In this week’s (May 10, 2020) Meet The Press Chuck Todd interviewed Vista Equity’s Robert Smith. The first 20 seconds of their exchange summarizes the devastating effect inertia has on our country’s minorities. If you add women to the mix, we are the majority of the population by far. Todd frames COVID19’s economic and health impact as “an MRI on inequality”, to which Smith reacts “this is a pandemic on top a series of epidemics”. One word: inertia.
I’ve looked at and experienced inertia wearing different hats: entrepreneur, investor, board member and policymaker appointed by President Obama to oversee tens of billions in capital. Two decades ago, just before the dot-com hubris fueled bubble burst, I published a study called “Hispanic-American Venture Capital: Financing the Growth of the Latino Market”. This is not a trip down memory lane. What is striking is how little has changed for Latinos and all other underserved and underrepresented groups in America. The reason is inertia. It disables the fundamental progress of the majority of our citizens because by design, it weakens their influence.
The pandemic has magnified inertia as a powerful force most of us take for granted. It shines a spotlight on the realities that have shaped our nation for centuries. The current combination of urgency and scale is daunting and has exposed inertia’s brutal consequences. As of this writing, over 30 million people have filed for jobless claims, our economy is expected to contract another 15% this quarter and about $ 7 trillion has been guaranteed, borrowed or in the process via different facilities and instrumentalities of the Federal government.
Only about 50% of our country’s adults are employed and this existence most acutely affects communities of color. The brunt of the economic damage being felt by African Americans and Hispanics is disproportionately high and tragic. Our country as a whole is asymmetrically being battered for all kinds of reasons that on top of the raw force of biology, they are rooted in policy. America makes up 4% of people in the world but we have about one-third of COVID19 cases and represent one-in-four deaths globally.
No economic sector has been harder hit than small businesses – harder yet, minority-owned ones. One of the most critical cylinders powering our country’s economic engine is the Latino population and the businesses they own and/or cater to them. Their contribution to GDP is about $2 trillion, hardly insignificant. Millions of small companies drive our economy and sources of income and work for half of our citizens. Recent policies and programs intended to support them did not quite hit the mark, but that is another story.
I once heard someone say that talent is evenly distributed. That seems to be true but the exact opposite is the case regarding opportunity and access - these are unevenly distributed. Broadly shared participation in the economy is a key to economic prosperity and social stability. Yet, our slow changing landscape continues to calcify wealth concentration and push talent to the sidelines. This is another lens through which one can examine the inertia that governs our economic and social systems.
From governments and the policies they enact, to boardrooms and the management teams they oversee, to universities and the young minds they shape, to investors and the asset allocations they make - most people believe more diversity and shared prosperity is a good thing. Right?
The crisis has exposed built in inequities and the lack of diversity in the corridors of power hampers action. Exhibit one: From the $350 billion of CARES Act’s Paycheck Protection Program only about 4% found its way to black and brown owned businesses. This is shameful and baffling in equal parts.
Despite the advances our country has made via decades-in-the-making confluence of seismic innovation, the digital divide continues to get wider and wealth gaps continue to grow. The knowledge economy, which provides people with paths to prosperity and wealth creation, should unlock potential for everyone. It isn’t because high-priced access tolls exist – another manifestation of inertia. These pathways continue to be scantly and sporadically reachable for the vast majority of our citizens regardless of their color, race or background.
If you look at the numbers that underpin the centers of our country’s power structure - civic representation, asset management and the economic resources of corporations - a business case can be made to counteract inertia with a language that everyone understands – mathematics.
On the publicly traded company front, McKinsey published a study in 2015 in which they looked at 366 corporations around the world. The dataset size rendered statistically significant results. McKinsey concluded that companies in the top diversity quartile are 50% more likely to outperform the median than those in the bottom quartile. It also found that every 10% increase in a company’s senior team diversity translates into 1.1% of additional earnings before interest and taxes. In their 2017 insight update they further correlated profitability and value creation to gender, cultural and ethnic diversity and underperformance to the lack thereof. It goes without saying that if those holding the levers of power looked more like our country, less gaps would exist just based on affinity.
In the asset management world, the National Association of Investment Companies in partnership with KPMG and GCM Grosvenor conducted an interesting study. It found that from an Internal Rate of Return (IRR) and Multiple on Invested Capital (MOIC) perspective, diverse owned or managed private equity funds outperformed the Cambridge Associates US Private Equity funds 62.5% of the time. On a Distributed to Paid in Capital (DPI) basis they outperformed 56.3% of the time. During the 1995-2015 period, upper quartile diverse funds delivered a 21.21% IRR, 1.80x MOIC and 1.37x DPI – better than the median and top quartiles of the Cambridge US Private Equity and US Buyout indices. Less than 2% of institutional assets are managed by minority-majority owned firms. Robert Smith, Orlando Bravo, Mary Meeker, John Rogers, Carla Harris and Jose Feliciano are remarkable examples of capital stewards that look like America.
