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To Quota or Not to Quota: Are Gender Diversity Quotas Merely Symbolic?

Even though the roots of corporate governance can be traced back to Adolf Berle and Gardiner Means in the 1930s, the area finally emerged in the 1970s. Corporate Governance is a patchwork regulation system developed over a period of time through public and private policymakers and what is deemed to constitute as successful corporate governance.

Over decades, the world has seen constant and radical change of how the boards of companies fundamentally functions by the way of legislation and amendments. The practices for good governance emerged and were heavily discussed.

The structure to the board being one focal point amidst many, the ASX Corporate Governance Council recommended[1] that to add value, companies should have a board with an effective composition, size and commitment so that it can adequately discharge its responsibilities and duties as boards are a critical component of improving corporate governance making board diversity integral.

A diverse board enhances the performance, and ultimately aims at cultivating a real-world perspective which reflects the demographics. Board diversity can be broadly classified into demographic diversity which consists of gender and race and cognitive diversity with includes education and experience; this paper focuses more on demographic diversity. [2]

Undeniably, merit has always been basis of for board appointments. So, do quotas undermine merit? And is the quota system essentially anti-meritocracy?The quota system has been inculcated in corporate governance with the aim of advancing women into boardrooms with the objective of correcting the present flawed promotional system and turns it into meritocracy.[3]Quotas have evidently been successful.

In 2003, Norway became the first country ever to introduce a Corporate Board Quota (CBQ) of 40%. When introduced, there were only 7% of women board members in the country, by 2008, the goal of 40% was almost achieved. Following suit, by 2018, 10 European Countries has also introduced CBQ. Conclusively debunking the myth of quotas undermining merit. [4]

Boardroom Gender Diversity Quotas and Tokenism
The harsh reality is that women are still underrepresented and underpaid, resulting in a lopsided gender balance in corporate leadership.We live in an age where gender diversity in the boardroom has become an imperative factor for effective corporate governance. Ethically, it is wrong when an individual is qualified to hold a position and is denied the same on the ground of gender.

The presence of women on corporate boards not only combats systemic discrimination but also tackles low representation of women. Moreover, a diverse board have a direct impact on the organizations performance and decision making by fostering innovation and creativity through the fresh problem-solving approaches and perspectives, making gender diversity an important factor in determining whether the company is well governed or not.[5]

While several studies support that women on the boards lead to better governance through diverse thinking, knowledge and experience; many argue that there is no direct no correlation between diversity and company performance.

The quota for gender diversity has undeniably become a significant aspect for promoting gender equality in boardrooms. But is it merely at face value? A range of diversity in the boardroom certainly brings in people of different backgrounds, skills and perspectives; enriching the quality of decisions made.

For gender quotas to achieve their purpose as an internal corporate governance mechanism, the appointment of a well-qualified women who bring a valuable perspective to the board is essential, but this can be problematic when the quotas are filled only for the purpose of tokenism.[6] This phenomenon leads to women tumbling down a glass cliff instead of reaching new heights and truly breaking the glass ceiling. [7]

With the rise in the implementation of feminist policies in the corporate world, the chances organizations only complying with the quota mandate to conform with the regulations and vis a vis maintain a positive image in the market are have risen. Defeating the very purpose of the quota system and instead be at risk of tokenism. Resulting in, the selected female members not being selected on merit but rather only to fulfill the statutory quota; making their appointment less legitimate in the eyes of the rest of the board members. Moreover, female board members, especially independent members, are more likely to be side-lined from board committees so as to limit the extent of their presence in internal board processes.

The Indian Scenario
In 2013, the Companies Act made it compulsory for all publicly listed firms to have at least one-woman director.Section 149(1) of this Act aimed to improve the representation of women on corporate boards. Out of the top 500 organizations, ranked according to market capitalization on the National Stock Exchange (NSE), only 303 (60.6%) had no women on their board in 2013 and were required to appoint at least woman director by 2015. By 2017, at least one-woman director was appointed by 82.8% companies and 13.6% had appointed two or more women to the board.[8]

However, even after the appointment of one-woman director, India fails to meet the required critical mass. Critical mass is a percentage or number representing a minority in contrast to token seats. Unlike other countries, who have a fixed percentage of women occupying seats on the board, India has reserved only one seat. A lone woman director, in comparison to a group, cannot make substantial contributions and overcome gender barriers and may also face stereotyping.  It takes at least 3 women to achieve critical mass and have a fundamental impact on enhancing corporate governance.[9]

With only 13.6% companies with more than one woman director, India has failed to imbibe these regulations in the right perspective and more so to escape strict punitive measures, reducing their position to that of a buffer. Moreover, it has been observed that to meet the requirements, companies many a time appoint women with political affiliations or family ties.

