Why firms should appoint ‘networked’ women directors

India has introduced regulations mandating companies to appoint woman directors on their boards, to improve gender balance at the top. In this context, this article traces the evolution of women-director networks in listed firms during 2010-2020. It finds that networked women directors are more involved in board activities, and positively impact firm performance through bridging information gaps and improving corporate governance.

Women in India have lower access to formal employment opportunities owing to a multitude of factors, key among which are their lower educational attainment, the persistence of gender-biased social norms, and firms attaching lower value to women workers based on the perception that such workers have a lower attachment to their jobs (World Economic Forum, 2014). Furthermore, the career trajectories of women employees are inferior to that of male employees owing to marriage and motherhood penalties, among others (Arena Jr et al. 2023, Healy and Heissel 2024). In fact, until 2013, less than 5% of director positions in India were held by women, despite compelling evidence from around the world that women directors improve firm performance and governance (Adams and Ferreira 2009, Post and Byron 2015).

In order to improve the representation of women in corporate boards, India mandated under the Companies Act, 2013 that listed companies must appoint at least one woman director on its boards in a phase-wise manner with effect from 1 April 2014. The mandate compelled companies to appoint women on their boards, with many women directors taking up multiple directorship positions across companies. This consequently led to an increase in women-director interlocks and placed them in more central positions in the entire director network.

Director interlocks are viewed as crucial means through which directors bring in resources and information, as well as improve the quality of monitoring, since interlocked directors have more experience and reputations and are viewed as having better ability to monitor (Hillman and Dalziel 2009). However, director interlocks can also negatively influence the monitoring ability of the directors as they become busy on account of multiple directorships and, therefore, have less time to devote to the affairs of a particular company (Ferris et al. 2003). Against this backdrop, our study examines how the network of women directors evolved with the introduction of gender quota regulation, on account of interlocking, and whether such network of women directors affects firm performance (Biswas et al. 2023).

Gender diversity regulation

Norway was the first country to introduce a mandatory gender quota in boardrooms in 2003, whereby 40% of the board seats were reserved for women directors. Following Norway, several countries such as France, Germany, Italy, and others mandated the representation of women directors in corporate boards, while other countries like Australia, Germany, and the United States, adopted voluntary codes to foster gender diversity on boards. Notably, India is the first among the few emerging economies to enact gender quotas for listed firms. Under Section 149(1) of the Companies Act, 2013, publicly listed companies were required to appoint at least one woman director, irrespective of the type of directorship.¹ Considering that the average board size of listed companies is around nine, the minimum requirement translates to about 10% of directors on board being female. Following the enactment of Section 149(1), the gender quota law was incorporated in the listing regulations of the country’s stock market regulator, the Securities and Exchange Board of India (SEBI), under the Listing Obligations and Disclosure Requirements (LODR), 2015.

Data and methodology

We use the Indian Boards database maintained by Prime Infobase, to obtain director-level information such as names of the directors, gender, type of the director, for all National Stock Exchange (NSE)-listed companies in India for the period 2010 to 2020. For obtaining firm-level information for the same time period, we rely on the Prowess database of the Centre for Monitoring Indian Economy (CMIE). The director’s network was computed from the directorships in all the listed companies in the Indian Boards database using 252,092 directorships of 2,085 NSE-listed firms.

To assess the evolution of women-director networks, we compute two network centrality measures, namely degree and betweenness centrality. The degree centrality measure computes the number of connections of a woman director. On the other hand, the betweenness measure gives the number of paths that pass through a director for connecting any two directors in the network. It reflects the bridging function performed by a woman director in the network (Freeman 1979).

From the director-level measures, we obtain the firm-level woman directors’ centrality measures by taking the average of the values of degree and betweenness for the woman directors on the board. The outcome variables are the market and accounting measures of firm performance, namely Q-ratio and return on assets (ROA)². Leveraging the regulation, we use an ‘instrumental variable’ methodology to assess the effect of women network on firm performance^3,4.

Findings

Figure 1 below shows that women interlockers (those with at least two directorships) were less than 4% of total interlockers before the gender quota regulations, and this increased more than threefold between 2015 and 2020. Even women directors holding three or more directorships (big linkers) increased from 2.8% to close to 20% by 2020, more than 17 percentage points increase in 10 years.

