The value of diversity

The #MeToo movement that began with individual revelations of sexual harassment in the workplace has triggered a society-wide discussion of gender inequality at work. Across the world, diversity is in the spotlight. At the same time, increasing LP pressure, particularly among large US pensions eager to see the mix of their beneficiaries reflected in investment teams, is forcing GPs to address diversity and inclusion internally and at their portfolio companies.

The big European pensions are also active in talking to GPs about gender and cultural diversity at the board level and below, amid a series of studies showing that there are better returns if diversity is taken into consideration.

Watch attendees at the PEI Responsible Investment Forum discuss diversity.

Among them, McKinsey’s Delivering Through Diversity report demonstrates companies in the top quartile for gender diversity at the executive level are 21 percent more likely to generate above average profits than those in the bottom quartile. For ethnic and cultural diversity, top quartile businesses are 33 percent more likely to outperform on EBIT margin.

With a deeper understanding of the environment in which businesses operate, a diverse team can better identify the right investment opportunity, says Adiba Ighodaro, Actis’s head of investor development group Americas. “That sets you on a path to great value creation. It’s important to avoid groupthink around risk and to have people bring different ideas to the table; to be not only in the market but of the market. Diversity provides a licence to operate in the community.”

In a fast moving, highly priced transaction space requiring GPs to execute aggressive value creation plans, employing a diverse workforce also contributes to increased understanding of the customer/client base; more creative thinking and innovation; enhanced employee engagement and reduced churn; and a healthier ability to anticipate market shifts and future customer needs, among other value drivers.

Gender inequality and diversity will be among the topics discussed at the forthcoming Women in Private Equity Forum, happening between 28-29 November at the Waldorf Hilton, London.

“Diversity is critical; you need people to look at problems in a different way,” says Andros Payne, managing partner at consultants Humatica.

Clients and customers also expect it. Diversity and inclusion typically fall under the broadening umbrella of environmental, social and governance commitments businesses are expected to make. They are linked to “the transparency and trust discussion and the credibility of a business”, says Graeme Ardus, head of ESG at Triton Partners, which has set a target to appoint at least one female board member at each portfolio company.

Here are seven steps GPs can take to ensure increasingly diverse and inclusive workplaces at the portfolio company level:

1. ASSESS DIVERSITY PRE-DEAL
It is never too early to consider diversity. To get a sense of a company’s profile at due diligence, managers can ask questions addressing diversity and inclusion procedures, any anti-discrimination policies, whether diversity is discussed at the board level, whether a business has any initiatives such as diversity champions, and if it is a UK business whether it has met its gender pay gap reporting obligations, says Caroline Löfgren, head of responsible investment at Hg. And even if those questions are not asked directly, “consideration of diversity is implicit in the value creation plan”, says Ralf Schremper, partner at Oakley Capital. “It comes into the assessment of the management structure and key talent.”

2. START AT THE TOP
As the McKinsey study shows, reaping the financial fruits of diversity begins with the executive team. Leadership clones “can make a company single-focused”, says Désirée van Boxtel, partner at Karmijn Kapitaal, a female-led GP that invests in Dutch SMEs with a balance of male and female leadership. Enhanced performance results from combining management styles, for example, long and short-term outlooks, risk-taking and risk management, and a results-driven versus client-orientated approach, she says.

And while management spearheads diversity initiatives, the board has a role in ensuring it remains on the agenda irrespective of whether it is a live issue. Here GPs can wield significant influence. “It has to start at the top,” says Christian Sinding, head of equity at EQT. “We undertake a clear mapping of the board, which we populate ourselves. Gender diversity is most important. Boards and managers haven’t appointed enough females.”

3. ESTABLISH DIVERSITY AS A CORE VALUE
Establishing a robust set of business values, which includes diversity and inclusion, is essential to leverage the benefits of different working patterns and approaches. Marshalling the talents of an eclectic group of employees “is a huge leadership challenge”, says Payne. “The most diverse organisations have the most consistent values,” he notes.

