India had a functional and an active stock market since 1875 unlike most of the other developing nations, but with a virtually non-existent corporate governance structure with instances of inconsistent disclosure, ineffective boards and diversion of funds by insiders (in the form of owners diverting funds for private benefits) until late 1990’s resulting in primary reliance on either internal or government funding for firms.
Corporate governance reforms were introduced for listed companies in India to facilitate capital needs among other things with the promulgation of a new clause, Clause 49, of the listing agreement with Indian stock exchanges by Indian securities market regulator, Securities and Exchange Board of India (SEBI). Now Clause 49 has been repealed by SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015 for new governance norms as well as to impose penalties for its non-compliance.
The enactment of new companies act 2013 and its subsequent notifications has further strengthened the corporate governance structure for all classes of companies in India and mandated among other provisions the inclusion of at least one woman director in the board composition. This provision was subsequently also included in the revised Clause 49 to align it with the Companies Act 2013. Our study is motivated by this new provision in the Companies Act as well as in SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015, mandating minimum gender quota in India and its impact on the corporate performance. Without limiting ourselves to gender diversity, we intend to explore the association of all major forms of board diversity in the Indian context with the measures of corporate performance by examining a cross-sectional sample of listed companies.
The board of directors, often referred to as the board, is the highest decision making body in an organization. Board structure, of which diversity is one of the important dimensions, has the potential to have a substantial influence on the board actions and thereby corporate performance in line with the corporate governance theory.
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/nonresident 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.
This project aims to set out the approach and awareness among all the companies to ensure adequate diversity in its Board which eventually enhances the quality of its performance.
Among all diversity factors, gender arguably remains one of the most long-standing and debated elements of board composition. Furthermore, gender remains one of the most significant governance issues faced by managers, directors and shareholders of the modern business world. There are a series of competitive benefits for a corporate which considers employing women on the board of directors. Authors have found that women have a more in-depth knowledge of the consumer market and customers, as well as women being not only innovative, but also highly socially and community minded. Also there is a significant effect on the performance of a company for a mixed gender board compared to a board with no female representation and that involving women in the board leads to potential benefits for the firm. It has been found that the situation of women participating on company boards is improving and that the percentage of female directors is growing. It can be seen that although there are regions with a small percentage of female representatives, a diverse board in terms of gender suggests an increase in the financial and organizational performance of a firm.
In India, the study reveals that the Board of the corporates, run by directors and KMP with a mix of both men and women, helped Return on Equity (ROE) rise over the years in contrast of a similar company with the men only Board. Certain examples are Chanda Kochhar, who heads ICICI bank and Kiran Mazumdar Shaw, Managing Director and Chief Executive Officer of Biocon Limited has shown a positive difference on ROE.
The company’s management as well as career progression is highly dependent on having a board, which mainly consists of mature, experienced and older directors. It has been found that older or retired executives are commonly seen as the ideal candidates for becoming non-executive board members, thus are more likely to be selected for the boards compared to individuals who are less experienced and who are younger. The idea behind having older directors on the board of an organization consists of a series of underlying benefits for a company.
Additionally, successful planning based on the previously acquired experience will guarantee a sustainable development not only of the board members, but also of the lower divisions of an organization. A more recent study found that age diversity is still an emerging positive factor and has significant influence on the performance of a corporate.
In comparison to age and gender diversity, the educational background remains a puzzling piece in terms of having a significant effect on corporate performance due to relatively less research compared to other diversity dimensions. Notwithstanding the fact of comparatively less conducted research, several authors identified that the educational background is of important relevance when it comes to measuring the performance of an organization.
Hence, making educational diversity a crucial aspect for the board of directors, especially for the largest corporations in the modern business world. Furthermore, it has been found that a more educationally diverse board benefits the firm in terms of better decision-making, which is based on the case of the banking sector and the financial industry as a whole. Moreover, it was found that a corporate might benefit from having an educationally diverse board of directors in terms of faster and in-depth assessments of particular decisions, as well as addressing the potential information asymmetry issues between the board and senior management.
Corporates being wary that people with disabilities are capable of work and not been given equal opportunities to be appointed as an employee or as a director of the company.
