Diversity and Board of Directors

There has been a lot of blather about Facebook’s upcoming IPO. Many are critical of Facebook because they don’t have anyone other than white men on their board. Those critics are very misplaced in their criticism.

It’s not diversity for diversity’s sake that makes the whole stronger. Too often we think diversity is like going to the grocery store. We pull different genders and colors off the shelf and hope that the diverse mix will satisfy the “diversity requirement”.

Before you stop reading this and call me a racist, I don’t discount diverse opinions and experiences. I just think that before anyone points fingers on diversity, they ought to think about the facts behind the anecdotes and examine what true diversity really is.

First off, it’s not diversity of skin color or gender that matters per se. It’s diversity of opinion and using diversity of strengths and weaknesses to build a more robust organization. For example, no matter what color or gender you are, if you come from a family of money you will have a different experience than someone that grew up in a blue collar area. That is sort of simplistic I know, but I hope you get the point.

People in business have different skills and experiences. They come from different areas of the country. That shapes different world views. Melding and managing those types of things correctly can create a very powerful force on a Board of Directors that can support the organization.

One fact that you need to know before you draw any conclusions about Facebook is that the Venture Capital world is about 95% male. Males also make up the largest percentage of the population in majors like engineering, and research sciences. People with those backgrounds find themselves becoming entrepreneurs a lot of times that lead them to pursue VC when they are done running their company. It is a circular cycle that has repeated itself for years.

There are various academic studies on diversity. One at Harvard showed that diversity really didn’t matter to the success or failure of a company. But, because institutional investors placed a value on having a female on the board, companies that had a female had a higher stock price.

In an old study from the University of Chicago archives, they interviewed more than 60 corporate directors and found similarities among them no matter what company, gender, or area of the country they were from. Many people don’t get what the responsibilities of a corporate board member are. They are nicely summarized here:

1. We are here to give counsel, make judgments, and oversee the commitment of corporate resources
2. We are responsible for assessing and, if necessary, replacing top management
3. We don’t manage the company
4. We don’t set strategy
5. We are responsible for assuring long-run survival of the firm
6. We cannot abdicate our responsibilities
7. Officially, we are here to act in the best interest of shareholders

Those are the standards that the Facebook board ought to be held to. Not some touchy feely non quantifiable diversity standard that doesn’t make a bit of difference in the success or failure of the firm.

The study went on to look at getting new blood. It points out that ” We should seek to add a woman or a minority group member to the board, but only if they are ‘truly qualified’.” Boards are tricky things and you need a nice mish mash of people. In Facebook’s case, each of their directors bring unique things to the board, and different personal networks that can advantage the company.

If you look closely at the academic studies on personal networks and gender, some interesting things appear. Professor Ron Burt has examined this phenomena and found out there were differences between the way men and women networked.

Why? The answer lies deeper than the usual explanations. First, the gender difference cannot be attributed to women preferring the support and cohesion of cliques because men and women are equally likely to build clique networks. “What’s different between men and women is not the kind of networks they build; it is the way they are treated when they build certain kinds of networks,” Burt says. Second, there is no evidence that women suffer because of “pink-collar” — or low-opportunity — jobs since there is no association in the study population between gender and the kind of work a manager does. Third, men more often build same-sex networks, rejecting the explanation that women with entrepreneurial networks do poorly because their networks are too often built around other women.

The real explanation, says Burt, turns on women being excluded from the informal communication networks among senior managers. Familiar with the rules of informal communication between men, established male managers have little experience with women as colleagues. Normal business involves conflict and complexity sufficient to make outcomes uncertain. Managers can avoid the added complexity of gender by focusing on projects proposed by male colleagues.

Herein lies the importance of a “strategic partner.” The best network for a woman in Burt’s study population involves a strong relationship with a strategic partner who has an entrepreneurial network. The strategic partner assures skeptical colleagues of the woman’s ability, and adds the woman’s name to lists of candidates being considered for key project assignments. The strategic partner’s value does not come from telling the woman how to develop as a manager; it comes from persuading colleagues to give the woman opportunities to develop as a manager. The presence of such strategic partners in a manager’s network, easily measured with social capital models, turns out to be the key factor distinguishing successful women from the unsuccessful.

Based on Burt’s research, women haven’t yet developed the strategic partners they need to break onto the boards of companies like Facebook. If we look at social media companies(Facebook($FB), LinkedIN($LNKD), Zynga, Yelp) that are public, or about to go public, there is only one woman, Leslie Kilgore, that is on any board. From her background, it looks like she has the entrepreneurial chops and personal network that placed her there.

However, what has happened in the past doesn’t necessarily predict the future. More women are attending college and graduate school today. More women are entering entrepreneurial jobs and starting companies. People in long downtrodden neighborhoods are slowly coming to the realization that government transfer payments can’t get them out of poverty but their creativity can. There are winds of change that will take a generation or more to sort themselves out.

For investors, it means they ought to be less worried about the gender and color of the skin in the board room and more worried about how they interact with top management to make decisions that are in the best long term interests of the company.

Companies should get the best possible people. For women and minorities, it just means actively setting up your personal network to place yourself in a spot where you will assume a top role in management. Different people set up their networks in different ways. If you concentrate and build your network with the end goal of being on a board, you can get there. It all depends on you, not some artificial standard.

Addendum

For the record, the angel organization I co-founded in Chicago has several women on the board. We have funded companies that had all races and genders as founders. Our angel group has 20% women, and has a woman managing director. In no circumstance have I ever heard anyone say that we had to invest or appoint a person to a role because of race or gender. We didn’t actively recruit women per se as angels. We recruited them, or they found us, because they are outstanding people with great backgrounds that are interested in investing in start ups. It’s all about looking at putting the right person in the job, or investing in a company that has the right stuff to bring a return on your Benjamin’s. The minute you succumb to a values based argument on race or gender is the minute you are guaranteed to lose money.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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