Before diving in to observe and understand the composition of women on the board of an organization, having a clear concept about corporate governance is the one important thing that should be done first.
In brief, it can be understood that corporate governance is like a set of rules and regulations that are formulated keeping in mind vast aspects of factors that affects an organization. The function of rules and regulations is to keep the business activities under control.
The corporate governance revolves around the organization’s welfare. It has set the policies and regulatory norms that are made by the board of directors so that an optimum level of productivity can be achieved along with the overall welfare of the organization, its employee, and society as well.
Now, let’s breakdown things for a better understanding of Corporate Governance and also will see the role of women in the formulation and implementation of the rules in an organization.
What exactly is corporate governance?
In simple words, corporate governance is a set of rules, guidelines, or policies that are framed for the smooth functioning of the business activities. It aims at controlling the process in which business functions take place while directing and guiding them.
Corporate governance is also meant for harnessing the balance between the different groups of people who are interested in the performance of the business. By different people we mean, the stakeholders, suppliers, government, and even employees.
The upper-level management and the board of directors are specifically more involved in the formation of the policies. Corporate governance is made for maintaining transparency between the associated with the organization.
Corporate governance is something that all types of the organization should apply. Because there is no negative side to having a set of rules, regulations, and policies, in the organization but the additive advantages are more.
What are the Principles of Corporate Governance?
Corporate Governance isn’t something that is formulated by a few people, it has set principles, which when followed yields amazing results for the organization. Some principles of Corporate Governance are:
By transparency, the organization should be able to provide all kinds of the necessary information to the group of people who are interested in the working of the firm. The stakeholders are the most important among them, and those organizations that keep their employees, stakeholders, creditors, and customers informed gains the confidence of the public.
Transparency in terms of operations, the next goal, and the problems that the organization is facingare necessary because it makes the people aware of the internal news. No transparency in an organization makes it difficult for the public to build a trustworthy relationship and confidence.
By accountability, we mean that the organization should take responsibilityfor the actions done by them. Corporate governance is not just a set of rules and regulations that are written in a book and kept aside, without its proper implementation and follow up, everything is a waste. Corporate Governance follows the principle of taking responsibility as it makes the organization appear as an attractive and genuine one.
An organization that deals with the concerns of its people are the one who attracts more investors. Accountability is one of the most important principles that should be followed in the organization as it is not about blaming others for something that went wrong but also taking responsibility and initiative in solving the issue.
When accountability comes into action, independence follows up along the way. When you give responsibility to a person for handling or taking care of a task, you also give them the freedom of taking minor decisions for the smooth working of the firm. Corporate governance is built on the principle of independence.
The board of directors also frames the limit within which the decision making can be done. The independence of the personnel to take decision boosts the morale of the person-in-charge as well. The quantum of independence given to a person in the organization is decided by the board of directors.
2. Why is Corporate Governance Beneficial for the organizations?
Corporate governance is something that is a major concern for big organizations. There are several benefits of having good governance of any business, because:
- It ensures the growth of the business and plays an important role in the long-term success of the organizations. Because efficient corporate governance of an organization brings along lots of different types of benefits along.
- Proper corporate governance helps in boosting the confidence of the investors because that leaves a positive first impression of the business. And more investors mean that the chances of getting funds from outside increases.
- Having good corporate governance helps in the reduction of wastage, mishandling, and mismanagement, along with minimized corruption. When the process and rules are set in advanced there is no dilemma of what should be done, which saves a lot of time for the organization.
- Corporate governance also helps in lowering the cost of capital. As the above-mentioned point states that having pre-set rules reduces any kind of trouble that is likely to incur in an organization. And when an extra expense reduces, it also helps in lowering the cost of capital.
- Having a formulated policy and process for daily operations in a firm leads to better management. The authority holders know every circumstance and that leads to the smooth functioning of the operations. Corporate governance also helps in taking care of the laws, because the government has also made some compulsions for firms of different sizes and types, which needs to be followed.
- Corporate governance is not only about having a set of rules and regulations that can help the smooth functioning of the organization. But today it has become a compulsion by the law. So for fulfilling the criteria set by the government for running an organization, having corporate governance will only reduce unnecessary hindrances on the path of a company’s success.
