Partner & Director
Performance on key social topics has become increasingly critical for private companies in every industry, and judging from this year’s ESG Data Convergence Initiative (EDCI) findings, by and large, they are making progress.
First of all, while private companies trailed their public peers in some areas—notably gender diversity on their boards of directors—they outperformed on other metrics, such as job creation levels.
In addition, the data shows that the private equity investment model can be effective at driving positive change over the course of the investment period across a diverse set of social metrics, from worker injury rates to gender diversity at the management level.
Moreover, we found further evidence of links between social factors at private companies and financial results: in the relationship between an engaged workforce and reduced employee turnover, for example, and in the correlations between lower worker injury rates and higher revenue growth.
Here, we examine in greater detail two particularly important themes from the latest EDCI social data— the quantity and quality of jobs being created at private companies, and diversity at the board level and across top management. Taken together, the evidence shows that private companies are succeeding in pushing forward the social aspect of ESG and improving their own prospects in the process. (See Exhibit 1.)
Job creation, and the quality of the jobs available, has long been a key concern of all stakeholders in the PE industry, and a considerable portion of the data collected through the EDCI effort has focused on these issues. While the results are mixed, the overall trend is positive.
Job Creation. Among the encouraging results of last year’s EDCI findings was the fact that—contrary to common perception—private companies were creating significantly higher numbers of jobs, net of attrition, than their public peers. And that finding held true this year: while employment growth at private companies slowed slightly, they still hired four more net new employees per 100 FTEs than did public companies. (See Exhibit 2.)
Job Safety. Even as PE firms are making progress on the absolute number of jobs created at their portfolio companies, they are also pushing to improve the quality of the jobs, a critical social aspect. While historically, these issues have been difficult to measure, they have become increasingly relevant to private equity’s social license to operate and a driver of commercial value creation. (See “What Makes a Job Good?”)
Work-related injuries are a key element of employee safety, and this year’s results show that injury rates vary considerably by sector, with higher levels in the food and beverage, resource transformation, and transportation sectors. These relatively higher injury rates may reflect the fact that these sectors have fewer desk-based employees, who typically have a lower propensity for injuries.
Furthermore, the results indicate that PE firms can be effective in driving down injury rates at their portfolio companies, although this too varies by sector. This year’s data shows that average injury rates at portfolio companies in three of the top five sectors ranked by injury rate declined the longer they were held by a PE firm. (See Exhibit 3.) This demonstrates that PE firms can succeed in encouraging their portfolio companies to improve safety standards. A 2018 study by the American Economic Association supports this conclusion; it found that PE-owned firms are better positioned to make long-term investments to improve both the safety of physical assets such as plants and equipment, and operational safety, through improved processes, procedures, and training, among other factors.
Employee Outcomes and Financial Performance. When discussing social considerations in PE, a common question is whether these initiatives can help to create financial value in addition to delivering social impact. Logically, it seems as though a happier, more engaged workforce should lead to lower attrition, while companies that create work environments where employees feel safe are also more likely to thrive. Is this borne out in the data?
The data does indeed back up this thesis. We found that higher employee survey response rates (a reasonable proxy for employee engagement) correlate with lower employee turnover. Companies with a more engaged workforce see lower employee churn rates. (See Exhibit 4.) And we know that companies with lower churn rates not only reduce the cost of recruiting and onboarding new employees but also have higher productivity rates, thanks to more experienced, motivated employees. For example, a Harvard Business Review study looking at more than 1,000 stores of a retail organization found that stores with the most experienced employees outperformed those with the least experience, generating over 50% more revenue and 40% higher profits.
A further benefit was the creation of more opportunities for upskilling and promotion among workers. The result: a positive cycle of social impact and financial outperformance. (See “Spreading the Wealth.”)
Meanwhile, we also found a correlation in the EDCI data between a company’s injury rate and its revenue growth. Businesses with the lowest injury rates increased their revenue at a rate 7 percentage points greater than those with the highest rates—a finding that remains true across sectors. (See Exhibit 5.) While correlation, as always, does not mean causation, it is important to note that companies that invest in building a positive work environment and keeping employees safe are also experiencing high revenue growth rates.
Last year’s EDCI results showed that the private markets were significantly lagging the public markets in terms of board-level gender diversity. Just 54% of private companies had at least one woman on their boards, compared with 87% of public companies. These results were not entirely surprising, given that public companies have likely faced greater scrutiny and pressure, from a wider variety of stakeholders and for a longer period of time, to increase the presence of women on their boards.
This year’s results reveal relatively modest gains on this front. The number of private companies with at least one woman on their boards rose just 3 percentage points, to 57%. And they continue to lag public companies by a significant margin on this dimension. (See Exhibit 6.)
Gender diversity, however, isn’t just about increasing female representation on corporate boards. This year, the EDCI added a new metric—gender diversity in the C-suite—and here, private companies outperformed their public counterparts. Women made up 22% of the C-suite at the median private company, compared with 17% at public companies. This finding holds true across regions and sectors.
Moreover, the proportion of women in the C-suite at private companies increases over the course of ownership by a PE firm. (See Exhibit 7.) This is an encouraging finding: it shows that PE firms understand the benefits of having diverse perspectives in top management as well as the virtues of being able to identify, recruit, and nurture top management from a larger talent pool.
Finally, this year’s data also enabled us to analyze trends in board membership among underrepresented groups at companies based in the Americas. (Data on this metric is not available for companies based in the EMEA [Europe, the Middle East, and Africa] or Asia.) Here, private companies are generally in line with their public peers. According to data from Equilar, a provider of information services on corporate leadership, in the fourth quarter of 2021, 15% of board directors at Russell 3000 companies came from underrepresented communities, an increase of 1 percentage point over the first quarter of that year. Meanwhile, the number of members of underrepresented groups on private company boards grew by 1 percentage point, to 14%, from 2021 to 2022. (See “Making a Difference.”)
In an increasingly uncertain world—rife with complex macroeconomic, environmental, and social forces—PE firms have an important role to play in building portfolio companies that deliver on their social license to operate. And as our analysis of EDCI data shows, many of them are rising to the challenge, building inclusive work environments, and creating safe, high-quality jobs. In doing so, they are also delivering outsize returns for their investors and society as a whole.
Yet this is no time for complacency. These results show that there are still many areas where PE funds can and should do better. We’re excited by the progress made so far and hope to see even greater adoption of the emerging best practices in the future.
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