How private equity can catalyze diversity, equity, and inclusion in the workplace (2022)

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Business leaders hear a lot about disruption. But 2020 redefined the term. By March, the novel coronavirus had completely changed ways of life and work for billions of people. In May, the death of George Floyd produced an equally seismic shift in cultural awareness of systemic racism and set in motion urgent calls for racial equity—globally. And today, second and third waves of COVID-19 cases are tearing through many countries, exacerbating socioeconomic, gender, and racial inequities.

(Video) Racial Equity in the Workplace

This article discusses how—in the current moment of upheaval—private equity (PE) has the ability and imperative to improve diversity, equity, and inclusion (DE&I) in the workplace; and in so doing, provide additional levers for financial outperformance. Our long-running researchon diversity across industries shows that companies with greater diversity in leadership ranks are more likely than those with less diverse leadership to perform better than industry average on margin growth. Applying this analysis to PE suggests an additional lever for value creation within firms’ portfolios. Improving DE&I will not only provide an additional opportunity for financial outperformance, but DE&I commitments may also help firms raise capital.

By focusing on DE&I, the PE industry can create more equitable and inclusive places to work, attract better talent, redefine corporate culture, and set a standard for businesses everywhere.

The opportunity for PE

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While the Fortune Global 500 comes first to mind when thinking about the corporate leaders of the economy, PE firms and their portfolio companies have an outsize ability to influence the status quo of the business community. Globally, about 10,000 PE firms have more than $3.9 trillion in assets under management (AUM). 1 In North America alone, about 4,700 firms own more than 18,800 companies. 2 With that kind of influence, if PE firms were to continue to reduce gender and racial inequalities across the companies they control, they could change the face of business.

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McKinsey and LeanIn.org’s new report, Women in the Workplace 2020, confirms that PE lags corporate America on gender and diversity in senior ranks. Our analysis presents overall trends and averages for the industry, and we fully recognize that some PE firms have made advancements on DE&I. On the whole, gender and racial diversity at PE firms are stronger in entry-level positions than at the top (exhibit). On average at the start of 2020, about 20 percent of senior leaders at PE firms (managing-director level) were women while the share of women on executive teams in the rest of corporate America was about 30 percent. 3 PE also trails on ethnic diversity. In 2020, investment deal teams are about 1 to 2 percent 4 Black in the United States, with other people of color comprising the remaining 11 to 12 percent of diversity at the managing-director level. 5 Public companies do better, with approximately 13 percent Black and Latinx executives. 6 But that’s still far below the US demographic composition (about 30 percent Black and Latinx in 2019) and also lags behind the ethnic-minority population that holds a graduate degree (about 23 percent of the total workforce with relevant graduate degrees in 2019). PE portfolio companies’ management teams and boards of directors represent a further area of opportunity.

How private equity can catalyze diversity, equity, and inclusion in the workplace (1)

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How PE can catalyze DE&I advancements

Over the past five years, McKinsey has studied the strengthening business case for gender and ethnic diversity: companies with greater diversity within their leadership team correlate to stronger financial results. Companies in the top quartile for gender diversity were 25 percent more likelyto outperform industry-median EBIT growth than bottom-quartile companies. Similarly, executive teams in the top quartile of ethnic diversity were 36 percent more likely to financially outperform the industry median.

If this business case were to hold for PE-backed companies, beyond the increased likelihood of financial outperformance for the portfolio company itself, a PE fund focused on driving significant change across the portfolio would produce significant enterprise value for the fund. While it is still early days for PE on improving diversity, and the correlation remains to be validated for privately held companies, the scale of potential value creation is significant.

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Firms are already moving ahead. Since May 2020, we have seen an uptick in the number of PE firms focused on DE&I. Much of that is because the energy gathering around gender and racial equity is raising expectations for employers. But institutional investors and other limited partners (LPs) are also beginning to bring DE&I criteria into their thinking as they allocate funds to general partners (GPs). Furthermore, as the data show, the push for increased DE&I could also make financial sense for PE firms.

