Private Equity’s Use of ‘Cultural Fit’ and Its Impact on Gender Diversity

July 21, 2020

Private equity firms are renowned for utilizing highly analytical, data-driven processes to identify deals and maximize return on investment.

Yet despite this reputed attention to detail, funds often reject qualified portfolio company candidates on the basis of a vague criteria: cultural fit.

Cultural fit is widely understood as the degree to which a candidate’s soft skills and personality fit with the culture of the company and sponsor fund.

While there is little doubt a true culture clash in the C-suite can disrupt an investment, the ambiguity underlying many funds’ definition of cultural fit often allows bias to impact evaluations of human capital.

In AlixPartners’ 2017 annual private equity survey, 50% of surveyed investors claimed their biggest hiring obstacle was assessing a candidate’s fit into a company’s culture. The urgent hiring timelines commonly present in PE can make determining soft skill compatibility a challenge, yet this issue is often exacerbated by a lack of clarity on the criteria being evaluated.

While a surface-level definition of cultural fit can be helpful in hiring an executive who will seamlessly transition into a company, it can also create environments comprised of a homogenous population.

Cultural fit is a vague evaluation criterium, and psychological data has found vague criteria can be more easily distorted by bias. This cloudiness may contribute to a lack of gender diversity both in fund and portfolio company leadership.

Women constituted only 17.9% of PE professionals worldwide in 2019, the smallest percentage of any asset class.

Humans tend to connect socially with those who share similarities to themselves. Therefore, while the use of cultural fit may be well intentioned to create a cohesive work environment, human tendency can lead to other results. Because many C-suite executive teams and private equity firms are comprised of white men, this tendency can perpetuate the hiring of white men with similar backgrounds.

Only 12.5% of Falcon’s placed candidates over the previous three years have been women despite active efforts to engage more female executives.

This low percentage is in part due to the number of women who apply for these positions, as obstacles in the career pipeline (such as child rearing and previous hiring/promotion bias) often make it difficult for women to achieve the type of trajectory many funds consider a prerequisite for an executive role or even to perceive themselves qualified.

With so few women achieving the trajectory required to interview for these positions, the elimination of female candidates due to a criterion as vague as cultural fit does significant damage to the progression of women into the C-suite.

This lack of gender diversity is unfortunate not only for the qualified female candidates who are overlooked for these opportunities, but also the firms that turn them down, as greater gender diversity among corporate leadership has been shown to lead to higher profitability.

High level executives are often seen as strong, outspoken, and driven leaders — characteristics traditionally viewed as male traits. If a woman embodies these traits, she therefore possesses attributes that are traditionally non-female. Such a violation of gender standards has been shown to lead women to be interpreted as less favorable and less psychologically healthy than women who do not violate these standards. Many consider extroversion and charisma in a male executive signs of a good leader, yet a woman who possesses these same traits may be categorized as “self-promoting.” Unstructured processes for defining and assessing “cultural fit” increase the likelihood of such double standards subconsciously emerging during the hiring process.

The concept of cultural fit in the hiring process need not be abandoned, however. Greater structure and explicit guidelines can elevate the notion beyond a source of potential bias and into an effective evaluation tool. The recommendations listed below can be used to mitigate unintentional bias when hiring for cultural fit.

1. Create a Defined, Inclusive Culture

Through the creation of and adherence to tangible culture guidelines, companies can more succinctly decide if a candidate embodies existing core values.

Defining culture can mean companywide cultural pillars or mission statements that include the values that a company aspires to uphold. By clearly defining what it means to fit into the culture of a company, there is less room for personal bias to seep into hiring decisions. Furthermore, placing more emphasis on tangible skills and achievements can lead to finding more qualified candidates of diverse backgrounds.

2. Establish Consistent Hiring Criteria

Given the inherent biases and cultural elements that pervade hiring processes, developing a clear framework for hiring is critical.  Funds should ensure they clearly define necessary skills, desired talents, and specific criteria that can be applied across the board to create a more level evaluation of what makes for a successful executive for a given portfolio company. Establishing greater detail around what constitutes a strong “cultural fit” in the role upfront can reduce bias and empower a more judicious process, thereby supporting the cultural aspirations of the portfolio company.

3. Eliminate Biased Testing

Engaging in unbiased testing, if assessments are used, is also important to ensure psychological traits that are often identified with male candidates are not over-weighted unless critical for the role. Further, ensuring adherence to the cultural hiring criteria will enable strong candidates of both genders who have less linear mid-careers to qualify for roles, thus allowing the true best athletes to emerge.

Culture cannot change unless everyone has bought into the new culture, and this begins with those at the top. Exhibiting leadership from the top down and dedication to increasing gender diversity in firms and portfolio companies alike could lead to greater gender diversity in private equity. Commitment from leaders to build a more inclusive workplace encourages junior employees to make changes as well. Looking to leaders is an important part of team building and culture change.

Private equity seems to be making progress in reaching gender parity. By taking concrete measures to eliminate unintentional bias wherever possible this progress is bound to continue. Amending the hiring process is an important tool to set standards right from the beginning. Setting the precedent of an equitable workplace from the outset of candidate evaluation creates an environment where female candidates are not only more likely to be hired based on skill and not gender, but also are more likely to maintain a positive trajectory throughout their time at the firm.

Falcon provides C-suite talent solutions for middle-market private equity firms across North America. Follow us on LinkedIn.