How the initial composition of the board is done?
Boards of Directors are those members of an organization who are involved with the top-level management. They are the highest level of members, who are like the brain of the organization. Some directors are responsible for handling different aspects of the business.
And when these directors sit together to discuss things, it is called as the board of directors. The board of directors comes into action when some big decision needs to be taken for the organization, or when a plan or policy needs to be formulated.
Coming to the composition of the Board of Directors of an organization; there are lots of important aspects that need to be taken care of during the initial composition of the board.
The numbers of directors are decided based on the company’s type. Like if an organization is a public company then the appointment of three directors is compulsory; in the case of a private company minimum of two directors are important, and one director is required for One Person Company (OPC).
There is a limit to a maximum number of directors that can be appointed and it is 15; for every new admission, a resolution needs to be passed. In some cases, the maximum limit of 15 directors can be increased.
An individual has the freedom of becoming a board of directors of not just one but 20 different companies, in India, according to the Companies Act, 2013.
Among the directors of the organizations, one director needs to live in India for at least 182 days in the previous year. And the appointment of a women director is a must by law.
For the listed companies at least one-third of the board of directors must remain an independent director.
The rules for the composition of the board of directors in a public company are different from the private ones, and they are required to go through some more steps.
The board of directors of the public companies should have 50% members as executive directors and the rest as non-executive directors. The appointment of 1 woman director is a compulsion by the law.
If the chairperson of the board of directors is a non-executive member then at least one-third of the members need to be an independent director.
According to the latest change, if an organization is one of the top 1000 or 2000 listed companies in India, then a minimum number of directors should be six.
Few committees are formed under the Board of Directors, and these are:
The Audit Committee of an organization should have at least 3 members. All the members of the audit committee must be well versed in finance. The two-thirds members of the audit committee should be an independent director, who can also be the chairman of the committee. The appointment of a company secretary is important for organizations.
Stakeholder and Relationship Committee
The stakeholder’s committee is formed for taking care of all the issues that arise concerning shareholders. It handles the issues or grievance related debenture issue and maintaining a good relationship with other parties. And the chairperson of the stakeholder’s committee has to be a non-executive director.
3. Nomination, Remuneration, and Risk Management Committee
This committee should have three non-executive directors as its member. The chairperson of the committee should be an independent director.
The risk management committee should be formed by the members of the board. A large number of board members are from the risk management committee. And the chairperson should compulsorily be a member of the board.
What are the changes in corporate governance over the years?
A Brief History of Corporate Governance in India
The evolution of corporate governance in India began very late. When India saw the emergence of LPG in 1991, the need of having a regulatory book in an organization became necessary. Liberalization, Privatization, and Globalization were implemented by India after the suggestion of the World Bank.
Liberalization focused on removing unnecessary hindrance that was present in India for doing business. It eased the process of doing business, all the paper works and license were reduced, and major emphasis was given to promoting businesses. Privatization focused on converting government-run organizations into a private one. And more emphasis was given to the private sector. Globalization taught India to be more open to the world market.
The initial phase of corporate governance began at the end of the 20th century. The economy of India was struggling to make the meets end, and only having self-sufficiency is the key to independent India. With the government encouraging the private sector, the rise of corporate governance began. Having a set code of ethics for all private and public sector was the main objective of the economy.
Slowly the rules for corporate governance in all firms began getting standardized. Later when companies started raising capital from the public, certain issues related to safeguarding their interests, transparency in the workings of the firm started arising. And that led to the birth of principles of corporate governance.
India’s corporate governance wasn’t formed in a day. It took years of trial and error for adding and making changes in the rules and policies. Let’s have a look at some of the landmark cases that forced the government in making some serious changes in the working of the corporate world.
Role of CII in 1996
Confederation of Indian Industries was the first governmental body to take part in the formulation of corporate governance. The major objective was to set up a code of conduct for all kinds of business types. It also took up the matter of public interest and small investors and safeguarding their interest as one of their priorities. The CII took a step further to maintain transparency in the organization and increasing the confidence of the public towards the corporate world.
