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Published : January 16, 2013 | Author : deboshreeritambharabanerji
Category : Company Law | Total Views : 8271 | Rating :

Completed LLB from ILS Law College, after working with Government of India and completing MBL from NLSIU now is pursuing LLM from NLU Jodhpur. Interested in Competition Law, Company Law, Securities and Corporate criminology.

Reservation For Women In The Board Of Directors: A Critical Analysis

The hand that rocks the cradle, is the hand that rules the world

Few days back I had to attend a conference in one of the eminent finance institutions of India. The brilliant panel of speakers had people coming from various strata of the finance and corporate sector. What baffled me as an audience was the ratio of women over male speakers, it was 1:10! This made me ponder over the present gender inequality in the corporate sector. True, that, the inequality was a product of socio-economic inequality rampant in the society. But, the real questions, which, struck me, were – Can such inequality be done with by merely granting reservation to the women in the Board of Directors of a Company? Can Social responsibility and Corporate Governance run hand in hand? Will such a settlement lead to a greater and a much more complex problem in the future? However, the questions that intrigued me the most was, will such a settlement of granting reservation to the women folks in the board of directors ensure their upliftment and emancipation in the Corporate sector? Moreover, will such a settlement of reservation for women in the corporate sector increase the efficiency of the corporation per se?

The issue of gender inequality has been rampant all over the world. With the wave of Feminism the issue was addressed to and later on in the latter half of the 19th century particularly after the First World War women entered the corporate sector but not still in the Board room.

In India, the wave of women addressing the Board of Directors is very acute yet significant. Nonetheless, the semantic value of such Directors is very low and therefore very insignificant numerically. Women are still considered as a good management option but a poor stake when it comes to the core management of the Companies. This trend is primarily due to the primitive conception of the role of women, i.e., of foraging and procreation. The society still continues to believe this archaic notion and hence the poor representation of women in the Board of Directors of the companies. But, in the present scenario, the number of female directors and top management associates among women is increasing at a substantial rate. Nonetheless, in the light of the global persuasion and the commitment towards various treaties signed by India, it comes as no surprise that the Companies Law Bill, 2011 provides for the provisions that create a nominal presence of women, this aspect shall be dealt in the later part of this comment.

Concept of Corporate Governance and nexus with Reservation of women in Company Board
The concept of corporate governance refers to the design as to control and decision – making within a company. It emanates from the rationale that a way is required for the investors to be assured of the fact, that, the sum invested by them in a company is appropriately and lucratively channelized. Corporate governance, in fact, are not just driven by agency or cost dimensions but also by the parameters of interdependence between firms and their markets, technical, cultural, social, political and institutional environments. Hence, corporate governance reflects to the power relations and political settlement between shareholders, creditors and management. Therefore, public policy plays an important role in sculpting the ambit and nature of corporate governance.

Emancipation of women and gender balance are cornerstones on which the whole structure of reservation for women in the Board of Directors is based up on. In 2010, women on average made up 12% of the board members in the biggest publicly – listed companies across the EU. However, only a handful 3% were on the Board chairs.

The above figure led to the realisation of the need to put women in the board – rooms. Hence, in 2003, Norway became the first Country to oblige all the public listed companies to reserve 40% of seat on their boards for women by 2008. Spain followed the lead and adopted a similar law in 2007, while France adopted the reservation law in 2011.

The question that arises here is, whether the government through such an initiative trying to amalgamate the corporate social responsibility issue along with corporate governance? Another question, that, such a settlement forwards is regarding the intention of the corporations towards the protection and upliftment of women, is it actually beneficial to the company (hence an integral part of the Corporate Governance) or is it merely a “goodwill” creating factor.

Pros of Reservation
The advantages that the reservation of women in the board of directors might have, can be calculated in terms of higher female representation which might further lead to the empowerment of women and better representation of women in the corporate sector. Another argument that is forwarded is based on the premise that a better representation of different strata of the corporate world in the board of directors will lead to better functioning of the Board. This is so owing to the fact that diverse opinion in the Board of any company will lead to better efficiency of the company. Apart from this, it is a matter of practice and observation that many women tend to leave their work due to maternity and post maternity reasons, therefore, the Government through introduction of such provisions possibly is trying to create an incentive for better representation of women in the corporate sector. In fact, the reservation of the fair sex runs in sync with the spirit of “equality” and “justice” as enunciated in the Constitution of India.

