1 Gender Diverse Boards and Corporate Governance
Navjeet Sidhu Kundal
DOI: 10.4324/9781003160786-3
Introduction
The issue of Corporate Governance has been debated since long but there is no consensus on its precise definition yet, since it is a concept encompassing many crucial components. Companies have shifted focus from only doing business to how business is being done. Corporate Governance as an area has grown tremendously since the last one and a half decades. A spate of financial scandals also ensured that there is a sharp focus on corporate governance, specially relating to transparency and disclosure, control and accountability and to the most appropriate board structure that may be capable of preventing such scandals from occurring in future (Mallin, 2016). Corporate Governance is concerned with holding the balance between economic and social goals and between individual and social goals, the aim is to align as nearly as possible the goals of individuals, corporation and society (Cadbury, 1999). More specifically, it is a system of rules, relationships, systems and processes within and by which authority is exercised and controlled in an organization. The Cadbury Committee report defines it as either the action of governing or the method of governing. The Organization for Economic Co-operation and Development (OECD) defined corporate governance as a set of relationships between a companyâs management, its board, its shareholders and other stakeholders. Good corporate governance should provide proper incentives to the board and the management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring (OECD, 2004).
Gender Diversity
Diversity is understood to be âvariety of approaches and perspectives that members of different identity groups bring to work. They bring relevant knowledge and perspectives how to actually do work, to design processes, reach goals, frame tasks, create effective teams, communicate ideas and leadâ (Hazarika, 2017). Diversity helps companies grow by challenging the basic notions about an organizationâs functions, processes, practices and procedures (Hazarika, 2017). Gender Diversity is a subset of the broader concept of diversity. In the context of corporate boards, it refers to including more women on the boards.
Corporate Boards play a crucial role in enhancing Corporate Governance. They ensure that a company operates effectively, achieves its desired objectives and giving strategic direction to the organization. They further monitor the progress of the company towards the objectives defined by shareholders. A perceptive, well-balanced, forward-looking board can successfully carry out the wide range of responsibilities and carry out the long-term vision and strategy of the company (Mishra & Jhunjhunwala, 2013). In essence, a Corporate/Management Board works as the main corporate governance mechanism. Its role crucially effects corporate performance.
Corporate Governance and Gender Diverse Boards: Establishing the Link
Effective corporate governance depends on directors effectively executing the duties entrusted to them and carrying them out to the best of their abilities. The success and long-term survival of any company depend on the decisions of a board. To actualize this, the board must appreciate the global environment political and economic conditions of different countries, market situations, financial and legal aspects and the latest technology and it must have the ability to innovate and overcome challenges faced in difficult times (Mishra & Jhunjhunwala, 2013). A task like this requires a broad range of skills, knowledge, expertise and perspectives. This becomes possible if directors come from different backgrounds in terms of education, experience, nationality and time periods (Hazarika, 2017).
Diversity, for its own sake, however, does not improve corporate governance. What is required is a diversity of talents and experiences of the members that enable the members to steer the company towards success and long-term stability (Hazarika, 2017). Studies have shown that groups with more educational diversity solve problems faster and are more efficient. Groups with more diversity are also able to generate correct answer to the problems posed to them (Catherine, Liljenquist, & Neale, 2009).
Board diversity can be of various types, ranging from gender, age, region, tenure, race, community and religion. Out of all the parameters of diversity, it is believed that gender diversity on corporate boards improves the financial performance of the company. âAlthough diversity is recognised as a value in itself as a manifestation of fundamental democratic values of liberty, equality and justice, in the corporate governance context, however, many of the contemporary debates about the value of diversity in the board of directors approach this concept in an instrumental way. Diversity is analysed as a means to another end, such as improved employee productivity and morale, higher customer satisfaction, or higher shareholder valueâ (Shin & Gulati, 2011).