Committee Report on Corporate Governance
Then chairman of SEBI, Kumar Mangalam Birla displayed concerns on the insider trading that happens at the stock exchanges. He suggested that listed companies should disclose their details in an organized manner.
The shareholders should be well aware of the functioning of the organizations and there should be no hidden facts. Later lots of other committees suggested new changes, in terms of the board of directors, financial aspects, relationship with other associated groups of people, etc.
With the slow rise of corporate governance in India, the changes were suggested over a decade. But as the process was rising, the early years of the 21st century witnessed some landmark cases that blew away the reputations of corporate governance. Few of the landmark cases are:
- Satyam Scam-One of the biggest scams of India happened in the year 2009 when the chairman of Satyam computer services announced that there has been a manipulation of the accounts. The scam was worth over INR 7,000 crores! The audit firm involved in the scam was Price Waterhouse Cooper who was badly defamed.
- Ricoh Case– This fraud was done just after the Satyam Scam and has a similar pattern as well. There were some serious account manipulation and stock price changes being made intentionally. The scam became a big example of the failure of corporate governance as only a few members of the organizations were involved in the corrupt act of presenting false data.
- Kingfisher airline– It is the most recent scams that have incurred and became a major landmark of failure in the field of corporate governance. The kingfisher airlines were owned by Vijay Mallya and he was an enthusiastic businessman of the country. He was keen on introducing a new element to the country. But as the airline went down to see a downfall, he went on to borrow loans from Punjab National bank. There he intended to bribe the staff of the banks to get loans of huge amounts, and there were lots of untraceable transactions. He ran away from the country with a great amount of loan and gave rise to a landmark failure.
Why women weren’t taken as a part of the board?
Before making new changes in the companies’ act 2013, the participation of women in boards was not considered an important aspect of corporate governance. As the law has made it compulsory for the companies to appoint a women director, the participation of women has increased since then. As the culture of India hasn’t much promoted the participation of women in the outside world, which forced the government in making amendments in the companies’ act 2013 for encouraging women.
Several reasonsare responsible for creating a hindrance in the path of women’s success. Even today women are required to break the glass ceiling for proving her self-worth. So let’s look at some reasons why women weren’t taken as a part of the board:
- The very first reason mentioned by the firms is that women don’t feel comfortable in the corporate environment. The corporate world has always preferred men over women, and it has been a male-dominated area. With the involvement of women in the workplace, the firm mentions that women don’t feel comfortable working in an environment that has men hovering all around. The working environment becomes uncomfortable for both the genders.
- Another reason why women aren’t preferred by the firm is the requirement put by the companies. The firm mentions that women aren’t competitive enough with the requirements of the job. Now it is something worth giving a thought, that if women won’t get the opportunities in the first place, how are they going to fulfill the experience criteria fixed by the corporate world. The opportunity of sitting on the board requires years of experience and effort, but for that, there should be growth for women as well.
- One of the other disappointing facts mentioned by the organizations is that they simply don’t want a women’s involvement in their work. It has been assumed that as women have been made a compulsion by law, so hiring them is like liability and that she won’t be experienced enough to be a part of boards. There are lots of factors that are responsible for this condition of women in the world, and one of them is male domination.
- Another excuse given by firms is that if there are experienced and capable women in the country, they are already appointed somewhere and they don’t have many options left. It sounds very lame, but it is a fact stated by many firms. You need to give women of your country a chance to rise and then look at the availability rate of capable women around you.
- The law made it compulsory to appoint a women director on the board, so that means if there is one woman and the organization fulfills the demands of the law, there is no requirement for other women directors on the board. The organization takes itself in a safe corner, and nothing more can be said to them. It’s like the organization had done their job of appointing one women director on the board, and they cannot do more favors by hiring more women.
- A simple way of avoiding more women directors in a firm is having no vacancy. Some organizations have a fixed ratio of employment criteria so that they can hire employees based on gender and nature of the work. Again the law comes into the picture as it mentions a minimum number of women that have to be in a firm based on the size of the firm. When the minimum requirement is fulfilled they stop hiring more women.
