Dr. Akshaya Kamalnath, Lecturer Auckland University of Technology
India’s regulatory intervention with regard to corporate diversity has focused exclusively on board gender diversity. It has required companies to have atleast one woman on its board. The relevant section of the Companies Act, 2013 is extracted below:
149. (1) Every company shall have a Board of Directors consisting of individuals as directors
and shall have—
(a) a minimum number of three directors in the case of a public company, two directors in the
case of a private company, and one director in the case of a One Person Company; and
(b) a maximum of fifteen directors:
Provided that a company may appoint more than fifteen directors after passing a special
Provided further that such class or classes of companies as may be prescribed, shall have at
least one woman director.
For listed companies, the requirement is that the woman director should also be an independent director. At present the requirement only applies to the top 1000 listed companies in India.
I have argued in my previous work that diversity on corporate boards should focus on a range of factors – age, experiential background, education, geographical/ ethnic background and gender. This expansive view of diversity is absent from the Companies Act, 2013. However, the SEBI’s Listing Obligations and Disclosure Requirements (LODR) requires the nomination committee of listed company boards to formulate a diversity policy which arguably leaves it open for companies to refer to other forms of diversity.
By and large, we end up focusing mostly on gender diversity in most jurisdictions. It is apparent that India’s regulatory intervention in this regard, has also only focused on gender unless one reads more into the SEBI LODR requirement of a diversity policy. I have also argued previously against a mandatory quota as a means to improve gender diversity on corporate boards.
In this post, I will discuss why it is important to focus on the corporate diversity project not only on the board but also at the management level and below.
Diversity in management teams and other levels of the company
The argument in favor of focusing regulatory efforts on gender diversity to the exclusion of other forms of diversity is that such efforts address not only corporate governance benefits but also help further gender equality within the company. My argument in this regard has been that even if our focus is only on gender, we must aim to diversify not just the board of directors but also the top management positions.
In an article where I conducted a qualitative study of Delaware cases to analyze the relevance and impact of diversity (particularly gender diversity) in corporate governance, one of the findings I make is that diversity on management teams will be beneficial. Below is a paragraph from that article where I make this argument:
“…the cases have underlined the importance of management, especially the CEO on the board’s access to information and decision-making process. The theory of groupthink also refers to the possible detrimental effects of a powerful and dominating leader who discourages being challenged. Further, since CEOs tend to affect the organizational culture of a company, it might be pertinent to ensure that there are people with a high moral compass in positions like that of the CEO and CFO. Since research suggests that companies with more women in management tend to have less number of lawsuits filed against them, it might be pertinent to focus on addressing barriers to women directors being promoted within the company to reach executive positions. For this, it important to understand the specific barriers in each sector and company. If this is merely related to women choosing to drop out of careers to be able to devote time to family obligations, it might be worth examining whether the current organizational culture promotes working styles that are more suitable to men. While this article did not set out to study women in management, it might be necessary to look at problems with management alongside those of the board to ensure that agency problems within a company are optimally addressed.”
While the above is an argument in favor of diversifying management teams to enhance corporate governance, the broader goal of gender equality would require us to ensure there is diversity (and inclusive practices to facilitate the retention of diverse employees) at all levels of the company.
As I argue in an earlier article, focusing on diversity at all levels of the company would “ensure that there are enough diverse candidates naturally retained in the corporate pipeline” to be available for management and also board positions.
Sustainability reporting regime
A committee constituted by the Ministry of Corporate Affairs has just issued a report proposing a business responsibility and sustainability reporting framework. This report will be the basis for the MCA to work with SEBI to create a reporting regime.
One of the things the report requires is for companies to report gender diversity. It requires companies to report on the number and percentage of women at the board level and then at the “key management personnel” level.
Although the business responsibility and sustainability framework was not aimed at improving the corporate governance benefits of diversity, this focus on diversity in top management teams is a good sign. (I have reservations about other aspects of the report but that is not the focus on my current post.)
There is also a requirement to disclose the number of male and female employees at various other levels categorised in the report as permanent employees, non-permanent employees, and workmen. Again, this focus on diversity in the entire organisation is a good sign.
The usefulness of quotas and disclosures
A mandatory quota like what we have in India might result in “token” appointments where women directors are hired simply to comply with the law rather than to improve the company’s governance. Such appointments are harmful because they undermine the idea of bringing equality to corporate boards if unsuitable or unqualified women are appointed as directors. In India, some promoters complied with the law by appointing wives or daughters to the board. Even if qualified candidates are appointed, and the company management is not serious about benefiting from diverse views that are supposed to result from having diverse board members, the efforts would be partly wasted, at least so far as improving corporate governance is concerned. As an experienced director in India says, “the chairman of the board can set the tone of deliberations and ensure the opinions of women directors are also heard with due seriousness”. This sort of board practice will obviously only come about if company management and the board chair is genuinely interested in improving governance through diversity, rather than simply complying with the quota. Unfortunately, a mandatory quota tends to encourage check-the-box compliance rather than genuine compliance.
Again, disclosures are not a perfect solution either. Companies can simply use vague statements about their commitment to diversity if qualitative disclosures are required, and simply numerical disclosures if that is what is required. Of course, the logic of requiring disclosures is that it gives investors information that may help them engage with companies on these issues. Although investor activism is not significant in India, this may be slowly changing. Here, it is also worth thinking about whether the investors (particularly institutional investors) have divergent interests to that of the company while advocating for issues like diversity. Disclosures are more useful if companies use it as an opportunity to reflect on their efforts on the issue rather than as a check-the-box exercise. Disclosures are also more flexible than quotas because companies are not working with a hard rule but merely a softer rule that requires them to provide some information about their efforts in a particular area, in this case, diversity.
The business responsibility and sustainability framework, if and when it comes into force, may again merely result in bland disclosure of numbers without too much reflection and improvement. However, at the very least, some companies will begin to focus their diversity efforts beyond the board and on to management and even other levels of the corporate pipeline.