We continue our series of guest contributions from our postgraduate community with an entry by Anindita Jaiswal. Anindita is a PhD student at our Law School. Her doctoral project, entitled “Female Directors on the Board: Viability from an Indian Perspective” is a critical assessment of the viability of the recently legislated quota, mandating one female director on the board of Indian public companies.
“Diversity” generally connotes variety, difference and mixed population. Historically perceived as a potential threat to social cohesion, it has evolved to become a necessary end of social justice. Regardless of what meaning and form it takes, diversity has carved out a permanent space for itself not only in social subjects but also across all disciplines, with corporate governance being no exception to it. More specifically in the context of board composition, the form of diversity that has assumed the maximum prevalence across countries is gender diversity, i.e., female representation in corporate leadership.
Conflict of Rationales
To start with, a conflict of rationales – social justice versus the business case – emerged on a recurring basis, as regards which of the two better justifies diversity in the boardroom. While proponents of the former demanded gender balanced boards for reasons of gender equality, distribution of power, fairness and democracy, the latter was based on commercial utility, i.e., the idea that diversity adds value to board performance, corporate profits, and the business. Over the course of arguments, it was realised that the choice of rationale had no practical significance insofar as justifying boardroom diversity. Drawing a demarcation between the two rationales had no concrete relevance, as such demarcation was seldom called for by the industry.
Thus, with some positive and some mixed-bag results, the debate was settled with a general industry wide acknowledgement of gender diversity as being a good governance practice. Accordingly, the debate has now shifted from “whether diversity or not” to “how to manage diversity”. In other words, the question whether or not the board should be diverse seems to have become obsolete, as the focus has now shifted to the next level, i.e., determining how such diversity can be optimally implemented.
How to determine the legal strategy?
To this end, countries have adopted strategies ranging from quotas of various kinds (incremental or fixed numbers, at individual company or industry levels, absolute or procedural), targets, disclosure requirements, to industry-led charters or agreements. Well-illustrated by Norway and United Kingdom (which converge upon a common goal of increasing female participation in corporate leadership, but via two contrasting pathways), all of such strategies can be located within the scale of mandatory regulation/hard law approach on one hand and voluntary regulation/soft law approach on the other hand.
What are the causes for the differences in strategies and policy approaches to board gender diversity?
A review of the two jurisdictions reveals that, while Norway primarily constructs its case on justifications of equality and social justice (with an ultimate diversity twist to ensure wider acceptance or least resistance from the business community), UK is firm on its business motives (where equality has an under-tone influence so as not to overlap or trample upon business autonomy). Such predominance of one rationale over another is what justifies why Norway (advocating fairer and egalitarian social norms) chose quota or hard law, as against voluntary means or soft law adopted by the UK (motivated by business value addition). Similar correlation can be observed in the context of France and Sweden. While France has legislated quota steered by prominent reasons of gender equality, Sweden has resisted State intervention in business autonomy and rejected a quota proposal. Thus, while the choice of rationale may not be significant to establish a case for boardroom diversity, the predominance of one over the other assumes relevance when determining the strategy to implement such diversity.
Further, an approach of hard law most often equates to rule-based governance, as against principle-based governance, which aims at more flexible and value oriented behavioural change conforming to standards or norms, akin to soft law. In other words, an approach of hard law normally works well when it functions in rule-based style of governance (for instance, the Norwegian quota was built upon a legacy of such mandatory governance), where both share a common aim seeking compliance. On a parallel note, soft law finds optimum prevalence in a principle-based governance system, premised on standards and norms, as in the UK.
Having said that, considering the unique mix/interplay of social and business concerns that is intrinsic to boardroom gender diversity, a more preferred approach could be an optimum balance of both- hard law and soft law. Accordingly, an optimum strategy could be one that seeks to amalgamate the two approaches into a fine balance. Countries have sought to achieve such balance through a single hybrid strategy (like comply-or- explain, flexible quota, procedural quota), and/or through a mix of strategies (as witnessed in the Swedish context), targeted at the overall board level or specific to non-executive roles only.
