Private Equity & Gender Parity in the Boardroom, a Love Story

There are stacks of disheartening statistics when it comes to gender inequality and apparently all sorts of awful things are happening faster than achieving gender parity in the boardroom or anywhere else for that matter. According to a recent report by Deloitte, if progress continues to be made at its current pace, gender parity in the boardroom will not be reached until 2038 at the earliest. If we look at the role of CEO, it will be 2111 before we have equal numbers of men and women in that position.

It’s odd, and yet completely believable, that diverse boards aren’t as commonplace as they should be despite gender balanced boards performing better than their all-male counterparts, showing stronger financial performance and improved likelihood of facilitating a successful exit with greater returns. Odd because one would think that even if all ethical and moral obligations were put aside, the chance to see through a more lucrative transaction or enhance financial performance would push progress forwards, and see women being hired onto boards left, right and centre. Believable all the same, you don’t need to be historian to understand why we are where we are. Unfortunately, you don’t even need to be old. 

Where are we now?

• Globally, women are filling only 23% of board seats. (Deloitte)

• Across Europe and the Americas, less than a third of companies are meeting 40% female representation in the boardroom, the generally agreed upon new target for female representation. (spencer stuart, world economic forum)

• The non-executive board is much more likely to be gender balanced than the executive board, only 16% of executive directors in the UK are women whilst women hold 46% of non-executive seats demonstrating some positive progress in this area. (spencer stuart)

• Gender parity in the top role remains elusive with only 6% of CEO positions globally being held by women. (Deloitte)

• The intersectional view of board diversity remains disappointing, a study of private venture-backed companies revealed that only 3% of board members are women of colour. (world economic forum).

Despite the seemingly long road ahead for achieving gender parity in the boardroom, Black Rock recently released a white paper which found organisations with gender balanced workforces saw better financial performance than those that did not. This effect is magnified, the performance gains even greater in organisations with gender balanced boards. The benefits of gender diversity are wide ranging from improved company culture to better financial performance and enhanced innovation.

Key findings from studies exploring the benefits of diverse boards:

• Organisations with diverse leadership are more likely to perform better than industry average on margin growth and more likely to deliver above average profitability.
   
  • A study of FTSE350 companies by diversity consultancy, The Pipeline showed that companies with a 25% female executive committee realised an average profit margin of 16%, more than 10 times higher than those with no female board members. (world economic forum)
  • According to MSCI, companies with boards made up of 3 or more women (or a female CEO and one other board member) have delivered a 36% better return on equity since 2010, than those with boards lacking this diversity. (FT)

• Mckinsey found companies with female representation at board level are more likely to have diverse workforces and the ability to establish inclusive cultures.
• Diverse teams foster creativity and resilience, leading to a higher predictability of returns. Bringing diversity into the boardroom means introducing different approaches and ideas, meaning those boards are better able to navigate unexpected challenges.

The list goes on, there are vast numbers of studies, big and small, that explore the impact of female leadership on company performance. Obviously, the benefits of gender parity in the boardroom go far beyond improved company performance. Increasing female representation on boards can have a positive social impact and support the fight for gender equality more broadly, arguably the most important reason for increasing female representation in leadership teams. However, as gender representation improves there is more data than ever telling us the benefits for improving gender diversity go beyond the ethical, there’s a business case for it.

The business case for private equity

Many of the statistics out there on gender representation in the boardroom are based on public companies. In the UK, listed companies and the largest 50 private companies are required to report on their board diversity. Despite many organisations undertaking studies of varying sizes, being able to gain a clear picture of boardroom diversity across all company types remains challenging. However, escaping the scrutiny faced by listed organisations indicates that progress with regards to board diversity within privately held or funded organisations is likely behind the curve.

The private equity (PE) sector has long been criticised for its tendency to hire white, middle-class men into their firms and portfolio. Whilst this has seen marked improvement in recent years, with PortCo ESG policies more frequently considered pre-investment, portfolio company (Portco) board make-up is still decidedly male. PE is a key player in helping to improve gender parity in boardrooms. PE backed companies make up a significant proportion of the economy, their influence on boardrooms is profound, and whilst there is no quick fix, PE firms have the ability to move the dial forwards if they so choose.

PortCo board diversity is receiving increased attention; PE is well known for recycling talent and choosing board members known to them and trusted to lead their PortCos. After all, who doesn’t want a proven board member who’s been there are done it before? However, given we don’t have to look that far into the past to find an era where seeing a woman on a board was a rarity, this can be a problematic approach and detrimental to fostering diversity. Increasing PortCo exit value may be a good enough reason for Private Equity firms to seek improvements to gender balance in PortCo boardrooms, but the other consideration is the benefit to the fund. Institutional investors are increasingly taking DE&I metrics into account so improving PortCo board diversity has the potential to support fundraising activity and generate considerable enterprise value for the fund.

So, how can Private Equity firms improve gender equality in boardrooms to increase their financial returns and make a positive difference all at once?

• Taking a research led approach to sourcing board level talent is key, avoiding an overreliance on existing networks. Vetting any external providers supporting board recruitment, ensuring they map the market and have the capability to provide a range of candidate options. Research should underpin any search for board level candidates.
• Expanding existing networks of Executives and Non-Executives to include non-traditional talent pools, step-up candidates, and high potential talent.
• Defining clear processes for PortCo board appointments, ensuring both the PE firm and PortCo have fair and standardised practices.
• Fostering robust DE&I policies within PortCos, tracking diversity metrics, and encompassing those metrics into reviews of PortCo performance. Encouraging PortCos to develop rounded diversity policies that go beyond the senior leadership team to enable the cultivation a diverse and balanced workforce is crucial; it supports the provision of the next generation of diverse board level talent.
• Promoting the development of strong talent retention strategies, ensuring PortCos place sufficient attention on career development across their organisations, keeping diverse talent within their businesses and preparing high potential candidates for board level roles.
• Building DE&I assessments into due diligence activity, assessing the risk of an acquisition with regards to meeting diversity policies and the value creation opportunity of improving their board diversity, setting clear targets for improvement from the outset.
• Making a public commitment of diversity targets and policies, advertising any success to enhance ability to attract diverse talent into the portfolio.

The points above all focus on portfolio-based activity PE firms can undertake to improve board diversity but the diversity within a PE firm itself is crucial to fostering gender parity on portfolio boards. Whilst gender balance within PE houses has improved hugely over recent years, the majority of leadership and senior investment positions are still held by men. It’s a well-recognised fact that as humans we are more likely to trust and choose people that look like us so it’s a fair assumption that lack of female representation within investment teams will negatively impact female representation in PortCo boardrooms. PE firms should not underestimate the importance of improving their own diversity in fostering gender parity within their portfolio boards.

Gender parity and value creation

PE has a real opportunity to maximise value creation within their portfolio whilst creating more equitable places of work and supporting progress towards gender equality in the wider society. Whilst not understating the significance of the ethical argument, the conversation has long since moved on from doing the right thing; the data increasingly demonstrates there is an excellent business case for increasing gender parity in the boardroom. It enables PortCos to attract better talent, enhance financial performance, and develop inclusive workplace cultures. However, progress remains slow. PE’s role in establishing gender equality in the boardroom must be an active one, it requires investment and changing operational approach, bringing diversity into every conversation. Unfortunately, there’s no quick fix and whatever steps are taken, they will need frequently reviewing to ensure approaches remain inclusive and acknowledge the complexity of establishing true gender equity in the boardroom. Whatever approach is taken it’s clear that establishing gender parity in the boardroom is no longer simply a moral imperative, it is an all-round sensible business decision.