Behind every great man, there’s a great woman. Behind every great company board, there are at least two

BACKDROP:

If we are a shareholder in a company, would we want that company to do well? We would want a higher return on equity or would we like a bigger market capitalisation? Would we want all this at lesser risk, and as a bonus would we also like the company to face fewer governance issues? I guess the response to all of these questions would be a YES. Imagine, if all us needed to do to get all of this would be to appoint two qualified, professional, educated women on the Board of Directors of the company.

This is exactly what a Bank of America Merill Lynch study said on March 6, 2019. “Asia Pacific stocks with at least two female board members have a price-earnings valuation premium, higher net profit margins, and dividend yield,” BofA-ML said. The report also said that more women directors improve returns and have lower earnings risk in subsequent years. Return on equity goes up as does the market capitalisation of a company. However, in the Asia-Pacific region, just 12 percent of board seats are occupied by women.

Number of Companiies with women directors

WOMEN DIRECTOR & COMPANIES ACT 2013:

The Companies Act, 2013 was approved in August 2013. The 2013 act was intended to enhance self-regulation, strengthen board governance, encourage corporate democracy, and reduce the number of required government approvals. One of the major goals of the 2013 act is to improve board diversity and to enhance the responsibilities and accountability of executive directors, managerial personnel, and independent directors. One of the new requirements pertains to the appointment of women directors to company boards.

The act requires the following classes of companies to have at least one woman director on their boards:

1. Every listed company

2. Every public company having: Paid-up share capital of INR 1 billion

3. Turnover of INR 3 billion or more. Companies meeting these criteria are required to comply within one year; newly incorporated companies meeting the criteria must appoint a woman director within six months of incorporation.

The board is required to fill any vacancy of a board seat previously held by a female director no later than the next board meeting or three months from the date of such vacancy, whichever is later. The Securities and Exchange Board of India, the regulator overseeing listed companies and stock exchanges in India, also revised its Equity Listing Agreement to align with the requirements of the 2013 act.

The Constitution of India enshrines the principle of gender equality in its preamble yet equal rights for men and women are still a distant reality. To remedy this situation section 149 of the Companies Act, 2013, incorporated the provision of mandatory appointment of a woman to company boards, subject to limitations. According to Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014 every listed company or any other public company, having paid- up share capital of one hundred crore rupees or more; or turnover of three hundred crore rupees or more shall appoint at least one woman director by 1 October, 2014.

The hassle which arises when such a provision is mandatorily imposed is finding the balance between the legal requirement of appointment a woman and satisfying the characteristics expected from that member in terms of expertise, training and skill as mentioned.

The Act also elucidated on the situation wherein there arises an intermittent vacancy in the post of the woman director; it shall be filled up by the board at the earliest. However, it is considered that the period of ‘three’ months for securing the right woman candidate for the board is an ambitious attempt as it causes the inevitable challenge of finding a person of the same rigor and zeal as the former member. Also, the diversity should not materialize at the cost of hierarchy disruption. Thus, the period should have been increased to a reasonable amount of time.

Non-compliance with the provision will attract a hefty fine ranging from Rs 50,000 to Rs. 5, 00,000. The regulatory requirement is provided under the listing agreement which is monitored by the Securities and Exchange Board of India. However, companies may face a challenge in respect of identifying women directors. Since SEBI has not specified that the woman director needs to be independent, companies may resort to appointing women directors from within the promoters’ family as directors. Researcher feels that this may not necessarily have a desired effect on the governance standards.

KEY REASONS WHY SEBI MANDATED THAT EVERY BOARDROOM SHOULD HAVE AT LEAST ONE INDEPENDENT WOMAN DIRECTOR:

The Companies Act, 2014 (“the Companies Act”) mandated that there should be one woman director on each board, but companies met this requirement by employing their female relatives/friends. As such, SEBI (Securities and Exchange Board of India) suggested that there should be at least one independent woman director on the company board.

1. Improved Profitability and Performance: Apart from the Bank of America Merill Lynch, there are several studies in the past decade that show the value of women directors. A 2010 McKinsey reports said companies with top-quartile representation of women in executive committees outperformed those without women at the top, bringing an average of 47% more return on equity and 55% more earnings before interest and tax. An IFC report on gender-diversity with Lebanese companies showed companies with female board members exhibited double the return on equity compared to all-male boards, and 2.3 percent higher growth in return on assets.

