Key events from 2020 have brought racial inequality to the forefront across the globe. Racial/ethnic diversity on boards is coming under increased scrutiny as calls come for boards to better represent corporate stakeholders (customers, employees, suppliers) and the evidence grows that diversity has a positive impact on an organization’s capacity to innovate. The limited data available suggests racial/ethnic diversity at privately-held companies is behind that of publicly-held companies. As the investor push towards DEI disclosure gains momentum, the Private Equity (PE) industry faces unique challenges to address what is fast becoming an imperative.
To support firms as they progress on their diversity journey, Sarah Green-Vieux, Head of Research and Education at Novata spoke with its ESG Advisory Committee member and Harvard Business School Professor Dr. Linda Hill.
Can you give us some context on the evolution of ethnic and racial diversity at the board level in PE firms?
Most of my research has been in the public corporation space, but part of that research included engaging in conversations with Black executives in particular about their board experiences and hearing that PE firms are reaching out to them more than ever before. I recently interviewed a number of Black women executives and serial entrepreneurs for an article I am writing and many described that they were being courted and/or had recently joined the board of a privately-held firm.
In fact, in the last four years, I have been approached by a number of firms to discuss board possibilities and/or to consult with them on how to improve their track record in attracting and retaining diverse talent—both employees and board members. Initially, firms were concerned about increasing the number of women on their boards; more recently their attention has begun to include adding more racial and ethnic minority representation. Why the increased interest? Some cite regulation. Countries in Europe and states like California passed legislation that will require more board diversity. NASDAQ recently published board diversity rules, and the SEC is expected to release human capital and DEI regulations soon. The second factor is societal pressure. People who reach out to me are concerned about meeting growing expectations from their employees, customers, and suppliers about racial equity on the board. Frankly, there is growing, but still limited research on the evolution of board diversity in publicly-held companies. I don’t really know of any systematic research on privately held companies; there simply is not much transparency on how those boards work in general. I suspect the numbers are improving, albeit slowly, with racial minorities.
Should addressing board diversity be a priority for private equity?
A PE firm’s long-term success is dependent on how expeditiously it can make its portfolio businesses attractive so they can exit them and redeploy their capital. More firms are recognizing that diversity and inclusion are aligned with achieving the PE firm’s business objectives.
Stakeholders (employees, customers, communities) expect to see themselves represented at even the highest levels of organizations these days. Boards and the C-suites of companies understand all too well the reputational risks associated with missteps around diversity and inclusion given the power of social media. Look at sites like Glassdoor—and you find that companies that are not perceived as inclusive are viewed as less attractive places to work—and the war for talent is alive and well.
How can board diversity help drive innovation?
For almost two decades I have studied what it takes to build an organization that can routinely innovate. It is hard to sustain success in today’s competitive environment without innovation. You rarely get innovation without diversity of thought. Diversity of thought is not the same as demographic diversity—experience tells us that—look at Silicon Valley. But demographic diversity is associated with diversity of thought—our lived experiences impact how we think. The ACT Report found that “with diverse [demographic] management teams achieve 19% higher revenue from innovation.”
But just because individuals on a board think differently, that does not mean that diversity of thought will be leveraged and harnessed for the good of the firm. Too often that diversity of thought is not unleashed; contrarian views are not aired. There is pressure to go along to get along on boards like in other social groups. To make the risk/reward calculations required for innovation, boards must have the capacity to engage in creative abrasion—that is the ability to generate a marketplace of ideas through debate and discourse. In an HBR article I co-authored on boards and innovation, we describe that many boards (which are still largely men and White individuals) are unable to engage in creative abrasion. Board members and the C-suite admit that they struggle to establish the sense of psychological safety and trust required to grapple with the big bets associated with breakthrough innovation.
And we can assume that when demographic diversity increases on boards, those boards will struggle to create a culture of inclusion in which all feel free to express their views and fully utilize the diverse insights, expertise, and experiences of the board members. In an invitational workshop with White and Black directors of public companies, all believed that it was important to have demographic diversity on the board, especially with the rise of stakeholder capitalism and ESG. It is important to have people with different lived experiences at the table when trying to appreciate the priorities of different stakeholders or figure out how to best communicate a firm’s choices. But they also admitted how hard it was to engage, for instance, on topics associated with race. We spent much of our time discussing how to navigate what are often uncomfortable conversations, conversations that both majority and minority directors describe as taking “courage.” As boards tackle ESG challenges and opportunities, it can be helpful to have members on the board who represent the different perspectives of their diverse stakeholders.
When it comes to board diversity, what challenges are specific to the private equity microcosm?
The size, profile, involvement, and operating modes of private boards differ from those of public boards. Private boards are generally smaller. Many board members, if not most, are investors in the company. Board members are expected to be more hands on and engaged in the life of the company. Consequently, the skillsets sought for board members of privately-held companies are usually very targeted – people are elected to the board to lend specific expertise required to turnaround or grow a business. For sure, racial/ethnic minorities are less likely to have the capital to be investors. Depending on the skillset, the pool for racial/ethnic minorities may be small—but I suspect not as small as some might think. One challenge we are finding in our research is that many racial/ethnic minorities these days are first-time board members; most search firms do not want to nominate someone who has never served on a board.
Frankly, both publicly held and privately held boards prefer to bring on board members whom they know and trust—people they have invested or worked with before. Personal networks still drive board placements, even when a search firm is involved; I suspect that the “old boys network” is even more alive and well in PE firms given the dynamics I described above.
What is the starting point for PE firms hoping to diversify their companies’ boards?
