April 14, 2021
Drax’s Lucy O’Byrne on diverse thinking in the workplace, why we need it, and how leadership evaluation tools can strengthen team and institutional performance
While real, demonstrable gaps in diversity and representation exist within private equity, there is work being done towards positive change, at individual firms themselves as well as their portfolio companies.
Blackstone have issued a mandate that a third of board seats at newly acquired US and European companies should be filled by diverse candidates within a year after Blackstone’s acquisition of a controlling interest.
At KKR, business leaders are tasked each year with building a diversity and inclusion strategy, which they must present to the Inclusion and Diversity Council. And Carlyle have rolled out new 2021 initiatives, one of which requires that 30% of its portfolio companies’ boards are ethnically diverse.
Speaking in September 2020 on Carlyle’s Building Better podcast, Kara Helandar said: “We spend a lot of time helping each other to understand how bias operates, but more importantly, the steps we can proactively take to help mitigate that bias so it doesn’t impact the quality of our decision making.” As chief inclusion and diversity officer, Helander drives the group’s inclusivity efforts.
There is clearly merit in this demographic approach. We can point to McKinsey’s 2020 analysis, Diversity wins, in which companies with gender and ethnic diversity in their leadership ranks are more likely to perform better than the industry average on margin growth.
Greater diversity is not only a moral imperative, but also leads to improved performance. Yet, to date, corporates and private equity-backed firms have focused solely on the demographic diversity issue. There is a lot more to consider.
Our own proprietary data shows that upper quartile performance at private equity-backed businesses is achieved when leaderships teams have each of the four value creation quadrants (see figure 1, below) covered by at least one senior figure, creating what we call diverse and heterogenous teams.
This is a strategy of diversity plus balance and there is a growing body of public work in support. Matthew Syed, a researcher in the field of high performance, has captured the balance + diversity equation persuasively.
He stresses in Rebel Ideas that when it comes to problem solving, generating creative ideas or establishing new products, the power of cognitive diversity is profound. Engineering this into a leadership team “can deliver a massive uplift in collective intelligence,” he writes, and by natural extension: an uplift in performance.
Samuel Robberts, head of drxDATA, agrees: “Our research has been focussed on the impact that cognitive diversity is able to have within the boardroom and allows us to conduct ‘blind’ leadership tests, but also to manage the risks associated with groupthink where overly similar leadership teams will struggle to resiliently deal with new experiences.”
For mid-cap businesses this is an area to evolve into; for corporates and large caps, a recalibration is needed. Software-led psychometric tools can help. One way some of the top-performing businesses are using these tools to achieve balance and diversity is to focus on behavioural complementarity – the state of working usefully together – within a leadership group (see figure 2, below).
In short, systematic, business-led approaches to diversity are best placed to achieve complementarity into a leadership team and therefore provide an additional lever for value creation.
It’s something we have been studying for a long time because we genuinely believe the most diverse and complementary leadership teams are the most valuable.
And not only does a greater focus on balance + diversity add to the bottom line, it enriches the wider company culture, helps break up existing assumptions and beliefs, and improves communication throughout the firm. It will be a key feature of competitive advantage for the next fifty years.
As drxDATA’s Samuel Robberts notes: “Diversity is therefore both a pro-active advantage seeker, but also a deliberate risk mitigation strategy.”
Over the coming months, we will review in more depth the building blocks of heterogenous teams and how private equity firms can get their leadership balance right.
Diversity & Inclusion Lead, CFO practice