And once established, businesses need to ensure they retain those foundational values that have underpinned growth. “As a business scales and grows and recruits more people it becomes more difficult to stay true to the values that often drove the client base,” says Cindy Casciani, managing director at non-executive director search company Equity Chair. “It should be a yearly conversation.”

Other ways to assess ongoing commitment to diversity include conducting exit interviews on departing employees and assessing how hard individuals are to replace, she says.

4. RECRUIT CREATIVELY
To tap into the range of talent in the market place, GP clients are requesting a more diverse list of candidates, says Casciani. “They want to see us be creative.”

Using a variety of recruiters, hosting recruitment forums, establishing female networks, using anonymous assessment software and hiring heads of talent all serve as routes to identify leaders from alternative backgrounds. Setting targets provides a clear goal against which to measure progress, says Ardus. “If you don’t set targets, you won’t move forward.”

Businesses require “robust competencies to execute the value creation plan”, says Payne. “Closing competency gaps is almost always linked to diversity and getting people that are not a clone of the current team.” To do so, businesses need to “look for areas where there is a monoculture; a blind spot”.

Uniformity can be a barrier to recruitment. “In the war for talent candidates have a choice, and choose to work for businesses that take inclusion seriously. This is important at the firm and portfolio company level,” adds Ighodaro.

5. BUILD A CULTURE OF INCLUSION
For businesses to benefit from a diverse workforce “an important prerequisite is an open and collaborative culture”, says Schremper. This requires encouraging employees to speak up and a leadership secure enough to be challenged.

“The level of participation and transparency over how a business arrives at conclusions and takes decisions is important,” he says. “If management is not driving that behaviour it’s hard to enforce. If the same [type of] people have the decision-making power, the business culture won’t change.”
Instead of flourishing, “a team that is very diverse may also die fighting”, says van Boxtel. In addition to establishing a core set of values, mentoring and coaching helps a business take advantage of differences in employee style, personality and approach, she adds.

Training, for instance on the benefit of quotas, is key “so that the firm and senior colleagues on the board of portfolio companies are aware of the context and importance of initiatives and are receptive”, says Ardus. The need for awareness extends to the workforce as a whole, where employee engagement surveys are useful for assessing the broader business culture, including diversity, he adds.

As an example of how a GP can apply internal best practice to its portfolio, Actis’s leadership has participated in unconscious bias workshops that the firm intends to roll out at its portfolio companies tailored to their particular markets, says Ighodaro. “There is no point in having diversity if you don’t get the most out of it,” she says.

6. LOOK TO THE FUTURE
Working towards greater workplace diversity today enhances the future talent pool. “As we exit or individuals leave, we are building a network of people who we could hire again,” notes Ardus.
And while the profile and attitude of senior management is critical to trickling down a diversity culture, businesses also need to consider a variety of entry-level candidates. Embedding diversity from the bottom up is key to succession planning. “Entry-level people are going to be the business leaders of tomorrow,” says Casciani. “You want to make sure there is a succession [cohort] coming up, otherwise it’s going to be impossible to find leaders that are diverse.”

7. LEAD BY EXAMPLE
Many GPs have teams comprised of a variety of international backgrounds and industry experience. However, women are scarce. They occupy only 5 percent of senior roles in European private equity, according to Invest Europe. “The challenge for many PE houses has been the historically low level of women involved in private equity, which to some extent has made them a bit cautious about preaching the benefit of diversity to portfolio companies if they feel their own houses are not in order,” says Alison Hampton, founder of responsible investment advisor Alma Verde Advisors.

Talent attraction and recruitment strategies are key in redressing gender imbalance, says Löfgren. Encouraging greater diversity ranges from including more images of diverse teams on the firm’s website and using inclusive language in job descriptions, to asking senior women to participate in candidate interviews, she says.

By offering ongoing support, devising family-friendly policies and sharing best practice with their portfolio companies, managers can lead by example.