Board Diversity: Public Policy or Business Case ?

The debate surrounding board diversity has evolved significantly in recent years.

Is diversity primarily a business imperative, or does it fall under the realm of public policy?

Public Policy: A Regulatory Push

In some countries, the drive toward diversity has been less about business incentives and more about legislative mandates. Norway set the stage in 2003 by requiring that at least 40% of board seats in publicly listed companies be held by women. Other European countries, including France, Spain, and Italy, soon followed suit. These policies have led to higher female representation. It is interesting to know that Norway now has 41% female participation on boards.

In the U.S., California introduced a landmark law in 2018 mandating that publicly traded companies include women on their boards. Though the law is facing legal challenges, it has prompted significant progress, with many companies now adding women to avoid penalties. Australia's approach has been more flexible, relying on a "comply or explain" policy, which has seen female representation on boards rise from less than 9% in 2009 to 32.1% in 2019.

In India The Companies Act 2013 has been a crucial regulatory force driving gender diversity in Indian boardrooms. Companies that fail to comply with the rule face legal consequences. This policy has been successful in bringing women onto boards, but critics argue that the law has sometimes led to token appointments, where women are appointed for compliance rather than merit.

The Business Case for Board Diversity

There is a growing body of research suggesting that diverse boards outperform their less diverse counterparts. A McKinsey study found that companies in the top quartile for gender diversity were 21% more likely to experience above-average profitability compared to those in the bottom quartile.

This effect is even more pronounced in companies with both gender and ethnic diversity, where the likelihood of outperforming on profitability rises to 27%. In sectors like finance and healthcare, diversity on boards correlates with better decision-making and innovation.

However, despite these benefits, progress remains slow. For example, in Singapore, women held only 16.2% of board seats in 2022, far short of the 20% goal. Similarly, in the U.S., underrepresented racial and ethnic groups held just 22.2% of board seats in Fortune 500 companies as of 2022.

Gender diversity on Indian boards is associated with better corporate governance and decision-making. Moreover, research shows that companies with diverse boards are more innovative and effective in handling corporate social responsibilities (CSR), which boosts their sustainability performance. However, like in many other countries, the correlation between gender diversity and financial success remains inconclusive, with mixed results on its impact on profitability.

Balancing the Two Approaches

The question remains: Should diversity be a corporate goal driven by business outcomes, or a public mandate? The answer may lie in a balance. While public policy can enforce minimum standards, businesses that embrace diversity as a strategic asset are likely to see enhanced innovation, better decision-making, and stronger financial performance. Moreover, diversity is not just a business issue but also a social one, reflecting the values of fairness and representation in leadership.

Way Forward

While the regulatory framework has laid the groundwork for increasing diversity, much more needs to be done to bridge the gap between policy and real-world progress. Companies must go beyond compliance and recognize the value that diverse boards bring. Empowering women in leadership roles, creating more pathways for diverse candidates, and changing the corporate culture will be essential for sustained progress.