How much progress has the private equity industry made when it comes to increasing gender diversity?
Joe Riggione: I think private equity has made progress in terms of recognizing that a lack of diversity is an issue for the asset class, but we need to do more. The reality is that private equity firms are still primarily made up of white males. And while the situation may be somewhat better for the leadership teams at the companies those firms own, there are challenges to be addressed at a portfolio level as well.
Progress has been made in operational talent roles, such as HR and marketing. But when it comes to senior leadership and investment professionals, a notable gap remains. Managers routinely express a desire to see a diverse pool of candidates but change isn’t happening fast enough, which is why we decided to launch a product, AboveBoard, that is specifically designed to help remedy this problem.
GPs are now clearly buying into the importance of a diverse hiring strategy. What has driven that change?
Brad Stadler: Many institutional investors are starting to focus heavily on this issue. Endowments and pension funds, for example, are putting pressure on firms to increase diversity, not only within the general partnership, but within portfolio companies as well. Employees themselves within these organizations are also deeply committed to change. Managers are therefore coming under pressure from a variety of different sources, which is why there is such an exciting opportunity to make real progress today.
JR: That pressure is also coming from portfolio companies. A growing number of businesses have diversity deeply embedded in their culture and values. Those businesses will be looking for partners whose values align with theirs. Indeed, they may not want to take money from a GP that has done a poor job of building a diverse team itself.
BS: From a purely business perspective, there is data that shows inclusive and diverse companies that mirror the population achieve better financial results. Diverse teams make better decisions, which delivers superior performance. From a strictly capitalist point of view, therefore, demand for diversity is growing. Most people simply want to do the right thing and understand that the right thing here is to reduce inequality and build a more diverse and inclusive workplace and society.
Given that collective will, why has so little progress been made?
JR: In our experience, PE firms will almost always be looking for a proven track record. And because there are so few women in private equity in the first place, women with the track record they are asking for are inevitably hard to find so they default to what is familiar. It becomes a vicious circle.
The second challenge is that, particularly in large firms, the number of parties that need to approve a hire can be significant. A hiring team may have a mandate to increase diversity, but when it comes to introducing the candidates to the broader GP population, the team fails to get buy in and it all falls apart. Another challenge we find inherent within private equity firms, is this belief that when you are assessing for cultural fit, you are really assessing for people that think in the same way you do. In reality, of course, a strong cultural fit will involve finding someone that can fit into a dynamic team with other individuals that approach things from a different perspective. But too often clients are looking for someone who looks and sounds just like them. Finally, search firms just aren’t serving up diverse lists of potential candidates, so firms are already limited in who they can hire.
BS: You have to remember that the whole executive search business model is predicated on speed. The quicker we turn around our searches, the more profitable our businesses are and the more our people get paid. That is why search firms typically rely on pattern matching. The reality is our data bases and networks are not as diverse nor as inclusive as they need to be and so, as an industry, we perpetuate the problem.
We are addressing that with our product AboveBoard. It allows people to see all the executive roles we are working on and then bring in their own contacts where they see a search that could be a good fit for someone they know within their network. The private equity firms then benefit from not only having access to our internal data base but also access to this growing and evolving community of diverse executives. That kind of transparency just hasn’t existed in the world of executive search historically, which we believe has been one of the major limiting factors in solving the diversity problem.
So, you’re focused on providing innovative ways to offer up more diverse candidate lists to private equity firms. But how can firms themselves improve their processes to ensure these diverse hires get over the line?
BS: The key is to hire on potential and not only to rely on experience. After all, there is plenty of data to suggest that success in a previous role isn’t necessarily a strong indicator of success in the next. One way of measuring potential can be through the use of unbiased assessment products that can help firms gauge cultural fit in the more meaningful sense, of ensuring alignment of values. Those assessments are anonymous, in that they are independent of the in-person screening. These tools can provide a useful way of making previous experience a less prominent part of the hiring process, circumnavigating some of those intrinsic obstacles firms face, and ultimately boosting diversity.
The primary emphasis in private equity appears to be on gender. But are firms also focusing on other aspects of the diversity agenda?
BS: I think private equity has come a long way in terms of thinking about diversity in more than simple gender terms. Certainly, there is a broader mandate for just about every firm that we work with.
How optimistic are you about private equity’s ability to succeed in its diversity ambitions?
JR: We are at a point in time where there is tremendous focus on this issue. The fear is that we may lose that momentum because undoubtedly this is going to take a while. Realistically, it is far easier to recruit diverse teams at a foundational level – it is easier not to get hung up on experience when hiring for junior roles. And those junior hires will feed through in a positive way. But it will take a long time to get there going that route. It is vital, therefore, that the industry doesn’t get distracted, in the meantime.
These issues aren’t going away. For example, we are seeing increased regulatory requirements around board level diversity in places such as California.
BS: There isn’t a private equity firm or an executive search firm out there that doesn’t care about this issue right now. GPs recognize they need to build diversity and embrace an entirely new approach because the same processes won’t produce different outcomes.
This new approach recognizes that great candidates come from various backgrounds, builds accountability into the hiring process, and assesses company culture to ensure success. I think if all of this is powered by innovation and better methodologies, demand will ultimately translate into real results.
Do the challenges around diversity end with hiring, or are there also issues to be addressed around career support and promotion?
JR: It is important to make sure a firm is ready and fully committed to a diverse hiring strategy before they embark on one. It is one thing to submit to social pressure to say the right thing, but quite another to fully embrace what that means and create an environment where those individuals can thrive. We hired a head of diversity and inclusion here at True because we recognized that hiring a more diverse workforce was only part of the puzzle. You also need to make sure you have coaching and mentoring in place and that everyone in the business is fully educated in matters of diversity and inclusion, otherwise you are setting yourself up for problems further down the line.
BS: Creating an environment where your team can flourish and feel supported is a big issue and, in particular, I would point to challenges around long-term leave. In competitive environments like private equity, but equally true of law, executive search, or any number of other industries, it is important that people that need to take extended time off are supported in doing so and that their careers are not set back as a result. This is about more than policy; it’s about creating an actively supportive culture.