When we embark on a journey, many of us start by looking at a map to our destination. It might be a physical, paper map or, increasingly, some sort of electronic guide. The map shows us our start and end points, and options for getting where we want to go. It might not have the romance of navigating by the stars, but there is little chance that we will lose our way and not make it to our journey’s end.
But within so many companies that supposedly want to increase the diversity in their boardrooms, there is no map, no documented plan for making the changes that most so desperately need. It is possible to create one, however, by taking six straightforward steps when a company is first being created or — failing that — before it goes for an initial public offering (IPO).
Diversity is not a matter of window dressing. It is something that every company should want because boardroom diversity is a positive predictor of effective governance. Diverse boards have better dialogue, more strategic engagement, and more dynamic and transparent interactions with management teams. When boards better reflect a company’s own organizational composition — and the composition of the start-up industry (and markets) as a whole — they become more inclusive and accountable. Beyond the cultural benefits (and being the right thing to do), there is incontrovertible evidence that companies with diverse boards deliver better financial results.
How to build that diverse board? Here’s my map:
Demand diversity for independent directors. Eight of ten founders (83%) and 93% of VC decision-makers are male, so diversity on boards begins at a deficit. Independent director seats often go unfilled at the outset and, later, are often filled in haste, closing a critical window of opportunity. Instead, declare an independent seat at the board’s first formation, actively move to fill it and don’t do so without interviewing at least one female candidate. If you can’t find at least one via your network, quickly go to retained search. Rinse and repeat whenever filling an independent seat.
Embrace the “Q” word. Quotas work. Set a hard target that 30% to 50% of your board will be non-white male within two years of formation. Diversity breeds diversity, and racial and gender diversity go hand-in-hand. In Europe, where Norway, Germany, France and Spain have legally mandated quotas for corporate boards, the data show that diversity is on the rise (much faster than in the U.S.) and that the conversation around women in the workforce is changing too, including within companies.
Impose term limits. Investors with preferred status have a contractual right to a board seat, which naturally limits board construction. Don’t further constrain a board by setting long-term service expectations for the others. Instead, create a norm for finite terms and natural board succession. Set three-year terms for all non-contractual seats. This doesn’t just support diversity — data show that a mix of institutional energy, fresh eyes and new skill sets are positively affect a company’s performance. Public companies typically have set terms and private companies can institutionalize the same.
Choose expertise over optics. During the IPO window in particular, companies feel pressure to quickly augment the skill sets and optics value of their boards. This can turbocharge the “buddy network” effect for convenience and also skew for candidates with some perceived cachet. Instead, choose expertise over optics. For example, finance experts for the audit committee are in particularly high demand. Companies can prioritize bringing a woman into that director slot, given that the functional expertise is found in a range of sectors. Companies can also widen the search aperture beyond the C-suite as we wait for those ranks to become more representative. Many corporate VPs from mature companies or leaders from public and not-for-profit sectors bring broad operating experience, including managing large organizations and budgets.
Engage a search firm. Companies have a tendency to deliberately avoid retained search. Leveraging existing networks and championing frugality are VCs’ mandates, but if your network is just more people like you, that’s not going to help diversity. When the pressure to fill slots mounts and there is no diversity strategy, the risk of default-to-dude through known networks is high. Search firms, by contrast, are stepping up the diversity game, expanding and curating the growing databases of female talent.
Extend an invitation. While I commend efforts to corral talented board candidates through databases and to create new networks via training programs, such as Boardlist, CSweetener, and Boardroom Ready, my view is that our problem is one of demand, not supply. I encounter immensely talented women every day, any of whom would be of enormous service to company boards. I am puzzled why they — unlike their male peers — need to be groomed or trained for the role. What they actually need is the first invitation. Extend it.
A lot of the conversation about increasing diversity is about finding women. But we also need to talk about what it takes to make a company and board a club that a talented woman wants to join. As demand for women executives and directors continues to grow, there will be increased competition to land them.
At Canaan, we are reaching a tipping point, with women making up 40% of our General Partner ranks and 40% of all investment professionals. Women around the table — and at its head — is what we’ve come to expect and embrace. It’s our new “normal”, and it is better: not only for us, but for the companies we serve.