2. Improved Corporate Governance: More diversity in the workplace means tough questions get asked. Studies have shown that women are better at research than men, they come to meetings after doing their homework and they don’t shy away from tough questions or decisions. More women in the boardrooms inevitably increases a company’s reputation and decreases governance issues.

3. Better Representation of the Marketplace: Gender-diverse boards represent marketplaces much better, different products are rolled out and innovation improves. Diverse voices mean robust dialogue and creative thinking take CenterStage setting the pathway for innovation and progress in a company.

4. Risk Management: Boards of Directors often have to make tough calls. All-male boards typically function like an old boys club with one or two alphas in the room taking a majority of the calls. Women directors bring in different, wider and broader perspectives and insights to the table.

5. Improvement in Employee Morale: The number of women entering the organised workforce is increasing exponentially. When women in junior roles see seniors break the glass ceiling in boardrooms, their morale improves. Women directors serve as role models to younger women. They represent the future.

JOURNEY OF THE CONCEPT OF WOMEN DIRECTOR:

Year 2015:

Almost 189 companies failed to comply with the mandatory provision of woman director on board: The Securities and Exchange Board of India (SEBI) in April 2015 announced a penalty of Rs. 50,000 for all listed companies that have failed to appoint a woman director on their Board by March 31, 2015. It further warned to take action against the promoters and directors, if the companies remain non-compliant beyond six months. It stated that the penalty would rise with passage of time and for each day of non-compliance there will be additional penalty of Rs. 1,000 per day beginning from July 1, 2015. SEBI proposed that the penalty for non-compliance would be Rs. 5,000 per day from October 1, 2015.

Year 2017:

The following details were provided by Mr. P. P. Chaudhary, Minister of State for Corporate Affairs in the Lok Sabha. It is pertinent to note that the Minister has referred to the penalty prescribed under Section 172 of the Companies Act, 2013.

Listed and Unlisted companies penalised: The Registrar of Companies (ROC) has filed prosecutions against 202 non-compliant public unlisted companies. SEBI has levied fine on the companies listed on NSE and BSE, including the PSUs for non-appointment of women directors, as per the fine structure prescribed by SEBI.

Penalty under Section 450: ICOMM Tele Limited before National Company Law Tribunal, Hyderabad Bench:

In this case, the ROC had issued a show cause notice on August 10, 2015 to the company and its directors questioning the applicants as to why penal action under Section 450 of the Companies Act, 2013 should not be initiated against the applicants for not appointing a woman director on the board. The main question raised in this petition was whether the NCLT had the power to permit the applicants to compound the offence when there is no penalty under Section 149 for non-compliance of provisions of this section.

Section 450 of the Companies Act states as follows:

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

IMPACT OF NON–COMPLIANCE ON OTHER PROVISIONS OF THE COMPANIES ACT, 2013 AND THE RULES LAID THEREUNDER:

AUDIT COMMITTEE:

Section 177 as amended by the Companies (Amendment) Act, 2017 read with Rule 6 of the Companies (Meetings of the Boards and its Powers) Rules, 2014 amended vide MCA Notification No. GSR 880(E), dated July 13, 2017 provides that every listed company and a company covered under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an Audit Committee of the Board.

Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 lays down the classes of companies:

Every other public company having:

1. paid up share capital of ten crore rupees or more; or

2. turnover of hundred crore rupees or more; or

3. In aggregate, outstanding loans or borrowings or debentures or deposits, exceeding fifty crore rupees.

  • Constitution of the Committee: The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority. Provided that majority of the members of the Audit Committee including its Chairperson shall be persons with the ability to read and understand the financial statement.
  • Disclosure of the Composition of the Audit Committee in the Board’s Report: The Board’s Report shall disclose the composition of an Audit Committee.
  • Penalty: In case of any contravention of Section 177 (Audit Committee), Sub-section (8) of Section 178 prescribes as follows:
    • The Company – shall be punishable with a fine which shall not be less than one lakh rupees but which may extend up to five lakh rupees; and
    • Every officer of the company who is in default – shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend up to one lakh rupees or both.

NOMINATION AND REMUNERATION COMMITTEE:

Section 178 of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of the Boards and its Powers) Rules, 2014 amended vide MCA Notification No. GSR 880(E), dated July 13, 2017 provides that every listed company and a company covered under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute a Nomination and Remuneration Committee of the Board.

Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 lays down the classes of companies:

Every other public company having:

1. paid up share capital of ten crore rupees or more; or

2. turnover of hundred crore rupees or more; or

3.  in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding fifty crore rupees.