- Some firms have mentioned that there are very few women at the senior level. So we need to ask how such a situation arises. As mention in the above point, women are hired in a limited number just to fulfill the criteria of the organization, and there can be several factors why this pipeline shrinks moving further. There can be an uncomfortable working environment for women in the organization or simply the growth opportunities are less for them. The factors can be many but are responsible for slowing down the growth or else getting them out of the organization.
- One of the lamest reasons given by firms in the context of women is they cannot just hire women just because they want to. Now there can be many conclusions to the statement. The firms can show rigidity in terms of hiring ratio and policies, or simply they don’t want to appoint more women to the boards because the majority won’t agree to that.
What is the importance of having women on the board?
Women are capable of doing everything in the world, and with some favors from the government; they can rise to do something for the country as well. Having a woman on the board isn’t only a compulsion by the law, but women bring lots of other perspectives on displays that are not highlighted by the male-dominated board. Let’s explore the importance of having women on the board.
- Women have different life experiences and that sets up their thought process. They can think from a woman’s perspective and bring new ideas for considerations. They are more curious and would not make a decision they don’t understand. Women are built in a way that they ask questions and look through all kinds of pros and cons a decision can bring along with it.
- It may not sound real but companies with balanced gender have yielded more profits. According to a research public companies that have more women involved in their boards have yielded more productivity and growth in comparison to those who have a lower male-female ratio. The reports also mention that the involvement of women in organizations has led to lesser corporate governance issues.
- Coming to the collective intelligence part, when the capabilities of both the gender are combined the productivity rises automatically. The reason behind this is that there are few qualities that only one gender possesses and when both work together balancing the needs of the organization, the productivity is likely to increase.
- More involvement of women on the boards has attracted better investors. Again it sounds unusual but, it has been mentioned in the research. A gender-diverse board leaves its first impression on a positive note, it has also been believed by few researchers that the presence of women creates a positive impact on the investors and the relations of trust are formed easily. Whereas in the case of male board members the investors take time before making decisions because trusting the organization’s performance is a question for them.
- Another importance of having women directors on the boards is the ease of communication. By ease of communication, we mean that socializing isn’t an issue for them. Women who are charming and have good interpersonal skills are likely to impress and have a good relationship with the investors. The influencing power of women is high than that of men, and when used strategically success isn’t a far cry for the organization.
- Women directors are capable of building a better workplace environment. Because they know what causes discomfort to others and eradicating those issues are one of the first things they do. Having a good and comfortable workplace environment helps in boosting the productivity level, which is the most important thing an organization requires.
- Having women on the boards doesn’t just have one or two benefits, there’s a lot more. It is the nature of the women to have collaborative decision making and that collaboration builds up a cooperative feeling in the organization. A firm where all the directors are cooperative and coordinate at times is one of the important aspects and factors responsible for the company’s growth.
- Women have great leadership skills, which is one of the most important factors responsible for the growth of an organization. The firms need to give opportunities to women, to rise to the senior level for guiding the people in her team. It has been mentioned in several reports that women have great skills in terms of handling and managing a team apart from having effective communication skills.
Criteria for appointing women director
As we saw that having women director comes along with bundles of advantages, and hence knowing appointing a women director in an organization becomes an important part.
In India, the compulsion of appointing a women director in an organization came to be effective from the year 2013. In case you are wondering that there are several categories of companies present in our country, and if the appointment of women director is necessary for all, so let’s clear this confusion as well.
As per the companies act 2013, every listed company needs to appoint a women director on the boards. Next in the line is a public company, those public companies whose turnover is over 300 crores or more; and those public companies whose paid-up capital is more than 100 crores are required to appoint women directors.
There are no different roles and responsibilities of a women director on the board. She has to represent the organization while taking part as an independent director. A woman director can resign anytime she likes and her tenure as a director remains until the next annual general meeting conducted by the organization. The women director can be appointed at the time of registration of the firm or after the incorporation of the firm.
There are some requirements for the appointment of women directors and the first thing that is required for the women director’s appointment is the DIN number also expanded as Director Identification number.
