In today’s rapidly evolving corporate landscape, the composition of boards is not just a matter of compliance or social responsibility; it’s a strategic imperative that shapes the future of firms. Amidst growing public scrutiny and socio-economic shifts, particularly following the 2020 George Floyd social justice movement, the topic of board diversity is at the forefront of corporate governance debates. In a new paper, we shed light on the often opaque world of boards of private firms. We document stark contrasts, but also surprising parallels, to board diversity of private firms relative to their public counterparts. In doing so, we not only offer a glimpse into the diversity of private firm boards, but also demonstrate how early board composition persists if a firm later goes public.
Our paper provides the first comprehensive description of board diversity within venture-backed privately held companies and draws comparisons with publicly traded firms. In it we leverage the large sociological shift triggered by the 2020 George Floyd social justice movement (GF) to test whether listing status has a causal effect on how firms respond to calls for more diverse representation. We also present evidence that helps identify the potential mechanisms driving the differences in response between public and private firms. Finally, we test whether and to what extent the initial degree of board diversity persists after a firm goes public.
Our sample includes directors appointed to private firms backed by venture capital (VC), a subset of private firms with an outsized role in innovation, job creation, and economic growth. These firms provide a closer counterfactual to public firms than other private firms, as VCs typically select firms with the potential to go public. Further, using GF as a natural experiment, we test whether listing status influences the response to increased calls for diverse representation. Our assumption is that, were it not for GF, trends in board composition would have remained similar for public and private firms. There are a number of recent studies that show an increase in board diversity in response to GF for public firms (Balakrishnan et al., 2023). Like those studies, we assume that changes in board diversity are driven by GF, rather than concurrent events, such as the Covid-19 pandemic, which began in early 2020.
To the best of our knowledge, our study is the first to assemble gender and race classifications on directors of venture-backed private firms between 2000 and 2021. We use PitchBook to create our dataset of about 150,000 directors of private firms. While PitchBook’s coverage is incomplete, we assume that coverage is not a direct function of race. The assumption seems reasonable given that PitchBook does not report race. To classify race, we rely on machine learning algorithms that use a combination of image processing and name prediction algorithms and conduct extensive manual review of the initial algorithmic classifications. For public firms, we rely on BoardEx for board data and gather race data from ISS.
Private firms have far less racial diversity than their public counterparts. For example, in 2019, 9.6 percent of new board appointments in public firms were minorities, compared with 2.9 percent in private firms. Post GF, this diversity gap has widened substantially. By 2021, minorities represent 34.3 percent of new board members in public firms versus 4.7 percent in private firms. This increase is concentrated among black directors. Gender diversity trends, by contrast, are remarkably similar for public and private firms. Our results shed light on broader market dynamics affecting corporate diversity, highlighting distinct trends in minority-director representation for private firms.
Of course, public firms are subject to more formal reporting, oversight, public scrutiny, and specific diversity mandates which may lead us to expect this diversity gap. However, they also face short-term pressure from analysts and shareholders. Hart and Zingales (2017) propose a model where diffuse ownership in public firms can drive public executives to take less personal responsibility for socially responsible actions. Indeed, Bernstein and Sheen (2016) and Cohn et al. (2021) find that health records and workplace safety improve when public firms are acquired by private equity investors. By contrast, private firms, facing less scrutiny, may find it easier to adopt socially desirable actions. However, they might also be more adept at avoiding media and public calls for more racial diversity, facilitated by the concentration of ownership among a few investors and firm founders. Adding complexity to this narrative, Lowry (2022) shows that private firms’ governance structures increasingly resemble those of public firms. This challenges the assumption of an inherent difference in private firms’ approach to board diversity.
Inertia within organizations may also cause governance structures established when a company is private to linger long after the company goes public. For example, Barry et al.(1990); Hochberg (2012), Celikyurt et al. (2014), and Iliev and Lowry (2020) show that venture capitalists maintain board influence well beyond a firm’s IPO. We also find that board diversity remains notably persistent among firms that transition from private to public, as VC-backed firms are less inclined to appoint racially diverse directors following their IPOs, especially when these firms had no diverse directors while private. These findings suggest that understanding why board diversity is lower in private firms is crucial for understanding variation in board diversity among public firms.
While we have documented that boards are less diverse at private firms than public ones, pinning down why is hard. There are several potential causes, including differences in shareholder monitoring, the financial motivations of management and incumbent shareholders, the level of media and public scrutiny, the degree of discrimination during the director recruitment process, and the level of institutional constraints. While a comprehensive exploration of these factors is beyond the scope of our paper, we present evidence suggesting that institutional constraints contribute to the diversity gap between public and private firms.
As an example of institutional constraints, over half of directors appointed to private-firm boards in our sample are VC partners (investor directors), a group with low racial diversity (Cassel et al., 2022; Gompers and Wang, 2017; Lerner et al., 2021). The lack of racial diversity among these directors can act as a bottleneck for board diversity in portfolio companies. Considering that diverse partners might be instrumental in recruiting other diverse board members, the impact is magnified. Given that VCs often recruit from their network — and prior work has shown that VCs and their network are from a similar demographic (Ewens and Townsend, 2020; Gompers et al., 2017) — the limited diversity can be self-perpetuating. Consistent with this notion, we find greater diversity at firms backed by minority-owned VC firms.
