The India Company Bill’s Board Representation clause: Don’t think “quotas”, think innovation and growth

Note: This is a reproduction of the article that appeared in the Economic Times

Corporate leaders in India have been watching the new Companies Bill’s passage through the houses of parliament closely – it was passed by Rajya Sabha today. It had already been passed by the Lok Sabha previously. The bill mandates at least one woman on the board of a certain class of companies—to be determined by the rules that are being framed potentially based on market capitalization. While there are murmurings of quotas, in reality, this is a progressive step that continues the move to increased discipline in governance and an innovation orientation.

Apart from the famous McKinsey study of 2007, multiple studies in diverse countries have made the case for women on boards. For example, the 2011 study of Dutch companies by M. Luckerath-Rovers of Nyenrode University, showed that companies with female directors performed better, financially, than those that did not. The research argues that besides governance roles, Boards are a critical linkage mechanism to the broader environment, and to that extent diversity is important for all four linking features they establish – understanding otherwise illusive information, communicating to the environment, getting commitments of support from key external stakeholders and legitimizing in the eyes of partners and current/future employees. This last feature is a critical one in the Indian context, where firms struggle with the retention of key talent.

Also, consider this. A recent study by Booz & Company estimates that if Indian women could achieve employment rates equal to men, the country’s GDP would increase by 27 percent.

In addition, emerging research from the Center for Talent Innovation has strongly correlated diverse boards and diverse leadership with innovation and growth in market share. The research will be public in September, but we’re talking double digit deltas when compared with companies with non-diverse leadership.

India has 5% of boards having women representatives, as against China at 8%, the US at 15% and Norway at 35%. Pretty dismal numbers. India’s most critical issue is that the pipeline is challenged. The research from the Center for Talent Innovation has shown that there has been a significant Off Ramp issue as women drop out at mid-management levels due to a combination of pull factors (societal expectations, the pressure to be the care provider to children and to parents, the lack of infrastructure for childcare and education, etc.) and push factors - unfriendly work environments play a significant role: 72 percent of Indian women professionals leave because their careers are not satisfying or enjoyable; 66 percent leave because they feel their career progression is stalled.

The good news: An overwhelming 91 percent of Indian women want to return to work, similar to the United States (89 percent) and significantly more than Germany (78 percent).

However, there’s bad news for employers: 72 percent do not want to return to their former employer. There is a stereotype of success – for example, 73 percent of women at multinational companies and 55 percent at Indian companies say they need to compromise their authenticity to conform to their company’s standards of executive presence, which is often a male vision of what excellence looks like.

Hence, such an initiative can have a significant directional impact. Larry Senn first wrote about the “Shadow of the Leader” in 1970. It gestures at the reality of how leaders through their likes, dislikes, treatment of subordinates, language and idioms, personal preferences, beliefs and values tends to shape the characteristics, culture and ways of doing business in the organization. When you have a highly male leadership, there are consequent behaviors and norms that emerge that tacitly exclude – think of the “let’s do business over a round of golf” or “over a drink” and you’ll get the picture of how excluded an average Indian woman leader might be. The more women leaders we have to set a tone of “let’s make the decision over lunch” the more inclusive such practices will get.

A word of caution – there is much written about how difficult it can be for a single representative of a minority (be it a woman, minority, young leader or a different capability like a non-engineer in a group of engineers) to be heard. I will watch this space closely to see how the first generation of brave business leaders fare, as they make inroads into large promoter and family-controlled boards and boards that have never had a tradition of engagement with diversity.