ONE WOMAN DIRECTOR MANDATE: LOOPHOLES AND TOKENISM
This Article has been authored by Harsh Pati Tripathi, a second year law student at NALSAR, Hyderabad.
Section 149 of the Companies Act, 2013, read with Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, says that any company with a paid-up capital of more than one hundred crore, and an annual turnover of more than three hundred crore must have at least one-woman director on board. The Government had stipulated that the deadline of appointing at least one-woman director was one year from the date of enforcement of the Act. The measure was intended to tackle the underrepresentation of women in the corporate domain, and encourage gender diversity. However, the same stood out to be a victim of loopholes and tokenism. The article looks into the backdrop of this legislation and discuss why it was imperative to have such a provision in the act. Further, it elucidates the employment of let-outs by companies that were deleterious to the intent of the measure, and where the country stands with respect to the implementation of this rule.
History behind the measure
The one-woman director rule was first brought up in discussion in the Companies (Amendment) Bill, 2003, after it was proposed by Naresh Chandra Committee in 2002. This rule was resented by many, and it did not become a subject of deliberation for many years. It was brought up again in the Companies Bill, 2011.
The one-woman director mandate was a culmination of various corporate governance proposals in India and abroad that advocated for gender diversity on company boards. For instance, the Davies Report in the United Kingdom supported gender diversity on board, citing various studies that had suggested women helped to improve the overall performance and efficiency of companies as they provided better insights on decision making processes. Also, the Higgs Report submitted by British Department of Trade and Industry suggested that gender diversity on the board of a company enhanced the effectiveness of their undertakings.
The discussions on women as board directors has not been limited to the west. In 2010, Community business, a non-profit organization, along with Standard Chartered Bank, brought out a report on women on boards in corporate sector of the leading companies on Bombay Stock Exchange-100. The report suggested that India lagged far behind companies from the United Kingdom and the United States of America, as far as representation of women on board is concerned.
Unsurprisingly, India is not the first country to have introduced a provision of this kind. In 2003, Norway became the first country in the world to introduce mandatory representation of women on company boards, mandating forty percent of directorial positions on company boards to be held by women. The measure had a substantial impact on the country’s corporate governance model. Studies have shown on several occasions that gender diversity on board and growth in company’s performance are inter-related. In a study, it was shown that firms with at least one woman director on their board did better in terms of income growth as compared to firms with no female on their board. Further, companies with a market capital of more than $10 billion with a female on board had a twenty-six percent higher share price performance as compared to companies lacking the requisite representation.
The imperativeness of mandating women representation on company boards is not limited only to utilitarian or practical utility. It was all the more crucial to address the existing structural inequality that denied them the requisite representation in company leadership roles, that have been considered a “prerogative” of men. The measure was intended to be a blow on such conceptions, and ensure a level playing field for women in the corporate sector. However, the reaction to the same projected the entrenched sexist narratives in the corporate domain.
When the law came into force in 2013, it faced stark opposition from numerous Indian companies. The crux of the argument made by these companies was that appointing a woman director by all the companies was impractical. They also argued that the appointment of a director should be based on qualifications and talent, and not gender. Also, The Federation on Indian Chambers of Commerce and Industry (FICCI) opined that competency of an individual should be the basis of board make up, and not gender. These rationales were particularly inconsequential as there is no dearth of well-qualified women, more than capable of holding such positions.
Those in favor of the policy, notably well-known corporate governance experts, rebutted that there were important moral and societal justifications for coming up with this policy.
Eminent academicians argued that this policy should be accepted with a broader societal outlook, as this legislation aims at equality and inclusivity. The government had brought out this policy with the intent of increasing representation of women. The then Corporate Affairs Minister, Sachin Pilot, said that there was a lack of substantial representation of women in directorial positions. He further opined that women had done enough work to prove what they are capable of and that this policy was just the first of many more to come, and that he believed companies perform better if they have a female at high managerial level. He also supported the bill when criticized for promoting tokenism.
While the intent of the measure is not the prime concern, allegations of tokenism are not entirely unsubstantiated.
Loopholes and Tokenism
The policy, even though brought out as a crucial reformative measure, did not get the due compliance, or rather the reform it had aimed to seek. It merely served as a tool for tokenism – most companies following the mandate in order to escape penalties, or projecting their “moral high ground”. A good number of companies did not meet the deadline of April 1, 2015 for appointing a woman director. SEBI had to apply penalties as high as $3.9 million for further non-compliance with deadlines. After this, even though a fair number of companies had made the appointments; in most instances companies had appointed a female family member on the board. The first to lead such an action was Reliance, which appointed the company head’s wife, Nita Ambani, as the first female director on its board. It turned out to be a loophole in the implementation of the measure, and consequently many companies incorporated this approach. As of 2020, many of the top 1000 listed companies had complied with the rule, but the concern of non-inclusivity of women in corporate boards nevertheless, is legitimate.
Even though companies followed the policy (with loopholes or without), it was just in action and not with intent. It raises potential and perturbing questions. Would the companies comply if SEBI had not introduced penalties? What does the act of appointing family members project about the moral policies of these companies? Is gender so deeply entrenched in the corporate domain, that tokenism and loopholes is the answer to a well-intended policy? The policy was brought out to establish that holding higher managerial ranks is not the prerogative of one gender. However, the manner of compliance by many companies insinuated the contrary.
Upshots of the Policy
In a study conducted by Women on Corporate Boards (WCB) Mentorship Program, Institutional Investor Advisory Services (IIAS) and Prime Database Group, representation of women on boards of directors went up from five percent in 2012 to thirteen percent in 2017. This accretion in representation shows that companies, at least ex-facie, have complied with the measure, and have started appointing women to high managerial position.
However, this cannot be the only factor that decides the outcome of this policy. If we look at the ROCE, i.e., Return on Capital Employed, there has been an increase of five percent after complying with the one-woman director mandate.
There have also been a number of cases which have been brought to the court where non- adherence to Section149(1) was the issue. In a case before the National Company Law Tribunal, Nizam Deccan Sugars Limited failed to appoint a woman director to its board before the deadline, and had to face penalties of Rs. 1,25,000 in total. In another instance, Shakti Bhog Foods Ltd., failed to appoint a new woman director within a span of three months after vacancy and as a result, proceedings were initiated against it by the Registrar of Companies.
The policy has been effective on the surface, i.e., in increasing the representation of women in the higher ranks of corporate domain. However, it still requires substantial overhauls as far as bringing a real and apparent state of gender parity in the corporate sector is concerned. Even though companies have appointed female directors on their boards, many leading firms have indulged in tokenism just to meet the requirements of the rule and save themselves from penalty. This tokenism and employment of loopholes can be curbed. For instance, a minimum requirement for certain years of corporate experience can be mandated, requisite educational and training qualifications can be introduced, etc. Such measures can turn out to be potentially effective against restraining the appointment of family members. The Government brought out the policy keeping in mind the underrepresentation of women in corporate firms, and the measure proves to be promising. However, with respect to righteous implementation and pursuance of the underlining intent behind the same, there’s still a long way to go.