Our analysis of the GF shock further supports the role of institutional constraints. We see a 4 percentage point (pp) increase in racial diversity among executive and independent directors post-GF, compared with a 1pp for investor directors. This contrast in response underscores the critical role that investor directors play in shaping overall board diversity, given that they comprise 50 percent of the directors in venture-backed private firms.
One interpretation of our findings is that VC investors fear that the GF movement would cause firms to compromise value by hiring unqualified minority directors. In contrast, public firms may succumb to the pressures and demands of public investors. To test this hypothesis, we compare the qualifications of directors appointed before and after GF. Racial minorities appointed prior to the movement have better observable characteristics: In comparison with their non-minority counterparts, they have stronger educational backgrounds and are more likely to have entrepreneurial experience. Following GF, the qualifications of directors – regardless of ethnicity – are more uniform. This evidence is consistent with the idea that, while minorities faced higher barriers before the movement, the playing field has become more equitable post-GF.
We also show that, while firms backed by minority-owned VCs appoint more minority directors, these VCs are not driving the post-GF increase in minority-director appointments. One reason could be the limited supply of minority partners. The promotion to partner within VC firms is a lengthy process, potentially making these firms slower to react to the social pressures spurred by GF. Additionally, existing minority partners are already serving on multiple boards, limiting their capacity to take on more roles. In line with this reasoning, we show that the post-GF increase in minority board appointments is concentrated among executive and independent directors, rather than investor directors, who are typically partners in the VC firm.
Given the highly politicized nature of the GF movement, one might expect that political sentiment where a firm is located influences the firm’s reactions. To test this, we classify U.S. states based on the percentage of voters who voted for the Republican or Democrat candidate in the 2016 presidential election. Perhaps surprisingly, our analysis shows no significant geographic variation in firms’ responsiveness to the GF movement. This holds whether we consider the location of the firm’s headquarters, of its VC investors, or of the limited partners who invested in these VC funds.
A comprehensive examination of the implications of less diverse boards is beyond the scope of our paper. However, our findings do provide evidence for two implications of diverse boards.
First, firms with a higher fraction of Black directors are more likely to hire Black employees. Interestingly, we do not observe the same correlation between Hispanic directors and employees or female directors and employees. Second, the limited diversity observed on the boards of VC-backed firms likely exacerbates racial wealth disparities. The estimated value of shares held by the median director in such companies going public is approximately $20 million on average.
Balakrishnan, K., R. Copat, D. De la Parra, and K. Ramesh (2023). Racial diversity exposure and firm responses following the murder of George Floyd. Journal of Accounting Research 61 (3), 737–804.
Barry, C. B., C. J. Muscarella, J. W. Peavy Iii, and M. R. Vetsuypens (1990). The role of venture capital in the creation of public companies: Evidence from the going-public process. Journal of Financial economics 27 (2), 447–471.
Bernstein, S. and A. Sheen (2016). The operational consequences of private equity buyouts: Evidence from the restaurant industry. The Review of Financial Studies 29 (9), 2387–2418.
Cassel, J., J. Lerner, and E. Yimfor (2022). Racial diversity in private capital fundraising. Working Paper 30500, National Bureau of Economic Research. https://www.nber.org/papers/w30500.
Celikyurt, U., M. Sevilir, and A. Shivdasani (2014). Venture capitalists on boards of mature public firms. The Review of Financial Studies 27 (1), 56–101.
Cohn, J., N. Nestoriak, and M.Wardlaw (2021). Private equity buyouts and workplace safety. The Review of Financial Studies 34 (10), 4832–4875.
Ewens, M. and R. R. Townsend (2020). Are early stage investors biased against women? Journal of Financial Economics 135 (3), 653–677.
Gompers, P. A., K. Huang, and S. Q. Wang (2017). Homophily in entrepreneurial team formation. Working Paper 23459, National Bureau of Economic Research. https://www.nber.org/papers/w23459.
Gompers, P. A. and S. Q.Wang (2017). Diversity in innovation. Working Paper 23082, National Bureau of Economic Research. https://www.nber.org/papers/w23082.
Hart, O. and L. Zingales (2017). Companies should maximize shareholder welfare not market value. ECGI-Finance Working Paper (521).
Hochberg, Y. V. (2012). Venture capital and corporate governance in the newly public firm. Review of Finance 16 (2), 429–480
Iliev, P. and M. Lowry (2020). Venturing beyond the IPO: Financing of newly public firms by venture capitalists. The Journal of Finance 75 (3), 1527–1577.
Lerner, J., R. Dewan, J. Ledbetter, and A. Billias (2021). Knight diversity of asset managers research series: Industry. John S. and James L. Knight Foundation, and Bella Private Markets. https://knightfoundation.org/reports/.
Lowry, M. (2022). The blurring lines between private and public ownership. Available at SSRN 4200794.
This post comes to us from professors Johan Cassel at Vanderbilt University’s Owen Graduate School of Management, James Weston at Rice University’s Jesse H. Jones Graduate School of Business, and Emmanuel Yimfor at Columbia Business School. It is based on their recent paper, “Board Diversity in Private Vs. Public Firms,” available here.