INTERNATIONAL CORPORATE GOVERNANCE AND TRANSNATIONAL CORPORATIONS
“Since the mid-1990s the board of directors has become a central figure of corporate governance. While the role of independent directors as a monitoring mechanism has been widely endorsed, more recently boardroom diversity has been emphasised at domestic, EU and international levels. Among others, policymakers have attempted to promote effective participation of women in board decision-making”.
Over time, the board of directors has become fundamental to corporate governance as a result of the critical role they play in the success or failure of a company as a whole. Principle A of the United Kingdom (UK) Code of Corporate Governance (the code) provides that a successful company is led by a competent and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, thus creating value for shareholders and contributing to broader society.
Just as the board is central to corporate governance, the composition of the board determines its effectiveness. The structure of the board has been the subject of debates among scholars who have sought to determine the most effective board formation. Non-executive directors, in particular, have been described as the cornerstone of good governance as they function as both supervisors of the executive directors, while also being instrumental, in the most part, to the general administration of the company. To ensure that the directors objectively act in the interest of the company, the importance of the independence of the non-executive directors has been generally favoured by various codes and reports since the mid-1990s.
This essay examines the extent to which board independence has been endorsed over the years, looking at the provisions that have been made on independence criteria for non-executive directors. It further focuses on the diversity of the board, which has recently become a cause for concern is. One of the reasons for this is that board diversity has been said to allow for diverse perceptions and insights on the different issues that a board has to evaluate. Finally, it examines how different levels have sought to promoting gender balance on the board, by appointing more women as independent non-executive directors.
BROAD ENDORSEMENT OF INDEPENDENT DIRECTORS
For over half a century, one of the features found in corporate governance regimes with dispersed ownership structure is that of directors that are independent of the corporation where they function as board members. This idea was reportedly first introduced as a component of corporate governance in the Investment Company Act of 1940 by the United States (US) Securities and Exchange Commission, whereby 40 per cent of the Board where required to consist of independent directors, thus reaffirming a New York Stock Exchange listing rule of 1931 which required independent representation on the boards of investment trusts. As a result, independence of directors has been reported as “…a tool of agency theory that has found its way from the Anglo-American paradigm of corporate governance to the corporate governance systems of concentrated ownership corporations”.
From the first version of the UK Corporate Governance Code (the Cadbury Report) published in 1992 by the Cadbury Committee, the importance of the independence of the non-executive directors was emphasised. In the recent code, the UK Corporate Governance Code 2018, Provision 11 states that in “at least half the board, excluding the chair, should be non-executive directors whom the board considers to be independent”. The code also sets out circumstances which are likely to impair or could appear to impair a non-executive director’s independence in Provision 10. This is a voluntary regulatory code with a predominant feature that corporations have to either follow the code or explain why they are not following it.
Additionally, the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance 2015 highlights the importance of board independence. It provides, among other things, that:
In order to exercise its duties of monitoring managerial performance, preventing conflicts of interest and balancing competing demands on the corporation, it is essential that the board is able to exercise objective judgement. In the first instance, this will mean independence and objectivity with respect to management with important implications for the composition and structure of the board. Board independence in these circumstances usually requires that a sufficient number of board members will need to be independent of management.
The OECD principles recommend that boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement, just as it considers the significance of independent board members’ contribution to the board’s decision making. This is because they will not only bring an objective view to board evaluation, they can also “…play an important role in areas where the interests of management, the company and shareholders may diverge”.
The prevalence of independent directors as machinery for governance is evident as at 2014 it had been included in the list of the six practices that feature across the corporate governance codes of 46 countries.
Board diversity has been defined as the percentage of women, African-Americans, Asians, and Hispanics on the board of directors. The academic, policy, and advocacy discourse surrounding board diversity frequently justify the push towards it in two ways: by making the social case, which centres on equality, and by advancing a business case, which centres on economic performance. While some scholars believe that diversity generally has a positive effect on financial performance, others have stated that the relationship between diversity and firm performance has not been convincingly established.
Several issues surrounding the composition of the board has attracted renewed debate. Recently, questions about the gender balance and ethnic representation at board level have arisen in various contexts. It has been noted that boardroom diversity will dilute the ‘groupthink’ which contributes to the lack of constructive challenge within a board, resulting typically in poor-quality decision-making. Additionally, it is averred that diversity widens a company’s talent pool, thus creating a competitive advantage for the company.
