Private equity firms often bring sector-specific expertise and a seasoned perspective to their investments, knowing how to best create efficiencies, improve operations and expand into previously untapped markets, all with the goal of creating value. That same approach to value creation can be applied to the implementation of diversity, equity and inclusion, or DE&I, programs, with PE firms helping their companies build strong DE&I frameworks that deliver tangible results.
The unique opportunity that PE firms have to accelerate DE&I progress is their multiplier effect; with nearly 16,000 private equity-backed companies in the U.S. alone, according to Pitchbook, PE firms are in an unmatched position to build impactful DE&I programs that reach millions of people, across employees, boards and communities, all while adding value to their investments.
Because simply put, prioritizing DE&I is good for business. According to McKinsey, companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile. To those of us who’ve had the opportunity to work on diverse teams in inclusive environments, that figure is no surprise. Bringing a wide range of backgrounds and perspectives to the table sends ripples throughout an organization – dialogues are deeper, creativity is celebrated and innovation is unlocked. Employees now expect this dynamic as the workforce becomes increasingly diverse, giving firms who embrace DE&I a competitive advantage in recruiting.
But that kind of transformation is only possible when DE&I programs are robust, include measures for accountability and are grounded in strategy. All too often, organizations simply focus on diversity in the hiring process. Comprehensive DE&I strategies aren’t a check-the-box exercise and must expand beyond hiring to be a core part of a PE firm’s business and the businesses they invest in, with defined strategy, measurable goals and buy-in from the top. Sponsors must adopt a systematic approach that incentivizes DE&I across their full commercial ecosystem.
Here are three actionable steps any PE Firm can take to advance DE&I:
First, focus on board diversity. Today, 32% of all S&P 500 board directors are women and 22% are from underrepresented racial groups. An immediate action that PE firms can take is to analyze the makeup of their corporate boards and prioritize diversity. Increasing the number of women and underrepresented racial groups on boards brings different perspectives and experiences to decision making for better business outcomes and improved risk management. Further, diverse boards that represent a company’s employees, customers and suppliers provide better alignment for financial success.
Second, hold executives accountable. This can be accomplished by tying performance reviews and compensation to executives’ achievements against long-term DE&I objectives, which should ladder up to business-wide goals or MBOs. Importantly, this also signals to the rest of the organization that DE&I is a strategic priority.
Third, build a community. With relatively long-term investment horizons, PE firms have the benefit of seeing what is working in one company and cascading those learnings across their other investments. No one needs to go it alone when implementing or scaling a DE&I program, and by sharing best practices and lessons learned, PE firms can help their companies create pipelines of diverse talent, develop company culture, implement tools to measure DE&I progress and more. Within this community of DE&I practitioners, ideas can be exchanged through in-person events, webinars, dedicated Slack channels or by simply picking up the phone to call a peer.
When it comes to DE&I, the investment industry has the potential to lead and a compelling fiscal incentive to do so. A comprehensive DE&I framework is an often-underleveraged tool for building stronger businesses and creating enduring value. PE firms that understand this dynamic and take steps to advance progress will reap the benefits – for their firm, their portfolio companies and their investors.