As a matter of fact, the McKinsey Report, in 2011 analysed 89 listed companies in Europe with very high proportion of women directors and their financial conditions to their peers in the same industry. The observation of McKinsey was that the firms with better female representation in the board of directors enjoyed higher return on equity, lucrative operating profits and buoyant share price. Analysing the trend the consultancy firm, however, failed to realise the cause that lead to such an increase in the efficiency of the management of women dominated Boards. Does this mean that women are better managers or to that matter better directors? Does it mean that a company with women in its Board of Directors increase its efficiency and thereby increase the value of its share price?

Cons of Reservation
On the flip side, reservation of women ipso facto is a matter of disadvantage. The basic reason for introducing reservation for women was primarily the better representation of the fair sex in the corporate sector along with their social upliftment. However, the question arises, whether such a change in the corporate governance structure will guarantee or at least assure such a socio-economic upliftment? In the light of governance aspect, reference can be drawn from the Panchayati Raj system, where the reservation of women was introduced by the Constitution Amendment, 2009. However, the Elected Women Representative slowly became mere proxy for the male relatives in the Panchayati Raj Institutions. The 33% reservation, no doubt, brought women on the political and social stream of the country but in the majority of the case they turned out to be mere puppets in the hands of their male relatives. Hence, reservation does not assure stoppage on the cultural and social stigmas. If mandatory reservation is brought in the Board of a company then won’t it lead to a similar fiasco? Moreover, reservation per se might lead to pareto efficiency, the fact that the corporate will be concentrating on the representation of the fair sex might amount to the reduction of the corporate productivity. If the reservation is made mandatory and it becomes compulsory to fill the seats reserved for the women in the Board of Directors then a situation similar to Norway might crop up in India.

Norway was the first country to impose strict laws pertaining to the reservation of women. Norwegian boards comprised of 9% women directors in 2003, they were directed to increase the number of women directors by way of 40% reservations in the Board of Directors and this was to be done within the span of five years. Many corporate reached this margin through window – dressing. The Norwegian companies, in order to comply with the norms of reservation promoted many women with much lesser experience than the directors before them to the position of the directors. This led to deterioration of business of such corporate.

The question, hence, is whether the companies and the fluctuating market in India afford such a situation in India?

Women Reservation in the Board of Directors and the Companies Bill, 2011
The proposition of reservation for women in the Board of Directors of the Company was received with mixed reactions, both amongst the corporate sector, business community as well as the masses.

Section 252 of the present Companies Act is proposed to be substituted with the new provision. According to the sub – section (1), every public company having a paid – up capital and free reserves of five Crore rupees or more or a turnover of fifty Crore rupees or more, shall have a minimum of seven directors out of which majority of directors shall be independent directors, provided that such public company shall have such number of women directors as may be prescribed. Through explanation II, the number of independent women directors shall be counted for the total number of independent directors required to be appointed.

This progressive provision has been welcomed whole – heartedly especially by the women folks and is often referred to as a “Gift by the Ministry of Corporate Affairs”. The basic motive of forwarding a provision of this nature is that, the Ministry wanted women to be better represented in the company boards. However, another rationale that can be drawn from the fact, that, the MCA sensed the change in the pulse of the world community in respect to the role and position of women in the Board of Directors.

On July 6th, 2011, the European Parliament passed a resolution calling the Member-States to amend their legislation in order to reserve 40% of seats of listed companies’ supervisory boards for women by 2020. Vivian Reding, the EU commissioner for justice, made an argument that such an arrangement would lead to overcoming the gender disparity in the board rooms. In March, 2011, she posted a “Women on the Board Pledge for Europe” on her website. The trend of overcoming gender disparity in the EU can be taken as a factor triggering the subsequent introduction of representation of the fairer sex in the Boards of the companies.