Taking this into consideration, the Securities and Exchange Board of India (SEBI) in 2018 mandated the appointment of independent woman directors on the board of top 500 listed companies to curb the practice of the board appointing their own relative as a puppet to comply with the mandatory requirements. This change further ensures effective governance by ensuring gender equality in the nascent stage.[10]

Yet, all challenges have not been resolved and the lopsided male domination in the corporate world still prevails due to the limits of corporate transparency hindering substantive change.

Conclusion
While some countries like Norway have experienced the Golden Skirt Phenomenon and achieved their objective through the quota system, a majority of countries are facing complications which are defeating the very aim of the quota. Some studies argue that soft laws instead of hard laws may be a better solution.

Soft laws enable voluntary systems instead of mandatory quotas which enable more autonomy and flexibility to the organization. The United Kingdom allows organizations to formulate their own policy, set targets and disclose outcomes. Australia and Netherlands allow companies to either comply with the country's diversity targets or justify their non-compliance.

Such a shift may be required in the near future as diversity in boardrooms is now slowly expanding to include LGBTQ oriented diversity. A LGBTQ oriented board can help bring a new perspective to the table, which makes structural changes exigent to shatter the glass ceiling.

Lastly, a board consisting of individuals from different backgrounds ensures protection of the shareholder's interest as there is a higher probability of efficient decision making and performance due to the expanse of knowledge, skill and experience of the board members. Making the company economically prosperous and ultimately increasing the company's value. Suggesting that board diversity does in fact positively impact the relationship between governance structure and corporate performance.

End-Notes:

  1. Corporate Governance Principles and Recommendations, 4th Edition (February 2019), https://www.asx.com.au/documents/regulation/cgc-principles-and-recommendations-fourth-edn.pdf
  2. Rita Goyal , Nada Kakabadse , Andrew Kakabadse, Improving corporate governance with functional diversity on FTSE 350 boards: directors' perspective, Journal of Capital Markets Studies, https://www.emerald.com/insight/content/doi/10.1108/JCMS-09-2019-0044/full/html(August 24, 2021, 9:00 pm),
  3. Madeline Taylor and J. F. Corkery, The gender gap: A quota for women on the board, https://www.researchgate.net/publication/309121318_The_gender_gap_A_quota_for_women_on_the_board (August 27, 2021, 9:30 pm)
  4. Heike Mensi-Klarbach and CathrineSeierstad, Gender Quotas on Corporate Boards: Similarities and Differences in Quota Scenarios, European Management Review, https://onlinelibrary.wiley.com/doi/full/10.1111/emre.12374(August 15, 2021, 8:15 pm)
  5. James OladapoAlabede, Effect of Board Diversity on Corporate Governance Structure and Operating Performance: Evidence from the UK Listed Firms, Asian Journal of Accounting and Governance, 67–80 (2016), https://core.ac.uk/download/pdf/96113661.pdf (August 15, 2021, 7:00 pm)
  6. Tanvi Apte and Nishtha Goyal, Corporate Board Diversity: A Critical Examination of Mandatory Inclusion of Women Directors, IRCCL, https://www.irccl.in/post/corporate-board-diversity-a-critical-examination-of-mandatory-inclusion-of-women-directors(April 25, 2021, 10:15 am)
  7. Katica Roy, Setting Up Women to Fail: The Glass Ceiling, Glass Cliff, and Golden Skirt, https://katicaroy.medium.com/setting-up-women-to-fail-the-glass-ceiling-glass-cliff-and-golden-skirt-50681f3e237 (July 20, 2021, 9:30 pm)
  8. Ruth V. Aguilera, Venkat Kuppuswamy and Rahul Anand, What Happened When India Mandated Gender Diversity on Boards, Harvard Business Review, https://hbr.org/2021/02/what-happened-when-india-mandated-gender-diversity-on-boards (April 23, 2021, 5:30 pm) 
  9. Ayushi Agarwal, India's 'One Woman Quota' on Board of Directors Fails to Bring About Gender Equality, Oxford Human Rights Hub, https://ohrh.law.ox.ac.uk/indias-one-woman-quota-on-board-of-directors-fails-to-bring-about-gender-equality/#:~:text=India's%20law%20mandating%20quotas%20for,to%20achieve%20its%20desired%20objective (April 24, 2021, 8:00 pm)
  10. Gagandeep Singh, Corporate Governance: An Insight into the Imposition and Implementation of Gender Diversity on Indian Boards, SageJournals, https://journals.sagepub.com/doi/full/10.1177/0974686220930839 (April 24, 2021, 9:00 pm)

Written By: Saiesha Dhawan, B.A.LLB (2017-2022) GLSLC

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