The Missing Element of Private Equity

Outspoken support from senior management helps remove barriers to change.

• Ensure that improving portfolio company (portco) board diversity aligns with or is reflected in the GP CEO’s goals.
• Have GP senior management’s vocal support for portco board diversity (who is accountable?).
• Clearly articulate the value proposition of diversity to ensure firmwide buy-in, and transform the conversation from “need” to “want” diversity on boards.
• Put resources behind the portco board diversity initiative by giving it a budget.
• Collect the detailed data required to track progress, as legally permitted by the relevant jurisdiction.
• Set internal metrics that track total portco board diversity and spotlight the portfolio companies that are succeeding or falling short.
• Have annual governance health checks and review tracking metrics at every portco.
• Integrate diverse governance into the broader board strategy.

A clear approval process for board appointments can clarify who among the senior leadership of the GP firm is held accountable for portco board diversity improvement.

• Have a formal process for portco board nominations and clarify who has the final say on appointments.
• Avoid an ad hoc approach to nominations.
• Build the diversity team internally at the GP (e.g., appoint a director of DEI) to serve as a resource when nominating new directors.
• Include diversity progress and achievements in the performance evaluation of leaders responsible for approving portco board directors.
• Use a skills matrix approach and select directors based on the skills identified in the matrix.
• With every director appointment, prepare a memo to explain why that appointee meets the needs identified.
• In every director interview, ask a standard question on DEI.
• Provide a mechanism for anonymous feedback to improve the recruiting and nominating process.

Recruiting candidates beyond traditional talent pools can expand the company’s contacts and allow for diverse candidates to find directorship opportunities.

• Cultivate a network of diverse directors who can be recruited into board service.
• Establish relationships with board recruiters who are well connected in communities that are less well represented and curate relationships with recruiting firms that focus on diverse candidates (make DEI a priority).
• Work with preferred partners—subject matter groups or other external partners known for diverse talent pools that are in demand.
• Sponsor events to meet new talent (e.g., speed networking sessions) and connect and expand the networks for sourcing talent.
• Maintain a database internally of diverse board candidates to build a pool with critical mass.
• Consider referrals from existing diverse directors when sourcing talent.
• Consider the usefulness of directors who sit on boards in the customer segment the company sells to.

Removing “shortcuts,” such as prior positions or titles held, can increase the pool of qualified candidates.

• Expand the criteria for how you define “qualified” by looking at the skill set you need rather than past positions or titles held.
• Consider looking for individuals from outside the traditional business community to source specialty skills (e.g., people from academia, members of the military, scientists, executives of large nongovernmental organizations).
• Proactively filter the job criteria to ensure that the role is not mis-scoped, overly specified, or exclusionary.
• Be open to first-time directors.

Clearly articulating a detailed value proposition is critical for attracting diverse board candidates.

• Recognize that the war for talent extends to board candidates and compete to attract the best candidates.
• Be able to articulate why a director would want to serve this company and, on this board, specifically at this time (value proposition of the portco).
• Be able to articulate what skills the diverse candidate brings to the board and how you believe they will contribute beyond their diverse background.
• Include opportunities for ongoing board service and networking with other directors (value proposition offered by affiliation with the GP).
• Offer the opportunity to co-invest.
• Consider at least two diverse directors for small boards and at least three for larger boards to ensure an inclusive environment.
• In addition to recruiting diverse candidates, focus on retention and inclusion once they join.

All new board members can benefit from a positive onboarding experience.

• All board members, whether diverse or not, may benefit from a positive onboarding experience.
• Provide time and space for “courageous conversations” in which people can share their experiences relating to the impact of diversity and inclusion—or lack thereof—to broaden understanding and offer increased opportunity for collaboration.
• Provide access to due diligence and corporate strategy materials to independent directors, as they are not often part of the deal process.
• Assign each new board member a mentor on the board to serve as a resource during the onboarding process.
• Offer continuing development opportunities, especially focused on equity and inclusion, for all directors.
• Develop a process to support and prepare independent board directors so that they can be as well-resourced as GP directors.
• Ensure that all directors are included in the “between board meetings” work—especially if an independent director is not on a committee.
• Rotate agenda and meeting facilitation or committee chairs/roles in a preset way to refresh perspectives.

Being strategic about the use of board seats allows for more access to new and diverse ideas.

• Ensure that boards are diverse from their earliest days, rather than trying to add diversity later in the portco’s life cycle, when inclusion becomes more difficult, let alone just prior to an initial public offering or exit.
• Limit GP employees’ maximum number of boards to open seats for diverse directors.
• Limit the maximum number of boards seats held by GP employees on any given portco board (e.g., if you have three seats to fill, two could be internal and the third must be external).
• Consider whether directors, especially independent ones, are over-boarded.
• Consider increasing the size of the board.

Investing with forward-thinking GPs could lead to greater returns.

• Invest with GPs that align with your diversity goals.
• Evaluate whether a GP is currently delivering the desired diversity outcomes.
• Evaluate whether a GP is likely to deliver the desired diversity outcomes in the long term, based on progress.

Incorporating evaluation of the diversity strategy into due diligence signals that it is a priority to the organization and not an afterthought.

• Ensure that senior members of LP organizations ask senior members of GP organizations questions on diversity, rather than leaving the issue to diversity professionals or the request-for-proposal process.
• Ask for diversity information in the “Talent” section of the diligence memo, not in the back, to emphasize its importance.
• Ensure that nondiverse decision makers are vocal about the importance of diversity when engaging with GPs.
• Ensure that senior members of LP organizations ask senior members of GP organizations questions on diversity, rather than leaving the issue to diversity professionals or the request-for-proposal process.
• Ask for diversity information in the “Talent” section of the diligence memo, not in the back, to emphasize its importance.
• Ensure that nondiverse decision makers are vocal about the importance of diversity when engaging with GPs.

Expanding the network for GPs to tap helps accelerate progress and demonstrates LP commitment to diversity.

Even when they are nonvoting, the presence of diverse people in the boardroom can amplify the voices of voting members of the board, magnifying their influence and contributing to a more inclusive boardroom environment.