National Council of Applied Economic Research
Opinion: Ratna Sahay.
The Companies Act (2013) implemented in 2015 marked a turning point for the presence of women directors in corporate India. This Act required all listed firms to have at least one woman on their board. In a recent paper, Mahima Vasishth, Navya Srivastava, and I looked at the trends of female leadership in corporate India. We examined whether the presence of women in boards led to better firm performance and firm culture, and whether there were any positive spillovers to top management positions. We also scrutinized whether director characteristics of men and women such as age, education, and independence changed after the mandate.
In just a year after the Act was implemented, the percentage of listed firms without women on boards dropped from 53 percent to under 10 percent, highlighting the policy’s immediate impact. Moreover, the share of women on boards also doubled from 5 percent in a year.
Despite this progress, India still lags global benchmarks. By 2021, the average share of women on boards in India was just over 17 percent, lower than the global average of nearly 20 percent. It was significantly behind countries like France, where women held over 43 percent of board seats. More concerning is the representation of women in management roles. In 2019, only 17 percent of senior and middle management positions in India were held by women, a stark contrast to the global average of nearly 33 percent.
There is a lively ongoing debate on the impact of gender composition on corporate boards on firm performance, with diverging evidence based on different national and cross-country settings. A 2018 global study found a strong positive association between share of women in boards and firms’ financial performance.
Gender gaps in corporate leadership—stylized facts
We not only found a sharp increase in the share of women on boards across most firms within a year after the board mandate was implemented, but surprisingly, the average firm had hired well beyond the mandate over time. By 2023, the share of women in boards had reached nearly 16 percent. This possibly indicated the positive experience gained by firms by hiring more women directors, an issue we explore in our paper.
Unfortunately, the positive developments on boards did not extend to top management positions. The share of women in C-suite positions remained stagnant, ranging between 15 percent and 18 percent over the five years following the board mandate. Worse still, more than half of the firms listed on the NSE still had no women in their top management teams in 2023.
Female director profile following the mandate: who was being appointed?
A criticism of gender quotas is the potential for “tokenism”, where women are appointed as non-independent directors (for example, through familial connections) merely to fulfill a quota rather than for their qualifications or expertise. However, our data indicate that this concern is largely unfounded in the Indian context. The share of independent women on boards increased after the mandate, surpassing the share of independent men.
We also found that the women’s average education levels had caught up with men’s by 2012 and surpassed them in the following years. The education gap widened further in the year after the Board mandate. The implementation of the quota did not lead firms to compromise on the quality of women being hired, at least regarding education levels.
Even before the mandate was enforced, women appointed to boards were generally younger than their male counterparts, with an average age gap of around seven years. Following the mandate, this gap widened, as the women added to boards were significantly younger than both their male counterparts and the women already serving on boards. This suggests that the mandate may have led to a new generation of female leaders joining the corporate sector.
We also find that women directors were stretched thin post-mandate, holding significantly more directorships relative to men. This may indicate a shortage of qualified women or that firms were not casting their nets wider in their recruitment efforts to find women.
Regarding the degree of participation in board meetings, women directors attended fewer board meetings than men before the mandate. This attendance gap narrowed post-mandate, with meeting attendance improving for both men and women by nearly 7 percentage points and 15 percentage points, respectively, over the next five years. These developments suggest that a more gender balanced board facilitates better board monitoring and oversight of firms.
Women directors and firm outcomes—did financial performance and organizational culture improve or deteriorate?
In our sample of over 1,400 firms listed on the National Stock Exchange, covering the period 2006-20, we found a significant positive relationship between the presence of women on boards and financial performance, where the latter was measured by profits, returns on capital, debt-equity ratio. However, this relationship held for medium- and large-cap firms, but not for small firms. The improvement in financial performance for the larger firms persisted over time, whereas the positive impact on smaller firms dissipated quickly.
Regarding organizational culture, we collected data from over 2,000 firms by web-scraping employee reviews and sentiment scores, starting in 2017. Our analysis indicates that firms with sustained female board representation had better outcomes, but only if there was at least one woman in top management. Employee reviews indicated higher levels of job satisfaction, improved career growth opportunities, and better perceptions of job security, when women were present in both boards and top management.
Why do more gender-balanced boards lead to better firm performance?
There are a few plausible mechanisms identified in the literature that explain the positive relationship. First, gender-balanced boards may help substitute for weak corporate governance, with women directors potentially enhancing oversight and monitoring. Second, discriminatory hiring practices may result in women of higher quality being appointed to boards, contributing to better firm performance. Our analysis supports both mechanisms. Third, women bring diverse perspectives and networks that may improve boards’ decision-making, leading to better financial performance, risk management, and employee welfare.
Policy implications
As India’s experience shows, implementing gender-based quotas on board membership improves a firm’s financial performance. This makes a business case for creating more gender-balanced boards. Expanding the representation of women in top management in the presence of gender-balanced board, has the additional benefit of enhancing employee satisfaction. This makes the case for introducing gender-based quotas or targets for top management positions.
In the specific case of India, to maximize corporate performance, additional efforts must be made to cast a wider net to find qualified women. This should not be too difficult because women are attaining higher education levels in a wide spectrum of fields that are on par with men.
Ratna Sahay is an Honorary Professor at NCAER. Views are personal.