Initially, the demands to redress the gender balance in boardrooms by appointing more women as independent directors, has been sought along with the push for independence. After the Global Financial Crises of 2007-08, the demand for independence in the UK and at the European (EU) level has been overridden by the need to change the character of the board composition to incorporate a diversity element, which mainly construed to be the appointment of more women as independent directors.
The lack of gender equality in corporate boardrooms, and in the governance of economic institutions more generally, has indeed raised an intense global debate. In 2010, the International Monetary Fund’s Managing Director, and at that time France’s Finance Minister, Christine Lagarde opined that the face of the global financial crisis would have had a very different complexion “if Lehman Brothers had been ‘Lehman Sisters’”. While her comment was viewed favourably in some quarters, it elicited critical comments from others.
In an attempt to encourage active participation of women in board decision making in the UK, Lord Davies was invited by the UK’s Coalition government to assess the issue of the lack of progress in the representation of women on boards and address same. This led to the Lord Davies’ Report in 2011 which reviewed the practice of Financial Times Stock Exchange (FTSE) 350 companies and recommended, among other things, that these companies should introduce a 25 per cent minimum threshold of women in the boardroom. The issue of gender diversity gained prominence in the UK following the publication of the Davies’ Report as it was reported that in 2010 women made up only 12.5 per cent of the members of the corporate boards of FTSE 100 companies, which was up from 9.4 per cent in 2004, but the rate of increase is too slow. The report also stated that there was economic evidence to support the case of more women on board.
It is pertinent to note that this recommendation of 25 per cent female representation on the board does not form part of the UK Code of Corporate Governance, and as such the requirement for companies to “comply or explain” will not be applicable here. Nevertheless, the follow-up report published in 2012 showed that there had been a significant increase of women on boards of these companies. Since the Davies’ Report was published in 2011 and the follow-up report in 2012, annual reports have been issued in years 2013, 2014, and 2015 updating the situation on board gender diversity in the UK.
Another recommendation made by Lord Davies report was the need for amendment of the corporate governance code by the Financial Reporting Council (FRC) to require companies to establish a policy on boardroom diversity. This recommendation was incorporated in the UK Corporate Governance code 2012, as diversity was introduced and remained in the UK Corporate Governance code of 2014. By 2018, a new Corporate Governance Code was introduced in the UK which reflected the growing trends and debates on board diversity generally. This code introduces new provisions which aim to promote diversity on the board.
Provision 23 of the Code describes the work of the nomination committee to include, among other things, “the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives”. Although it does not particularly recommend a quota, this provision gives the nomination committee an explicit obligation to promote diversity. Therefore, while the provision is likely open-ended, there must be a clear policy on diversity.
Additionally, even though the UK Corporate Governance Code 2018 does not put in place a specific threshold, it emphasises diversity by the introduction of certain principles. Principle J of the code provides that there should be a formal, rigorous, and transparent procedure for the appointment of new directors to the board, and these appointments should be based on merit and objective criteria, as well as promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. This directs the board to create appointment and succession plans in order to promote diversity. Principle L of the Code also provides that annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Thus ensuring that the directors at least consider diversity and how it relates to the company.
These principles were not in any of the previous corporate governance code in the UK, as such there has been an improvement in the UK’s corporate governance regulation to the extent that the “comply or explain” approach will be applicable here, and any reaction to an explanation instead of compliance is left to market participants. However, the code, which is not mandated by law and which attracts no legal sanctions for non-compliance, but is merely dependent on market support for its effectiveness is still soft law.
In 2015, there was another report by Davies on gender balance which showed that in less than five years after the original report of 2011, female representation on corporate boards has doubled to 26 per cent, a positive move as it exceeds the target of 25 per cent set in 2011. This report also increased the voluntary target for women’s representation on Boards of FTSE 350 companies to a minimum of 33 per cent to be achieved in the next five years. Therefore, the current proposal for FTSE 350 companies is to have a minimum of 33 per cent of female representatives on the board of directors. This was fixed because, although reaching the target of 25 per cent set before now is quite commendable, there is still a long way to go if the UK is to remain at the forefront of trends, considering the achievements of other EU Member States
At the EU level, there is much discussion on the issue of board diversity and promotion of women participation on the board. Some EU Member States have legislation in place that introduces compulsory quota mechanisms to promote gender diversity. Norway and Spain were among the countries that had previously legislated and had quota systems in place at 40 per cent.
The publication of Women in economic decision making in the EU: Progress Report in March 2012 found among other things, that the average number of female board members in the largest companies listed in the EU was only 13.7 per cent compared to 11.8 per cent in 2010. After that, the European Commission considered legislation to improve the gender balance on the boards of listed companies in member countries.  