While I ran SBA’s Small Business Investment Company program during the Obama administration, I commissioned a Library of Congress study on the program’s effectiveness and its performance. In terms of scale, since 1958 (not a typo) about 2,300 private equity, venture capital, and structured debt funds licensed as SBICs had invested $80.5 billion in about 173,000 financings. Some of those investments include early capital infusions into Apple, Intel, Whole Foods, FedEx, Sun Microsystems and Tesla. These iconic American companies were all tiny little businesses at one point.
The study found that for every 100 investments made by all SBICs into women owned businesses, 237 were made by funds with at least one female general partner. Furthermore, an SBIC with at least one minority group general partner invests $4.03 into a minority owned businesses for every $1.00 invested by all funds licensed as SBICs. Representation matters when looking at who signs the checks.
Even more math
The US population is about 330,000,000. 50.8% is female and 36.2% is African American, Hispanic or Asian. Yet only 29 women are currently S&P 500 CEOs, a dismal 5.8%. Furthermore only 3 women (0.6%) of the 500 are women of color. I am not sure why this continues to be the case especially when you discover that public companies with at least 3 female directors deliver 45% higher return on equity and 61% higher return on invested capital according to Catalyst.
According to the Latino Corporate Directors Association just seven companies of Fortune 1000 have more than two Hispanic directors and a full 770 (77% of the Fortune 1000) companies have no Latinos on their boards - ZERO! Latinos are a little under 20% of the country, contribute trillions to GDP and in twenty years are expected to number 100 million. The lack of representation of our fastest growing, youngest and largest minority in the boardrooms of our biggest companies is a raw and disappointing marker of inertia. A similar dynamic applies if one were to use an African American lens, in case you were to ask.
More math anyone?
A peek at who holds sway in public service reveals that elected republicans/democrats are ~90%/80% white and ~70%/65% male. Furthermore, the mayors of the 100 largest cities in America are majority white and an astounding 70% are male. Chicago, our country’s third largest city, is a notable exception with a chief executive that is not only a black woman, but also openly gay. The backdrop to this civic representation gap is the fact that white men represent 31% of our population.
If you combine these facts, one sees the contours of seemingly insurmountable structural issues facing underrepresented groups, especially those at the top of their games. All of this is true despite the math.
COVID19 threw truckloads of sand on already inefficient gears. That inefficiency is anchored in inertia and the pandemic has put this on stark display. Why has inertia proven to be such a powerful force? Because the combination of race, class and power to a large extent dictates most people’s place in society. One of the largest determinants of success and economic mobility is the “condition of our birth”. Where we start in life is more dispositive that skill, talent and effort.
A few people power through inertia. For instance, I am still powering through it. In my case the combination of a loving home, good education and serendipity most likely had a bigger role to play than my hard work, effort and accomplishments. For the record, I am Puerto Rican partly of Middle Eastern descent – a double whammy. It almost does not matter that I hold a Harvard MBA - or that I worked at McKinsey, Booz Allen, Abbott and Bridgewater - or that I co-founded a media company - or that I oversaw tens of billions of dollars in a position of public trust – what gets noticed first and foremost: is that I am brown. This is annoying to put it mildly.
Adam Serwer published one of the most poignant recent articulations of inertia and framed it in the context of our society’s implicit (many times explicit) versions of the ‘racial contract’. He writes, “The Declaration of Independence states that all men are created equal; the racial contract limits this to white men with property. The law says murder is illegal; the racial contract says it’s fine for white people to chase and murder black people if they have decided that those black people scare them.”
In the context of COVID19, he goes on to say, “Once the disproportionate impact of the epidemic was revealed to the American political and financial elite, many began to regard the rising death toll less as a national emergency than as an inconvenience… But in America, where labor and race are so often intertwined, the racial contract has enabled the wealthy to dismiss workers as both undeserving and expendable… In America, the racial contract has shaped the terms of class war for centuries; the COVID contract shapes it here.”
These are incisive words that illustrate the negative pull and power of inertia. You know what’s at least as powerful – math and the will to change. Inertia has shaped and continues to shape our society but it doesn't have to. It does not have to because it shouldn't, period.
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