (whether gender, age, culture or profession) should not reduce that new person to a ‘token’. Nobody likes to be a token. Also a board with diversity just in ‘token’ form is like a vehicle with square wheels, that is incapable of doing its job.
Age, Cultural and Professional Diversity
There are no two opinions about the importance of having the board composition in such a manner that people of different age groups are well represented. While the aged persons will have an edge on their experience and expertise, the younger ones will beam with enthusiasm, energy, positivity, better technological knowledge and risk-taking approach. While the younger board members would like to jump at every new opportunity, the older ones can help keep them level-headed. When it comes to cultural diversity, this again is very important as diversity in background here can increase the perspective of board decisions. As for professional diversity, there is hardly any doubt that a board needs to be professionally balanced so that all aspects of corporate governance are given equal weightage and due compliances are done as required by law.
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