Governing By The Spirit, Not Just The Letter

Diversity in the boardroom is critical to effective corporate governance. A balanced board, combining the executive and non-executive members with different skillsets and backgrounds, will outperform in both essential board tasks -- holding management to account and setting strategic direction.

India has made major strides in enhancing board composition in recent years, as a result, both of the tightened Clause 49 of the Listing Agreement and new standards set by the Companies Act 2013. According to the data from Spencer Stuart, the leadership advisory firm, the Sensex constituents now have boards averaging 10 members, 67% of whom are non-executive directors. There has also been a major change in the number of female directors, who now account for 12% of board strength.

While there is much further to go, India seems to be tracking in the right direction and is catching up other comparable markets on such measures. Leading US boards have 85% non-executive members and the UK 61%; US boards are 22% female and UK boards 26%.

However, diversity goes beyond simply executive/ non-executive balance and gender. Most larger company boards in India still draw members from similar circles, backgrounds and age groups. Two Sensex members, including India’s largest company, satisfy the requirement for a female director by the appointment of a family member of the promoter. India still needs more experienced and robust directors drawn from a wider gene pool.

Take the number of foreigners as one measure of diversity. On average, Sensex 30 boards have 8% members who are non-Indian, which compares to 32% of UK boards who are foreigners. Only 13 of the 30 index members have at least one foreigner on the board. Among those without a foreign director are some of the largest companies such as Reliance and even HUL, all of the PSUs and, most surprisingly, companies with significant international business such as Infosys, L&T, and Mahindra.

The least diverse boards appear to be the PSUs, which perhaps are in particular need of fresh strategic thinking. Following the retirement of Arundhati Bhattacharya, SBI is currently the only Sensex 30 member not to have a female director. Of SBI’s eight NEDs, only three have backgrounds outside government while four are still employed by government (at the Finance Ministry, RBI, LIC, and the Central Information Commission).  

The norm for executive chairs of Indian boards must make securing stronger independent directors from truly diverse backgrounds the more important. Of the Sensex 30, only five companies have a non-executive chair. The expectation in the UK is now to have independent chairs in order to encourage the right balance and separation between management and board. The US still mostly has executive chairs, but also tends to have fewer executive directors that is the norm in India or the UK.

India has seen some spectacular failures of corporate governance in recent years, but also evidence (including in recent tensions in the Tata Group and Infosys) of boards becoming more robust in doing their job. Governance is not so much a matter of complying with tighter rules but more a question of culture and spirit. The starting point must be to have directors of the highest quality recruited from as diverse a talent pool as possible. On that measure, many boards in India have yet some way to go.