Vidushi Gupta[i]
In recent years, the issue of gender diversity in corporate boards has gained increased prominence. There has been a worldwide thrust towards increasing the number of women appointments on corporate boards, through the adoption of various measures including voluntary targets and disclosure requirements. In fact, the G20/OECD Principles of Corporate Governance, that were recently endorsed by the Organisation for Economic Co-operation and Development (OECD) Council and the G20 Leaders Summit in 2015, also recommend promotion of gender diversity in boards, for effective corporate governance. However, the Board of Directors of corporate entities in India (and most other countries of the world) continue to be male-dominated. As per the 2019 Credit Suisse Gender 3000 Report, the percentage of women on boards in India is 15%, while it is only 20.6% globally.
Recently, the imposition of mandatory quotas for women as a means to promote women directors on boards has gained currency, with several countries of the world, including Germany, Italy, and France following the trend. In India, the source of mandatory quotas is Section 149 of the Companies Act, 2013, and Regulation 17 of the SEBI (LODR) Regulations, 2015, which mandate the appointment of at least one woman director on the Board of Directors of certain classes of companies. This article analyses whether mandatory gender quotas are the ideal way to promote gender diversity in corporate boards in India, from a law and economics perspective. It is argued that the mandatory quota for one woman should be retained for the time being. However, since these quotas lead to various undesirable consequences, we should rely on other softer, more voluntary measures, including nudging the corporate entities, to promote gender diversity in the longer run. Such a balanced approach will help ensure smooth change and proper implementation.
Mandatory Quotas
The mandatory quota for one woman director has no doubt set off an uptrend in India. Female representation in the boards of the NIFTY 500 companies has increased from 6% in March 2014 to 17% in March 2020. Moreover, the costs of enactment and implementation of this rule are also very low. This is because no ex ante costs have been incurred in enacting this rule, since no empirical analysis etc. is required before setting the bare minimum requirement of one. Further, the ex post costs of enforcement of this rule are also less, due to the imposition of a clear threshold of one woman director, making it easier for the regulator/stock exchange to check and take action against defaulting companies, by imposing fines etc. There is also a compelling ‘business case’ in favour of gender-diverse boards, based on the correlationbetween higher gender diversity and better financial performance and governance of companies.
However, the percentage of women directors in India remains dismal. This is because of the glass ceiling faced by women, as a result of discriminatory institutional barriers and cultural beliefs, biases and negative attitudes, and homosociality. Mandatory quotas fail to smash this glass ceiling, to make a real difference. This is evident from the fact that hundreds of companies appointed women directors in a last-minute scramble in 2015. This highlights a “check-the-box” attitude on the part of companies, raising doubts on the nomination process. Although a few NIFTY 500 companies have appointed two or more women directors, the probable underlying reason for such appointment is the requirement to have one independent woman director on their board, as per the SEBI (LODR) Regulations. This is supported by the fact that most of these companies have exactly one independent woman director, in addition to other non-independent women directors on their boards. Further, this indicates that most companies appoint women directors only to meet the minimum legal requirements, and avoid facing consequences for non-compliance. Some companies fail to appoint even one woman director, in spite of being required to do so. For instance, 125 listed companies (i.e. over a tenth of India’s biggest listed firms) missed the March 31 deadline set by the SEBI, to appoint women as independent directors on their boards, in the year 2020. This indicates the failure of the existing regulatory and statutory framework to deter non-compliance, despite the fact that sanctions (including fines, suspension of trading etc.) can be imposed against defaulting corporate entities.
Quotas also lead to the appointment of underqualified, less-experienced women, causing serious damage to the performance of companies. This trend was observed in Norway too, the first country to impose such quotas, where it was found that firms that were forced to increase the share of women on their boards by more than ten percentage points saw the ratio of market capitalisation to the replacement value of assets (Tobin's Q) fall by 18%. In India, this is not just due to a lack of availability of qualified women directors, but also because mentors themselves are deliberately training unskilled women to become directors, who are incapable of making valuable contributions. This underpins the idea that men are better directors, since they have adequate skills and experience. Thus, women directors are perceived as less deserving and are not taken seriously, making them uncomfortable and hesitant to express their views. Some male directors even go to the extent of walking out or using their phones, when a woman director starts to speak. Conversely, the appointment of a small number of highly-qualified or already-established women result in the same pool of women being present on multiple boards. Moreover, the appointed women are seldom Independent Directors, especially since India has the third-highest family-owned listed companies. Thus, the quota fails to promote inclusivity and benefit all women as a group, and makes boards more insular than diverse.
