Practical analysis for investment professionals
26 October 2018

Diversity and Inclusion: Driving Change in Investment Management

The investment management industry has a failing grade when it comes to diversity and inclusion. But a new CFA Institute report hopes to change that with a number of recommendations and a call for “experimental partners” as part of a broader effort to move the sector forward.

Driving Change: Diversity & Inclusion in Investment Management,” which was released at the recent CFA Institute Diversity and Inclusion 2018 Conference in San Francisco, is the result of months of discussions with investment professionals in workshops across North America.

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These forums took place in Toronto, Boston, San Francisco, Chicago, Philadelphia, and New York City from October 2017 to May 2018 and were held under Chatham House Rule to encourage participants to have candid discussions. The 344 participants ranged from C-suite executives to diversity and inclusion professionals and represented 99 companies with about $38 trillion in assets under management (AUM).

The report sets out to answer a series of questions, among them:

    • What can be done to change the state of D&I in the industry?
    • What is motivating some asset owners and asset managers to improve D&I at their firms?
    • What is working and what isn’t when it comes recruiting, hiring, promoting, and retaining top talent?
    • How do firms attract a diverse candidate pool and successfully recruit diverse candidates?
    • What does an “inclusive” work culture look like?
    • If the era of D&I as a “check the box” initiative owned by HR is indeed over, what does D&I look like today?
    • And, most importantly, what can we learn from companies that have succeeded?

The result is a carefully curated list of 20 recommended actions inspired by the workshop conversations.

“Part of what we were trying to do was bridge the gap between the academic world of diversity and inclusion and what is going on in other industries and how it works in our industry,” Rebecca Fender, CFA, head of Future of Finance at CFA Institute, told delegates.

CFA Institute staff thought very carefully about who should attend the workshops, she said. Firms were asked to send three to five people from different levels and functions within their organizations. “We tried to get influencers in the room, people with different perspectives,” she said. “We were trying to create some ‘Aha! moments’ for firms.”

Investment Professional of the Future report graphic

Fender co-facilitated the workshops and began each roundtable by defining the terms “diversity” and “inclusion.” For that, she relied on the definitions created by the Centre for Global Inclusion for its Global Diversity & Inclusion Benchmarks (GDIB). Diversity encapsulates “the variety of similarities and differences among people,” and includes a wide range of factors such as gender, ethnicity, disability, and work style. Inclusion, in turn, “is a dynamic state of operating in which diversity is leveraged to create a fair, equitable, healthy, and high-performing organization or community.”

With inclusion, the key word is “leverage,” Fender said, adding that Vernā Myers’s line that “diversity is being invited to the party; inclusion is being asked to dance” resonated with participants.

To get a sense of the room at each event, participants were asked a series polling questions. The first was: “Does your firm have a stated diversity goal?” to which about two-thirds (65%) said yes.

Next, Fender wanted to know more about what was motivating firms’s D&I efforts. Eighty percent said “improved business outcomes,” 71% said talent acquisition, and 6% compliance.

And that is a good thing. “We started out saying, ‘This is really not a compliance exercise,’ and that’s not really where we are hoping firms are at this point,” Fender said. “We want to move them on to a mindset of how diversity is really more helpful overall.”

When it came to which areas firms focused on for D&I, 96% selected gender and 83% race/ethnicity.

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A Failing Grade

Perhaps the most telling data point was the response to the question, “How do you think the investment industry is doing on diversity?”

It’s no secret that women and other historically underrepresented populations are greatly outnumbered when it comes to investing. In the United States, less than 10% of portfolio managers at mutual funds and exchange-traded funds (ETFs) are women, according to Morningstar. And a May 2017 report, commissioned by the John S. and James L. Knight Foundation and the Bella Research Group, found that women and minority-owned firms manage just 1.1% of the industry’s $71.4 trillion of AUM.

It’s not surprising, then, that the industry does not get high marks when it comes to its diversity efforts: Before the workshop, roundtable participants gave the sector an average score of 1.8 on a 5-point scale with 1 being poor and 5 being excellent. That figure inched up ever so slightly — to 2.0 — when the same polling question was asked at the end of the workshop.

