Diversity in Action

Hear from Your Peers

19 March 2019

14 min read

What You Need to Know

We asked four institutions around the world to share their thoughts about how they are advancing diversity and inclusion (D&I) in their organizations and why it’s becoming increasingly important for success in investing. Here’s what they said.

Companies across industries are facing increased expectations to improve their record on diversity and inclusion (D&I). The challenges are enormous—from adding more women across the employment structure to narrowing the gender pay gap to reducing gender, age and ethnic bias in hiring decisions.

Beyond the social benefits, these issues are particularly important for investment firms, as a lack of diversity can lead to groupthink and hurt performance. We asked investors in the US, UK and Australia to talk about why diversity is essential for their institutions and the initiatives they are taking to create meaningful change.

1. D&I has been an area of increasing focus and importance in the industry. Why is D&I important to you and your organization?

Johanna Neilsen, Head of People, VFMC (Australia): At VFMC we recognize that making full use of the diverse backgrounds, skills, talents and perspectives of our people can lead to great outcomes and a deeper connection to our organizational purpose.

We know that involving a diverse group of people in making our decisions will lead to better outcomes for our business and our clients. A diverse mix of views and approaches to decision-making not only makes good business sense, but creates an inclusive culture and positive working environment, enabling our people to be the best they can be and genuinely feel they contribute to our professional team.

John St. Hill, Deputy Chief Investment Officer, NEST (National Employment Savings Trust, UK): NEST believes a balanced workforce is key to the success of any organization. Reasons why high-performing organizations embrace inclusivity and strive for a diverse leadership include attracting the best talent, increasing employee satisfaction and improving decision-making. McKinsey’s recent report “ Delivering through Diversity” confirms that diverse organizations demonstrate better decision-making, improved performance and better understanding of their customers.

Deb Clarke, Global Head of Investment Research, Mercer (UK): Diversity and inclusivity are critical to a long-term sustainable business. Our mission is to ensure colleagues reach their full potential. To us, a thriving workforce is essential for a thriving business. We recognize the business benefits as well as the positive cultural outcomes of having employees from different backgrounds.

Elizabeth Burton, Chief Investment Officer of Hawaii Employees’ Retirement System (US): It’s been exciting to see the increased focus on diversity and inclusion. Diversity is critical to any team. As for my work—investments—we all know that finding alpha is incredibly hard and looking through only one lens makes it even harder. For example, if our team is homogenous, we could get trapped in groupthink and we could easily miss something.

Ideally, I think, investment teams aim to construct a diverse team where each individual contributor brings something unique to the table. However, once you have a diverse team in place, you have to take it a step further and embrace that diversity–that’s where inclusion comes in. Inclusion is not talked about enough, but it’s absolutely critical to retaining the best and the brightest. Inclusion is about creating an environment that engages everyone and encourages everyone to share ideas authentically, regardless of differences in gender, race, age, educational and cultural backgrounds. If we build a diverse team, and every individual contributor feels included, we are going to be better investors.

2. How does your organization define and assess D&I?

Deb: We’re focusing on four key themes: advocacy, environment, leadership and measurement. Within each of these themes, we have multiple initiatives underway, ranging from conferences and sponsorships to analysis aimed at eliminating bias trends in compensation or promotions and employee surveys.

Russell Clarke, Chief Investment Officer, VFMC (Australia): Like many of our peers, we are beginning our journey. We are pleased to join the CFA Experimental Partner Program this year. As part of the CFA Experimental Partner Program, we have selected three areas of focus to monitor. These are: “defining diversity” to create organizational alignment; “data” to better build and measure the impacts of our actions; and “storytelling” to ensure that everyone knows what we are doing and how it is impacting our organization.

To support these areas of focus we are about to undertake our first D&I survey. We hope that the feedback will contribute to developing our first D&I policy and work program. Outside of these focus areas, we have set metrics around measuring flexible work, gender balance, tenure, age and the impact of our leadership development programs. We have a range of individuals that sponsor and support our diverse talent. We are currently in the consolidation phase and are expanding our efforts across the broader VFMC team.