Does the same strategy work for executive and non-executive directors alike?
As mentioned above, countries have mostly promulgated a single overarching strategy for the overall board, or specific strategy for non-executive roles while exonerating executive positions altogether or subjecting the latter to the same strategy but with lesser stringent rules. For instance, as can be observed in the proposed EU Directive, the strategy is to impose an obligation for listed companies to undertake individual commitments regarding gender balance in executive director positions. Likewise, in the UK’s Hampton-Alexander Review of 2016, the strategy remains that of being voluntary targets, as is applicable to other board positions. Also, quota forms the dominant strategy for France and Norway (including the executive directors in the former case, and excluding them in the latter).
Adoption of different strategies for the two sub-sets of the board is uncommon at national level. It is here that a divergence is suggested from the regular course commonly adopted by countries. To explain further, it is suggested that a balance of hard and soft law approach, which is desired in the context of corporate governance (and more specifically, for boardroom gender diversity) keeping in view its dynamic and complex character, can be attained through differential strategies adopted for executive and non-executive roles, i.e., one strategy for non-executive positions, and another for executive ones. Considering the established variances in the objectives, roles and responsibilities, and eligibility conditions, within which the two sub-sets of the board function, a “one size fits all” approach is less likely to work for the entire board. This is more so, as the executive appointments are more individualistic and function-oriented, rather than being representative roles.
What could be the strategy befitting each of the two sub-sets of the board?
While what could be a good strategy for the executive and the non-executive roles depends much upon the political, economic and cultural conditions specific to the country where it is sought to be implemented, a good starting point can be (i) mandatory quota for non-executive directors, alongside (ii) comply-or-explain targets for executive positions.
A review of Norway and UK reveals that, while there is no substantial lack of talent (both in terms of qualifications and board exposure) at the overall board level (inclusive of non-executive positions), a gap exists in the executive pipeline. Most of it can be attributed to filtering-out or mid-level attrition resulting in poor female presence in the line or direct to executive positions of the corporate hierarchy, which serve as the preparatory or feeding ground for potential senior management recruits. In such a situation, imposing a mandatory quota would either result in large scale non-compliance, or recruitment of directors not suitable for the functions for which they are responsible. This can have dangerous implications on the business, considering that the executive directors are the ones responsible for day-to-day management, decision-making and revenue generation. Hence, mandatory quota is definitely not the way forward for executive positions.
Rather, female participation in the executive positions ought to be driven by soft law approach, aiming at generating an adequate pipeline through systemic reforms. While voluntary targets may be an option, a more preferred strategy may be setting up targets on a comply-or-explain basis, i.e., companies would be directed by a minimum threshold of say 30% (acknowledging the critical mass) female executive directors, but not as a mandatory obligation. If the company falls short of it, the reasons for such non-conformity must be disclosed. Thus, under this strategy, companies would be inspired to undertake systemic reforms while retaining the leverage to decide conformity based on their individual business specific conditions. Any breach, i.e., omission to explain a non-conformity, would then be subject to regulatory intervention (thereby infusing some element of layered binding regulation).
Considering that the pipeline for non-executive roles is more broad-based with potential candidates from within and outside the corporate domain, including professionals, academicians, representatives from the non-profit sectors, and industry experts, mandatory quota could work well for such positions. This is more so, as non-executive directors are not directly engaged in active revenue generating or management decisions, but are mostly responsible for monitoring or supervising the executive functions. Hence, imposing a quota for this sub-set of the board (while the executive pipeline is developed) can be good way to start the diversity movement. Aside to enhancing the board experience or exposure among female directors, it would also increase the visibility of female role models which is likely to trigger greater interests among female board aspirants down the corporate ladder. Such quota can be a great step to get the ball rolling, for an enduring movement of boardroom gender diversity that still has a long way to go.
