CFA Institute's inclusion push to take account of caste, gender neutrality

The focus has recently been on new-age technology companies, where disclosure quality, audit quality, and shareholder rights are areas that have attracted regulatory attention, says Arati Porwal

Caste will be among the factors considered for the voluntary diversity, equity and inclusion (DEI) code being worked on for India, similar to the code being rolled out for other markets by the CFA Institute. The not-for-profit institute conducts the chartered financial analyst (CFA) exam, considered the gold standard in investment management globally. The DEI code is slowly being rolled out across that world, beginning in North America. It’s being adapted for Europe, and a version is expected to be worked on for the Asia-Pacific market, including India, by early next year. In a conversation with Sachin P Mampatta, CFA Institute Asia-Pacific region managing director Nick Pollard and country head (India) Arati Porwal talked about governance, inclusion and diversity. Edited excerpts:

There have been some issues related to governance that have come to light in recent days (Adani, Byju's). How do you see the trend in governance standards in India shaping up?

Porwal:If one takes a medium- to long-term view, India has seen several corporate governance reforms, the most recent being the implementation of the Kotak committee recommendations of 2017. Some areas have seen many improvements, be it board independence, where independent directors are more conscious of their responsibilities, or related party transactions, where successive reforms have reduced the materiality threshold for shareholder approval and improved disclosures over time. However, there are areas where improvements are needed….One step in that direction could be for companies to separate their chairperson and CEO (chief executive officer) roles to strengthen board independence.

The focus has recently been on new-age technology companies, where disclosure quality, audit quality, and shareholder rights are areas that have attracted regulatory attention. For example, given that some of these companies are not yet profitable, the companies’ use of key performance indicators (KPIs), the need for continuity in these disclosures, and assurance around these measures have become important.

Is the dominance of promoter-led companies a hurdle to improving minority shareholder protection in markets like India?

Porwal: Promoter-led companies are a feature in many markets, including India. Promoter ownership brings some benefits; the owners may adopt a longer-term perspective and a stakeholder orientation. But there are challenges as well. These range from the challenges to board independence we described earlier, questionable related party transactions, to excessive executive compensation not linked to performance.

Promoter-led company issues are not limited to family-owned firms. They may extend to Indian subsidiaries of multinational companies, which also have challenges in terms of board independence and related party transactions. In our report, independent directors in the Asia Pacific, we studied seven subsidiaries of prominent multinational companies. None of them had an independent chair, and many of them did not have more than 50 per cent of independent directors on their boards. Most of these companies paid a significant amount of royalties as a proportion of their net profits to their parent companies, and the amount in several cases exceeded their dividend payments by a significant margin. Minority shareholder protection is therefore a generic issue, not restricted to a type of company.  

There has been a lot of talk about inclusion and diversity helping with governance, how important is gender diversity to the CFA institute?

Pollard: One in four CFA candidates in India are women (though only 11 per cent of the members are women). In China, which probably has the highest percentage anywhere in the world, just over 50 per cent of the candidates are women. One of our board members is a charter-holder and the CEO of the largest asset management company in China…great role models for us to be able to tell the rest of that market and maybe the rest of the world that there is space for everybody.

There is also an established body of research which shows issues with regard to caste diversity in India. Would you have had a chance to think about the issue or form a perspective on this?

Pollard: The CFA program is about as democratic as it gets in terms of access. It’s not about going to the right school or….the right background…or any of those things which might be seen as advantages that someone has over the other….Its open to all.

Porwal: We have a DEI code which is right now very America-centric. We are looking at adapting it for the Asian markets as well. We’ll be starting work on that. The intention of the DEI code is to look at inclusion across the spectrum…irrespective of anything be it caste, religion, race, etc. If here we have issues with caste, in America and other markets it might be race. Our intention is to increase the level of inclusion irrespective of all that. The idea of introducing the DEI code is to encourage organisations to do that. Inclusion would mean that when they are hiring…one needs to be gender-neutral, caste-neutral, race-neutral.

We would like to encourage organisations which have practices which ensure that these factors are not even noted or recorded during the process of recruitment.

What we are striving for is a transparent market, a professional market which is growing because there is professionalism, ethics and education in the market. That can only happen if there is sufficient inclusion of all sectors of society and decisions are being made rationally and not on the basis of factors like this.

Is there room for affirmative action there?

Porwal: Yes, there is room. We intend through the code and its adoption to encourage affirmative action. But the basic requirement would be that there are practices which ensure inclusion which means that these factors are not even taken into account. That you don’t look at gender, you don’t look at…

But can they do that? Would it not show up in name, background, appearance?

Porwal: We did this event in March. One of the speakers was a recruiter. They mentioned new AI (artificial intelligence) recruitment technology which masks the gender completely while making the recruitment decisions on shortlisting (applicants) from a database. So, it is possible to do. Just mask people’s résumés or last name. Give them a code. You can use AI to do that, eliminate those biases. At least from a short-listing perspective you are able to remove those biases.

Are you aware of any organisations which currently practice that in India?

Porwal: We haven’t really gone in and looked for that but when we introduce the DEI code that is our intention. We encourage organisations to adopt that code. If they are adopting that code, then they will have to demonstrate that they are doing these activities. There will be a process of reporting.

Pollard: It almost governs itself. For instance, in North America, the firms that have signed up for the DEI code took out an ad saying that they had signed up for it and what it stood for. Now that means that’s public knowledge. Anybody who reads that and says that’s not the way I was treated by your company, and social media being what it is, they will be all over that.

So, you see what I mean when I say it governs itself? Once you’ve made a bold statement because you know it’s good for your brand to be out there in the market associated in this context with diversity… you have to live up to those ideals.

What about the pushback that people might get from people who disagree, perhaps more conservative in their leanings? Could that make firms more reluctant to make those declarations?

Pollard: I think that’s exactly the point, in many ways. The level of knowledge that we as consumers have today about anybody we are prepared to do business with is enormous. And you’d like to think that what it means is that people are making informed decisions, in this context, about who they choose to invest their money with. And particularly members of the younger generation are heavily concerned about the impact of a firm on society, their treatment of employees, their approach to CSR (corporate social responsibility)….these are all decision-making factors in an investment context almost as important as the rate of return of the underlying funds. If you choose to ignore this…in my view with each passing generation you’re going to get less and less business out of the market because people won’t want to do business with you.