John: At NEST we define diversity as a celebration of difference. This includes not only the nine protected characteristics, but also the extent to which individuals may be further marginalized by membership in multiple groups. Inclusion is core to our organization. It is the steps we take to create a culture of acceptance and understanding.

We are currently rolling out our D&I strategy for 2019/2021 and are focusing on the following priorities: we’re promoting inclusivity in everything we do, aiming to create a workforce that reaches its full and future potential by attracting, recruiting and retaining diverse talent.

3. Where does the responsibility for D&I rest within your organization (CEO, dedicated D&I officer, human capital officer, etc.)?

John: All members of the executive board have a diversity objective. Their delivery on this objective is monitored by the CEO. Our executive board signs off on the D&I strategy, the delivery plan and diversity scorecard. Day-to-day responsibility for the policy is managed by a D&I business partner from HR. Our chief financial officer acts as the diversity senior champion and chairs the Diversity Steering Group. And the Diversity Steering Group is composed of staff members in the various departments who act as local champions. The steering group has overall responsibility for the implementation of the D&I strategy in NEST and scrutiny of our policies.

Deb: We have a D&I Council and Advisory Group comprising executive leadership and representatives across the business. We also have a global D&I leader and regional leaders. Our local diversity champion network aims to ensure local needs are met and initiatives take hold on the ground. Ongoing events, activities and research are in place to support gender equality. In 2015, we embedded diversity objectives in our business strategy. With the full support of the board and executive team we introduced five-year targets to work towards a 50/50 gender split, which we have already achieved and aim to maintain, and to increase our senior employee female population to 30% by 2020. To support this, we have updated our recruitment approach to check that diverse shortlists are in place for all senior hires to increase representation in key roles.

Elizabeth: All of us have a responsibility to be committed to diversity and inclusion. As such, my team is actively committed to diversity. We likely have one of the more diverse investment offices among public plans across age, gender, background, work experience, education and ethnicity.

Johanna: We believe the responsibility at the strategic level rests with our board and executive leadership team. As Head of People, I have a key role to play in sponsoring this piece of work as part of our endorsed People Strategy, alongside our CEO Lisa Gray. Russell also plays a significant role in how our team can work together—starting with a “whole of portfolio” focus. Evolving our business begins with our people. With the right people and an inclusive culture and positive working environment, you have the elements for a high-performance team.

4. What are some of the D&I initiatives you have rolled out within your organization?

Johanna: In addition to the survey mentioned earlier, we have recently revised our flex work program and have set an internal target of 30% to encourage more of our people to think differently about how they balance their work and life integration. Flex work at VFMC is not only for people who have caring responsibilities. Currently, around 21% of our people access some form of flex work. Our aim is to increase that to 30% by June 2020. We would also like to normalize the concepts of flex work across all parts of our business. We have technology to support mobility and enable flexible ways of working, and have already seen that come to life across all parts of our business.

VFMC people have access to gender-neutral parental leave, which we hope will be accessed more frequently by all genders as we continue to evolve that benefit.

John: Throughout the year we run various campaigns that coincide with national and international awareness initiatives. Examples include Time to Talk Day, International Women’s Day and World Mental Health Day.

NEST regularly invites guest speakers to talk to our staff about D&I from both professional and personal perspectives. We also offer a comprehensive flexible working scheme for all staff. The aim is to encourage staff to have a better work-life balance whilst still delivering an excellent service.

On a biannual basis we run the Dragon’s NEST competition (using a format like the BBC TV show Dragons’ Den) where we encourage staff to bid for funding for wider staff well-being initiatives.

In terms of recruitment we have just undertaken a review of our recruitment activities and are in the process of rolling out a wave of new initiatives, including redacting identifying information from CVs and applications forms to help remove any bias and rolling out a “licence to recruit training” package that will be mandatory for all hiring managers who recruit staff.

