Gender Diversity Becomes A Private Board Imperative

Gender Diversity Becomes A Private Board Imperative

Companies looking to go public, or innovate should consider bringing women into the boardroom

By Maureen Milford

Private company directors might be feeling a tad lucky they’re exempt from California’s new board diversity requirements now that the state has issued its first report on corporate compliance to the law that requires women on public company boards.

But don’t get too comfy.

Before WeWork’s latest tribulations leading to the ouster of its CEO Adam Neumann, the provider of shared office faced a diversity backlash. When it filed an August registration for an IPO with the U.S. Securities and Exchange Commission – a move that’s been delayed – it touted its “culture of inclusivity.” The filing then proudly listed the “particular insight” of its seven directors – all men. The censure over the all-male board was immediate, especially since the company has faced allegations of sexual harassment and gender discrimination.

In early September, The We Company reported in an SEC filing it will add a woman director with “particular insight into strategic planning and leadership.”

Meanwhile, even private companies without WeWork’s high profile have been called out for going public with all-male boards, including Elastic, a search company, and Gaurdant Health, a cancer testing company. Both California-based companies, which had IPOs in 2018 – took until this year to add their first woman director.

All these cases are instructive for any private company director – and not just those whose companies envision selling shares to the public one day. The pressure to have more diverse company boards is gaining strength and is seeping into  the private company sphere, experts say. It would be prudent for private companies to prepare for such a reality, warns Jennifer S. Fan, a law professor and director of the entrepreneurial law clinic at the University of Washington School of Law.

But while most boards have discussed their board composition in the past two years, diversity appears not to be an urgent priority among private company directors, based on the 2018-2019 Private Company Governance Survey by the National Association of Corporate Directors.

  • Two-thirds of directors surveyed reported that their boards had no set goals increase board diversity, the NACD report says.
  • And in companies that do have goals to bring in a greater range of directors, the primary object is to increase the “cognitive diversity,” such as varying mindsets or experiences.  
  • Indeed, most directors surveyed said their boards do not face challenges in diversifying its composition.

The way Fan sees it, companies ignore board diversity at their own peril.

For starters, more and more private companies, particularly so-called unicorns, are finding it harder to hide from the glare of the public spotlight, Fan points out. Besides WeWork, Facebook, Twitter and Zynga were all criticized for launching IPOs with no women directors. An analysis by Intelligize found that 60% of unicorns that launched IPOs in 2018 had zero or just one woman director.

“This new level of scrutiny means companies would be better off addressing issues — such as the dearth of women on the boards of directors of private companies — at the early stages of the company rather than in anticipation of going public…” writes Fan in “Innovating Inclusion: The Impact of Women on Private Company Boards” published in the Florida State University Law Review.

Employees and customers are also more likely to exert pressure for a diverse board, says Stessy Mezeu, a senior research analyst with NACD. Boards with a mix of gender, race, age, skills and mindsets also helps companies avoid costly and troubling missteps resulting from the lack of diverse perspectives. A growing body of research, she adds, links greater diversity with more effective risk mitigation.

William W. Eigner, a partner at Procopio, Cory, Hargreaves & Savitch, says, “Some investors believe that resistance to adding women on the board may indicate resistance to change and a lack of nimbleness.”

Diversity can bolster innovation, Fan adds. “I believe that private company boards should be diversified in every industry based on what I’ve dubbed the ‘innovation imperative.’ Put simply, diverse perspectives help to create better innovations.”

Still, it’s often hard for private companies, particularly in their early stages, to prioritize mixing up the boardroom because the focus is on building a product or service, Fan concedes. “Unless there is someone at the board or company level making it a priority, there is no incentive for startups to actively identify and recruit diverse candidates for their board. It’s much easier for them to rely on their existing networks instead of looking outside of them,” she says. 

Eigner believes boards should consider women for every board vacancy. Another solution is for private company counsels to advise clients to include additional independent board seats as the company matures, Fan says.

“Many private companies adopt public company governance practices, not because they have to, but because these are seen as leading practices. Board diversity shouldn’t be any different—it should be one of many considerations embedded into any board’s (public, private, or non-profit) governance framework,” Mezeu says.

 

 

 

 

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