Therefore, although quotas do increase numbers, they only cause cosmetic changes. The invisible costs of quotas (discussed in the preceding paragraphs) exceed the benefits, and the gains (i.e. token female representation on boards) are not sufficient to offset the losses resulting from such quotas, thereby leading to inefficient outcomes. Thus, we needless coercive, alternative measures, to cause changes not only in form, but also in substance.
Need for Alternative Measures
One alternative measure is to change corporate behaviour and improve board access for women through nudging companies’ behaviour towards gender diversity. Nudging is used to steer people in particular, desired directions, while also allowing them to go their own way, thereby preserving their liberty of choice. This can increase overall welfare by overcoming behavioural biases (such as status quo bias, familiarity bias etc.), which mostly work against women. Nudges can be used in a variety of ways. Since lack of information often leads to irrational decisions, the government can use media platforms to inform companies of the positive impacts correlated with gender-diverse boards. However, this by itself is not sufficient, since companies may not promote gender diversity, even after knowing that they should do so for their own benefit, due to a variety of socio-cultural factors, including misogyny and patriarchy. Therefore, to counter this, the government should prepare reports, that contain comparative information about companies and classify them into ‘red, yellow and green categories’, based on parameters like gender diversity and inclusivity. It should also rank, appreciate and award companies on the basis of it. This will not only act as positive reinforcement for companies that are already taking steps, but will also urge other companies to do so. Collective conservatism and social norms also influence people’s behaviour, since they tend to do what they hear and see other people doing. So, instead of naming and shaming companies that fail to be gender-diverse, the government should highlight and promote companies with gender-diverse boards, to make other companies believe that most companies are moving towards greater gender diversity. It should also reward women directors at business conclaves, conferences etc., promote the image of a director as a woman (as opposed to the usual image of a man) to break gender norms and stereotypes, organise all-women-directors’ conferences etc. This will help to create a choice architecture, based on social norms, which will nudge other companies to follow suit. Moreover, since loss aversion also influences behaviour, the government should impress upon companies the losses that they can incur, by not having gender diverse-boards. Lastly, the government should lead the way, by ensuring that all public sector enterprises comply with the quota requirement. This will require considerable changes to be brought about, since as per the current trends, public sector enterprises have high levels of non-compliance with gender-diversity norms.
Nudging can lead to more efficient outcomes, as they cost little, and can have a larger impact than coercive tools. However, a change in social norms often needs a legal norm (like quotas) to start it off. This is because nudges are very subtle in nature, and will take time to yield results. So, in order to minimise the friction caused while changing the approach towards promotion of gender diversity, it is recommended that the mandatory quota should be retained for now.
Other alternatives include giving economic incentives to companies which actively promote gender diversity. Apart from this, companies can agree to adopt a voluntary code of conduct. They can also be required to formulate and disclose their own policy, initiatives and progress on gender diversity, creating a ‘comply or explain’ model, similar to the model adopted in the United Kingdom. However, their effectiveness is limited, since these mechanisms are incapable of producing results by themselves. They simply encourage disclosure by companies, and rely on investors and shareholders to exert pressure on companies for promoting gender diversity, a culture which is grossly underdeveloped in the Indian corporate sphere. A good way to achieve a critical mass of women directors would be through the means of a legal threat to increase the quota from one to 33%, thereby urging companies to take steps themselves.
Since these alternative measures preserve the autonomy of companies, they are likely to cause less tokenism and more acceptance of the appointed women directors. In terms of Calabresi and Melamed’s ‘Cathedral’ framework, what is required is a shift from the liability rule model to the property rule model, to promote women in corporate boards. Thus, there is a need to move away from mandatory gender quotas in the longer run, since they are an inefficient way of dealing with the multifaceted problem of gender diversity.
[i] The author is a third-year B.A. LL.B. (Hons.) student at the National Law School of India University, Bengaluru. Her interests lie in Corporate Law and Arbitration Law. For any discussion related to the article, she can be contacted via mail vidushigupta@nls.ac.in.