Why IPO-bound companies should make gender diversity a priority

Experience and data tell us that companies with diverse leadership teams perform better. That’s why we need to put gender equality at the top of our agenda.

When it comes to gender diversity in corporate America, opportunities for improvement abound. Investors, regulators and others have recently become more vocal in urging corporations to bring more women into executive roles and onto boards. Yet, most companies still have work to do.

This International Women’s Day, I took some time to reflect on my own 30-year career working with dozens of pre-IPO companies. I asked myself what I typically see in the C‑suites and on the boards of these ambitious enterprises. If I’m honest, I must admit most pre-IPO companies are even further behind the curve when it comes to gender diversity.

In 2019, just 9% of companies that went public on US exchanges were women-led (EY/Dealogic). And this percentage hasn’t changed in many years. Why does this matter, you may ask? Here’s why.

According to a global EY study, a company with a leadership team comprising at least 30% women could add up to 6 percentage points to its net margin. And increasing diversity overall at the top can drive even stronger results. A McKinsey report on over 1,000 companies found that those in the top quartile for gender diversity on their executive teams were 21% more likely to have financial returns above their national industry median than those in the bottom quartile; ethnically and culturally diverse management teams performed even better at 33%. Diversity is also proven to enhance an organization’s ability to innovate and develop a vision that appeals to its inherently diverse market, ultimately driving business success.

If gender-diverse leadership teams perform better than homogeneous teams, why aren’t we insisting that companies entering the public markets do so with this performance advantage as a matter of course?

Meeting stakeholder expectations

As a company goes public, investors and other stakeholders must have confidence in a company’s leadership, with the conviction that the chosen team will navigate the IPO process successfully and create value quickly and consistently as a public company. Preparing to go public is a critical time to establish the leadership team and board that will drive optimal performance and deliver what stakeholders and future shareholders expect.

Longer term, to deliver quality, future-forward products or services and, ultimately, results, public companies must attract or retain the right talent — diverse candidates with the varied backgrounds, skill sets and experiences that contribute to a performance edge. Shouldn’t every business mirror in its C-suite and board the diverse teams they need in their ranks to continually innovate and compete? 

Where the gender gap begins

For many pre-IPO companies, especially if they are in or highly dependent upon the technology sector, diversity challenges begin in the computer lab, where women represent just 24% of the workforce in STEM. That gender gap contributes to the all- or mostly male founder groups we see in the pre-IPO process.

From there, the challenges continue in the financing realm, where most of the well- established venture capital and private equity firms are comprised of predominantly white, male investors. How do we know this imbalance contributes to the gender gap? In 2019, women-founded firms saw a mere 2.7% of the total capital invested in venture-backed startups in the US, according to PitchBook data.

On the progressive side, new financing vehicles — many comprised of all or mostly women investors — are challenging the status quo and redirecting much-needed early stage financing to women founders. Other groups, such as AllRaise, which EY sponsors, advocate for more funding for women entrepreneurs.

But private financing represents only one part of the IPO ecosystem. Each participant within the system, including investment bankers, attorneys, accounting firms, government agencies and regulators, and the stock exchanges, needs to consider gender diversity. Each one needs to be vocal in challenging all male-teams and boards and in channeling resources to women-led ventures, so they can grow and achieve their full potential.

The good news: in the largest IPOs of 2019, we saw a shift in board composition. Women held 21.9% of the board seats in the 25 largest IPOs that year, according to a report by 2020 Women on Boards, up from a five-year average of 10%. And some notable players are starting to take a stand. Investment bank Goldman Sachs recently announced that it will refuse to take a company public unless it has at least one woman or non-white board member. California passed the Women on Boards bill, requiring at least one or two female directors on public boards of California companies, depending on company size. These are positive moves — but how can we do more?

So, where do companies start?

First, do some benchmarking. Analyze how your competitors describe themselves in public filings. With serious reconsideration of long-term value definitions underway from Davos to Main Street, we’re seeing more companies speak more boldly about the value and importance of diversity. Fortune 1000 corporations have already moved further down this path. Take note of what their boards, leadership teams and compensation schemes all look like.

Then, assess your board and leadership team, acknowledge gender (and other) imbalances or gaps, and work closely with recruiters to source qualified, diverse candidates.

Ultimately, investors back a company if they have faith in the leadership team, like the company’s story and purpose, and believe it has the potential to deliver impressive returns. Every pre-IPO company has the opportunity — if not the obligation — to optimize its chances for long-term success. And that requires making sure #SheBelongs.

The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.