However, the language of the proposed section 252 itself is pretty ambiguous in regard to whether the women directors are contemplated within the category of independent directors or whether they are to be treated separately from the independent directors. Sub – section (4) and Explanation II of section 252 apparently seems to treat both “women directors” and “independent directors” separately and distinctly. In fact if this is the idea, then the women directors so appointed need not fulfil the qualifications of an independent director proposed under Section 252A. The fact that the independent director is mandated to take a training from an institute notified by the Central Government does not, then, become compulsory on the women directors.

- Reaction by women
To an utter surprise, the women folks in the business community gave a mixed reaction to the issue of reservation. It was welcomed stating that presence of women directors would make the board aware and sensitive towards issues like sexual harassment, maternity benefits, conditions of work and working hours. But it was also stated that such reservation would prove counter-productive. However, it was argued that reservation would also stop relegation of women workers into less important responsibilities.

- Reaction by Federation of Indian Chambers of Commerce and Industry(Ficci)
The Federation of Indian Chamber of Commerce and Industry (Ficci) outwardly opposed the idea of the reservation of women directors on company boards. It opined that gender of an individual must not be the basis for procuring an important position such as the board of directors. Elaborating further, the Chamber stated that a position such as the director requires “expertise, knowledge and qualification” as a criteria, the fact that the MCA proposed such a gender – based reservation was taken as demeaning to the dignity of women. It opined, that, “women do not need the crutches of the statute”. It stressed that the Companies Act per se is meant for the purpose of efficient management of the company rather than removing social disorders and mal – practices.

The Corporate Affairs Minister Shri Veerappa Moily, however, in a press conference gave the statement, that, the companies would not find it difficult to comply with the new provisions of the Companies Bill 2011 since there is enough talent among women. He further stated, that, “The clause is very much workable. It was our proposal and the committee has approved it. There are enough talents among women and that has to be promoted.”

What can be a suitable alternative?
As discussed before the primary objective of introduction of reservation of women is representation of women in the decision – making process of the company. Bearing this in mind, it can be suggested that instead of creating a reservation pool in the Board Rooms why such reservations are not introduced at the managerial and staff level. Let the boards be free from the clutches of RESERVATION, let the boards be the temples of the economic growth of the company, let the board be custodians of efficiency and accountability of the investment made by the shareholders. However, incentives in the form of subsidised crèches and nurseries along with the schools taking care of the children of the working mother (as is practiced in United States and Britain) should be granted. Another example can be borrowed from Germany where, parents enjoy fourteen months of Elterngeld (taxpayer - funded parental leave), the aim of which is to encourage women to take shorter breaks from their job after giving birth.

The initiative to bring in more women in the Board is no doubt comes with a positive motive behind it. However, the very idea of a sound board of directors that emanates from the concept of corporate governance reflects on to the better management of the company along with securing the interest of the shareholders. The reservation per se does not assure such a move, however, what it assures is better and a sounder social parity and structure. One needs to question, therefore, what is the basic task of a board of directors- better corporate governance or adhering to corporate social responsibility? The question can only be answered once the Companies Bill 2011 is passed, before that all statements would be mere speculation.
# see Andrei Schleifer and Robert W. Vishny, “A Survey of Corporate Governance”, (1996) NBER Working Papers, no. 5554, 2.
# see Neil Fligstein and Robert Freeland, “Theoretical and Comparative Perspectives on Corporate Governance” (1995) 21 Annual Review of Sociology 21.
# Vivian Reding, Vice president The European Commission, “Women on the Board Pledge for Europe”, http://ec.europa.eu/commission_2010-2014/reding/womenpledge/index_en.htm
# The Economist, “Women in Business: Still Lonely at the Top”, July, 21st, 2011.
# The Hindu, http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/article1564720.ece
Economic Times, “Not Difficult to find Enough Women Directors: Veerappa Moily”, August, 19th, 2012.

Authors contact info - articles The  author can be reached at: deboshreeritambharabanerji@legalserviceindia.com

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