Consequently, in 2012, the EU Commission put forward a proposal for a Directive on improving gender balance which sets out a 40 per cent minimum objective of the under-represented sex in non-executive board-member positions in publicly listed companies, except for small and medium enterprises. The proposed directive observed that boards are currently dominated by one gender and sought to correct same. Though, while striving to achieve equality between men and women, the EU Commission noted that ‘in business leadership, the situation is particularly disappointing: in October 2014, women accounted for just 20.2 per cent of board members of the largest publicly listed companies registered in EU countries’.
While this is a presently a draft, if it becomes a directive, countries in the EU will have to comply by enacting legislation to apply a 40 per cent quota as directed, following the example of Norway and other countries that already have said legislation in place. Many countries in the EU have since enacted legislative measures aimed at improving gender balance in company boards. Hence, while some countries had previously legislated to introduce quota mechanisms, others acted on the possibility of a possible quota imposition from the EU with their respective arrangement to support diversity-based appointments through either legislative intervention like France and Italy, or through amendment of the code of corporate governance and ‘comply or explain’ mechanisms like in the UK.
The proposal, although supported by Parliament, has reportedly remained deadlocked at the Council level, with many EU Member States supporting the objective, but objecting to its restrictive measures. The Commission, however, remains committed to the adoption of the Directive in due course.
Although there have been challenges regarding the promotion of diversity on the board in each jurisdiction, it is note-worthy that positive progress on inclusion can be reported across the EU Member States.
As of 2014, global statistics indicate that women are noticeably underrepresented on the boards of the world’s most significant publicly traded corporations and country-level progress is generally slow. In Europe however, was reported to display the most noteworthy movement toward gender-balanced representation levels, with Norway exhibiting one of the highest percentages of women in global boardrooms, while North America lags behind Europe; Canada trailing the United States- and Asia; especially Japan and China, remaining virtually stagnant. Recently, these statistics have become the subject of regulatory attention, with states seeking to diversify the upper echelons of their corporate sectors by pursuing law-based ameliorative strategies. Therefore, several countries have taken measures to promote the gender diversity on board of companies in their ways.
The Statement and Guidance on Gender Diversity on Boards released by the International Corporate Governance Network (ICGN) in 2013 considers both board responsibilities and investor responsibilities regarding gender diversity on boards. The ICGN in its statement asserts that gender diversity is an essential aspect of governance for a company. It further affirms that: “increasing the representation of skilled and competent women on Boards will strengthen the corporate governance culture and ultimately contribute to value for all stakeholders”.
The OECD Principles of Corporate Governance provides that boards should regularly carry out evaluations to appraise their performance and assess whether they possess the right mix of background and competencies, and this is recommended in order to avoid groupthink and bring a diversity of thought to board discussion. The principles further recommend countries to consider measures such as voluntary targets, disclosure requirements, boardroom quotas, and private initiatives that enhance gender diversity on boards and in senior management.
In Africa, attempts have been made to promote the active participation of women in board decision-making; using South Africa as a case study, the Kings report, which is the South African Corporate Governance Code, has made a recommendation to include women on the board of companies, this is, however, still soft law.
COMPARING THE APPROACH IN THE UK AND NORWAY.
In Norway, a more forward transformative initiative aimed at creating gender balance in boardrooms has been adopted in the form of legislation. With its combination of mandated gender balance and severe sanctions for noncompliance in the form of forced corporate dissolution, the Norwegian quota model represents the boldest assault on traditional market sovereignty. If progress is measured by the rapid increase in sheer numbers of women on boards, Norway unquestionably leads all other jurisdictions.
The UK, by contrast, has taken a less regulatory approach by making recommendations, as is the case with the Davies’ reports, and amending its code of corporate governance to reflect the trends in diversity. Regulators have also chosen to use the tool of information disclosure to promote board diversity, rather than dictating a predetermined outcome that corporations must achieve, thus, companies are asked to publicly report on diversity-related governance information as found in reports or corporate governance code.
Although both jurisdictions have recorded substantial improvements, it can be argued that the introduction of legislation with compulsory quotas in Norway might lead to a faster implementation across companies. However, in both jurisdictions, what is germane is that systems are being put in place to deal with the issue of diversity.
