Culture Wars Risk Killing Fintech Board Diversity Progress

Culture Wars Risk Killing Fintech Board Diversity Progress

Despite consistent empirical evidence that diverse boards and companies perform better, a backlash of “anti-woke” sentiment is sweeping across the financial services industry. Women occupy only 16% of private company board seats, and only 4% for women of color. And while female fund managers are making progress breaking into venture capital boards, the critical force behind private company governance, they risk stagnation as “anti-woke” culture goes mainstream.

Inadequate diversity on private fintech boards isn’t exclusively a culture wars problem. An annual tracking report produced through a collaboration between Him For Her, the social impact venture amplifying networks and solving for diversity on corporate boards, and Crunchbase, found at least two important structural issues inhibiting board diversity. The first was the overwhelming homogeneity among investors and entrepreneurs (boards, as it turns out, tend to reflect the networks that source them). The second was the persistent issue of vacant independent director seats.

Despite their recognition that diverse operators bring fresh perspectives and relevant experience (and even though venture-backed companies typically designate space for at least one independent board seat), nearly a fifth of the companies studied in their report had no independent directors sitting on their boards. Nayreen Akhtar, an investor at 2150, affirmed the importance of independents, saying, "Boards can become unwieldy and lose focus, yet they are vital for governance. Lean, purpose-driven structures with industry-specific insights from independent members ensure valuable outcomes for the company and meaningful learning experiences for younger investors.”

Still, in spite of these ongoing structural challenges, there is room for moderate optimism: the 16% of board seats held by women in 2023 is up from 14% in 2021, and 7% in 2019. Similarly, the paltry 4% of private company board seats held by women of color represents a (very slight) improvement from the 3% observed in 2022. While we can note some incremental progress, the rate of change is sluggish.

Today’s extreme political polarization has succeeded in making even the mention of banal corporate diversity efforts feel edgy. A few years ago, executives were happy to boast about their environmental, social and governance initiatives. By contrast, financial research platform AlphaSense reported that of the 575 earnings calls they monitored in June of 2023, mentions of the terms “ESG,” “diversity, equity and inclusion,” “DEI” were down 31% from the same period the year before.

It’s possible that in the name of maintaining neutrality, boards and their members are similarly avoiding DEI and social impact topics deemed too controversial by conservative investors and advocacy groups, pumping the brakes on “woke” initiatives.

Maria Josife, a partner at Erevena, a company focused on executive search for venture-backed companies, suggested that, in addition to “anti-woke” sentiment, today’s difficult economic climate may also be contributing to a diminished appetite for board diversity. “Investors and entrepreneurs are under pressure,” Josife explained via email. “There are people with fund-destroying positions in high profile assets, and saving one’s bacon is often more important than where the bacon comes from. So, you can extend the concept of “anti-wokism” to really just conservatism. In moments of pressure people revert to experience over any other criteria even though every stat you read reinforces that diverse boards make better commercial decisions.”

Indeed, progress on board diversity is impactful, not just on soft metrics, but also in terms of the bottom line. As exhaustively documented by McKinsey & Company in their Diversity Matters report, public companies with more diverse boards of directors financially outperform less diverse teams. This correlation remains statistically significant across gender and ethnicity. Companies in the top 25% for board-gender diversity were 27% more likely to outperform financially than those in the bottom quartile. Similarly, the top 25% of ethnically diverse boards were 13% more likely to outperform those in the bottom quartile. A definitive business case for DEI efforts on boards has been rendered.

I asked Crista Bailey, the Chief Business Development Officer at Him for Her, about the impact of the current culture wars for the financial services industry, specifically if the market downturn on diversity might be slowing down progress around fintech board diversity efforts. Her position was hopeful, “It makes the work all the more important. What we’re seeing is that leaders are doing the right things for their business and that includes diversifying talent. They know that earnings and people are inextricably linked and when the most important room in business lacks cognitive diversity, that’s not good for shareholders.”

Benign neutrality is not the same thing as deliberate oversight. In skirting diversity measures, board members not only resign themselves to worse performance, they rightly run the risk of accusations of negligence when it comes to their fiduciary responsibility to shareholders (which demand both neutrality on social and political issues and abiding discrimination laws).

In a pivotal global electoral year, the prospect of a rematch between Trump and Biden in the upcoming U.S. presidential election looms large, suggesting that the political polarization surrounding initiatives to diversify boards is unlikely to diminish. However, amidst rumors of IPO markets reopening, private fintech companies have a unique opportunity to transcend the culture wars and shape the agenda for finance culture in the new economy.