Gender Diversity and The State of Private Boards

Nicholas J Price

Corporate boardrooms have historically been dominated by men. In a move to improve governance, shareholders, legislators and regulators have been stressing the importance of corporations including women on their boards of directors. Most of that pressure has been directed toward public companies. In response, public companies have been moving slowly in the direction of adding one or two women to their boards or adding a seat to accommodate a female director.

If the move toward adding women to boards has been slow for public companies, it's been even slower for private companies. In a collaborative research study of some of the most heavily funded private companies by Crunchbase, Him For Her, and Kellogg School of Management, most private companies are lagging in adding women to their boards.

The idea behind the study was to bring attention to the need to have more women on private boards, highlight the benefits that women can bring to boards and serve as a benchmark for tracking future progress. To date, we have less information about women on private boards than for public boards.

Some studies have shown that gender diversity in the boardroom leads to better corporate performance and greater opportunity in the workplace. Spencer Stuart and the Equilar Gender Diversity Index have done studies on public boards, and those studies have called attention to the lack of women on boards. While the proportion of female board directors has grown steadily, women still occupy the minority of board seats on public and private boards.

Research on Gender Diversity and Private Boards

The study included 200 private companies. Each of them was backed with close to $100 million or more in venture-backed funding. The companies had all been founded since 2004 or they were valued at over $500 million.

The study showed that 60% of the companies had no women on their boards at all. Only 7% of the board seats of private companies overall were held by women. Executives and investors made up 80% of board director seats, and fewer than 5% of those seats were held by women. If we compare those percentages to boards of Russell 3000 companies, women made up 10.8% of the boards. Of the S&P 500 companies, all board directors are males.

There are 1,366 board seats among the 200 companies studied, and only 101 were held by women. That equates to only 7% of board seats filled by women as compared with 20% for the Russell 3000 and 26% for the S&P 500.

Just under 40% of the companies studied had at least one board director and 76% had only one woman director. Fewer than 10% of all the boards had placed a woman on their boards. The highest concentration of women on boards was by three companies that each had three female board directors.

Investors as Board Directors

Private boards consist of some combination of executive directors, investor directors and independent directors.

Executive directors are usually CEOs, co-founders or other members of the management team. They make up about 24% of the board seats.

Investor directors make up about 56% of board seats and they make up the largest number of board directors for venture-backed companies.

Private companies aren't required to have independent directors on their boards. Since they're not tied to the founding management team and they're not early investors, independent board directors are typically added to the board after all other seats have been filled. Independent board directors make up about 20% of board seats on private company boards. It's more likely that women on boards will be independent board directors. In fact, at 19% of all the companies surveyed, all the independent directors were women. Around 29% of the companies hadn't yet added any independent board directors.

Of all the board seats held by women, 50% are independent directors, 36% are investor directors and only 14% are executive directors.

More research needs to be done to gain better insight as to what's driving gender disparities on private boards of directors. One reason may be that only 39% of private companies use search firms. Almost half of the firms rely on personal networks or recommendations from other board members to identify prospective board candidates. Because current private company board directors are mostly men, the bulk of their networks also tend to be men. In addition, most boards want their board members to have previous board experience or CEO experience, which further limits the candidate pool.

California Companies Face New Laws

Of the 200 companies that participated in the study, 115 have their headquarters in California. Many of these companies may never be traded on the public market. Those that do will need to reconsider the status quo for women on boards and start the process of adding enough women to their boards to meet the qualification of California's Women on Boards law. Private companies with headquarters in California that are planning for an initial public offering (IPO) will need to have at least one woman on their boards right away. They'll also need to make sure that if they have at least five directors on their boards, they must have at least two women on their boards. Boards with six directors or more are required to appoint at least three women directors.

Very few of the private companies in this study would meet the criteria for the California law. Of the 115 companies in the study that are based in California, only 38% had a female board member in time to meet the 2019 deadline. Relative to the criteria for the July 2021 deadline, only four of the companies would meet the deadline for boards that are of the size that would require more than one woman director.

Considering that the pressure to increase the number of women on public boards is bound to increase in the future, it's important to consider that private companies are the pipeline for public companies. Another big reason that it's important to have women on boards is that corporations employ a diverse workforce and they serve diverse customers and they like to see themselves reflected in senior leadership. These are all good reasons for private companies to consider working toward greater gender diversity on their boards.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.