Deb: We have a series of business resource groups that support a number of initiatives. More recently the D&I group has established Accessibility & Inclusion (focus on disability)—that led to a new business resource group.

Our efforts also aim to raise awareness of other groups. For example, on race and ethnicity, our #letstalkaboutrace initiative has created posters around the office highlighting different aspects of diversity. Another initiative that is more specific to the Vine (our women’s network) has been about “Engaging Men.” This aims to get more men involved in the conversation around gender parity and diversity through panel sessions and workshops around the typical stereotypes that women and men face. Unsurprisingly, these stereotypes are not very different, but surprisingly, women are not necessarily aware that men face these issues as well (e.g., around parental leave or flexible working).

We also have initiatives to promote flexible working arrangements, such as #allrolescanflex, and to combat unconscious bias for our people managers.

5. Which aspect of D&I has been most difficult to promote and why? (gender, ethnic/religion, education, etc.)

Elizabeth: All? Each is challenging in different ways.

Ethnic and religious diversity is a challenge because it can be difficult to identify unless the information is volunteered. Gender diversity remains an enormous challenge for the asset-management industry. We see a dearth of women leaders among our pool of portfolio managers (and chief investment officers), and we are eager to see more progress in this area of diversity.

Education can also be a challenge. I am not speaking for Hawaii specifically; however, I have found that there tends to be an industry gravitation toward managers that attended certain schools or worked at certain institutions. There is still a bias for what an ideal resume looks like or some level of security associated with a certain degree, although hopefully that is changing.

John: Discussions around mental health remain heavily stigmatized, particularly among men. The first step to normalizing the topic is to encourage open discussions. We want our colleagues to be comfortable discussing stress and mental health, and feel able to request help when they need it.

Deb: We have further work to do across all areas. One challenge is around getting individuals in the middle-management functions more engaged—many can appear disengaged, in the belief that they can’t move themselves and others further ahead and so don’t necessarily spend time getting more involved. We want everyone across the whole business to be engaged in this becoming mainstream.

6. What are some of the biggest challenges you face in improving D&I?

Russell: One of the challenges for any organization is working out what to focus on, competing priorities and how you measure success. The D&I area is so broad and for some, it can be overwhelming. For small organizations, you can’t work on everything at once. VFMC believes it is important to set priorities and focus on delivering your initiatives; measure your impact and we will see iterative success.

John: We are committed to being an efficient organization that represents good value for money, and therefore the key challenge for us is prioritizing the various strategic initiatives and balancing our ambition against the available resources, identified needs and required time to implement.

Elizabeth: Inclusion is hard to define and assess with external asset managers, and a one-size-fits-all approach doesn’t really work. What does seem to work is regular dialogue with managers to see that wherever they are with respect to D&I, they are continually and thoughtfully improving their process or approach.

Internally it can also be tricky—what I consider inclusion or appreciation may not be considered inclusion or appreciation to someone else. Having an open and professional dialogue or initiating 360 reviews can help negotiate some of these difficulties.

7. Is D&I an important consideration when selecting an asset manager. Why or why not?

Deb: Mercer believes that investment managers employing diverse teams with shared values are, all other things being equal, more likely to outperform than those who are not diverse. Hence, we think it is important to consider D&I when selecting, or rating, an asset manager. We believe that diverse teams derive better and more imaginative solutions to complex financial problems, which is one of the key attributes of a successful manager. Diverse teams also have a better, and broader, understanding of their investment universe, and are better able to probe and challenge each other’s ideas, and hence avoid the phenomenon of groupthink. Cognitive diversity, whereby teams comprise individuals who think and approach problem-solving in different ways, is central to this. However, identity diversity is also important, particularly in the realm of avoiding groupthink. Mercer assesses managers bearing all types of diversity in mind, particularly cognitive diversity; we have a track record over the years of making rating changes—both up and down—where diversity (or lack of it) is a factor.