Increased representation of women on boards improves corporate governance by introducing broader knowledge base and experience. The new perspectives brought on board by females contribute to alternative solutions to the problems, prevent pre-mature decisions and help develop creative and innovative solutions to the problems of the day (Pletzer, Nikolova, Kedzior, & Voelpel, 2015).
The business case for diversity which supports increased female representation on boards argues that women introduce useful leadership qualities and skills in the boardroom. These include risk averseness, less impulsive decision-making and more sustainable investment strategies. Another view says that female leaders fulfil their leadership role in a more transformational way through their encouraging treatment of colleagues and subordinates. Further, they value their board responsibilities higher than male directors, which is associated with effective corporate governance (Terjesen & Sealy, 2009).
Aaron Dhir in his book empirically investigates the important role diversity can play in enhancing corporate governance in Norwegian boards. He highlights this through a qualitative study that gender diverse boards bring diverse views which provide a wider perspective to decision-making process. He further goes on to add that female presence on boards enhances cognitive diversity and constructive conflict in the boardroom. Women are more apt to critically analyze test and challenge received wisdom. In doing so, they appear to have harnessed for their boards the value of dissent, a key driver of effective governance (Dhir, 2015).
The world is driven by innovative ideas and ingenuity. The World Economic Forumâs Corporate Gender Report, 2010, highlights that âInnovation requires new ideasâand the best ideas flourish in a diverse environment. This means that companies benefit by successfully integrating the female half of the available talent pool across their internal leadership structures.â A study conducted by Development Dimensions International, a Pittsburgh-based human resources consulting firm shows organizations that reported better financial performance than their competitors had a higher percentage of women in leadership positions (Boatman, Rich, & Neal, 2011). Women leaders foster a better environment and introduce strong team orientation into organizational culture. Studies show that women leaders are more loyal to the organization, bring greater stability and are less prone to attrition (Financial Express, 2017). Women in top positions are more adept at bringing creativity and innovation to the organization.
A study of social responsiveness of a corporate firm also indicates that women directors are more oriented towards discretionary elements of corporate responsibility than men (Ibrahim & Angelidis, 1995). Female leaders tend to exhibit more positive attitudes towards the adoption of an ethics code in their organization and hold more confidence that the ethics code will raise moral standards in their business operations (Ibrahim & Angelidis, 1995). This stems from the fact that women are more empathetic and caring than men.
Landscape of Gender Diversity Across the World
Despite significant progress towards gender balance in many Western countries, women still remain under-represented in many fundamental positions across the world. It is difficult for women to work their way up in the corporate ladder (David & Amalia, 2013). When they do participate and voice their opinions on critical issues, they are told in no uncertain terms that their presence on the boards is just a governance requirement, and they are a mere signing authority (Nath & Deepika, 2000). United Nations Women Empowerment Principles (2010) include establishing High Level Corporate Leadership as one of the seven principles for gender equality. International Financial Corporation of World Bank promoted increasing gender diversity as part of their overall corporate governance work. Over the past decade, countries in Europe, Asia and Africa have taken a more proactive approach to gender diversity on board. Responding to the global call for increased women representation, many countries took the lead. The earliest attempt to bring quotas through legislation took effect in the year 2003 in Norway. Non-compliance of this resulted in delisting and dissolution of the company. Currently, there are around 14 nations and provinces that have legislated/regulated quotas for public companies and state-owned enterprises. In less than ten years, countries such as Finland, France and Sweden have made significant progress. In 2010, France made 40% reservation for women on boards compulsory for its largest companies, whether listed or not, the breach of which would cause for the suspension of the directorsâ fees. A recent survey reveals that France now has 29.7% of women directors in their companies (Women on boards, 2014). European Parliament approved European commissionâs proposal to improve gender balances in company boards. This shows that various countries have adopted different routes to ensure gender equality in company boards. âBroadly the following are the measures taken across the world: Quotas (India, Norway and Belgium), disclosure requirements (Australia, U.S. and New Zealand), setting voluntary targets (the UK is) and encouraging voluntary efforts (Canada and Poland are examples). The penalties for non-compliance range from dissolution of the company in Norway, to pecuniary sanctions, to name and shame measures, to no set penaltiesâ (Kamalnath, 2015).