I think the starting point is having a candid discussion about why the firm wants to increase diversity, what challenges can they expect to encounter, and how will they address them. If the firm is not committed to doing what it takes to build an inclusive culture, they should not fool themselves. The chairperson sets the tone for how the board will operate. Boards should not hesitate to turn to consultants or coaches who can provide them with the tools to build an inclusive culture or engage on DEI matters. I am not talking about simply putting everyone through unconscious bias training. I am talking about looking at how the board gets its work done and identifying what changes might have to be made to establish a truly inclusive culture—from their onboarding process, to the nature of social activities, to learning how they all can engage in conversations about race when they arise. By the way, it turns out informal activities, especially trips to customers or global sites, are perceived as especially useful ways for board members to get to know each other and build trust.
There was some debate in our research to determine what the responsibility of the diverse board member is when it comes to raising issues of race/ethnicity in the boardroom. We are finding that most (Black and majority) believe that Black board members are expected to “pay it forward” and be prepared to raise issues of race if they are not being considered. Many noted it is often the demographically diverse board member who ends up requesting that DEI data be tracked with some precision and regularity. When they do, some described feeling like that they were being categorized as the “race director.” Indeed, Debra Meyerson’s research describes how hard it is to play the role of the “tempered radical;” it often comes with a loss of social capital. But all agreed that the time has come for majority directors to assume and share responsibility for bringing up the topic of race when relevant as well. A diverse board member should not be expected to solve the company’s diversity problems. As Professors Robin Ely and David Thomas highlighted “[i]ncreasing diversity does not, by itself, increase effectiveness; what matters is how an organization harnesses diversity, and whether it’s willing to reshape its power structure.” In their work, they identified that valuing different voices, cultures, and styles is what drives value for organizations—not expecting the demographically diverse person to assimilate.
What strategies have been successfully implemented by private equity firms when it comes to diversifying the boards of their companies?
First, do not think “one and done” is an effective approach. In our work, we hear how lonely that position can be. Instead, boards should adopt a practice of developing a diverse slate of candidates whenever doing a search for new members going forward.
Second, be open to the first-time director. At least, have some in your pool. Also think more broadly about experience. There are a very limited number of CEOs and investors who are racial/ethnic minorities. Sometimes individuals may not have C-Suite titles but their experience is spot on—especially in this digital age. Take a hard look at your interviewing process; your human resources executive should be able to tell you about what is considered best practice in reducing bias.
If a person has never served on a board, in particular a PE board, be prepared to provide them with training. Share what is expected of them and co-create developmental experiences for them.
Third, and perhaps most importantly, while numbers do matter, focus on creating an inclusive environment. Inclusion means valuing individual differences, providing equal opportunity for all to be engaged in board discussions and prepared to move into board leadership positions over time. Remember we all work best when we can bring our authentic selves to work.
What advice do you have for diverse board candidates?
First, you should take advantage of opportunities to participate in those activities that support board members of color like the Black Corporate Directors Conference (most are invitation only). I personally received both instrumental and emotional support for the networks I built through such experiences. Being a fiduciary for an organization involves a broad range of responsibilities for which you should be prepared. Proactively ask for coaching or training when you join a board. When you are the first diverse board member to join an organization, most of the other board members won’t have experience working alongside and sitting on boards with diverse individuals like you. I turned down my first board opportunity in my 30s. I felt like I would be a token in the pejorative sense of the word and wanted no part of it—although the money certainly looked good and I did know the industry.
I joined my first board in my early 40s. The CEO was looking to bring in a young person and some diversity. A mentor, who was in the CEO’s “old boys network” recommended me. I believed that I was an “affirmative hire board member,” however, when I met the CEO and his wife, I realized he took me seriously. But let’s face it I was a Black woman academic from Massachusetts joining the board of a manufacturing company in the oil and gas space. I was very different in every way from my fellow board members. It was not always easy for me (they went hunting together) and I am sure that it was not easy for my new colleagues. I did not know what I did not know—the tacit knowledge all the others had—white CEOs of major corporations. Another Black director eventually joined the board; he became the lead director and I became the chair of the compensation committee. I had no idea how naïve I was when I started. It would have been invaluable to connect with other diverse board members who could have advised me on how to navigate board dynamics.
I have never served on a PE board but I have served on a start-up board which went through an IPO and now we are listed in NASDAQ. I think start-up boards probably work more like PE boards. The board is smaller; you meet more regularly. I find you work more closely with each other and the management team.
Second, I think diverse board candidates should do as much due diligence as possible about the board dynamics and how the board interacts with management. Ask them why they are interested in you–how do they expect you to contribute. You should make sure you are comfortable with the way things are done and feel that your values fit the values of the organization (though you can’t really know until you get on the board). Your reputation is tied to the reputation of the organization. If you feel over time you are not being taken seriously or something isn’t working, raise your concerns with the lead director and/or CEO—life is too short. If it turns out the relationship is not working, do not be afraid to resign gracefully.
Looking Forward
In order to remain competitive, companies need to innovate. One way to improve the board’s capacity to innovate is to create an inclusive environment that fosters diversity of thought. What better place to start culture change than at the top. As one CEO put it, change starts with “Mirror Mirror” and an honest and in-depth look at your culture and processes. Do we have an inclusive culture? If not, are we prepared to change our mindsets and behaviors and maybe develop some new skills (creative abrasion)? How can we most effectively build a pipeline of diverse candidates who meet our requirements? Do we have the right processes in place for attracting and interviewing them? Have we thought through our onboarding process and the training the new board member might need? DEI is fast becoming an imperative; the journey will bring challenges, but the payoff cannot be overstated.