While the standard tactics to improve DE&I—including early recruitment and interview prep for underrepresented minorities, unconscious bias training, and inclusivity surveys—are helpful to any company, some PE firms are beginning to assert that they can and should do more. A set of tailored and unique actions can help GPs and their portfolio companies improve DE&I in their organizations and lead across the business community. Here’s a small sample of those actions.

PE firms can do the following:

  • Make a public commitment. Firms can, for example, establish an internal council on DE&I for themselves and their portfolio, with a C-level chair to signal that this matters. The council can develop metrics, set goals, and monitor progress on targets for both the firm and the portfolio.
  • Conduct diversity assessments of targets. Firms can include DE&I throughout the deal life cycle. Building DE&I criteria into due diligence of targets and investment-committee reviews can help not only to assess risk but also to understand the value-creation opportunity inherent from improving DE&I. Once targets are acquired, owners should include DE&I in the 100-day value-creation plan. And they should revisit DE&I as one of the value-creation levers highlighted for buyers upon exit.
  • Focus on diversity performance. Leadership can review firm and portfolio-company diversity metrics at all partner meetings and even link a portion of compensation to deal teams’ or portfolio companies’ performance on these DE&I metrics.

Within portfolio companies, advancing DE&I includes the following steps:

  • Set diversity targets for boards. PE firms have seats on the boards of most of their investments. They can use those to position qualified, diverse candidates; they can also add seats to create a diverse board of directors with relevant skill sets for their companies.
  • Establish diverse management teams. Firms can review the diversity of each portfolio company’s workforce and management and identify areas where increased DE&I could lead to improved culture and performance.
  • Remove structural racism from all corporate policies portfolio-wide. Firms can examine current benefits and corporate policies and restructure them as needed to improve retention and promote equity in advancement of underrepresented minorities.

These levers are not exhaustive; instead, they are a few of the tangible ways that PE firms can lead in the creation of a more diverse, equitable, and inclusive workplace.

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It is increasingly clear that PE’s push on DE&I in this moment can serve as a catalyst, with outsize impact across the business community, while also increasing the likelihood of outperformance for early adopters.

In the coming months, we will continue to share steps the industry can take to improve racial and gender diversity within its firms, portfolio companies, and as an industry.

FAQs

What is DEI in private equity? ›

Diverse private equity firms (referred to here as diversity, equity and inclusion [DEI] firms)1 are an expanding and critical component of both the emerging manager and broader private equity (PE) industry.

How does equity relate to diversity and inclusion? ›

Diversity is the presence of differences within a given setting. Equity is the process of ensuring that processes and programs are impartial, fair and provide equal possible outcomes for every individual. Inclusion is the practice of ensuring that people feel a sense of belonging in the workplace.

Why equity is important in diversity and inclusion? ›

A diverse group, community, or organization is one in which a variety of social and cultural characteristics exist. Equity ensures everyone has access to the same treatment, opportunities, and advancement. Equity aims to identify and eliminate barriers that prevent the full participation of some groups.

How do you implement equity and equality in the workplace? ›

How to promote equity in the workplace
  1. Understand and promote the importance of equity. ...
  2. Evaluate and improve your equity practices. ...
  3. Communicate your targets and share progress. ...
  4. Make wage equity a priority. ...
  5. Prioritize equitable representation. ...
  6. Think about equity recruitment. ...
  7. Review and upgrade your onboarding.
2 Nov 2021

How do you create a DEI strategy? ›

Here are some tips for creating a winning DEI strategy:
  1. Make it specific and actionable. As with any goal, specificity is key to success. ...
  2. Make it measurable. ...
  3. Communicate! ...
  4. Don't focus solely on hiring. ...
  5. Start with what you already have. ...
  6. Get employee feedback. ...
  7. Don't forget about culture.
1 Mar 2022

What is a DEI strategic plan? ›

The DEI Strategic Plan aligns the college's structure with the corresponding strategic themes, institutional objectives, and measurable indicators for each outcome. Strategies are identified and are then broken down by objective and into measurable action items.