Constitution of the Committee:

The Nomination and Remuneration Committee shall consist of three or more non-executive directors out of which not less half should be independent directors.  Provided that the chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.

Penalty:

In case of any contravention of Section 178 (Nomination and Remuneration Committee), Sub-section (8) of Section 178 prescribes as follows:

  • The Company – shall be punishable with a fine which shall not be less than one lakh rupees but which may extend up to five lakh rupees; an
  • Every officer of the company who is in default – shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend up to one lakh rupees or both. 

COMPOUNDING OF OFFENCES UNDER THE COMPANIES ACT, 2013:

Section 441 notified vide Notification No. S.O. 1934(E), dated June 1, 2016 and amended by the Companies (Amendment) Act, 2017 provides for the compounding of certain offences.

GENDER DIVERSITY:

Companies have failed to appreciate the reason for board diversity, in gender or otherwise. They generally look for the same attributes in such ‘diversity’ directors as they look for in any other director. The purpose of diversity is to get a different perspective on business matters; to reduce the risk of group think.

Today, in the context of a company’s responsibility to balance the interests of all its stakeholders, this is even more relevant. The advantage of female attributes being included in board discussions and decisions is a development of greater sensitivity to stakeholders other than the equity investors. In order to see such a difference, there should be not less than three women on a board who demonstrate such conduct. But that will require boards and controlling stakeholders to accept that a company exists for every one of its stakeholders.

As per the Institute of Chartered Accountants in England and Wales (ICAEW) there are four principal reasons why diversity matters:

Lack of diversity raises doubts about effectiveness: Since boards mainly operate behind closed doors, people outside the boardroom will use external signs to assess board effectiveness. Boards should accept this and understand that a board with members whose individual profiles look very similar will raise doubts about its ability to think outside the box. Boards should also be prepared to explain their policies for setting priorities for diversity based on the arguments set out below relating to social acceptability, achievement of business purpose and decision-making rigour.

Diversity can help social acceptability: In a diverse society, a company whose board members look like each other rather than like society, can undermine people’s belief that the company supports social norms of equal opportunity and fairness, and will conduct itself in a socially acceptable way.

Diversity can strengthen understanding of the business Businesses need to achieve a business purpose: For a company to do this, it helps if it is in tune with its key internal and external stakeholders and can see business opportunities and threats through their eyes. Board diversity can help boards understand customer, supplier, employer and other relevant perspectives. As companies become more international, this adds another dimension to the need for diversity.

Diversity can enhance rigour: Although a tightly-knit group of like-minded people with common experiences can take decisions quickly and efficiently, problems associated with groupthink are well-documented. An overriding objective of sticking together may mean that common limitations and biases go unchallenged. Better decisions are made by a board that contains people who are prepared to consider a wider range of alternatives, to be critical or to simply ask why?

An increase in the number of independent women directors would help the cause. This will bring to the front women who have the necessary skillsets and are therefore not on boards merely to fulfil the regulatory mandate. They can then contribute not only to gender diversity but to also the skill-based diversity that is required on any board.

The benefits of having a socially and professionally diverse board cannot be realized without an equal board culture. Boards that want to maximize their effectiveness need to do more to ensure that different perceptions are regularly stimulated and assimilated into the board’s work.

ROLE OF WOMEN DIRECTOR:

The role of a women director is not segregated in any specific compartment, but is the same as any Director irrespective of their gender. A woman can act as an independent director who is responsible for improving corporate credibility of the company and also to improve governance standards of the company. Also, women directors can be appointed as a nominee director who mainly looks after and represents the interests of the appointee. An appointee can be a stakeholder, a creditor, or a shareholder.

Watchdog for Public Shareholders: One direct means of addressing the potential expropriation problem presented by controlled firms is to enlist independent directors to monitor the behaviour of management or controlling shareholders to reduce the chances that either of them will expropriate or misuse firm assets in some unfair manner.

Academic literature suggests that independent directors exercise vigilance on behalf of minority shareholders in contexts such as potential self-dealing transactions involving the controlling shareholder and the company, as well as minority freeze-out transactions proposed by the controlling shareholder.

In these contexts, the independent director serves as the “watchdog” for the company’s public shareholders. Even though the director may not have the voting power to stop these types of activities, he or she has the power to make public any wrongdoing, and while the controlling shareholder could remove the director or take other retributive measures, such actions would likely cause unwanted public scrutiny.