From casual work to a career, the idea of work is a natural part of human behavior. It is simply the effort applied to accomplish a task, contributing to success and society. There is a need to recognize the potential of people with disabilities as they can make significant contributions for the success of the company.
For instance, companies such as IBM India Pvt. Ltd, Shell companies in India, HSBC India, E.I. DuPont India Pvt. Ltd, Tata Steel Ltd, Hindustan Unilever Ltd and Dr Reddy’s Laboratories Ltd have started hiring disabled people as part of their human resources policy of being an equal opportunity employer and increasing diversity in the workplace. The trend has since grown to include several other companies. However, there is also a need to appoint such people in the board of directors of the company which will lead to effective utilization of their potential and talent as well as making them feel their presence in the society.
LGBT individuals in India face a number of challenges – both in the wider community and in the workplace. Given the vastness and diversity of India, both as a country and as a society, it is dangerous to make broad generalisations about the experiences of LGBT individuals in India. One of the most fundamental challenges facing LGBT individuals in India, is that homosexuality is generally considered a taboo subject - both by Indian civil society and the government.
As stated earlier, India as a society is deeply conservative and tends to be bound by tradition, and as such, there is little open discussion of sexual matters of any kind at any level. With virtually no public education and little open discourse to facilitate greater understanding of the issues, homosexuality is either ignored, covered up, or treated as a disease. Homosexual behaviour is regarded by many as ‘abnormal’ and as such something that is either unacceptable or needs to be ‘fixed’ or ‘cured’. Consequently LGBT individuals face social stigma and are often ostracised from society.
There is a need to change the way LGBT individuals are being treated and to provide them equal opportunity to work in corporates and also to be appointed as the directors of the company as per their potential and caliber to work.
Board diversity can be promoted by a number of methods. Measures currently adopted by different regulatory bodies are generally classified into the following approaches:
Imposing quotas refers to mandatory requirement in appointing a minimum number of directors with different attributes on the board. This legislation enactment mainly deals with gender diversity to tackle the relative underrepresentation of women in the boardroom.
Another measure to enhance board diversity is through transparency and disclosure. Companies, under corporate governance codes, are required to disclose their diversity policy in appointing directors so that investors and stakeholders can make proper evaluation. Those who fail to implement such measures have to explain their non-compliance in the corporate governance report or equivalent.
The Board of Directors (BODs) is entrusted with overall direction and management of the affairs of the company. In performing these functions the directors are bound to comply with the provisions of the Companies Act, 2013 and SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015 and to perform general and specific duties imposed on them by the Articles of Association of the company. The performance of BODs is a deciding factor for the corporate governance.
Board composition is one of the most important determinants of board effectiveness. Beyond the legal requirement of minimum directors, a board should have a judicious mix of internal and Independent Directors with a variety of experience and core competence. The potential competitive advantage of a Board structure comprising executive directors and independent non-executive directors lies in its combination of – the depth of knowledge of the business of the executives and the breadth of experience of the non-executive/independent director.
As per Companies Act, 2013, the board of directors of the company should comprise of following directors:
As per Second proviso of sec 149(1), the following class of companies shall appoint at least one woman director-
As per Section 149(3) every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.
Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe* the minimum number of independent directors in case of any class or classes of public companies.
*Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 provides that Following class or classes of companies shall have atleast two directors as independent directors
As per Section 149(6) of the Companies Act,2013, An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—
An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
As per Regulation 19(4) of SEBI(LODR)Regulation, 2015: The role of the nomination and remuneration committee as specified in Part D of the Schedule II, provides that the Committee has to devise a policy on diversity of board of directors.
As per Regulation 17 (1) of SEBI (LODR) Regulations, 2015:
Provided that where the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of board of director or at one level below the board of directors, at least half of the board of directors of the listed entity shall consist of independent directors.
A Board of Directors that has a good mix of members with age, experience, and youthful perspectives balances the insight and experience that comes from older board members with longer tenure with the new ideas introduced by younger and perhaps less experienced directors. We need leaders who are focused listeners and who encourage all board members to participate. The quiet member, who has been put on to a board for an important reason, should not be allowed to languish. The leader must demand contributions from each and every member. The leader can literally count the contributions, and when someone is hiding out, their opinion must be gently sought out.