Research: Gender Diversity on Start-Up Boards Is Worse Than You Think
U.S. corporate boards remain overwhelmingly male, despite high-profile pushes to increase their representation of women. Today, women hold a mere 26% of board seats on the S&P 500 and 20% of those on the Russell 3000. Some see these numbers as evidence of a need for continued change — after all, women now comprise roughly 40% of students at top MBA programs and 40% of corporate managers in addition to being 50% of the population. Others have grown tired of diversity pressures and see these numbers as good enough.
A new study jointly conducted by information platform Crunchbase, social-impact venture Him For Her, and the Kellogg School of Management confirms that, indeed, there is still much more work to be done — especially when data from private start-ups are analyzed, too.
Using the Crunchbase database, we analyzed the boards of 200 of the most heavily funded U.S.-based, private, venture-backed companies — organizations that had about $100 million in total funding each or were valued above $500 million dollars. We chose these companies because they play an outsize role in driving innovation and represent the public companies of the future.
Our findings show that the boards of elite private firms are incredibly homogenous. Women held just over 7% of board seats in our study. But most strikingly, roughly 60% of the businesses in our sample did not have a single female board member. In comparison, none of the boards of the S&P 500 companies are all-male.
Among the minority of boards that had female members, the most common number of women on private-company boards was one. This is troubling because research suggests that, when it comes to gender, there is strength in numbers: Boards typically need three women to fully capture the economic returns to board diversity. Less than 2% of companies in our sample fit this criterion.
We also found gender differences in type of board seats held. We classified board seats into three categories: executive directors (CEOs, cofounders, management team members; 24% of seats in our study); investor directors (56% of seats); and independent directors (20% of seats).
Not surprisingly, given systematic gender biases in funding for new ventures and the under-representation of women in the venture capital industry, women were least represented among executive directors (4%) and investor directors (5%). But the numbers trend even lower than one would expect given this very skewed pipeline. Women represent 10% of VC partners overall, but private-company female investment directors are outnumbered about 20-to-1 by men, double the expected rate.
Women were most likely to fill independent director seats, though they were still under-represented in these seats (19%) compared to men. A full half the women in our sample occupied such roles. While more research is needed to understand why female board members are concentrated among independents, our conversations with executives revealed that when companies search for independent members, they often look for individuals who provide novel backgrounds, skills, or outside perspectives and can round out the overall expertise of the board. This seems to be a role where executives intentionally seek out difference, including by gender.
Broadly, we suspect that the dearth of women on private company boards may be driven by reduced accountability pressures faced by these companies, greater reliance or personal and professional networks in board member recruitment, and increased emphasis on prior board or CEO experience, all of which tilt competition for seats towards men.
Our findings have multiple implications
The largest is that private firms have a lot of work to do toward improving board diversity, given how much they lag behind their public counterparts in this area.
But even if their underperformance compared to public companies is not sufficiently motivating, new regulations may be. For example, California recently enacted legislation requiring all public firms headquartered in that state to have at least one female board member by year-end 2019. By mid-2021, boards with five directors must have at least two women, and those with six or more directors are required to have at least three female members.
In our private-firm sample, 115 companies were based in California. Only 44 of them (38%) had at least one female board member. The majority would fail to meet the state’s near-term requirement; only four of the boards we studied would meet the 2021 mandate. In short, most such private California-based firms looking to go public soon will have to make big governance changes.
The good news is that the transition from private to public bodes well for board diversity. We conducted an additional analysis of 98 U.S.-based venture-backed companies that went public between early 2018 and mid-2019. In this group, 82% had at least one female board member; half of those had two or more. Women held 18% of all board seats, more than double the proportion in our private-company sample. Thus, as IPO-bound companies address SEC and other requirements, board gender diversity improves. Notably, public companies are required to have independent directors; private companies are not. Mandates for independent director seats may inadvertently counterbalance gender homophily and encourage gender diversity.
Just like the public-company indices, we plan to revisit private-company board gender diversity regularly, to assess the situation and promote greater accountability to change it. Businesses — public and private — can reap the rewards of greater boardroom diversity (like higher returns on equity and assets and fewer governance issues), while promoting larger opportunity for underrepresented groups.
We hope our research provides some of the incentive they need to make this a larger reality.