Strategic Advisor to the Controlling Shareholder: Independent directors may also be viewed as strategic advisors who can provide their expertise and experience on business matters to the firm’s management or controlling shareholder. In this role they may serve to enhance firm value by helping the firm make better business decisions and by helping the firm tap into the director’s wealth of business and political connections.

In today’s world, a consultative style will get better results than an authoritarian or autocratic style. And women are consultative by nature.

Women are as ambitious as men, but they go about it in a different way. Due to this different approach, women bring a different perspective to issues – be it about fairness, taking stock of the minority stakeholders’ interest and assessing risk perceptions. The chairman of the board can set the tone of deliberations and ensure the opinions of women directors are also heard with due seriousness. It is important for women to be able to communicate their views and make sense to their male colleagues to earn respect.

IMPEDIMENTS BY WOMEN DIRECTOR:

The issues / impediments could be because of the fact that the pool of available talent is still limited. At an entry level, most companies have a very good gender diversity percentage, but higher up the ladder, it is skewed in favour of men.

Coincidentally, according to data from the Global Gender Gap Report 2020 by the World Economic Forum, only 8.9 per cent of firms in India have female managers. Even among companies with female majority ownership, only 2.8 per cent firms are in India.

Practically, it is not possible for a company to pick up any woman from the organisation and put her on the board. Women first have to elevate themselves to reach that level. They have to rise to the occasion and make themselves worthy of being there.

The first part of the problem is how to get women to be a lot more self-confident, a lot more self-assured so they can take up larger roles. The other issues remain that we are still in a social structure where challenges remain around practical issues like maternity, child birth, and relocation with spouse etc.

Studies say that an Indian woman, on an average, spends 300 minutes more than a man every day attending to household chores. Hence, despite getting quality education in fields like science, technology, math, and business management, women professionals face hurdles in their professional journey, off-ramping due to the typical societal norms, causing disparity in workspaces.

To bring more women into the workforce, they need to be mentored and given enough guidance. Companies and organisations have, of late, been putting in place a lot of policies to promote women in the workforce.

CONCLUSION:

To sum up, it can be gain said that the legislature of India has put forth a half-baked measure in an ostensive demonstration of purported puffery of women participation in corporate sector, when the dismal representation of women in Indian board rooms needs more holistic and emphatic efforts to not only achieve parity in numbers but also parity in meaningful and gainful contribution

In the current scenario in India, appointed women directors from promoter’s families shall have the same voice as the promoter, defeating the very purpose of the directive of creating genuine (independent) gender diversity. The only hope is that these women too could bring a different perspective to the board, even if it is not entirely independent.

Women’s groups have long complained about the paucity of women in the top ranks of corporate. In making their case, they typically point to the injustice of discrimination, glass ceilings and old-boy networks. But today as they are being joined by business and financial groups who emphasize profit, we shall soon see how these directives are able to revolutionize and bring in a genuine change in mindset and need of having more and more women’s directors on company boards.

In order to bridge this gap, the education system in our country must look beyond textbooks, build confidence in girls so when they start working, they become assertive. Organisations have to recognise that women are different and have a different set of biological and physiological needs. They should also ensure that their recruitment pool is reflective of the gender diversity they want to bring in. The whole notion of diversity and diversity-related orientation, diversity-related training should be given to the men in the organisation.

Organisation need to become not only more gender-diverse but also sensitive to gender diversity. It needs a cultural and mindset change, and it will take time to yield results.

Good corporate governance cannot be legislated and if companies themselves can’t see the benefits of higher return ratios and valuations, legislation can go only so far in nudging them in the right direction. As such, there is a supply issue that needs to be addressed as well. That’s what great company boards should do invest in their women and ensure there is a steady stream rising up to leadership roles and board seats.

BIBLIOGRAPHY:

https://shodhganga.com

https://www.livemint.com

https://www.thehindubusinessline.com/companies/women-on-board-the-prolonging-case-of-gender-equality-in-india/article30997846.ece#

https://www2.deloitte.com/content/dam/Deloitte/in/Documents/risk/Corporate%20Governance/in-cg-women-in-the-boardroom-india-perspective.pdf

https://content.timesjobs.com/why-independent-women-directors-are-not-just-a-tick-in-the-box/articleshow/74614700.cms

https://assets.kpmg/content/dam/kpmg/in/pdf/2017/04/Towards-Gender-Balanced-Boards-new.pdf

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