Guest writer: Sarah Keohane Williamson, CEO – FCLTGlobal
Strong boards of directors are vital to helping companies maintain a longer-term focus while executing on shorter-term priorities. A board’s unique position atop the organization allows it to shape corporate culture while guiding long-term strategy through a mix of encouragement, skepticism, and guidance. This role is consistent regardless of the ownership structure of the company—be it publicly held or privately controlled.
In 2018 FCLTGlobal performed research to identify the long-term habits of highly effective corporate boards. We found that several characteristics were consistent across successful public companies, however one stood out – boardroom diversity.
While the research data is from public companies, there is no reason to believe that diverse boardrooms do not have the same positive impacts on private equity portfolio companies. However as public company boards have been diversifying globally, private company boards have trailed in this area considerably.
Inclusive boards generate more long-term value
The competitive advantages of having a diverse board go well beyond compliance or optics. Greater diversity among board directors means that different perspectives and backgrounds are working together for the benefit of the company. Boardroom diversity is linked to stronger long-term value creation, more robust investment in R&D, and improved capacity for creative innovation, all while lowering a company’s vulnerability to risk.
That diverse boards are apt to be more resilient in the face of volatility is logical, as ideas born out of diverse experiences keep companies efficient and better able to navigate the unexpected. Companies neglecting to push for inclusion risk leaving proven performance on the table.
- For gender diversity in particular, FCLTGlobal’s recent analysis determined that companies with gender-diverse boards outperformed non-diverse boards by 2.6% on ROIC.
- According to a study of Carlyle Group’s portfolio companies, boards with two or more diverse members saw their annual earnings growth exceed those with fewer diverse members by 12%.
A 2015 study by McKinsey & Company found that companies in the top quartile for ethnic diversity were 35% more likely to have returns above their national industry medians.
Progress is slow within private companies
The growing discourse around corporate diversity efforts – among shareholders, regulators, and the public at large – has shone a spotlight on the boards of directors of public companies. Nasdaq’s own efforts to usher in new listing requirements on board diversity may indeed fundamentally change how companies evaluate candidates and fill their own board seats. While momentum is growing in the public sphere, and ample evidence suggests that diverse leadership presents distinct advantages, private companies have been slow to adapt.
A 2019 study of private equity funded company boards showed that only 7% of board seats were filled by women, and 60% of companies did not include women on their boards at all.
Facilitating change and building momentum
To make private board rooms more inclusive, general partners (GPs) and limited partners (LPs) can collaborate to advance mutual understanding and embolden portfolio companies to diversify their boards. One of the first steps they can take is to assess their current practices and the roles they can play in facilitating progress.
GPs, who control the boards can leverage their control positions to facilitate real change and build competitive advantage.
LPs can have frank discussions with their GPs, both in the diligence process and post-investment, ideally at the senior levels of the firm. Portfolio company boards can change quickly and enhancing diversity and inclusion at the portfolio company board level can be a near term goal.
Accountability and reporting will be crucial in ensuring that private equity firms are meeting these goals. A framework that tracks the status of current voting and non-voting portfolio company board directors and board chairs, and tracks changes resulting from director turnover, can serve as a baseline for creating consistent information sharing between GPs and LPs.
As private equity-backed companies comprise a significant and growing proportion of the economy, the diversity of private equity-backed portfolio company boards is receiving increased attention and provides an opportunity to promote diversity, equity, inclusion, in the pursuit of long-term value creation.
I recently sat down with Katey Bogue from Nasdaq to talk about the importance of board room diversity at the portfolio company level and FCLTGlobal’s new paper on the topic, The Missing Element of Private Equity Creating Long-term Value Through Portfolio Company Board Diversity.