 PH Schuck, ‘The Perceived Values of Diversity, Then and Now’ (2000-01) 22 Cardozo Law Review 1915.
 SA Ramirez, ‘A General Theory of Cultural Diversity’ (2001) 7 Michigan Journal of Race & Law 33. See also, RF Burch, ‘Worldview Diversity in the Boardroom: A Law and Social Equality Rationale’ (2010-11) 42 Loyola University Chicago Law Journal 585.
 ‘Beyond Independent Directors: A Functional Approach to Board Independence’ (2005-06) 119 Harvard Law Review 1553.
 LM Fairfax, ‘The Bottom Line on Board Diversity: A Cost-Benefit Analysis of the Business Rationales for Diversity on Corporate Boards’ (2005) 795 Wisconsin Law Review 798.
 DB Wilkins, ‘From ‘Separate is Inherently Unequal’ to ‘Diversity is Good for Business’: The Rise of Market-Based Diversity Arguments and the Fate of the Black Corporate Bar’ (2004) 117 Harvard Law Review 1548.
 M Huse & M Brogi, ‘Introduction’ in S Machold, M Huse, K Hansen & M Brogi (eds), Getting Women onto Corporate Boards: A Snowball starting in Norway (Edward Elgar Publishing Ltd 2013) 3.
 DC Langevoort, ‘Overcoming Resistance to Diversity in the Executive Suite: Grease, Grit and the Corporate Promotion Tournament’ (2004) 61 Wash & Lee Law Review 1615.
 AG King & JW Hawpe, ‘Gratz v Grutter: Lessons for Pursuing Diversity in the Workplace’ (2004) 29 Oklahoma City University Law Review 41.
 K Hansen & S Machold, ‘Concluding Remarks to Part V’ in S Machold, M Huse, K Hansen & M Brogi (eds), Getting Women onto Corporate Boards: A Snowball starting in Norway (Edward Elgar Publishing Ltd 2013) chapter 30, 211.
 M Teigen, ‘Gender Quotas for Corporate Boards in Norway’ (European University Institute, Department of Law, 2015) 8.
 Lord Davies, ‘Women on Boards’ (UK: The Department for Business, Innovation & Skills, February 2011) 8.
 Proposition 97 (Norwegian Ministry of Children and Family 2002-03).
 ‘UK Response to the European Commission Consultation on Gender Imbalance in Corporate Boards in the EU’ (The Government Equalities Office, department for Business Innovation and Skills, May 2012).
 A Masselot & A Maymont, ‘Balanced Representation between Men and Women in Business Law: The French ‘Quota’ System to the Test of EU Legislation’ (2014) 3(2) Centre for European Law and Legal Studies Online Paper Series (University of Leeds).
 ‘Sweden Rejects Quotas for Women on Boards of Listed Companies’ (The Guardian, 12 January 2017) < https://www.theguardian.com/world/2017/jan/12/sweden-rejects-quotas-women-boardroom-listed-companies> accessed 2 April 2017.
 AA Dhir, ‘Contextualizing the Content Analysis Results: Norms, Expressive Law, and Reform Possibilities’ in AA Dhir, Challenging Boardroom Homogeneity – Corporate Law, Governance, and Diversity (Cambridge University Press 2015) Chapter 7, 240.
 AL Dempsey, Evolutions in Corporate Governance: Towards an Ethical Framework for Business Conduct (Greenleaf Publishing 2013) 83.
 M Teigen (n 10) 12.
 J Casson, ‘A Review of the Ethical Aspects of Corporate Governance Regulation and Guidance in the EU’ (Institute of Business Ethics Occasional Paper 8, June 2013) 13, 41.
 R Tomasic & F Akinbami, ‘Towards a new corporate governance after the global financial crisis’ (2011) 22(8) International Company and Commercial Law Review 237.
 Annual Accounts Act of 1995, chap 5, section 18. Section 4.1 of the Swedish Corporate Governance Code (Swedish Corporate Governance Board, 1 December 2016).
