Push in the Missing Piece for Boardroom Diversity

Last summer, major public companies across the country pledged to increase diversity in their boardrooms, one of the actions taken after the assassination. George Floyd in police custody. Corporate directors have set goals, and some have begun to make progress, with investors, activists and others tracking their commitments to racial equity.

But conspicuously absent is the discussion of diversification efforts at privately held companies. There are far more of them than there are publicly traded firms: less than 1 percent of the more than 30 million businesses in the United States are listed on a stock exchange. The most successful private companies often become the biggest public companies of tomorrow – and the biggest employers.

What’s more striking about the lack of diversity among major private companies is what binds them: the venture capital and private equity firms that operate them with money and influence their governance.

Numbers tell the story.

The country’s 18 top venture capital and private equity firms – Andreessen Horowitz, Blackstone, Carlyle, Greylock, KKR and Sequoia – have invested in 843 private companies that have gone public since 2000. Collectively, those companies are now worth more than $10 trillion.

According to new research from the Board Diversity Action Alliance, only 49 of the 4,700-some board seats at those companies are held by black directors over the same period.

Let that sink in for a moment. This is only 1 percent of the thousands of posts spread over more than 20 years.

Those diversity gains, by any measure, have been recent: 21 of the 23 seats held by black directors of venture-backed companies in the past 20 years were filled in the past decade, the research reported. Similarly, all 15 board seats held by someone with a Latino background in the past 10 years were achieved.

“These organizations are started by white people. They start company with their friends and their family. His friends and family look exactly like him, don’t they?” said Ursula Burns, former CEO of Xerox and still one of the very few black leaders in a Fortune 500 company. Today, she is the leader of Exxon Mobil, Datto and Uber. She sits on the board and is the chair of Teneo. She is a founding partner of the Board Diversity Action Alliance with Gabrielle Sulzberger, who is also a senior advisor to Centerbridge Partners.

“I didn’t know how bad it would be, but I knew it was bad,” Ms Sulzberger said of the research. She is one of the few black female directors; She sits on the boards of Eli Lilly, Mastercard, Brixmore Property Group and Cerevel Therapeutics, and she is a strategic advisor to Two Sigma Impact, a private equity fund in New York. She is also a senior advisor to Teneo. He said the impact of private equity and venture capital firms on the companies they invest in, “cuts into such a large part of our economy.”

(Ms Sulzberger is separated from Arthur Ochs Sulzberger Jr., past president of The New York Times Company; he was not involved in the research.)

Because the culture of most companies is built in their early days, a focus on diversity when companies are still private – rather than once public – should be a priority for investment firms providing funding and advice during these early years. needed.

That’s clearly not happening, but it probably shouldn’t be surprising: There is little diversity on top of private equity and venture capital firms, even less than in corporate America as a whole. Black employees made up 4 percent of investment professionals in venture capital firms in the United States last year, according to Deloitte. Private equity firms’ deal teams were only 1 to 2 percent black last year, according to McKinsey.

Some private equity firms, some of which are themselves publicly traded, have pledged to diversify their ranks, but have been slow to turn a profit. They have less public pressure than other companies, as most of these firms are not household names and are tightly controlled by their partners.

“Part of their business model is to be private,” Ms Sulzberger said. “That’s part of the value: the calculation that they can do whatever they’re going to do without public accountability and awareness.”

Ms Burns quickly said she does not believe the lack of diversity is intentional. “I don’t think that’s the intention,” she said. “I think it’s a lack of intention.”

Ms Burns said, for many executives, recruiting inside their immediate circle is simply a matter of expediency, and not “because they want to do something illegal or immoral.” “They just say, ‘I’m in a different phase of my life, and all this other stuff is going to slow me down.'”

Yet there may be a real price to pay for addressing issues other than diversity among private companies. A growing body of research shows that more diverse teams tend to outperform their peers. A BCG study reported that “companies with more diverse leadership teams report higher innovation revenue — 45 percent of total revenue versus only 26 percent.” Start-ups and other private companies may also be able to attract more capital as investors place increasing weight on diversity and inclusion in their investment calculations.

The increased focus on boardroom diversity in public companies is having an impact, with black directors accounting for a third of new board members from July last year to May this year, up from a tenth in the same period a year ago. ISS Corporate Solutions. This pushes private companies to the brink of going public to diversify their boards. And stock exchanges like the Nasdaq and some banks that underwrite offerings like Goldman Sachs require a minimum level of boardroom diversity before working with companies.

But it is often too late by then, Ms Burns said of running to diversify its boards just before private companies go public. “I enter all these boards with the following mantra: ‘Do it now,'” she said. Instead of “scrambling” to diversify their boards as a public offering approach, she said, “they might end up being more objective and faster if they did it earlier.”

And this is for companies that plan to go public. Many more would prefer to stay private, away from the spotlight of the market and the scrutiny of diversity – or lack thereof – in their boardroom.

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