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How to Increase Gender Diversity Company Wide Based on Current Data (Hint: Not Only on the Board)

How to Increase Gender Diversity Company Wide Based on Current Data (Hint: Not Only on the Board)

By Constance Gamache (Research Lead) and Madison Hofert (Undergraduate Researcher)

Summary:

The impetus of the cultural wave of diversity and inclusion, #MeToo, cases like Ellen Pao’s (***link to our write-up), and this informed website have spurred many initiatives that strive to increase gender diversity on companies’ boards. In September 2018, California passed a law requiring all companies headquartered in the state to have at least one woman on their board by the end of 2019 with additional requirements for the end of 2020. The 2020 Women on Boards campaign seeks to have women comprise 20% of US company boards by the year 2020. These are only a few of the initiatives spearheading the effort for greater female board leadership. And the popularity of this effort makes logical sense — adequate representation of women at the highest level of a company should increase gender diversity in the ranks below. However, is a definitive focus on women at the board level enough? 

Brown University student Sabrina Chen (‘21) tackled questions like this while interning at Just Invest, a startup that creates custom Environmental, Social, and Governance (ESG) portfolios that track indexes. Sabrina analyzed data from 100 companies to test for a correlation between board diversity and the broader diversity of employees within a company. 

Her results aren’t the simple Cinderella story you would expect. Sabrina found that there was no correlation between:

  • The number of women on boards and the percentage of women in the firm as a whole
  • Board diversity and the number of women being promoted within companies, 
  • The number of women who serve as senior managers and the percentage of women who make up the top ten percent of earners within the company.

Thus, even though the idea of increased board gender diversity suggests a ripple-effect within a company, and even though board diversity data is readily accessible (from sources such as MSCI, Sustainalytics, and Bloomberg), board diversity is not representative of diversity within entire firms. “A better measure of how firms are doing in terms of gender diversity would be to look at gender diversity within any level of a firm (this could range from entry level to senior management). In fact, there is a positive correlation between the percentage of women in the executive level of a firm (or any other level) and the percentage of women in the firm altogether,” Sabrina says. Thus, the gender makeup of boards is neither comprehensive, nor reflective of gender diversity in companies as a whole, and we should move towards a more nuanced definition of gender diversity to truly enact change. 

Takeaways:

  • Increased gender diversity on boards is better than nothing: From the LA Times, “If the law survives a legal challenge, 684 women will be needed to fill board seats for Russell 3000 companies by 2021”
  • Subpopulations of gender create nuance through intersectionality: Women of different backgrounds (race, LGBTQ, and disability status, among many more) can face compounded adversity due to structural oppression — this should be taken into account when analyzing data and making hiring decisions

 

Additional Reading:

 

 

*Denotes Key Source

The Diana Project: Researching Investment in Women-Led Ventures

The Diana Project: Researching Investment in Women-Led Ventures

By Constance Gamache (Research Lead) and Madison Hofert (Undergraduate Researcher)

Summary:

The Diana Project began in 1999 out of the Arthur M. Blank Center for Entrepreneurship at Babson College to research women entrepreneurs in the US. Soon after releasing their initial findings in 1999, The Diana Project partnered with the Entrepreneurship and Small Business Research Institute, Sweden to form the Diana International collaborative. The Diana Project continues to research and publish reports on the state of women entrepreneurs, and Diana International hosts regular conferences around the world pertaining to these same issues. The 2020 Diana International Research Conference will be held at IPAG Business School in Nice, France on October 19-20. 

The Diana Project’s 2014 report, Bridging the Gender Gap in Venture Capital, still stands as one of the most comprehensive sources on gender diversity in VC ever published. Four main questions structure the report: 

  • Do women entrepreneurs seek and receive the venture capital needed to grow their businesses?
  • How are women entrepreneurs performing after receiving venture capital?
  • Who are the venture capital firms investing in women entrepreneurs?
  • Who are the women entrepreneurs receiving venture capital investment?

The report also includes valuable data on the types of women-owned companies that receive VC funding and profiles of women partners in VC firms. 

