How Private Companies Can Level Up on Board Diversity

As increased competition for talent tops directors’ lists of concerns for the coming 12 months, private company boards should be looking within at their own talent as well. To attract the best employees throughout an organization, board composition should reflect the workforce and can be a key differentiator in this battle—not only because workers will see themselves represented at the top tiers of the organization, but because diversity of thought has been proven to bring innovative, fresh ideas to the table, in addition to spurring difficult conversations that need to take place.

But diversity on private company boards is lacking. A 2021 Him For Her and Crunchbase study of private company board diversity found that women occupy only 14 percent of board seats at the best-funded private organizations. Almost 40 percent of the companies studied have no women serving on their boards. Meanwhile, 19 percent of private company board seats studied are filled by men of color and only 3 percent are filled by women of color, marking no real change for women of color from the year prior. As Crunchbase colorfully puts it, “Notably, among the board members included in our study, roughly as many are named ‘Dave’ or ‘David’ (107) as are women of color (110).”

There’s a stark difference between the diversity levels of public and private company boards, especially with regard to gender. According to the 2021 US Spencer Stuart Board Index, women hold 30 percent of board seats in the S&P 500. Ten percent of S&P 500 board seats are held by women from historically underrepresented ethnic and racial groups. What has caused such a disparity, and where should private company boards aim their focus to ensure improvement?

Barriers to Better Diversity

When looking at gender diversity, the Him For Her and Crunchbase study finds that more than half of women directors on private company boards occupy independent director seats, while only 31 percent hold investor seats and 13 percent executive director seats. Yet, investors generally hold 48 percent of private company board seats and independent directors only 29 percent. This is evidence of issues within the pipeline of executive leadership and within the investment industry. Adding women independent directors cannot solve the issue on its own when nearly half of private company board seats are occupied by investors—and only 9 percent of these investor seats are held by women.

Private company boards often look for executive experience at other companies as well when bringing new board members into the fold. The skills that private company boards are looking for are often too narrowly defined, and directors’ networks, especially in the world of private companies, are too small to invite diversity. People’s networks often consist of others who look, think, and act like them, and when private company boards seek out the quickest, least expensive solution to finding a new board member—or seek to keep leadership of the company within the family—they are likely to end up with more of the same types of leaders and thinkers.

But there are also limitations in defining “diversity” itself. Diverse traits, such as disability and veteran status, rarely make it into companies’ or regulations’ definitions of diversity. In fact, California’s AB 979 mandated that boards have or explain why they do not have members from underrepresented racial and ethnic groups or the LGBTQ+ community, leaving out people with disabilities or those that have other unique perspectives. While the law targeted public companies headquartered in the state, this is one example of a prominent definition of board diversity that is incomplete. When the definition is narrow, as when skills criteria and directors’ networks are narrow, the results of searching for diversity will be narrow, too.

Moreover, private companies are not held to the same disclosure standards as their public company counterparts. Transparency is uneven across organizations. Even the most revered unicorns—private companies valued at $1 billion or more—sometimes do not publicize who serves on their boards or list their names on company websites. And there is less pressure on private companies without outside funding to diversify their boards or be transparent about board composition. For companies with outside funding, many private equity and venture capital investors do not look at board diversity as a precursor to investing.

“Without transparency, it’s difficult to put a spotlight on boards with both great diversity and boards with little to no diversity,” said Alicia Syrett, chair of Digimarc, founder of Madam Chair, and founder and CEO of Pantegrion Capital. “In the case of the latter, it’s even more difficult to call for change if you cannot see the data.”

How to Level Up

To bolster board diversity, private company boards can explore how to improve the following issues within the scope of their specific companies.

Director mind-sets. Adding diversity won’t be effective, let alone happen, if there’s not buy-in and ownership from each director on the board. Most people have seen the studies that demonstrate that diversity improves performance and boosts innovation, not to mention that it allows companies to better connect with employees and customers. But when it comes to adding diversity to the board, some private companies may find their directors asking, “Why fix something that’s not broken?”

“My reply to that is that it’s broken, you just don’t know it, and it’s a matter of time before it will derail if you don’t change,” said Neeti Dewan, board member of the Indo-American Chamber of Commerce—Atlanta and Symmr, and chair of Global Platinum AdvantEdge. “Over time, you’re going to lose those profits, you’re going to lose competitive edge, because you haven’t kept up with market necessities.”

Showing reluctant peers the return on investment of adding diversity to the board is just one way to achieve buy-in.

Official policies. According to Dewan, it’s okay to put formal diversity policies in place to get your board to move the needle. Companies may not like external mandates either, such as those recently struck down in California, but in that state the mandates saw results. As of Sept. 30, 2021, women held 1,844 California public company board seats compared to 766 seats in 2018, when SB 826 was first signed into law. To Dewan, it doesn’t matter why a director is working toward a more diverse board, whether because of the business value, corporate policies, government mandates, or it’s the right thing to do.

“We still accomplish what we need to accomplish, and then once the change happens, where you get more diversity, [those new directors] get to work with the [naysayers]. That’s when their minds will change,” Dewan said.

The pipeline. Diverse workers must be promoted to the top ranks within investment firms and as executives at the most heavily funded private companies to build out their share of investor and executive board seats. It’s an intercompany effort. As the boards of investment firms and private companies pay closer attention to the talent pipeline in and below the C-suite, they and other private company boards will benefit from the improved pool of diverse talent. Syrett also suggests that “institutional investors who are [limited partners] in private equity and venture capital funds can pressure these firms to increase diversity in their firms and require diverse boards when the private equity and venture capital firms make investments in portfolio companies.”

The search criteria. As women in the public and private company spheres occupy far fewer C-suite roles than do men (only 24 percent of C-suite roles, according to LeanIn.org's Women in the Workplace 2021 report) it does not make sense to continue looking exclusively for “CEO experience” in board candidates while also looking for diversity. Limiting the pool of talent to only CEOs will lead to complaints of there not being enough qualified women to fill board roles—a common, but inaccurate, conclusion. Critical skills for board work such as financial, technology, human resources, innovation, and other expertise are honed in many other leadership roles.

“Change the thinking that you need to be a CEO to be able to serve on these boards, because the way our economy is changing, the way our businesses are changing, and the way [stakeholder] needs are changing, you don’t have to be a CEO,” Dewan said. “There are so many other specific qualities that a board leader needs to bring to the table.”

Private company boards should think hard about the specific skills criteria they are looking for in a new director, rather than focusing on titles.

Networks. Directors can also take it upon themselves to diversify their networks, including through interacting with groups such as the Latino Corporate Directors Association, the Executive Leadership Council, and Out Leadership.

In addition, Syrett recommends considering setting up an advisory board, which would allow the governing board to interact with talent and build relationships with potential future board members from this pool.

Transparency. Increasing transparency around who serves on private company boards by publishing directors’ profiles on company websites would help to hold companies accountable. This can have the double effect of enforcing transparency and making diversity a private company board standard.

“If [directors] see industry-leading peers with diverse boards as examples, they may feel more comfortable pursuing change, especially given the positive benefits of diversity to performance,” Syrett said.

It’s not hard to see that employees, investors, and other stakeholders are increasingly calling for better board diversity, and private companies are not exempt. Being prepared by working to diversify boards now will mean that companies can avoid negative press down the line—and reap the benefits sooner.