This essay recognises the attempts by policymakers to encourage diversity in the boardroom at various levels, more specifically that of gender diversity. It acknowledges that the most steps taken in this regard can be found primarily in the EU jurisdiction, where there has been substantial compliance with legislation, reports or corporate governance codes by companies themselves to increase the presence of women on the respective boards. Even though the extent to which diversity affects a company’s performance as a whole is still in contention, it is essential that the extent to which there is imbalance on the board is recognised in the world all over, and moves are being made to resolve it in due time, albeit quite slowly in some jurisdictions. It is therefore safe to conclude that although there have been endeavours to ensure women participate in board decision-making, a faster approach would be to adopt the imposition of quotas on companies, as is currently obtainable in some EU member States.
- Dhir A, Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge University Press 2015).
- Hannigan B, Company Law (5th edn, Oxford University Press 2018).
- International Corporate Governance Network, Statement and Guidance on Gender Diversity on Boards (International Corporate Governance Network 2013).
- Mallin C, Corporate Governance (5th ed, Oxford University Press 2016)
- Wheeler S, ‘Independence and Diversity in Board Composition’ in R Tomasic (ed), Routledge Handbook of Corporate Law (Routledge 2007)
- UK Code of Corporate Governance 2018
- OECD Principles of Corporate Governance 2014. <https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf>
- Christine Lagarde, “Women, Power and the Challenge of the Financial Crisis,” The New York Times (10 May 2010), online: <http://www.nytimes.com/2010/05/11/opinion/11iht-edlagarde.html?dbk>.
- Mervyn Davies, ‘Women on Boards’ (2011) Department for Business, Innovation & Skills, London <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/31480/11-745-women-on-boards.pdf>.
- Mervyn Davies, Women on Boards, Davies Review (2015) Annual Report
- EU Commission, ‘Proposal for a Directive of the European Parliament and of the Council on Improving the Gender Balance among Non-Executive Directors of Companies Listed on Stock Exchanges and Related Measures’ COM(2012) 614 final
 Christine Mallin, Corporate Governance (5th edn, Oxford University Press 2016).
 UK Code of Corporate Governance 2018 <https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF> accessed 23 December 2018.
 Mallin (n 1) 181.
 ibid 192.
 ibid 198.
 Sally Wheeler, ‘Independence and Diversity in Board Composition’ in R Tomasic (ed), Routledge Handbook of Corporate Law (Routledge 2007)
 ibid 84.
 ibid 93.
 UK Corporate Governance Code 2018.
 Wheeler (n 6) 84.
 Principle 6 (E) OECD Principles of Corporate Governance 2014 <https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf> accessed 25 December 2018.
 Wheeler (n 6) 83.
 Mallin (n 1) 200.
 Aaron Dhir, Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge University Press 2015).
 Mallin (n 1) 200.
 Brenda Hannigan, Company Law (5th edn, Oxford University Press 2018).
 ibid 132.
 ibid 132.
 Wheeler (n 6) 83.
 ibid 83.
 Christine Lagarde, “Women, Power and the Challenge of the Financial Crisis,” The New York Times (10 May 2010), online: < http://www.nytimes.com/2010/05/11/opinion/11iht-edlagarde.html?dbk> accessed 27 January 2019
 Dhir (n 16) 1.
 Mallin (n 1) 198.
 Mervyn Davies, ‘Women on Boards’ (2011) Department for Business, Innovation & Skills, London <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/31480/11-745-women-on-boards.pdf> accessed 2 January 2019.
 Hannigan (n 18) 133.
 Mallin (n 1) 198.
 ibid 199.
 Davies (n 26).
 Mallin (n 1) 199.
 UK Corporate Governance Code 2018.
 Hannigan (n 18) 129.
 Mervyn Davies, Women on Boards, Davies Review (2015) Annual Report
 Wheeler (n 6) 92.
 Mallin (n 1) 199.
 European Commission, ‘Women in economic decision making in the EU: Progress Report’ (2012) <https://www.west-info.eu/gender-equality-if-not-with-the-good-with-the-bad/progress-report/> accessed 20 January 2019.
 Mallin (n 1) 199.
 European Commission, ‘Proposal for a Directive of the European Parliament and of the Council on Improving the Gender Balance among Non-Executive Directors of Companies Listed on Stock Exchanges and Related Measures’ COM(2012) 614 final
<https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52012PC0614&from=EN> accessed 7 January 2019.
 Mallin (n 1) 199.
 Wheeler (n 6) 92.
 Hannigan (n 18) 132.
 Wheeler (n 6) 92.
 Dhir (n 16) 3.
 International Corporate Governance Network, Statement and Guidance on Gender Diversity on Boards (International Corporate Governance Network 2013).
 ibid; Mallin (n 1) 199.
 OECD Principles of Corporate Governance 2015.
 Dhir (n 16).
 Wheeler (n 6) 92.
 Dhir (n 16).