Nine recommendations for firms conclude the report, largely centering around the importance of hiring and promoting women VCs to the partner level, and encouraging a re-examination of potentially gender biased investment decisions (read through all 9 here, page 19).

Takeaways:

 

  • The 2014 report conclusion: “… companies with women on the executive team are just as successful if not more successful than companies with no women on the team. 

 

The lack of diversity in the venture capital industry, taken together with the overall performance of the industry, suggests that the model for venture capital that has been in place since the 1980s should be reconsidered and re-evaluated in order to affect change.”

  • Critical thinking from any perspective can kickstart change: starting with the four questions above, anything from one’s personal outlook and actions regarding D&I to changes in VC-wide culture can happen

 

Additional Reading:

*Denotes Key Source

Workplace Discrimination & Harassment in VC

The Lawsuit that Got Our Attention: Ellen Pao’s 2015 Case Against Workplace Discrimination & Harassment in VC

By Constance Gamache (Research Lead) and Madison Hofert (Undergraduate Researcher)

Summary:

With the recent rise of the rise of the #MeToo movement, many industries now face large public cases of workplace discrimination and harassment. For the VC industry, however, this moment came four years ago, in 2015. 

Ellen Pao, former employee of VC firm Kleiner Perkins Caufield & Byers, filed a gender discrimination suit against Kleiner Perkins in 2012. Pao had been with Kleiner Perkins since 2005, and alleged that she was denied promotions, kept out of meetings, and received unwanted sexual advances from colleagues due to her gender. Pao sought $16 million in damages for unmade earnings due to her early termination and discrimination. 

When the case went to trial in early 2015, news outlets like the New York Times, Wall Street Journal, and TechCrunch reported extensively on the proceedings and its implications for the industry. Many sources noted that it was extremely unusual for cases like Pao’s to go to trial; most discrimination cases were settled privately in order to avoid the scrutiny of a public trial. Pao, however, refused to settle. Upon losing the case, Pao tweeted the Toni Morrison quote, “If you are free, you need to free somebody else. If you have some power, then your job is to empower somebody else.” Her case prompted increased discussion of VC’s lack of gender diversity across the country.

Since 2015, Pao has occupied several other prestigious seats in Silicon Valley. First as interim CEO of Reddit, Chief Diversity and Inclusion Officer at Kapor Capital, and now co-founder and CEO of Project Include, an advocacy group for diversity in VC and Tech.  

Takeaways:

  • Question natural/unconscious tendencies and biases: A superior male performance in VC firms could be due to gender-exclusive collaboration; women in VC firms simply have fewer in their tribe
  • Consequences of implicit biases: A seemingly harmless male-to-male association or preference within a VC firm can quickly become insular, affecting women and minorities both professionally and personally (Ellen Pao lost her job over this!) 
  • “The Second Sex”: According to Simone De Beauvoir, women operate in the world as “the second sex” (men are the primary sex); the VC industry has an opportunity to lean into greater cultural awareness, utilizing its reputation of challenging the status quo for good

Additional Reading: 

*Denotes Key Source

Community and Capital in Entrepreneurship and Economic Growth

Community and Capital in Entrepreneurship and Economic Growth… 27 Pages in 7 Minutes

By Constance Gamache (Research Lead) and Madison Hofert (Undergraduate Researcher)

Summary:

Samila and Sorensen’s 2017 paper Community and Capital in Entrepreneurship and Economic Growth explores the relationship between local social dynamics and investment performance, adding richness to the discussion of diversity and inclusion in VC. They went further than just saying VC investments boost the local economy, or simply analyzing the relationship of investment performance to the identities of the founders or the funders. In this paper, VC investments are contextualized within the economic development of an entire community. Samila and Sorensen ask, how does the social structure within a community (i.e. its diversity) affect its economic development (i.e. the efficient allocation of VC funds)?

