Insight

Diversifying portfolio company boards

Diversifying the composition of private-equity portfolio company boards is a significant challenge, yet opportunties to change are just as abundant for these firms as they are public company boards.

With concentrated ownership and less public scrutiny, diversifying the composition of private-equity portfolio company boards is a sig­nificant challenge, yet opportuni­ties to change are just as abundant for these firms as they are public company boards.

“In order to appropriately serve today’s retail and business con­sumers, you need the support of a diverse board,” said one entrepre­neur at the WomenCorporateDi­rectors Global Institute in May. Her panel, which included direc­tors, a private-equity investor, and a lawyer, discussed the challenges in shifting the composition of private-equity and investment company boards for greater diversity.

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Yet, according to results from the 2015–2016 NACD Private Company Governance Survey, on average only 1 woman and 0.7 minority directors serve on private company boards, compared to 1.6 women and 0.9 minority directors at public companies.

“De-risking a portfolio com­pany by upgrading the talent level has to start with the board,” said one director. “We’re looking for women directors who can lead with purpose and accountability,” said another panelist.

The panelists agreed that lim­ited partners and investment firm leadership—those who can most compel change within hedge funds, real estate, private equity, and venture capital firms—are taking active steps to adjust for the under-representation of women and minorities, particularly within their industries and generally for portfolio company boards.

According to KPMG’s Women in Alternative Investments Report, the lack of positions for women to build a track record is the top chal­lenge for women. But there are now increased efforts to grow the pipeline of women in alternative investing by focusing on key entry and reentry points.

The recently launched non­profit, Girls Who Invest, founded by Seema Hingorani, former chief investment officer of the New York City Retirement Systems, offers rising female college sophomores and juniors an intensive four-week summer program that pro­vides financial training followed by a six-week paid internship at an investment management firm.

In venture capital, some firms are following the National Football League’s Rooney Rule, whereby they commit to inter­viewing women and underrep­resented minorities for all senior and intern-level openings. “It’s not a hiring quota,” said Kate Mitch­ell, co-founder of Scale Venture Partners. “We’re merely modify­ing our recruiting process to ensure that we are also looking at female and minority candidates.”

Other initiatives focus on com­mon drop-off points, such as after business school, and advance­ment through mid-career and senior-level networking.

In the current environment, many stakeholders believe that investors in private equity have the greatest power to effect change. “When those who al­locate capital start to ask ques­tions about diversity, changes will start within firms,” said Kelly Williams, CEO and chair of the Private Equity Women Investor Network.

In this area, we are seeing signs of progress. Not only are pension funds increasingly considering the diversity of their underlying investments, but they are also ask­ing questions about the diversity consideration for funds of funds. In addition, there is an increased focus on funds owned or managed by women. For example, the New York City Retirement Systems and the Netherlands’ APG have added questions regarding gender balance to their due diligence questionnaires.

“Enhancing our diversity ef­forts—across genders, ethnicities, nationalities, sexual orientations, and other life experiences—not only supports our people but also makes us more competitive and, ultimately, better investors,” said Henry Kravis and George Rob­erts, the co-chairs and co-CEOs of global investment firm KKR.

Portions of this article were adapted from KPMG’s Fifth Annual Women in Alternative Investments Report

This article originally appeared in the July/August 2017 Directorship magazine.

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