Corporate governance is the essence of a company’s strategy and it is the company’s board of directors that helps to ensure corporate governance and create long-term shareholder value. The effectiveness of this board becomes extremely important in such a case, and the effectiveness depends on what this team is composed of. It is a common understanding that any decision that involves a diverse set of people in terms of age, gender, educational backgrounds, skills, sexual orientation, etc. is sounder than a decision that involves similar and like-minded people. Pooling of a varied set of capabilities brings about fairness and effectiveness of any organization, and the same holds true in context of Board of Directors in a company.

The board of directors of a company is entrusted with the responsibility of management oversight, thereby ensuring fairness and transparency in the company’s operations to protect various stakeholders’ interests. There are provisions in the Companies Act 2013 with respect to quality, size, independence and diversity of the board. Let’s delve deeper into the concept of Board Diversity. Board Diversity would mean heterogeneity in the board in terms of various demographic parameters viz. age, gender, educational and professional qualifications, skills, personality, functional expertise etc.

Since the main objectives of every business are to make profits and to create shareholder value, let’s try to understand if board diversity can help accelerate that. In a 2018 report, McKinsey observed that the companies that had greater ethnic and gender diversity in their boards showed higher profitability. The attributes which were impacted by a more diverse board recruitment were identified as Talent recruitment, Innovative decision making, Employee satisfaction and Customer orientation. (McKinsey, 2018). A 2021 study which tried to gauge the impact of gender diversity in the board on the firm performance of S&P 500 companies from the IT sector, showed that relationship does exist, but only through one regression method. When the same relationship was evaluated through another regression technique, there was no impact of board diversity on the accounting performance but a positive impact on the market valuation performance (Simionescu, 2021). Likewise, conflicting results were gathered on review of other similar studies. So, if a definite relationship between board diversity and firm’s profitability can’t be established, why are the governments across the world pushing for a diverse board?

There is emphasis on the board diversification in the law because such a practice certainly adds to stakeholder confidence and leads to better corporate governance. There are various reasons which can explain as to why board diversity could lead to better overall corporate governance.

Firstly, it enhances the pool of knowledge and resources in a board. It can bring in valuable insights to different aspects of company’s management- such as corporate finance, marketing, pricing, supply chain, information technology, sustainability etc. It can also bring in much needed contacts from board members’ strong industry connects.

Secondly, increasing the board diversity can be seen as an effective way to nip corporate scams in the bud. For a long time, we have witnessed corporate scams in India and abroad. For a long time, we have witnessed corporate scams in India like Satyam, Kingfisher Airlines, Jet Airways, Punjab National Bank, YES Bank, PMC Bank etc., all of which have destroyed investor confidence and created financial stress. A diverse board tends to challenge the top executives constantly, thereby reducing the probability of such scams.

Thirdly, having a diverse board helps to introduce more perspective in decision making. It would prevent a ‘groupthink’ environment, which is a common phenomenon wherein a homogenous group reaches a consensus without critically evaluating a decision. More disagreements and counter questions would help in better monitoring of the company’s top management, which is an important characteristic of a good board.

Fourthly, a diverse board would help to foster creativity in the decision-making process due to different expertise, preferences, risk appetite etc. This creativity is needed while dealing with company’s reputation and compliance risk-related decisions. For example, the ways an oil and gas company can reverse its perceived image of causing environmental damage, ways to alleviate workplace discrimination and ensure workplace safety to avoid fines and penalties etc.

Fifthly, more board diversity will enable a wider stakeholder connection, which is the main purpose of a board in the first place. If a board has directors from different walks of life, they would be able to understand the underlying needs and aspirations of various stakeholders like the government, media, markets, and general public. This is particularly important for consumer-facing industries like FMCG, Telecom, BFSI, Travel, Pharmaceuticals etc. For example, 70 to 80% of all consumer purchase decisions in the world are made by women, so having more women directors in D2C businesses may be helpful.

Sixthly, it improves the merit of the board because the board selection is made from an even wider pool of candidates. For example, if management removes the bias that every board member needs to be a former CEO, companies would get access to a wider and more talented pool.

Last but not the least, having a diverse board can have a favorable impact on the company’s reputation because it sends across a message to the public that the company promotes representation from diverse backgrounds. Such a company’s management is projected as a responsible corporate citizen that aims to serve the community better.

Board diversity can be ensured through imposing minimum requirements with respect to the number of directors from a particular demographic. There are provisions made for a certain class of companies (listed, public, with a paid-up share capital of at least Rs. 100 crores, with an annual turnover of at least Rs.300 crores) in sections 149,151 and 152 of the Companies Act 2013. For example, for gender diversity, companies must have at least one women director on their board ((ICSI), 2013). Furthermore, for resident diversity, there should be at least one director who has stayed in India for total minimum 182 days in previous calendar year ((ICSI), 2013). Besides, having at least one-third independent directors adds another layer as it ensures independence of the diverse board ((ICSI), 2013). Furthermore, the Nomination and Remuneration Committee which carries out directors’ performance evaluation ensures that the board diversity is enforced in the best way possible ((ICSI), 2013).

Despite the extreme relevance of board diversity and mandate by the law, not all companies have been able to make their board fully representative and inclusive. For example, women's representation in the board has risen by only 9.4% in 2021 from the time mandatory provisions were made in Companies Act 2013 for companies to have at least one women director in the board (Deloitte, 2022). As per Deloitte Global's Women in the Boardroom report published on 8th February 2022, only 17.1% of the board seats in India are held by women. The number of women taking up the CEO positions currently stands at a mere 5%, a rise from 3.7% in 2018; suggesting that we still have a long way to go in achieving the near-parity gender representation in India (Deloitte, 2022).

Apart from the legal requirements, it is important that the company’s management establishes its own goals in managing board diversity. Board diversity should not just meet the minimum stipulations as per law, but should rather be based on specific needs of the company as well as the expectations of the key stakeholders, which would be unfolded through scanning the internal and external environment of the company.

After company-specific needs analysis, it should be ensured that all diverse characteristics are taken into account while choosing a board, and not just some basic demographics like age, gender, race, etc. Having diverse backgrounds, experience and skillsets also adds to the achieve positive outcomes. For example, for a pharmaceutical company, the board should not just comprise of directors with pharma experience, rather a wide industry experience is desirable. Furthermore, enough comfort and autonomy need to be given to all non-executive and independent directors to share their points of view during boardroom discussions, so that benefits of a diverse board can be realized fully.

Thus, having a diverse board of directors is extremely relevant in the contemporary world. This diversity- which is manifest in terms of diverse gender, age groups, ethnicity, sexual orientation, educational backgrounds, professional experience, skillsets, capabilities, etc. helps to enhance the knowledge and resource base, prevents scams, brings new perspectives, fosters creativity, helps in better stakeholder connection, brings merit and improves company reputation. Thus, the need of the hour is to make board diversity a strategic priority.

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