 Proposal for a Directive of the European Parliament and of the Council on ‘Improving the Gender Balance among Non-Executive Directors of Companies Listed on Stock Exchanges and Related Measures’ – COM(2012) 614 Final 2012/0299 (COD) (The European Commission, Brussels, 14 November 2012). See also, ‘Improving the gender balance in company boardrooms’ (European Commission June 2014).
 ‘Hampton-Alexander Review- FTSE Women Leaders, Improving gender balance in FTSE Leadership’ (KPMG November 2016).
 R Tomasic & F Akinbami (n 20).
 D Higgs, Report on Review of the Role and Effectiveness of Non-Executive Directors (UK: The Department of Trade and Industry January 2003); and ‘A review of corporate governance in UK banks and other financial industry entities’ (November 2009) (“Walker Review”).
 H Bjørkhaug & S Øyslebø Sørensen, ‘Feminism Without Gender? Arguments for Gender Quotas on Corporate Boards in Norway’ in F Engelstad & M Teigen (eds), Firms, Boards and Gender Quotas: Comparative Perspectives (Emerald 2012) Chapter 6, 201.
 S Machold & K Hansen, ‘Policy Approaches to Gender Diversity on Boards: An Introduction to Characteristics and Determinants’ in S Machold, M Huse, K Hansen & M Brogi (eds), Getting Women onto Corporate Boards: A Snowball starting in Norway (Edward Elgar Publishing Ltd. 2013) chapter 24, 168-169. See also, A Klettner, ‘Corporate Governance Codes and Gender Diversity: Management-based Regulation in Action’ (2016) 39(2) UNSW Law Journal 715; and EE Clark, ‘Reflecting Inward and Looking Outward’ (2013) 2 Global Journal of Comparative Law 115.
 S Machold & K Hansen (n 27) 173.
 ‘Board representatives, by gender, age groups, level of education, size groups and economic activity’ (Statistics Norway, 1 January 2016); T Løyning, ‘Business Elites and power: board networks during the period from 2008-2013’ in M Teigen (ed), Gender Balance on Company Boards (Institute for Social Research Report 2015) 38. See also, ‘Improving the Gender Balance on British Boards- Women on Boards Review: Five Year Summary’ (KPMG, Cranfield University October 2015) 22, 23; ‘Patterns and Trends in UK Higher Education 2015’ (Higher Education Statistics Agency 2015) 23.
 S Halrynjo, M Teigen & M Nadim, ‘Women and Men in Senior Management. Ripple effects of Laws Requiring Gender Balance on Company Boards’ in M Teigen (ed), Gender Balance on Company Boards (Institute for Social Research Report 2015) 20. See also, Lord Davies (n 11) 16; ‘Gender Diversity in the Boardroom: Reach for the Top’ (CIPD Survey Report, February 2015) 13; and ‘Empowering Productivity: Harnessing the Talents of Women in Financial Services’ (HM Treasury, March 2016) 28 (“Gadhia Review”).
 A Rafiq, Member of Parliament (Parliamentary Debate 2002)- H Bjørkhaug & S Øyslebø Sørensen, ‘Feminism Without Gender? Arguments for Gender Quotas on Corporate Boards in Norway’ in F Engelstad & M Teigen (eds), Firms, Boards and Gender Quotas: Comparative Perspectives (Emerald 2012) Chapter 6, 185, 201.
 A Klettner, ‘Corporate Governance Regulation: Assessing the Effectiveness of Soft Law in relation to the Contemporary Role of the Board of Directors’ (University of Technology – Sydney 2014) 7.
 C Parker, ‘Meta-regulation: Legal Accountability for Corporate Social Responsibility’ in D McBarnet, A Voiculescu & T Campbell (eds), The New Corporate Accountability: Corporate Social Responsibility and the Law (Cambridge University Press 2007) 208.
 ‘Improving the Gender Balance on British Boards- Women on Boards Review: Five Year Summary’ (n 29) 20.