Mandating Board Diversity in India

MANDATING AND MEANING OF DIVERSITY

The listing agreement under Securities Contracts {Regulation} Act 1956, for the first time has mandated companies whose shares are listed on stock exchanges to formulate, publish and implement a Board Diversity Policy.

The term “diversity” of Board of Directors {Board} has not been defined in the Companies Act 2013 or in the listing agreement with stock exchanges. Diversity is statutorily achieved; more particularly function wise, as also residence and gender wise, whereby the Board has to have an optimum combination of executive, non executive, independent, resident/non resident director/s, woman director/s, & small shareholders director/s in terms of law and corporate governance.

As per various national / international practices, it would also mean that the individuals of the Board should be diverse in background, education, experience, knowledge, thoughts, perspective, functional expertise, independence, age and gender. Diversity would further include differences that relate to communication styles, problem solving & interpersonal skills.

OBJECTIVE

The purpose for achieving diversity on the Board of Directors of the Company is for the benefits of:-

• Enhancement of the quality of performance of the Board ;
• Usher in independence in the performance of the Board;
• Eradicate the gender bias in the Board;
• Achievement of sustainable and balanced performance and development in the Company;
• Support the attainment of strategic objectives of the Company; &
• Compliance of applicable law/s and good corporate practices. 

BRIEF OVERVIEW OF THE LAWS STIPULATING DIVERSITY

As already stated, Board diversity has not been defined and has to be understood in broader terms. In keeping with this understanding all relevant legal provisions will have to be complied. Following are pertinent in this context.

Companies Act 2013 and its Rules

{Sections 149, 151 & 152 & Companies [Appointment and Qualification of Directors] Rules 2014 & Section 178 & Companies [Meetings of Board and its Powers] Rules 2014}

• Every company shall have a Board of Directors consisting of individuals as directors and shall have minimum three directors in case of public company and maximum fifteen directors. This lays down the size of the Board within which board diversity will be ensured.
• Every listed company has to appoint at least one woman director on the Board within one year from the commencement of Companies Act 2013. Any vacancy shall be filled up at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later. This provision brings in the gender diversity in the Board.

• There should be at least one director who has stayed in India for total minimum 182 days in previous calendar year. Diversity with respect to resident / non resident director will be ensured by this.

• Every listed public company shall have at least one-third of the total number of directors as independent directors whose period of office is not liable to determination by retirement by rotation. Independent Director shall meet the criteria of Independence. Any vacancy in the office of independent Director shall be filled up at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later. Bringing diversity with regard to directors who are independent of the management is critical for good corporate governance and that will have to be complied.

• Not less than 2/3 of the total number of directors of a public company shall be persons whose period of office is liable to determination by retirement of directors by rotation {e., rotational/ non executive directors}. Moreover, the remaining directors, subject to any regulation in the articles of association of the company, shall be persons whose period of office is not liable to determination by retirement of directors by rotation, {i.e., non rotational director /executive directors}. This will ensure diversity by having those directors whose offices are enduring and those whose offices need approvals of shareholders on a regular basis.

• The Board of every listed company shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors. It shall identify persons who are qualified to become directors in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance. This Committee will ensure that Board diversity is carried out as per best practices.
• A listed company may have one director elected by small shareholders. An important right has been given to such shareholders resulting in a Board having diversity of group specific directors. Similarly nominee directors of any institution or government will bring in diversity.     
  

New Clause 49 of the Listing Agreement {W.E.F. 1-10-2014}

Overall this clause, to be complied by listed companies, mandates diversity to the Board by balancing executive directors who are Managing director or Whole time directors responsible for management of the company, and, non executive directors who are not involved in its day to day activities comprising generally of independent as well as directors simpliciter. The woman director is also required as well as a special Board committee to implement this, in line with Companies Act 2013.

• The Board of Directors of the company shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent {50%} of the Board of Directors comprising non-executive directo

• Where the Chairman of the Board is a non-executive director, at least one-third {1/3} of the Board should comprise independent directors and in case the company does not have a regular non-executive Chairman, at least half {50%} of the Board should comprise independent directo

• Where the regular non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half {50%} of the Board of the company shall consist of independent directo

• The setting up of Nomination and Remuneration Committee is in consonance with the provisions of the Companies Act 2013 and its Rules.

• Board Diversity Policy is required to be laid down. This is the provision which is the focal point of assimilating and complying with the provisions of Board diversity as per law and beyond.

CONCLUSION

Although the concept of Board diversity has already been present in Indian legal system even in the Erstwhile Companies Act 1956 and the earlier clause 49 of the Listing agreement, the coining of this term as compliance has been new. The only significant change which can be considered in this context is the requirement of appointment of woman director. Hopefully the purpose of diversity can be achieved in Indian corporate more in beneficial context than in mere compliance.

(Author can be reached at gangulyamitav57@gmail.com)

Click here to Read Other Articles of Amitav Ganguly