In case there is a vacancy for the seat of a woman director this vacancy needs to be filled at the earliest note. And there shouldn’t be a delay in appointing a woman director if the next board meeting is about to arrive. The seat should not be left vacant for more than three months from the date of the vacancy.
The only loophole or a negative point that the new amendment has is that no specific punishment or penalty has been mentioned by the act for non-compliance. If a woman director leaves the board, and even after three months if the vacancy is not fulfilled, there is no specification as to who shall be held responsible for this act, the company, or the officer who is in default. Only the fact that the punishment will be according to section 172 of the act may be applicable is what the act mentions.
Present scenario (how are women now taken and encouraged in the board)
Till now we saw the condition of women in the corporate world, and also came across the benefits of having women director on the boards. As the regulation hasn’t even seen a decade after its finalization, but the progress is worth noting. The present scenarios of women on boards have improved for sure, but having a detailed analysis is important.
With the compulsory appointment of women on the board, several public companies in India fulfilled the criteria for staying out of trouble. But it was mentioned in a report that over 60% of the public companies in India failed to appoint women directors.
Even by the end of 2019, the number of women directorson the board has remained lower in comparison with the male directors of the board. Most of the companies have just maintained the minimum criteria where no objections can be made.
The condition of women directors in India may look below the expectations, but when the comparison is made from different countries of the world, India stands at the 12th position. The 12th position of India in the world is in terms of women’s involvement in the boards of all the public companies of a country.
There were over 600 companies that were included for this analysis and over 55% of the members of boards have the composition of women. The ratio is likely to increase and with every passing year, a growth rate of 14% is expected by the analysts.
When it comes to Asia, the figures are positive; the number of female workers in the continent is 54%. This positive figure has taken the lower and middle-level positions of the organizations into consideration.
Coming to the global level, on the world level only 14% of the organizations have women directors; the figure is quite low and disappointing. But this figure is double the growth of what was happening in the previous years. Within this figure, almost 29% of the organizations have two women directors on the board whereas 63% of the organizations have just one women director on the board.
All these figures represent a thought that prevails not just in one country or region but it is present everywhere. The majority of the organizations have just fulfilled the minimum criteria for staying out of trouble. And the number of organizations encouraging women and taking more than one women director on the boards very few in numbers.
All these data and analyses are representing a fact and reasons that something is wrong. Now several reasons are responsible for this condition of women all over the world.
To bridge this gap some of the basic things that can be done are providing education to the women of our country and even to the world. Because only if you are educated enough any gate of success in the corporate world is likely to open.
The case here we see if of gender equality, and why it arises is backed by several religious, cultural, and other aspects. If women won’t be allowed to go out and work for her living, the case of gender equality in the world will keep on rising. The socio-cultural facts influence the work ethics and mentality of people as well. So, it is important to have a look at the issues and work for the welfare of everyone, and not just a particular gender.
These were few aspects that were taken into the consideration in context with women and their role in the organization. These points are important for the discussion of women’s roles in the corporate world. We saw what corporate governance is, and how it has come into effect during the late 20th century in India.
Indian economy witnessed a delayed rise in even after several decades of independence. When the liberalization, globalization, and privatization came into force in 1991, India began its journey. Within a few years of span,a lot of development has been done.
Even the principles of corporate governance were evolved as the country grew. But with the introduction of the corporate world in the country, many scams took place, which affected the economy’s growth while pointing out the loopholes the corporate governance had.
Coming to the involvement of women in the boards, after a half century of independence, the importance of women was not considered in the boards. The involvement of women in such highly prestigious positions of the companies wasn’t possible in a short period.
The society has played its role in degrading the image of a woman when it comes to the corporate world and career. Thus, government interventions were necessary. By making the amendments in the existing companies act, the appointment of women was made compulsory by the law.
And this has helped in boosting and supporting women who want to excel in their lives. Even though the government has supported women bypassing the law, but the majority of the companies are not allowing more than one woman on the boards, because that fulfils the minimum criteria.
In the global scenario, the condition of our country is still better as according to recent research, India stands at the 12th position in terms of women directors on the boards. The conditions of women are expected to grow and get better in the coming time.