Last summer, large public companies across the country pledged to increase diversity in their boardrooms, one of the measures taken following the murder of George Floyd in police custody. Company directors set goals, and some have started to make headway, with investors, activists, and others pursuing their commitment to racial justice.
What is striking, however, is that there is no discussion of diversity efforts in privately run companies. There are far more of them than publicly traded companies: of more than 30 million companies in the US, less than 1 percent are publicly traded. The most successful private companies often become the largest public companies of tomorrow – and the largest employers.
What is more noticeable about the lack of diversity among prominent private companies is what they have in common: venture capital and private equity firms that pour money into them and influence their governance.
The numbers tell the story.
The country’s top 18 venture capital and private equity firms – including Andreessen Horowitz, Blackstone, Carlyle, Greylock, KKR, and Sequoia – have invested $ 10 trillion in 843 private companies that have gone public since 2000.
Of the approximately 4,700 board seats of these companies during the same period, only 49 were occupied by black directors, according to new research by the Board Diversity Action Alliance.
Let that sink in for a moment. That’s only 1 percent of thousands of jobs spanning more than 20 years.
Those, by every aspect, minuscule diversity gains have only occurred recently: 21 of the 23 seats held by black directors of venture-backed companies in the past 20 years came in the past decade, the study reported. Likewise, all 15 board seats have been won by someone with a Latino background over the past 10 years.
“These organizations are founded by white men. They start the company with their friends and family. Your friends and family look just like you, don’t they? ”Said Ursula Burns, former CEO of Xerox and still one of the very few black executives at a Fortune 500 company. Today she sits on the boards of Exxon Mobil, Datto, and Uber, and is the chairman of Teneo. Together with Gabrielle Sulzberger, who is also Senior Advisor to Centerbridge Partners, she is a founding partner of the Board Diversity Action Alliance.
“I didn’t know how bad it was going to be, but I knew it was bad, ”said Ms. Sulzberger about the examination. She is one of the few black directors; She sits on the boards of Eli Lilly, Mastercard, Brixmor Property Group and Cerevel Therapeutics and is a strategic advisor to Two Sigma Impact, a private equity fund in New York. She is also a senior advisor to Teneo. The influence of private equity and venture capital firms on the companies they invest in, she said, “is cutting such a large chunk of our economy”.
(Ms. Sulzberger is separated from Arthur Ochs Sulzberger Jr., former chairman of the New York Times Company; he was not involved in the research.)
Daily business briefing
9/2/2021, 4:54 p.m. ET
Since the culture of most companies is created in their early days, focusing on diversity when companies are still private – rather than when they become public – should be a priority for investment firms providing funding and mentoring during these early years.
This is clearly not happening, but perhaps that should come as no surprise: There is little diversity at the forefront 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 at venture capital firms in the United States last year, according to Deloitte. According to McKinsey, deal teams at private equity firms were only about 1 to 2 percent black last year.
Some private equity firms, some of which are publicly traded, have pledged to increase diversity in their ranks, but have been slow to make profits. They face less public pressure than other companies because most of these companies are unknown and tightly controlled by their partners.
“Part of their business model is to be private,” said Sulzberger. “That’s part of the value: the calculation that without public accountability and awareness, they can do whatever they will do.”
Ms. Burns was quick to say that she doesn’t believe the lack of diversity is intentional. “I don’t think it’s on purpose,” she said. “I think it’s a lack of intent.”
For many executives, hiring in their immediate circles is simply a matter of expediency, not “because they want to do something illegal or even immoral,” said Ms. Burns. “You’re just saying, ‘I’m in a different phase of my life and all these other things are going to slow me down.'”
However, focusing on issues other than diversity between private companies can come with real costs. A growing body of research shows that more diverse teams outperform their peers. A study by BCG reported that “Companies with more diverse leadership teams report higher innovation revenues – 45 percent of total sales versus just 26 percent”. Startups and other private companies may also be able to attract more capital as investors increasingly look for diversity and inclusion in their investment calculations.
The increased attention to the diversity of boardrooms in public companies seems to be having an impact, with black directors making up a third of new board members from July last year to May this year, up from a tenth for the same period last year, according to ISS Corporate Solutions. This drives private companies to the threshold of going public in order to diversify their boards of directors. And exchanges like Nasdaq and some banks that subscribe to bids like Goldman Sachs require a minimum of boardroom diversity before doing business with companies.
But by then, it’s often too late, Ms. Burns said of private companies sprinting near the IPO to diversify their board of directors. “I enter all of these panels with the following mantra, ‘Do it now,'” she said. Instead of diversifying their boards as a public offering approaches, they could end up being more focused and faster if they did it sooner.
And that’s for companies planning an IPO. Many more will choose to stay private, away from the market limelight and control that diversity – or lack of it – brings to their boardrooms.