John: Yes. The evidence (James Surowiecki, The Wisdom of Crowds) suggests that heterogeneous teams are more resilient and make more accurate forecasts than individuals or homogeneous groups. To the extent that better decision-making translates into better performance, more diverse teams should be associated with better outcomes for members.

Elizabeth: As mentioned above, yes! Diversity can be your edge. The way an investor looks at a market may be influenced by where a PM was born, where they grew up, languages they speak, schools they attended, prior careers, gender identity…the list goes on.

Russell: As mentioned earlier, we believe that diverse backgrounds, skills and perspectives will lead to a more effective organization. We also believe that the same is true of investment managers. Making the best investment decisions usually benefits from a broader range of ideas and perspectives—and a more inclusive culture assists in higher quality challenge and debate. Therefore, we believe that D&I is an element that should be considered when selecting an investment manager.

8. How do you assess D&I in asset managers?

John: Before being appointed, a manager must fill out our due diligence questionnaire, which includes questions on the diversity of the workforce and the steps that the manager takes to achieve diversity. The answers to these questions are evaluated alongside other factors by the manager selection team.

Elizabeth: There is not a one-size-fits-all template, but when evaluating potential managers, we discuss their commitment and progress with respect to D&I internally. We like to find out from them how they perceive and measure their success in D&I.

We actively engage with our managers on D&I on multiple fronts, we participate in the CFA Society Hawaii Conference on D&I, we speak about D&I during our Hawaii ERS Investment Summit, and our team attends D&I events.

Russell: Like our own organization, assessing D&I explicitly in asset managers is a journey. We have long held the view that cognitive diversity is helpful in investment processes and there should be sufficient challenge in any investment process to avoid both groupthink and excessive key person risk. However, it is only in recent years that we have started to think about these elements in a more explicit D&I context. We are therefore starting to probe our investment managers in a more focused way on this topic, including asking about the organization’s commitment to these principles, what is it is doing in practice, evidence of execution/improvement over time and so on. Naturally, like many aspects of assessing investment managers, it is hard to set prescriptive parameters, so there is a material degree of subjectivity involved, but the conversation is certainly occurring more frequently and will continue to do so.

Deb: D&I is integral to many of the issues we consider when assessing a manager. However, there are, broadly speaking, two key areas to consider. The first covers the policies and practices of the asset manager at the firm level. To what extent is the firm able to attract and retain a diverse team, and to get the best out them by following inclusive practices? To that end, we question managers on a range of policy issues, such as: (a) does the firm have a formal D&I policy? (b) how does the firm measure diversity, and has it established diversity targets? (c) what initiatives is it taking to achieve those targets? (d) what are the firm’s recruitment practices, and how are compensation and promotion practices aligned with improving diversity? (e) does the firm maintain a ‘returnship program’, and (f) has the firm signed up to industry-wide initiatives or charters?

We also assess the diversity of individual teams within the firm. Here, there are some visible metrics which we can assess—e.g., the makeup of the team in terms of gender, educational background, prior experience, race and ethnicity, etc. However, of equal, if not more, importance is the assessment of cognitive diversity. This is harder to do in an objective, “measurable” way, but we believe that an experienced professional manager researcher will, over time, get a good understanding of these (less visible) aspects of diversity at an asset-manager. To do this, the researcher will consider a number of questions. Does the team have a dominant leader, or is there a low level of challenge within the group, regardless of any surface-level diversity? If a team is under pressure from poor performance or from client outflows, is it more vulnerable to groupthink? How does the team reach decisions and how does it manage any mistakes it has made? What is the team leader’s attitude to diversity? Is there an illusion of unanimity, where in reality team members are hesitant or reluctant to disagree? How does a team work through dissenting views? Does any recent staff turnover tell us anything about team dynamics and the value placed on diversity? Does the remuneration structure (team versus individual bonus) have any implications for how a team reacts to challenge or debate, or the way the team manages dissenting views?

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

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