Figure 1. Share of women interlockers and big linkers

Figure 2. Number of women among top-100 directors, by network centrality measures

Further, as is evident from Figure 2, the number of women directors among the top-100 directors in terms of their centrality (both degree and betweenness) has also increased since 2015, indicating the growing importance of women in director networks in the post-gender quota period.

Next, we assess the relative importance of women in the director network in terms of ‘power gap’ – calculated by taking the ratio of mean (average) centrality of women and male directors, and deducting this ratio from one (Eckbo et al. 2022). The power gap remains stable for degree measure and declines for betweenness (Figure 3). In fact, it turns negative for in the period after 2018, suggesting the prominence of women in performing the bridging functions in the director network, especially in the post-quota period.

Figure 3. Power gap between women and male directors, 2010-2020

Next, applying our methodology to the firm-level data, we find that the women director network positively impacts the market measure of performance. Women directors are found to bring value to the firm both through the number of connections with other directors and by acting as a bridge for information flows as well as influence. On exploring the possible mechanisms, we find evidence that in the presence of higher information opacity as proxied by high stock price volatility, women-director networks have a greater impact. This suggests that access to information is a possible mechanism through which women network improves performance.

With regard to the influence of networked women directors on governance, we find that firms with a powerful Chief Executive Officer (CEO) on board (as proxied by CEO duality, where the CEO of the company also serves as the chairman on the board – a phenomenon that is widely prevalent among family firms in India), stand to benefit more from women-director networks. This result suggests that women directors with more connections positively influence a powerful CEO to act in the interest of outside shareholders. For the information and/or the influence channel to work it is necessary that networked women directors are involved in board deliberations. We find evidence of this from our director-level analysis, which reveals that more networked women directors attend a higher share of board meetings and occupy more positions in important board committees (risk management committee, nomination and remuneration committee, audit committee, corporate social responsibility committee, and stakeholder relationship committee).

Concluding remarks

Our results contribute to the debate on the need for a critical mass of women directors to affect firm outcomes. We find that networked women directors can bring valuable resources to the firm, and have the ability to mitigate agency costs⁵. In light of this finding, adding even one woman director to the board, someone who occupies a central position in the director network, can be sufficient to impact firm activities. Our key recommendation is that the discourse on gender quotas needs to go beyond mere numbers to focusing on the appointment of influential women who are more central in director networks and can help firms bridge information gaps and improve governance practices.

Notes:

The Rules with respect to the implementation of this Sub-section was notified on 31 March 2014 and required that all listed companies, as well as all unlisted registered companies with a paid-up share capital of Rs. 100 crore or more, or turnover of Rs. 300 crore or more, have to appoint at least one woman on their board within six months of the notification. Sanctions for non-compliance to the gender quota under Section 172 of the Companies Act, 2013, ranged from a minimum of Rs. 50,000 to Rs. 5,00,000.
Q-ratio is defined as the ratio of market value of equity plus book value of debt divided by the book value of assets. ROA is defined as the ratio of profit before depreciation, interest, and tax to the book value of assets.
Instrumental variable approach is a commonly employed econometric technique to address ‘endogeneity’ issues due to omission of important time-varying unobserved factors (for example, more able and committed women directors – an omitted variable – may end up occupying multiple board seats; hence, one can argue that director networks are in fact capturing the effect of director ability), simultaneity (outcome variable and explanatory variable being simultaneously determined, such as firms may jointly decide growth strategy and woman director appointments) or reverse causality (outcome variable having an effect on the explanatory variable, such as better performing firms may appoint more networked women directors). If there is endogeneity, it is difficult to obtain the effect of the explanatory variable (women network) on the outcome variable (firm performance). An instrument is a variable that it is highly correlated with the explanatory variable but has no theoretical relationship with the outcome variable. In the econometric specification, we also control for firm fixed effects in order to capture firm-level, time-invariant unobserved factors. This addresses the issue of endogeneity as explained above.
There were firms that already had women directors before the regulations (‘control’ group) and hence, were unaffected by the introduction of quota. Firms that did not have a woman on their board in the pre-quota period were mandated to appoint one in the post-quota period (‘treatment’ group or those that are subject to intervention). The woman network is likely to increase ‘exogenously’ (a change external to the firm) due to the appointment of women directors by these treated firms. We consider treated*reform as the instrument for the women network variable. This is a binary variable taking the value 1 in the post-quota period and 0 in the pre-quota period.
Agency cost arise due to competing interests of the managers of the firms and the shareholders of the firms. The idea of agency cost was proposed by the seminal paper by Jensen and Meckling (1976).