Why do companies focus on DEI? ›

Studies show DEI has the potential to increase sales revenue, increase customer base and ultimately increase profits. DEI is not only the right thing to do, it also makes good business sense. backgrounds, identities and experiences collectively and as individuals.

Does equity include diversity and inclusion? ›

Key Takeaways. Diversity is about differences, equity is about providing equal access, and inclusion is about fostering a sense of value and empowerment in employees. A substantial number of employees and job seekers consider a company's diversity to be very important when applying.

What does equity mean in diversity equity and inclusion? ›

Whereas diversity refers to all the many ways that people differ, equity is about creating fair access, opportunity, and advancement for all those different people. It's about creating a fair playing field, to use a familiar metaphor.

How do you implement DEI in the workplace? ›

DEI Strategies in the Workplace
  1. Embrace the Power of Employee Resource Groups. ...
  2. Prioritize Women's Development. ...
  3. Reframe the Role of Coaching. ...
  4. Seek Buy-In from Senior Leaders. ...
  5. Consider DEI from the Start. ...
  6. Measure Your DEI Efforts. ...
  7. Prioritize Open Communication.
27 Jul 2022

Why is equity and equality important in the workplace? ›

It establishes a diverse thought process in innovation and decision making and it facilitates needs-based development for the workforce. Moreover, because it enhances engagement among all employees, it promotes work satisfaction and by extension retention.

What are the 7 pillars of inclusion? ›

About 7 Pillars of Inclusion
  • Access.
  • Attitude.
  • Choice.
  • Partnerships.
  • Communication.
  • Policy.
  • Opportunities.

How do you increase diversity and inclusion? ›

9 Proven Strategies to Improve Diversity, Equity & Inclusion at Your Workplace
  1. Identify DEIB as a strategic priority. ...
  2. Conduct pay equity reviews. ...
  3. Recruit and promote from a diverse POV. ...
  4. Create a robust mentorship program. ...
  5. Consistently train and engage employees on DEIB. ...
  6. Make sure benefits and programs are inclusive.
22 Jun 2021

How do you prioritize DEI at work? ›

5 ways HR leaders can prioritize DEI in the workplace
  1. Take stock of your current situation. ...
  2. Build an inclusive recruitment and hiring process. ...
  3. Paid remote work opportunities and internships. ...
  4. Demonstrate diversity in your executive leadership team. ...
  5. Create employee resource groups (ERGs).
25 May 2022

How do you promote DEI? ›

Below are five meaningful ways to support DEI in any organization.
  1. Educate yourself and take personal inventory. ...
  2. Don't speak in rhetoric. ...
  3. Actively advocate for and value diversity, equity and inclusion. ...
  4. Create a safe and accountable culture. ...
  5. Prioritize your values over your worries and doubts.
21 Sept 2021

What are your top DEI initiatives for the workplace? ›

The most popular action items introduced during 2020 are training sessions (25.7%) and sourcing and recruiting more diverse candidates (25.5%). Mentorship programs and targeted development are most likely to be planned in the future (21%).

What are some DEI goals? ›

Goal: Promote diversity and inclusion in my workplace. Goal met by: Promote the development and advancement of underrepresented groups in my team through professional development courses and trainings. Goal: Actively create a productive work environment within my team that is free of harassment and bullying.

What is a DEI scorecard? ›

The DEI Scorecard for Library and Information Organizations, developed by the ALA Committee on Diversity, is an evaluative tool that centers accountability and transparency in determining organizational effectiveness in diversity, equity, and inclusion in the recruitment, hiring, retention, and promotion of people of ...

What are the 6 C's for inclusive leadership? ›

The 6 c's of inclusive leadership are:
  • Communication. Leaders need to be able to communicate with people from all walks of life. ...
  • Collaboration. Leaders need to be able to work with people from all walks of life. ...
  • Creative problem solving. ...
  • Commitment. ...
  • Courage. ...
  • Cultural competence.

