Are Regulations Mandating Board Diversity Helpful?
The regulations mandating gender diversity has several important ramifications. First, a large portion of new additions of female directors on the boards of Indian firms after the enactment of gender quota has been to the pool of non-independent directors
The regulations mandating diversity on corporate boards of Indian firms have primarily come in two forms. The set of regulations that were introduced in early 2000’s mandated a minimum proportion of independent directors on the boards of listed firms among several other things.
These regulations, as well as the subsequent sanctions for non-compliance with them, were first imposed on listed companies through Clause 49 of the listing agreement with stock exchanges.
Later on, most of these regulations have also found a place in the Companies Act, 2013. It has increased the structural diversity of corporate boards in India by ensuring a good mix of independent and non-independent directors. Several empirical studies have found these regulations value-enhancing for firms.
Another set of regulations aimed at enhancing gender diversity on corporate boards was introduced first through the Companies Act 2013, and it has mandated the inclusion of a minimum of one female director on the board of an Indian firm among other provisions.
The regulation on mandatory gender quota has subsequently also been incorporated in Clause 49. Although this regulation has increased the gender diversity of Indian boards significantly, there are still over 60 companies listed on National Stock Exchange (NSE) that do not have any female director.
The regulations mandating gender diversity has several important ramifications. First, a large portion of new additions of female directors on the boards of Indian firms after the enactment of gender quota has been to the pool of non-independent directors.
In fact, if media reports are to be believed, around one-fourth of the newly appointed female directors are family members of the promoters. This indicates that a large chunk of companies has adhered to the regulations only in the letter of the law and not necessarily in the spirit of the law.
Additionally, even if the newly appointed female directors are independent, the regulation is likely to have increased their busyness in terms of the average number of companies’ boards they serve on.
This is mainly because India has a limited pool of female directors with the right kind of expertise, and companies which appoint female directors in independent positions have to make a decision mostly from within this pool. The increase in the busyness of female directors may take a toll on the effectiveness of these directors.
It, therefore, remains an open question if the regulations mandating gender diversity on corporate boards of Indian firms has been any beneficial. Only time will answer this question.
(This article is co-authored by Varun Jindal, a FP student at IIM-Calcutta)
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