4 minute read 21 Apr 2021
Diverse group of businesspeople meeting inside of an office

Strategies for diversifying private company boards

By Anthony Sgammato

Partner, Audit, and Office Managing Partner, Iselin, NJ, Ernst & Young LLP

Audit partner focused on driving audit transformation, quality service, and unique experiences for our clients and our people. Enjoys outdoor activities with family. Avid New York Mets and Jets fan.

4 minute read 21 Apr 2021

As the world begins to recover from COVID-19, businesses everywhere are assessing what its disruptions mean for their future business models.

In brief:

  • Recruit diverse board directors from business inception.
  • Look for directors whose experience and expertise align with your strategy then widen the pool further.
  • Consider a more balanced board part of growth and maturation.

To understand where their customers, employees and society around them are headed, and how best to align to future expectations, private companies are well-advised to lean on their boards for insight, guidance and direction.  

The perspectives entrepreneurs and leaders seek from directors should incorporate the best ways to address the growing expectations of all stakeholders — investors, customers and employees — that businesses will have a positive social impact, including by advancing gender, racial and ethnic equity.

In this increasingly complex environment, diverse perspectives are more important than ever to achieve all these objectives. How can private business leaders make sure their decision-making embraces a range of views while reflecting the values they cherish?

1. Recruit diverse board directors from business inception

To help shape a young company’s culture and reputation, it’s valuable to assemble a diverse board early while these qualities are still developing and fluid. Diverse thinking also contributes to the quality of your decision-making, capacity for innovation and financial performance. The executive management teams, and even early investors, of many private companies look the same: no women or minority leaders in executive positions. In these cases, in particular, recruiting independent board members with diverse backgrounds can be very helpful.

2. Look for directors whose experience and expertise align with your strategy

Candidates with experience in areas of business urgency, such as global markets, cybersecurity, regulations, or science and technology, may have a lot to contribute to your board. There also is a great deal of value in including directors whose demographics reflect those of your employees or customers. However, independent directors traditionally come from the ranks of current or former corporate CEOs and directors where women and minorities are tougher to find. Looking for directors only on the usual rosters is going to eliminate many qualified candidates, and you will likely need to broaden your sources of candidates as you deliberately pursue diverse and specialized resources.  

3. Widen the pool even further

You can find excellent leaders in nonbusiness sectors, including the military, government, academia, and the non-profit world, who can offer important ideas and connections. To find the right people, founders and current directors may need to broaden their networks. Fortunately, there are many organizations that help to develop diverse candidates’ board readiness and connect them to board opportunities, including the National Association of Corporate Directors (NACD). Your advisors may also be able to offer leads.

4. Make sure every slate of board candidates includes more than one diverse contender

A study¹ published a few years ago found that when only one woman or minority was included among the finalists for a position, their likelihood of being hired was almost zero because there was a bias in favor of the status quo. However, if there were at least two women or minorities among the finalists, the status quo was altered, and a diverse candidate was much more likely to be hired. Other strategies for realizing a more diverse board include interviewing diverse candidates first and/or limiting your search to qualified candidates with diverse backgrounds.

5. When you diversify your board, make sure your new directors are heard 

New directors are there to contribute their experiences and knowledge. As Kathryn Swintek, the NACD’s Private Company Director of the Year, told Ernst & Young LLP (EY), one of the first things entrepreneurs need to learn in dealing with an advisory or formal board is “optimizing the value of the group.” That means creating a collegial board culture that not only values newer voices but also actively invites them into the conversation.

6. Consider a more balanced board part of growth and maturation

An increasing number of key players in the US capital markets are putting pressure on public companies to change their board composition to better represent the world around them. As stated earlier, there are many good performance-related reasons for this, and private companies should adopt the same approach. Moreover, at EY, we believe private companies intending to go public at some point should begin preparing for this transformation, by establishing public company standards of responsible leadership as soon as they can. A strong, diverse board is essential to achieving this wise, valuable oversight.

 

¹ “If There’s Only One Woman in Your Candidate Pool, There’s Statistically No Chance She’ll Be Hired”, Harvard Business Review website, https://hbr.org/2016/04/if-theres-only-one-woman-in-your-candidate-pool-theres-statistically-no-chance-shell-be-hired, April 2016.

Summary

Private companies should make board diversification a priority. This leads to improved financial performance and leadership and values reflecting the society in which you operate. And the rewards of that are nearly limitless.

About this article

By Anthony Sgammato

Partner, Audit, and Office Managing Partner, Iselin, NJ, Ernst & Young LLP

Audit partner focused on driving audit transformation, quality service, and unique experiences for our clients and our people. Enjoys outdoor activities with family. Avid New York Mets and Jets fan.