For Private Companies, It’s Time To Open Up ‘The Room Where It Happens’

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Being present when important decisions are made has always been a sign of influence and status. Everyone knows what it means to “sit at the table”. Broadway Fans Will “Remember The Importance Of Being In”the room where it happensFor Hamilton, Jefferson and Madison, this meant a secret dinner meeting in New York City. Today, instead, the corporate board room has become a symbol of the place where big choices are made.

Thus, there is In recent years there has been a strong crackdown on diversifying public company board rooms, whether through Nasdaq.
NDAQ
“Comply or Interpret” Policy, Goldman Sachs’ board diversity needed for IPO, or the act of groups like Board Diversity Action Coalition or thirty cent club, And for good reason.

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Data has shown that having a diverse board of directors adds value to the organization over time. Between 2010 and 2017, The companies with the most gender and ethnically diverse boards added 3.3% to their return on invested capital compared to their least diverse peers, Different perspectives among board members can explore new perspectives and opportunities. One way to ensure that diverse views are heard is to create a board that includes people from a wide range of demographic backgrounds.

But while public companies have borne the brunt of criticism over their lack of boardroom diversity, private equity, through its investments, controls thousands of board seats. Yet little is known about the governance and board structure of the companies they control; Limited data available suggests that private equity-backed portfolio company boards are significantly less diversified than those of public companies.

For private equity-backed companies, smaller boards focus the influence of board members even more. The private equity firm (general partner or “GP”) typically controls the company and establishes a board consisting of company representatives, the GP, and perhaps an independent member or two. These board members often serve until the next deal – usually a few years out – and then sometimes move on to the next company in the GP’s portfolio. There is no proxy process or annual shareholder vote like in public companies.

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As private companies have now overtaken public companies in the US, greater attention is being paid to the diversity of their boards – and the opportunities to foster diversity, inclusion and long-term value creation.

According to crunchbase, 49% of private companies have no women on their boards, and women hold only 11% of board seats. New data on racial diversity shows that 18% of board seats are held by men of color and only 3% by women of color. Independent directors are more likely to be women, with women holding 20% ​​of the seats.

While many major private equity firms have made significant progress in this regard, progress has been less consistent in areas such as smaller firms and venture capital. And there is still a feeling that many of those who invest in private equity (limited partners or “LPs”) are silent on the issue or it is unclear how diversity affects their decision-making process. In addition, little attention is paid to external board advisors, a group that is usually overlooked but is often critical to a company’s strategy and performance.

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Diversifying the drivers of strategic decisions in a firm — management, board members and advisors alike — will serve the company well in the long run from both financial and strategic perspectives. With the start of a new year, now is an ideal time to unwind the room where it takes place.

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