Many companies approaching their initial public offering (IPO) have an all-male board of directors — but that’s changing. Whether it’s including women or people of color, the scrutiny of public markets is becoming increasingly focused on diversity. Here’s how building a diversified board can help your upcoming IPO.
What’s the Issue?
There’s a woman on every single S&P 500 company board. The same is nearly accurate among Fortune 500 companies, with only a handful of all-male boards. Strangely enough, private companies aren’t mirroring their larger counterparts regarding diversity, and it’s hurting them. According to Fortune, 49% of late-stage private companies are still all-male. Aside from gender, race also factors into a successful IPO, not to mention professional history and experience.
But why does all this matter? The short answer is because it matters to stockholders.
The long answer is multifaceted. Let’s review some of the most critical points of board diversity a late-stage private company must consider before going public — and before facing the (relentless) scrutiny of the open market.
The global pandemic has hurt women worldwide in a way that seemingly pushed them back several decades. Many were forced to pause careers to attend to their families, while others had to decline promotions or quit working altogether.
Amid the frustration, though, many women were able to move forward to represent those who decided or were pushed to step back. Consider Karen Lynch, the new President and CEO of CVS Health. Or Janet Yellen, the US Secretary of the Treasury. And we can’t forget about Kim Ng, the Marlins new General Manager. These female leaders continue to make strides forward; society is beginning to expect it, and women depend on it.
Why Gender Matters
These pivotal moments in history have impacted stakeholders vital to the private-to-public transition. Non-diverse boards are not only unwelcomed; they’re not allowed by some players. Many stakeholders understand that a diverse board positions a company for stronger financial performance and improved governance.
For example, Goldman Sachs has made a massive board diversity commitment, refusing to take a company public unless it has at least one “diverse” board member. In July of 2021, they’re increasing the requirement to two board members, and one must be a woman. Nasdaq even proposed implementing requirements for board diversity for companies listed on its stock exchange.
Reserving a spot on your board for a female member is a wise move; good for the company and good for society. And it’s more than merely sliding under the requirements radar. Women board members must have a voice — because if they don’t, stakeholders will now demand answers.
As with many eras, several social movements are unfolding at the same time. Besides the movement for gender equality, another movement weighing heavy on society is that for racial equality, particularly Black Lives Matter. It was only this April in 2021 that Derek Chauvin was found guilty of murdering George Floyd. This particular case sparked the most prominent civil rights movement in years, protesting against racial discrimination and systemic racism.
Keep in mind that none of these social issues are new; however, public market stakeholders are responding to them in a way unlike any other time. Like us, they’re only human, after all. As a result, late-stage companies preparing for an IPO must not ignore these powerful social movements. How companies respond will largely determine their IPO’s success.
Why Race Matters
Racial diversity is the focus of many companies nowadays. But out of the 200 largest S&P 500 companies, only 10% of directors are Black. Consider the Harvard Business Review’s article titled, “Why Do Boards Have So Few Black Directors?” This piece also points out that in 2019, 37% of S&P 500 firms had no Black board members — a statistic that recently changed. It examines board recruitment, board introductions, director onboarding, leadership roles, and board dynamics as possible solutions to the lack of racial diversity.
We point out the relevance of this movement to encourage against shrugging it off. Stakeholders are taking notice of gender and race on boards nowadays. A diversified board of directors sends the message that your company values social responsibility as well as financial performance. For companies that strike a balance between these two values, longevity is likely in your future — and stakeholders know it full well.
Endless debate exists on the best combination of skills and obligations board members need to do the job successfully. From duty of care to CEO experience to industry knowledge, there’s no one-size-fits-all approach. What’s more, board qualifications aren’t solely focused on who candidates are naturally, such as race and gender, but also who they choose to be. Professional history also plays a significant role in how companies assemble their board of directors.
Many famous leaders were once considered “too inexperienced” to serve on a board — Elon Musk comes to mind, in particular. But building a diversified board includes what a candidate has accomplished in the past as well as being an independent thinker. Plus, experience isn’t the same as age. Unlike in the past, serving on a board isn’t the end of the road, only meant for individuals about to retire. Board qualifications have evolved into something more profound.
Why Professional History Matters
Because of the many environmental, social, and governance (ESG) issues, it’s imperative for board members to have personal conviction instead of merely being a yes-person. Companies gauge current ESG-ratings closely, and stakeholders hold companies accountable.
Source: Market Business News
Additionally, board members must ask tough questions and go against the other board members, introducing out-of-the-box ideas. On that same note, stakeholders expect leaders to make deliberate decisions instead of being led by impulse.
As the business world is ever-changing, many experts think that boards must embrace more frequent turnover to make meaningful progress. Sitting with the same people on a board year after year doesn’t always leave room for new ideas or learning fresh business strategies. However, keeping up with current trends, best practices, and new information is necessary. And building a diversified board requires an up-to-date approach.
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