The ministry of company affairs wants companies with five or more independent directors to have at least one woman director. This is an idea whose time has come, although the compelling argument in favour of this initiative is not necessarily the one that is usually put forward . The ministry should go ahead and incorporate the necessary provision in the new Companies Bill. The case for a quota for women on boards is generally made on grounds of gender equality or social justice. Those in favour point out that women account for less than 5% of board members in India, and these, too, are mainly from promoter families. In the US, women constitute close to 15% of the board; in the UK 12%. Those who oppose the proposal put forward a number of arguments . Board members must be selected on 'merit' alone. Not enough women may be available who satisfy the requirements for board membership . Quotas for women are patronising - women must and can make it to boards on their own steam. Having women on boards is little more than tokenism - the government should focus on other areas that require empowerment of women.
These objections are easily disposed of. The argument that 'merit' alone must count in selection has, well, little merit. It is familiar enough since it has been used to oppose quotas for disadvantaged groups in India. The contention is that not focusing on 'merit' will mean compromising on quality or performance. For educational institutions or jobs, 'merit' is defined in terms of academic performance . A person who has secured the cut-off level of, say, 85% is deemed to be meritorious . A person from a disadvantaged group, who gets 82%, is said to lack merit even if he has managed the performance without paying for expensive tuitions. One can see how specious the argument about 'merit' is. In the case of independent directors , claims about selecting people on merit sound even more hollow. First, promoterrun companies in India overwhelmingly prefer to select independent directors from amongst friends and associates . Secondly, retired bureaucrats , serving or retired corporate executives and celebrities, who are the second-most important source of independent directors, also tend to be people known to the promoter. Thirdly, independent directors are not so independent of management because it is management that selects them and compensates them handsomely.
In this situation, the so-called merit has little bearing on the key outcome, namely, good governance. So, any suggestion that imposing a quota for women will imperil board quality or board performance must be dismissed out of hand. The point is simple enough: it can't get any worse. When corporate bosses say that they may not be able to find enough qualified women, what they mean is 'we may not find enough women known to us' . But that is indeed the primary reason why we need to bring women on board. The biggest problem with independent directors today is that they are all members of a closed club. Getting boards to induct women will compel to reach out beyond the closed club in which they now operate . It will usher in diversity in the board-room . Diversity in itself spells quality. One of the great lessons driven home by the bestselling book, The wisdom of crowds, is that the more diverse a group, the better is the quality of judgements and decisions it makes. One country that has shown the way in the matter of women sitting on boards is Norway.
In 2006, the government there passed a law imposing a minimum requirement of 40% for women on corporate boards . Business leaders warned of a collapse in shareholder confidence and a flight of foreign capital. By 2008, most companies had complied. A survey showed that the women who joined the boards were brighter and younger than their male colleagues and most of them had distinguished themselves in their professions before being appointed to boards. By some measures, governance has improved . There appears to be no improvement in performance of the companies but nor has the bottom (or, rather, the bottom-line ) caved in. Spain and France have since followed suit with 40% quotas for women on boards to be achieved by 2015 and 2016, respectively.
These objections are easily disposed of. The argument that 'merit' alone must count in selection has, well, little merit. It is familiar enough since it has been used to oppose quotas for disadvantaged groups in India. The contention is that not focusing on 'merit' will mean compromising on quality or performance. For educational institutions or jobs, 'merit' is defined in terms of academic performance . A person who has secured the cut-off level of, say, 85% is deemed to be meritorious . A person from a disadvantaged group, who gets 82%, is said to lack merit even if he has managed the performance without paying for expensive tuitions. One can see how specious the argument about 'merit' is. In the case of independent directors , claims about selecting people on merit sound even more hollow. First, promoterrun companies in India overwhelmingly prefer to select independent directors from amongst friends and associates . Secondly, retired bureaucrats , serving or retired corporate executives and celebrities, who are the second-most important source of independent directors, also tend to be people known to the promoter. Thirdly, independent directors are not so independent of management because it is management that selects them and compensates them handsomely.
In this situation, the so-called merit has little bearing on the key outcome, namely, good governance. So, any suggestion that imposing a quota for women will imperil board quality or board performance must be dismissed out of hand. The point is simple enough: it can't get any worse. When corporate bosses say that they may not be able to find enough qualified women, what they mean is 'we may not find enough women known to us' . But that is indeed the primary reason why we need to bring women on board. The biggest problem with independent directors today is that they are all members of a closed club. Getting boards to induct women will compel to reach out beyond the closed club in which they now operate . It will usher in diversity in the board-room . Diversity in itself spells quality. One of the great lessons driven home by the bestselling book, The wisdom of crowds, is that the more diverse a group, the better is the quality of judgements and decisions it makes. One country that has shown the way in the matter of women sitting on boards is Norway.
In 2006, the government there passed a law imposing a minimum requirement of 40% for women on corporate boards . Business leaders warned of a collapse in shareholder confidence and a flight of foreign capital. By 2008, most companies had complied. A survey showed that the women who joined the boards were brighter and younger than their male colleagues and most of them had distinguished themselves in their professions before being appointed to boards. By some measures, governance has improved . There appears to be no improvement in performance of the companies but nor has the bottom (or, rather, the bottom-line ) caved in. Spain and France have since followed suit with 40% quotas for women on boards to be achieved by 2015 and 2016, respectively.
