BOARD DIVERSITY AS POSITIVE FACTOR FOR BETTER CORPORATE GOVERNANCE

INTRODUCTION• Recently, there has been an trend for diversifying the board.

Intuitively, diversity means having a range of many people that are different from each other. There is, however, no uniform definition of board diversity. Traditionally speaking, one can consider factors like age, race, gender, educational background and professional qualifications of the directors to make the board less homogenous. Some may interpret board diversity by taking into account such less tangible factors as life experience and personal attitudes. A simple and common measure to promote heterogeneity in the boardroom – commonly known as gender diversity – is to include female representation on the board.

DEFINITION

• Professor Lisa Fairfax defines board diversity as “the portion of women and people of colour on a corporate board, and focuses on gender, racial and ethnic diversity’’… J. Robert Brown, Jr. observes “Diversity encompasses gender and race, two categories heavily represented among consumers but not among directors. It also includes persons with views and backgrounds at variance with management

• J. Robert Brown, Jr. observes “Diversity encompasses gender and race, two categories heavily represented among consumers but not among directors. It also includes persons with views and backgrounds at variance with management.

GENDER DIVERSITY IN BOARD

• Gender balance makes good business sense. Women make up over half of the World population, account for nearly half of the working population, outperform men educationally and are responsible for the majority of household purchasing decisions. Women are as successful as their male counterparts at university and in their early careers, but attrition rates increase significantly as they progress through an organisation. The under-representation of women in senior roles and at board level impacts the performance, governance and reputation of companies, as they fail to attract and retain the widest possible range of talent.

WHY WOMEN ON BOARD?

• Improve performance at Board and business levels through input and challenge from a range of perspectives;

• Access and attract talent from the widest pool available;

• Be more responsive to market by aligning with a diverse customer base, many of whom are women; and

• Achieve better corporate governance, increase innovation and avoid the risks of ‘group think’

GLOBAL BOARD SEAT HELD BY WOMEN

NORWAY

• The Public limited companies to meet the requirement of gender diversity on boards until 1 January, 2008.

• Consequences of Non-Compliance could result into dissolution of the company.

• However, no company has been dissolved so far on account of the non compliance with the gender rules.

FRANCE

• In January 2011, the French Law was modified and quotas were introduced in order to improve the representation of women on boards of both listed and unlisted companies.

• W.e.f. 1st January 2017• Proportion of men and women directors should not

be below 40% in case of listed companies and non-listed companies having revenue or assets over 50 million euros employing at least 500 persons for three consecutive years.

INDIA• The 2nd Proviso 149(1) of the Companies Act, 2013 and rule 3 of

Companies(Appointment and qualification of directors) Rules, 2014 mandates for prescribed class/classes of companies to have at least one women director.

• Every listed company • Every other public company having- 1.Paid-up share capital of one hundred crore rupees or more; or 2.Turnover of three hundred crore rupees or more. • The paid up share capital or turnover, as the case may be, as on the last

date of latest audited financial statements shall be taken into account. • According to Clause 49 of the Listing agreement it is mandatory to have

atleast one women director on the board.

WHAT CAN BE DONE TO HAVE MORE WOMEN ON BOARD

AGE DIVERSITY ON BOARD• Traditionally, most members of corporate boards are

mature, experienced, and by default senior directors. This can be explained by the inherent nature of company management and career evolution, which results in considering retired executives or executives which had a significant work experience in other companies in the same industry as ideal non-executive board members. Still, age diversity on boards helps the company to benefit from the different perspectives of different age groups, and the value of having the perspectives of younger directors on boards is emerging as an aspect of diversity worthy of attention.

• (Walt and Ingley 2003)found that companies in the consumer services and products industry are more likely to appoint directors in a more diverse age range. They conclude that in order to deal with a wide range of customers' needs and interests, boards have an advantage when their directors reflect this age range.

• When addressing age as an element of diversity, there are many facets to consider. While one may believe that older board members bring more experience to the table and younger members bring more energy and a new outlook

BOARD DIVERSITY BASED ON TYPES OF DIRECTORS – INDIAN SCENARIO

• The BODs is entrusted with overall direction and management of the affairs of the company. In performing these functions the directors are bound to comply with the provisions of the Companies Act and to perform general and specific duties imposed on them by the Articles of Association. The performance of BODs is a deciding factor for the corporate governance.