Effect of Female Leadership on Social Outcomes
Leadership of women not only contributes towards greater organizational efficiency but also has an impact on the society, in general. World Bank in its 2012 report points out that gender equality is correlated with greater economic productivity and national wealth (Kumra, Simpson, & Burke, 2014). Womenâs representation in high-level positions leads to gender equality as it boosts the inclusion of other females in the leadership positions. Various studies reveal that more women in top-level management correlate with increased participation of women in lower-level management. Also, women are rated better as bosses by their peers. Women directors can inspire others and can play an important role in the identity development of other executives below director level watch and learn what to do and what not to do from them (Sealy & Singh, 2006) âThe presence of female directors symbolises career possibilities to prospective recruits, and also contributes to increased retention of womenâ (Bilimoria, 2000). Also, since women directors are appointed on boards with much publicity and fanfare, they become symbols of change and empowerment resulting in changed perceptions about their role in the society. Womenâs presence as directors signifies that they play a full part as citizens of the society and organizations. However, for them to participate fully in the society, an appropriate environment needs to be created so that they may voice their opinions fearlessly. âThe number of women on Top Fortune 500 companies is positively linked to the number of women officers, number of women holding line management jobs, number of women holding high-ranking titles, number of women in the top earners of the company and a critical mass of women officersâ (Bilimoria, 2006).
A recent study of Harvard Law School on Corporate Governance shows that companies with more women on board enhance the environmental, social and governance performance of the firm and have greater insight into issues driving key stakeholder behaviour. The study further highlighted that women who sit on boards contribute in a host of ways by improving customer responsiveness, ethical accountability and risk management (Cristina & Gabriel, 2018). Women directors also hold their directorial responsibilities in higher regard which is associated with effective corporate governance (Terjesen, Sealy, & Singh, 2009).
In sum, increased women participation in boards has a number of strategic advantages as they bring desirable leadership skills and diverse perspectives to the boardrooms.
Gender Diversity and India
Women in India have come a long way from the traditional roles given to them. They have been fighting stereotypes in the business community. Ours is a country that worships Goddess Kali but shuns the girl child. A girl in India with any trace of ambition has a long road ahead of her. The society throws many challenges at her right from the start but with grit and determination, many women have risen the corporate ladder and have gone on to occupy important positions in the boards.
The traditional Indian society prevented womenâs participation in the mainstream, their roles were largely confined to home and hearth. Gender bias, illiteracy and patriarchal society ensured that their condition remained pitiable even amongst the most sophisticated ones (Kaila, 2005). The corporate sector of the country also did not remain untouched by this. A close look at the top companies of the country clearly reflects the strong bias against women. The law governing corporates seldom gave women any resources to reach their full potential. Keeping them contented with soft jobs by giving them uncomplicated tasks seems to be the broad opinion in companies (Terjesen et al., 2009). The law on companies, that is the Companies Act, governed the formation, functioning and dissolution of companies till 2012 since the laws governing companies had become obsolete. The Companies Act, 2013, was introduced to regulate the functioning of the companies. âOne significant departure of the new Act from the old one is the provision for mandatory inclusion of at least one woman on the Board of Directors in certain class or classes of companiesâ (Tadwalkar & Vedula, 2015). It provides for a remarkable provision in Section 149(1) which says that âsuch class or classes of companies as may be prescribed shall have at least one-woman director. Prescribed class according to Rule 3(1) of the Companies (Appointment and Qualifications of Directors) Rules, 2014 includes every public company other than the listed companies, having a paid-up share capital of Rs. 100 crore or more or turnover of Rs. 300 crore or more a...