Still, by most measures, 2 out 5 is a failing grade.

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So what can be done to change this?

This is where the list of 20 ideas comes in.

“What makes this stand out from other diversity documents is that it focuses on the nuances, pitfalls, think in analyst terms, the footnotes, where the real information is found about unintended consequences and how things really work,” said Kelli E. Palmer, PhD, director of corporate citizenship at CFA Institute and co-facilitator at the workshops. “Also, it is not only a here-and-now action-oriented plan. There is a plan for ongoing action and engagement.”

Indeed, the report contains 20 ideas, or “concepts,” plus “recommended actions,” “common pitfalls,” and “additional detail.” The items are arranged numerically from the most foundational — “define diversity” — to the more challenging.

As for the methodology, Palmer said she “used qualitative data analysis to identify clusters of keywords and concepts” from among all the ideas and practices submitted by participants.

“It was a revealing process from which you benefit from through the 20 carefully distilled recommendations of our report,” she added.

Palmer said her job was to bridge that gap with the academic community, noting that there were a few concepts that were introduced in the workshops that participants really appreciated, including intersectionality, which “recognizes that individuals are a combination of characteristics and categorizing them in only one dimension reduces the opportunity to leverage their perspective,” and “cultural taxation — the phenomena in which people from historically underrepresented populations are doing extra work to advance diversity and there is a negative correlation between doing this work and getting promoted.”

One of the items on the list is “culture vs. policy.” Fender cautioned that “culture can’t be mandated through a memo.” She also urged participants to think carefully about so-called “blind hiring,” where identifying details are stripped from resumes and applications. “Having a blind resume process won’t fix a non-inclusive culture,” she said. “It’s a potentially useful tool but have some guard rails around it.”

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Fender noted that one of the ideas on the list — storytelling — may surprise some.

“We vetted this list with all the participants and also went to some academics out there and asked them, ‘What’s in the literature? What fits?’ And storytelling was the one that surprised them. This is outside of the bounds of what we normally talk about. It doesn’t really come up,” she said. “But we found over and over again, it’s the stories that help us. Stories are really important to help us connect and as evidence of progress.”

She told one about the CEO of a large firm who had said at one of the early workshops: “Our employees have 1,300 unique narratives that when woven together result in an incredibly beautiful story” and urged attendees to get to know people’s stories.

As for the pitfalls, or unintended consequences, Fender gave this example: One of the concepts in the report is “candidate slates” where the recommended action is, “When engaging an executive search firm, explain your firm’s definition of diversity, and select search firms that have a track record of providing diverse candidate slates.” One of the pitfalls is that diverse candidates are sometimes eliminated because they “don’t fit the culture.” This is “the fit-trap.”

She said many firms have begun to apply a version of the “Rooney Rule,” which requires National Football League (NFL) teams to interview at least one minority candidate when filling head coaching vacancies, to candidate searches. Consultants are also talking about this. The problem arises when high-potential diverse candidates are included but rarely hired because of a lack of a cultural “fit.”

“The key phrase to listen for: ‘Not a fit here.’ If you hear that, alarm bells should go off,” Fender said.

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What Happens Now?

It’s about putting the ideas into action.

“We’re at the point where we have done these roundtables, we’ve got some data, but that is only the first step of this project,” Fender said. “The real way that this will make impact is if we start to use it. We started out this process and we said, ‘Let’s just gather people and uncover the best practices’, and we found they don’t actually exist, they aren’t formally incorporated into our industry yet. And so what we need to do is work together as an industry to learn.”

To that end, CFA Institute is inviting firms to become “experimental partners” — to implement one or more of the recommended actions, report back on their effectiveness, and contribute to an updated version in the next two years.

“Join us, try out some of the recommended practices in your organization, and let us know what you learn,” Palmer said. “Contribute to the knowledge base of the profession so that we can become increasingly diverse, equitable, inclusive, effective, and profitable, for the ultimate benefit of society.”

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image courtesy of Nicola Laing

About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

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