The results? More integrated communities benefit comparatively more from venture capital across multiple metrics, including the quantity and quality of new patents, jobs, and companies. The authors give us three reasons for this relationship between the diversity of a community and its response to VC:

  • Diversity dramatically expands a community’s capacity for innovation, and hence the supply of potential ideas for investment. Demographic diversity also increases the nature of interactions: the whole community works harder to learn more from each other, ultimately creating more collective knowledge.
  • Resource mobilization: more interconnected communities have shorter average path lengths between any two people; an entrepreneur has a greater ability to employ social connections to access funding or other needed resources. Since high-potential entrepreneurs and profitable ideas exist across all social groups, and, in general, people have tighter connections to others of their own ethnicities, the close-ness of a community overall determines the extent of resource mobilization.
  • Information spread: seeing the success of a diverse group of entrepreneurs encourages others to participate as well.

Takeaways:

  • A company as a microcosm for a connected community: Rather than trying to quantify social relationships, this paper examined the potential for a social relationship. If a company/VC firm is full of that potential, then the ball is set rolling for greater community connection within the workplace, and all of the benefits described above. 
  • Efficiency vs. Innovation: Diversity may increase friction or conflict, but that ultimately only affects efficiency, which is superseded by the benefits to innovation.

 

Additional Reading:

 

 

*Denotes key source

The Strength of Strong Ties in an Emerging Industry

Summary and D&I Takeaways from The Strength of Strong Ties in an Emerging Industry: Experimental Evidence of the Effects of Status Hierarchies and Personal Ties in Venture Capitalist Decision Making

By Constance Gamache (Research Lead) and Madison Hofert (Undergraduate Researcher)

Wuebker, Hampl, and Wustenhagen. , 2017

Summary:

Common sense suggests that personal networks and perceived prestige are both key factors in how venture capitalists make investment decisions; if an investment is recommended by someone that a given investor holds close both personally and professionally, then the investor ascribes high value to the recommendation based on a history of trust. Similarly, if others who are making the same investment have high perceived status or prestige, then that investor is also much more likely to trust their decision. Literature shows that these intuitions derive from both organizational and social network theory, which explain the mechanisms behind decision making heuristics.

The interaction between organizational and social network theory is less intuitive. The Strength of Strong Ties takes an experimental approach to finding a relationship between status hierarchies and personal social networks. The experiment involved a three-step series of decision making tasks meant to simulate real-world investment selection processes. Three clear patterns emerged in the data. 

  • In the context of high market uncertainty, the trust behind personal ties is much more important than the signaling effects of high-profile investors. This result is particularly salient to startups operating in areas like new and emerging technology, implying that those working on products with little-to-no market history should prioritize personal connections rather than status when seeking investments. 
  • The extent to which personal ties are prioritized is mediated by the density of personal networks: using geography as a partial proxy for understanding network density, Wuebker et al. compared investors from the densely-connected San Francisco Bay area, as well as the much more sparsely-networked Europe. Personal ties were substantially more significant in San Francisco than in Europe. 
  • As investors gain experience, the role of strong personal ties in investment heuristics follow a U-shaped path. Wuebker et al. find statistically significant evidence that the most inexperienced investors rely on strong social ties for choosing deals. As investors gain experience, the strength of personal networks declines in importance, perhaps as investors develop their own decision making heuristics, which could include the relative prestige of the lead investor. For very experienced investors, however, there is a return to prioritization of personal ties. Wuebker et al. explain this phenomenon — extremely experienced investors may expect to be aware of  “high quality deals” based on their close connections who are also likely to be highly experienced; in another vein, extremely experienced investors may begin to over-rely on their heuristics. Additionally,  at this part of the scale, “prestigiousness” may also correlate strongly with personal networks. 

Takeaways:

  • Personal relationships are relatively more important: This highlights the compounding difficulties that under-represented entrepreneurs and investors face in the VC space. 
  • Consider the ease of your personal networks: Given that this study is premised on the importance of personal networks as well as perceived prestige, it’s clear that founders (and aspiring investors) who aren’t white, male, or alumni of certain schools are at a disadvantage, as they are more likely to lack the “ins” to those networks and to be picked up by “prestigious” investors.
  • Opportunity for a diversity of new communities to form: The development of social and professional communities for and by marginalized communities in VC could overcome structural, compounded disadvantages facing minority groups, leveling the playing field of social connections. 

Additional Reading:

 

 

*Denotes key source