The Securities and Exchange Board of India Committee defines corporate governance as the “acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.” The definition is based on both the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as a moral & ethical duty.
One of the most significant governance problems presently facing the managers, directors, and shareholders of the modern corporation is the gender, racial, and cultural composition of the board of directors. The issue has taken on a high public profile due to media coverage and scrutiny of corporates, activist shareholder proposals, and policy statements from major institutional investors.
The Challenge :
The global monetary crisis has led to demands for larger transparency in company practices. But the aspect of who those players ought to be in this new environment has been largely overlooked Corporate boards across the world are typically have male directors. At time when we are saying business has gone global - we still see a lack of diversity in terms of gender, race/ethnicity and international expertise in the boardroom.
When we look at the question of board diversity, we must consider two key aspects - one aspect is equity and the other is shareholder value. Many company leaders and alternative parties believe that board diversity must be considered in the context of shareholder value.
Many proponents of good governance believe that a positive link exists between board diversity and shareholder value. Many are of the view that we ought to consider the connection between diversity, the success of the board, and a successful company.
We must think of sensible governance, not just for the cause of diversity, but look at its contribution towards running a successful enterprise. That means we must be able to the impact on the bottom line and top line that, in turn, means that we achieve distinction which is evident to shareholders in terms of value generated. Given the emphasis being placed on board diversity as a source of sound governance, the relationship between board diversity and shareholder value creation deserves each theoretical and empirical investigation.
Why Diversity ?
One argument is that diversity increases board independence as a result of folks with a completely different gender, ethnicity, or cultural background as they may ask questions that others from more traditional backgrounds may not consider while making decisions. In other words, a lot of numerous boards may be a more activist board as a result of outside administrators with non-traditional characteristics can be thought of the last word outsider.
Regardless of size, industry, and other company governance measures, statistically important positive relationships exist between the diversity on the board (women directors, representation of minorities) and firm's worth. Another observation is that diversity on the board increases with firm size however the number decreases as the number of internal appointees increase.
First, corporate diversity and in turn board diversity helps understand the market conditions and consumer preferences. Because demographic projections indicate the marketplace is a diverse place composed of numerous people with varying value systems and belief sets, thus mirroring the marketplace in terms of board composition brings in the ability & flexibility to penetrate markets.
Second, diversity increases creativeness and innovation. It is a key driver of innovation the world has recognized that a diverse set of experiences, perspectives, and backgrounds is crucial to innovation and the development of new ideas. According to this view, attitudes, cognitive functioning, and beliefs are not every which way distributed within the population, but tend to vary consistently with demographic variables such as age, race, and gender.
Third, while heterogeneousness might ab initio introduce a lot of conflict in the problem solving process, the multitude of views that emerges from a diverse set of people lead to more effective troubleshooting. The group as a whole is lot more open to exploring the alternatives they normally would overlook.
Fourth, diversity enhances the effectiveness of corporate leadership. Homogeneity at the top tiers of an organization is believed to lead to a myopic perspective whereas a diversified top leadership can take a holistic view of the direction of the company. This diverse team can lead to a better understanding of both macro & micro-economic complexities of the environment the organization exists in.
Finally, diversity promotes more effective international relationships. Research suggests that companies incur substantial costs due to a poor integration of their work force especially when the organizations are working in different geographies across different time zones. These costs show a direct co-relation to employee turnover and dissatisfaction, thus it is safe to say that organizations that deal with Diversity issues would have a competitive advantages over firms that do not.
The need for diversity in boardrooms is deservedly receiving some attention and space in the corporate world today. Organizations are making more efforts to be more inclusive and transparent in the digital era and it goes right to the top. Research is this space has provided enough and more data and insight into the positive ways a diverse board can influence corporate strategy creating a win-win for both the organization and the society.