California’s board of director law is a big step for diversity — but is it big enough?
Last month I spoke on a panel in San Francisco titled “The Business Case for Investing in Women”. I was glad to be on the panel, but I also felt a bit weary: do we really still need to be making the business case for women? For all the data on the performance of women-led businesses, and the overwhelming research showing that diverse teams outperform, why do we still need panels to argue for the benefits of increasing investment in female-founded and female-led companies?
During the panel, I was asked if institutional investors / LPs are demanding that funds they invest in have more diverse teams and diverse portfolios. Today, women make up just over ten percent of portfolio managers, and only seven percent of partners in VC firms — which is likely a huge contributing factor to the low rate of investment in companies led by women (or people of color, for that matter). Hence the question: are LPs refusing to invest in funds that have all-male or mostly-male teams?
The answer? Not really. Do an increasing number of LP’s want to invest in funds with diverse teams? Sure. But no one is forcing their hand, and as far as I’ve seen, most investors are not drawing a hard line. It’s still a “nice to have”, not a “need to have”.
I’ve been thinking recently about the role that government can play here. Thinking about how policymakers value the role and stature of women can be pretty discouraging these days, especially in the wake of the Kavanaugh hearings. But there has been one interesting bright spot in the past month, in California.
Government leading the way on gender diversity
Last month California passed a law mandating that every publicly-traded company must have one woman on their board of directors. By 2021, companies with at least five directors will need to have two or three female directors, depending on the size of the board. Companies that don’t comply will face financial penalties.
This follows the example of several countries in Europe, starting with Norway, which was the first country to mandate better representation of women on corporate boards all the way back in 2003. Other countries (Spain, Belgium, France, Italy, the Netherlands, and most recently Germany) have followed suit.
Last year, European Union leaders announced that they were pushing for an EU-wide quota. Under the proposal, companies whose non-executive directors are more than 60% male would be required to prioritize women when candidates of equal merit were being considered for a post. For those of you who are sports fans, it’s similar to the “Rooney Rule” in the NFL.
The thing about these European laws: they seem to work, at least at their intended goal. Data from the London School of Economics shows that the proportion of women on boards increased dramatically in each country, and outpaced the EU overall in each country.
While I’ve largely been a proponent of minimizing government’s role in the markets, I’ve become more pessimistic about the fact that people in power lack the incentive to change the dynamic that got them there. At the World Bank Group’s recent conference on “Disrupting the Gender Divide,” Andy Dunn, the founder of Bonobos and now SVP of Walmart Online, remarkably advocated for a federal law that would be much more ambitious than California’s, mandating a makeup of 50% women on corporate boards.
Who will force investors’ hands?
To date, governments have been trying their hand at playing a role in mandating change at the board level — with some indication of success. But who can — and should — play a role at mandating change when it comes to decision making at the earliest stages of a company’s development?
In my work sourcing, training and supporting early stage startups, I’ve seen that while women own 40% of all businesses in the United States, we’re not represented when it comes to building and financing the types of businesses that build wealth and create jobs — only 2.2% of venture capital goes to women founders not working with a male counterpart, in spite of overwhelming data showing that diverse teams perform upwards of 35% better than industry norms — and that funds with diverse teams make more money.
Changing how investment decisions are made likely shouldn’t be the purview of the government. But we need people (mostly men) in positions of power and influence today to insist on change — whether they’re LPs who refuse to invest in funds that do not have female partners, or board members who insist on increasing diversity on their boards. This is even more important when it comes to women of color, who face an even more uphill battle when it comes to representation as decision makers and senior leaders.
At Village Capital we’re proud to play a small part in mandating and creating change when it comes to diversity in who makes decisions, and who receives capital. Our cohort sourcing and selection process relies on highly diverse and inclusive advisory boards. Our cohorts are on average 40% women. And our democratized peer selection process has yielded diverse investments — 44% of capital deployed by our affiliated fund has been in female-led companies. Reach out if you have other ideas on how to incentivize investors to make change.
Allie Burns is Managing Director of Village Capital. Read more on vilcap.com/blog.
