The Imperative of Women in Private Equity
May 22, 2024 – As with many sectors, the urgency of diversity and gender equality is taking center stage in the world of private equity (PE). But why is having diversity in leadership roles, particularly women, so vital in private equity and PE organizations’ portfolio companies? The answer lies not just in numbers – although the metrics do speak volumes – but in a more inclusive vision of success, according to a recent report from Odgers Berndtson’s Lauren Kincaid, Catherine Bass Black, and Ann Wheeler. Recent findings by Lean In and McKinsey shed light on a glaring discrepancy: for every 100 men promoted from entry-level to manager, only 87 women achieve the same.
“This statistic, dubbed the ‘Broken Rung’ phenomenon, ensures women continually lag behind their male counterparts when it comes to representation and seniority,” said Ms. Kincaid. “In a typical corporate structure, this results in men occupying 60 percent of manager-level positions, while women trail with 40 percent. The implications extend further as this disparity creates a shrinking pool of women available for promotion to even higher leadership roles.”
The PE world exacerbates this problem. While one out of every two entry-level roles in PE is held by a woman, this figure plummets to one in 10 at senior levels and, alarmingly, to one in 100 for women of color. “This vast underrepresentation is not reflective of a lack of talent but a structural flaw that needs urgent attention,” said Ms. Bass Black.
“Such findings aren’t just alarming; they point to a missed opportunity,” said Ms. Wheeler. “Diverse leadership teams have consistently shown to be more resilient, innovative, and socially responsible.”
Why Diversity Matters for Continued Success
“Before we dive into solutions to the gender gap in private equity, let’s talk about why diversity matters in the PE world in the first place,” said Ms. Kincaid. “Diversity, particularly at the leadership level, is not a mere box-checking exercise. There’s a clear link between diverse leadership and ESG (Environmental, Social, and Governance) metrics, suggesting that diverse boards and leadership teams demonstrate greater social responsibility.”
But don’t make the mistake of thinking diversity is just a social imperative; it’s a strategic one, according to Ms. Bass Black. “Even as early as 2018, McKinsey found that companies in the top-quartile for gender diversity on their executive teams were 21 percent more likely to have above-average profitability than companies in the fourth quartile,” she said. “For ethnic and cultural diversity, top-quartile companies were 33 percent more likely to outperform on profitability.”
“PE firms have an outsized influence,” Ms. Wheeler said. “Their decisions, strategies, and ethos ripple through their portfolio companies, impacting multiple sectors. Given their influential position, PE firms have a responsibility, and indeed an opportunity, to champion DEIB (diversity, equity, inclusion, and belonging).”
Roadmap to Gender Equality in PE
“From both social and revenue perspectives, it’s clear that investing in diversity is worth it–and, truthfully, required of companies that want to remain innovative and in-line with consumer values,” said Ms. Kincaid. “For PE firms specifically, diversity is becoming imperative, as financiers and institutional investors are putting increasing emphasis on board-level diversity.”
So, what actions can forward-thinking PE firms take to bridge this chasm? To navigate and thrive in light of mandates and clear upside, Odgers Berndtson explains that PE firms must:
1. Redefine leadership paradigms: “PE firms have traditionally
concentrated their talent investment on the CEO and CFO of a portfolio company,” said Ms. Wheeler. “However, progressive firms understand the criticality of having an inclusive culture and diverse talent. For this reason, the emerging “magic triangle” in relation to influential C-suite roles expands traditional focus to include the chief people officer. It’s also the CPO (and team) who are going to address the broken rung phenomenon referenced above through improved recruitment, development, and promotional practices.”
2. Prioritize DEIB at all levels: While leadership diversity is essential, DEIB should be a foundational element at every level of the organization, from entry-level roles to the boardroom, according to Ms. Bass Black. “This requires addressing the broken rung predicament,” she said. “Companies must proactively nurture career paths, promotions, development, and sponsorship efforts for women, at all levels of seniority. This entails fostering a culture where talent, irrespective of gender, is not just recognized and rewarded, but developed as well. PE firms must work diligently to ensure their promotional practices are unbiased and opportunities are equally accessible.”
3. Encourage inclusion efforts and diversity beyond mandates:
“Private equity firms, having a good amount of influence on their portfolio companies and the marketplace at large, can move the needle in a helpful way by deploying resources like playbooks and toolkits to encourage diversity beyond mandates,” Ms. Kincaid said. “In fact, PE firms often bring in Odgers Berndtson’s organizational design team, OrgShakers, to develop those types of tools for them. This allows portfolio companies to enact best practices suited to their unique challenges, thereby driving systemic change.”
“The importance of DEIB, once seen as a progressive ideal, is now a business necessity,” said Ms. Bass Black. “For private equity firms, it’s not just about gender equality but about harnessing the unparalleled value that a diverse leadership team brings. Private equity firms, with their vast influence, are perfectly poised to lead this change, ensuring that the new normal is one of inclusivity, equity, and boundless potential.”
Odgers Berndtson delivers executive search, leadership assessment, and development strategies to organizations globally.
