Published on October 23, 2019
By Louis Hernandez Jr., Black Dragon Capital Founder, CEO, and Managing Director
Achieving racial, ethnic and gender diversity is an urgent societal goal. It’s also essential to business success. Yet business lags in its ability to achieve true diversity. The two industries I’m engaged with, technology and private equity, are even farther behind. What is to be done?
The first step is to make the business case. Across industries, diversity is directly correlated with superior performance. Companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective industry medians. Companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective industry medians. For every 10% increase in racial and ethnic diversity on the senior executive team, U.S. companies generated an EBIT rise of 0.8%. (From McKinsey & Co. and other industry reports.)
Diversity broadens the talent pool. A more inclusive hiring effort is a way to ensure that you have the best talent at the table. And a diverse leadership team of senior executives or general partners at that table bring more viewpoints to bear. It will present a wider array of strategies and solutions. Importantly, a diverse leadership team and workforce enable your organization to better connect with a larger and increasingly prosperous population of clients and customers.
In the PE realm, managers that are diverse may add a new dimension to selecting investment targets. Valuations are high, so different vantage points may mean more opportunity.
Yet women and minorities are dramatically underrepresented in private equity and in technology. In the latter, the problem runs deep, with women and ethnic minorities lagging greatly in STEM participation in college.
Representation is difficult to achieve in large measure because lack of diversity is a societal problem, not just a business matter. When women and minorities are denied opportunity, that of course translates to a less-diverse talent pipeline. While too many businesses use that as an “out,” blaming the pipeline for their failure to achieve diversity, it can be a legitimate challenge for leaders with the best intentions to locate and recruit diverse talent.
The heart of the challenge is time. Diversity and time are natural enemies. In technology and private equity, organizations need to move fast. Technology companies are often growth companies and operate in growth mode. Private equity firms are often building portfolios of growth companies and are operating in growth mode as well. If the most urgent business need is to put a leadership team in place right now, and if the industry lacks minority representation, then it’s possible that the immediately available leadership talent pool will be white and male. Diversity requires patience, and in growth companies, patience is in short supply.
But the challenges are not insurmountable. I am the founder of Black Dragon Capital, a minority-led private equity firm, and I have served as CEO of several of our portfolio companies. In many of those companies, we’ve been able to drive inclusivity and build diverse leadership teams. At Avid Technology, we improved ethnic diversity by 50% and improved gender diversity by 13%. Long-term development is less about statistic-filled hires of mediocre talent and more about investing in a long-term diversity plan. At Avid, we increased the number of female managers by approximately 40%, creating the foundation for long-term success and development.
Diversity was not just “by the numbers.” It encompassed some of our most critical leadership roles, including reimagining our product suite, creating and building our 40,000-strong Avid Customer Association, and setting the pricing and bundling strategies that allowed us to meet our targets, all of this during a challenging turnaround.
In addition, I’m trying to help address the root problems. My charity, Louis Hernandez Jr.’s Foundation For A Bright Future, formerly A Little Hope Foundation, is focused on creating educational opportunities for the disadvantaged, including many minority students. The Foundation is the expression of my deeply felt personal commitment. As a minority myself, I was lucky to have parents and others who pushed me to take on the challenges of technology and private equity. Not everyone is so fortunate. People put trust and faith in me. The Foundation enables me to do the same for others.
The way we address the challenge of an under-representative talent pool is to create a diverse leadership team by growing our own. You can, too. Although you may not be able to create an instantly diverse leadership team, you can identify and cultivate future leaders through smart recruiting and a smart review of your middle management ranks. You can make diversity a central part of that review, selection and mentoring process.
To do this, you need a plan. The goal is not only to diversify but also to set your people up for success. First, identify the talent that’s right for the organization’s current state of development. People who perform well in $10 million organizations may not be suited to $100 million organizations. The reverse is also true. In this respect, building a diverse leadership team is just like building any leadership team. You need to be a strong and systematic evaluator of talent. At Black Dragon Capital, a minority-led firm that is 75% ethnically or gender diverse, we employ a proprietary methodology that we call The Black Dragon Leadership Index™. It’s a framework for evaluating both hard performance metrics and soft values, such as emotional intelligence. It enables us to match the talent to the need and to the state of the organization’s evolution, whether we are cultivating leaders for our portfolio companies or for our own organization. We use the Leadership Index to evaluate all talent, no matter the background. But it truly shines as a tool for identifying, and opening up opportunities for a bigger, more diverse leadership cadre.
You may have such a tool in your own arsenal. If not, consider building one. I believe it’s a necessary component for a program that will result in more opportunity for more people and better leadership for your organization.
Diversity goes hand in hand with superior organizational performance. Commit to it and lean in!
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