Diversity on boards reflects what society looks like

The board of directors is responsible for the highest level decision-making and governance oversight in any company. It sets the tone for how a company carries out its functions and presents itself to the public. Boards are composed of those who bring knowledge, experience and vision to help the company achieve its goals and good corporate governance.

Under the Companies Act, 2013 (act), a private company must have at least two directors and for public companies, a minimum of three is required. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODRs), provide that the boards of the top 2,000 listed entities shall consist of at least six directors.

Unlisted public companies with a paid-up share capital of INR1 billion (USD1.15 million) or more or a turnover of INR3 billion or more must appoint at least one woman director to its board. Further, the LODRs require the boards of the top 1,000 listed entities to have at least one independent woman director. The inclusion of women as directors should be acknowledged as having a positive impact. Women on the board significantly improve a company’s culture and overall performance.

One-third of the board of every listed company must be independent directors. Every unlisted public company having a paid-up share capital of INR100 million or more; a turnover of INR1 billion or more, or an aggregate of outstanding loans, debentures and deposits of at least INR500 million or more has to appoint no fewer than two independent directors to its board.

Independent directors play a vital role in promoting good corporate governance and safeguarding the interests of all stakeholders, particularly minority shareholders. As reported by the Expert Committee on Company Law, independent directors bring objectivity to board processes, benefitting the general interests of a company, and the minority interests and smaller shareholders.

The Companies Act and the LODRs prescribe detailed eligibility conditions for the appointment of independent directors. They should have no pecuniary relationship with the company that could jeopardise their independence. They should be persons of integrity and possess relevant expertise and experience.

Board diversity is the key to better corporate governance. Such a widening of board membership brings essential knowledge and insights from different genders, ages, ethnicities and educational backgrounds. A diverse board helps a company to make better decisions, improve its performance and foster a culture of inclusion. The company enhances its reputation by being more innovative, forward-thinking and socially responsible. Diverse boards prevent groupthink by bringing new perspectives to discussions and policies.

The audit committee is a committee of the board. Among its other responsibilities, it liaises with external and internal auditors and the company’s management. It oversees internal control mechanisms and scrutinises related party transactions. All members of the audit committee, including its chairperson, should possess the ability to read and understand financial statements. At least one member shall have accounting or financial related management expertise.

The Companies Act requires every listed entity and every unlisted public company meeting the financial thresholds that require the appointment of at least two independent directors set out above to set up an audit committee. This body must consist of a minimum of three directors with the majority of them being independent directors.

The LODRs require two-thirds of the members of the audit committee of a listed entity to be independent directors. All members of the audit committee of a listed entity having outstanding equity shares carrying superior voting rights (SR equity shares) must be independent directors. The chairman of the audit committee of a listed entity must also be an independent director.

Diverse boards with strong audit committees ensure high audit quality, better decision-making and better risk management. The existence of a well-qualified audit committee improves the quality of internal corporate governance by complementing the board in effectively monitoring managerial actions.

Mayank Mehta and Jayesh Kothari are partners at DSK Legal
The authors would like to thank principal associate Pooja Khanna for her contribution