What does diversity and inclusion mean in the workplace? ›

Diversity is the presence of differences within a given setting. In the workplace that can mean differences in race, ethnicity, gender identity, age and more. Inclusion is the practice of ensuring that people feel a sense of belonging and support from the organization.

How do you foster inclusion in the workplace? ›

9 ways to foster inclusivity
  1. Be transparent. Everyone in the company — leadership and individual contributors alike — should practice transparency. ...
  2. Use inclusive language. ...
  3. Be an ally. ...
  4. Self-educate. ...
  5. Switch up your social media scene. ...
  6. Amplify marginalized voices. ...
  7. Lean into discomfort. ...
  8. Accept critical feedback.
8 Jun 2022

Why is diversity and equity important in the workplace? ›

Diversity and inclusion (D&I) is more than policies, programs, or headcounts. Equitable employers outpace their competitors by respecting the unique needs, perspectives and potential of all their team members. As a result, diverse and inclusive workplaces earn deeper trust and more commitment from their employees.

What is an example of equity in the workplace? ›

Equity refers to the specific things each person needs to succeed. As an example, a person might ask to work from home a few days a week because of a medical condition. Providing the option to work remotely allows them to fulfill their full potential at their job.

Why is diversity and equality important in the workplace? ›

A workplace encouraging equality, diversity and inclusion can help: make it more successful. keep employees happy and motivated. prevent serious or legal issues arising, such as bullying, harassment and discrimination.

What is equity talking about diversity? ›

Equity: The fair treatment, access, opportunity and advancement for all people, while at the same time striving to identify and eliminate barriers that prevent the full participation of some groups.

What is difference between equality and equity in diversity? ›

Both equity and equality promote fairness. However, equality achieves this by treating everyone as the same, whereas equity does so by treating people differently dependent on their need. In order to achieve equality, equity is needed to give everyone the same chance of getting there.

How are equity diversity inclusion and cultural competence related? ›

Cultural competence for equity and inclusion is the ability to live and work effectively in culturally diverse environments and enact a commitment to fairness and to the full participation of all members. In environments that are equitable and inclusive there is a fair distribution of resources and opportunities.

What are 3 major differences between diversity and inclusion? ›

Mitjans: Diversity is the "what"; inclusion is the "how." Diversity focuses on the makeup of your workforce — demographics such as gender, race/ethnicity, age, sexual orientation, veteran status, just to name a few, and inclusion is a measure of culture that enables diversity to thrive.

What is an example of equity in the workplace? ›

Equity refers to the specific things each person needs to succeed. As an example, a person might ask to work from home a few days a week because of a medical condition. Providing the option to work remotely allows them to fulfill their full potential at their job.

How do you increase inclusion in the workplace? ›

6 Steps for Building an Inclusive Workplace
  1. Introduction.
  2. Educate Your Leaders.
  3. Form an Inclusion Council.
  4. Celebrate Employee Differences.
  5. Listen to Employees.
  6. Hold More-Effective Meetings.
  7. Communicate Goals and Measure Progress.
19 Mar 2018

Videos

1. ARIS Summit 22_Keynote: Technology, Innovation, and Partnerships (TIP)
(ARIS Impacts)
2. Diversity, Equity, and Inclusion (DEI) - A Leadership Imperative for Systemic Transformation
(MITSloan)
3. Developing Policies and Shifting Operations for Equity, Diversity and Inclusion
(ACSA National)
4. Workforce 100% Strategy Primer | Facilitating Fair and Thriving Workplaces
(Pitt CSB)
5. Transforming “The Great Resignation” into “The Great Reimagination”
(NYU Stern)
6. Opening ourselves: An introduction to anti-oppression practices and frameworks (1/2) - Jan 13, 2022
(Healthcare Excellence Canada)

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