• According to clause 49, the BODs of the company shall have

• An optimum combination of executive and non-

executive directors.• With at least one women director and • Not less than 50% of the Board of Directors

comprising non-executive directors.

• Rotational Directors: At least two-thirds of the Directors of a public company or of a private company subsidiary of a public company have to retire by rotation and the term "rotational Director" refers to such Directors who have to retire (and may, subject to the Articles, be eligible for re-appointment) at the end of his or her tenure.

• Nominee Directors: They can be appointed by certain shareholders, third parties through contracts, lending public financial institutions or banks, or by the Central Government in case of oppression or mismanagement. The extent of a nominee Director's rights and the scope of supervision by the shareholders, is contained in the contract that enables such appointments, or (as appropriate) the relevant statutes applicable to such public financial institution or bank. However, nominee Directors must be particularly careful not to act only in the interests of their nominators, but must act in the best interests of the company and its shareholders as a whole.

INDEPENDENT DIRECTORAs per sub-section 6 of Section 149 of the Act, ID means a director other than a managing

director or whole time director or a nominee director,a) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise

and experience;b) - Who is or was not a promoter of the company, Who is not related to promoters or directors in the companyc) Who has or had no pecuniary relationship with the companyd) None of whose relative has or had pecuniary relationship or transaction with the company.e) Who, neither himself nor any of his relativei. Holds or has held the position of a key managerial personnelii. Is or has been an employee or proprietor or a partner, in any of the three financial years

preceeding.iii. Holds together with his relative two per cent or more of the total voting power of the

company; oriv. Is a Chief Executive or director, of any nonprofit organization, or who possesses such other

qualifications as may be prescribed

BENEFITS OF DIVERSITY• Creativity and Different Perspectives • People from different background and with different world

experience will be able to find solution to the similar problem in different ways with different approach and perspective. Emperical study indicates that more diverse group foster higher creativity, innovation and produce greater range of perspective and solution to the problems.

• Diverse groups are less likely to suffer from ‘group think’.

Dissimilar group may also contribute creativity by acquiring information through more diverse set of sources.

• Access of Resources and Connections • Directors with different characteristics will help firm to

access the different resources.• Ex: Directors with financial industry expertise can help

the firm to gain access to investors who can contribute to the firm.

• Directors with political links will help firm to deal with government regulations or to win government contracts.

• Career Incentives Through Signalling and Monitoring

• Diversity in the boardroom may signal to the low level employees of the company that the company is committed to the promotion and welfare of minority workers.

• The minority status will not be a constraint to their career in the company. The diversified boardroom engages mentorship with directors and other personnel and share their knowledge, expertise and insights

• Public Relations, Investor Relations and Legitimacy • Some companies will benefit more from conforming to social

expectations.• Ex: consumer goods firm may want to maintain a image of

social responsibility.• Firms in which institutional investors comprise major fraction

when compared to share holders will surrender to investors demand on board diversity.

• Firms having more diverse board can be a means of acquiring legitimacy in the view of the public, government, media etc.

DISADVANTAGES OF DIVERSITY

• Conflicts: People often feel confused, threatened or even annoyed by individuals with views and backgrounds very different from their own; constructive disagreements can become power struggles and create a bad political atmosphere that hinders project advancements.

• Bureaucracy: Decision-making can be delayed due to diverging views and opinions, thus corporate decisions and actions take time.

• Un-Productivity: Dissimilar cultural identities and values, or simply said when people lack things in common, could negatively affect the overall team spirit that is essential for reaching high-levels of productivity.

• Disunity: Everyone in the company might have a different opinion on the way business should be run and managed; thus, the company might have people doing their own thing, especially if there is no protocol and authority to ensure common practices.

CONCLUSION• A Board of Directors that has a good mix of members with age,

experience, and youthful perspectives balances the insight and experience that comes from older board members with longer tenure with the new ideas introduced by younger and perhaps less experienced directors.

• We need leaders who are focused listeners and who encourage all board members to participate. The quiet member, who has been put on to a board for an important reason, should not be allowed to languish. The leader must demand contributions from each and every member. The leader can literally count the contributions, and when someone is hiding out, their opinion must be gently sought out.