Racial Diversity and Investment

Colin Melvin is founder and managing director of Arkadiko Partners Ltd. and former Global Head of Stewardship at Hermes Investment Management. This post is based on his Arkadiko memorandum.

Racial diversity—iniquity and interdependence

Whilst gender diversity has been a growing priority for several years, investors have not approached racial diversity with similar enthusiasm and urgency. In the UK, the Parker Review and Baroness McGregor-Smith’s recommendations urged public policy makers and private organisations to focus on increasing ethnic minority representations on boards in FTSE 100 companies [1] and publishing ethnicity pay gap figures. [2] However, little progress has been made. The topic of racial diversity in the investment industry was recently raised in an open letter in the UK from a group called Black Women in Asset Management, challenging the industry to move beyond statements on solidarity and anti-racism. [3] The extensive Black Lives Matter protests, catalysed by the killing of George Floyd, have highlighted our interdependence in the midst of a global health crisis and the urgent need for action. It is time to ask what institutional investors can do to address the increasingly evident racial iniquities and their inconsistency with commitments to responsibility in business and investment.

Unequal opportunities

Institutional investors face a significant cultural challenge in addressing the problems of racism, unequal opportunities and an associated lack of racial diversity in their industry. It is no longer sufficient that they simply declare what they expect of investee companies in respect to diversity. They need to act upon this and embrace diversity within their own investing institutions or asset management businesses. They have an opportunity to draw parallels between the power of diversification in their investments and diversification in their hiring and management of talent, as adding significant value in both contexts. Investment teams with diverse backgrounds contribute with a larger variety of perspectives, which will ultimately increase the quality of investment decision-making.

The obvious lack of racial diversity and the debate around equal opportunities has led many investment firms to defend themselves on the grounds that they are open to everybody. However, there is no equality of opportunity for the candidate who is battling against decades of discrimination and limited choice, from educational access to unconscious bias. Many asset managers focus on graduate programs when trying to attract new and diverse talent. These programs might bring gender diversity to the industry, but they rarely add racial diversity as they tend to focus on specific universities with low minority representation.

There are cognitive biases in the way we take decisions when hiring people to undertake investment research and in our investment decisions themselves. In addition to graduate programs, a large proportion of jobs are secured via personal networks. We tend to network in overlapping circles, that is, to be around people that we are linked to, or know, or went to school with, or have done business with. This behaviour creates a self-reinforcing cycle of biased hiring practices fuelled by the favouring of personal contacts, which makes it difficult for talent outside the circle to be provided with the same opportunities as their peers on the inside. We can therefore benefit from deliberately seeking talent beyond our personal networks. However, a common presentation of this problem is that it relates to the “pipeline” of talent, which is beyond the control of the hiring manager. That is, there simply aren’t any ethnic minority candidates interested in and suited for the job openings. Of course, this is untrue. By moving outside our overlapping circles, we will realise that talent is very widely distributed among communities, universities and geographical regions. There is no such thing as a limitation for talent. But, there is such a thing as limitation of opportunity.

The problem doesn’t only lie with entry-level positions. Some ethnic minority candidates might be successful in finding a role in the investment industry, only to battle discrimination and favouritism when trying to advance their careers, encountering glass ceilings at mid and upper-management levels. An EU study [4] shows that ethnic minorities are often underrepresented in management positions and tend to hold lower-level jobs. The study further shows that in the UK, black and minority ethnic employees are less likely to be appraised and acknowledged for high performance. This results in more ethnic minorities struggling to advance their career compared to their white counterparts.

A call for asset owners to act

The lack of racial diversity in the asset management industry is certain negatively to affect the quality of investment decision-making processes. Investment teams without a diverse knowledge base can be constrained when selecting and interacting with the companies in which they invest. The ability to analyse risks and opportunities through the lenses of different perspectives is important for good stewardship and investment decision-making. In globalised investment, as in business, we would hope and expect that investment teams and asset managers generally would understand and reflect the diversity of the world. However, this is far from the case.

Asset owners are in a position to influence how asset managers approach diversity, in their selection, monitoring and dialogue. The agenda for a typical meeting between asset managers and their clients tends to focus on short-term investment performance, fees and risks, with a recent increased attention towards environmental, social and governance (ESG) risks and stewardship in relation to the assets in which they invest. However, asset owners could usefully initiate every new mandate discussion with “tell us about your company”. Asset managers should be expected to demonstrate that diversity is actually pursued and implemented in their own businesses. However, in trying to achieve better racial diversity, asset owners need to be aware of the perception gap between what the asset manager thinks they are doing and what is actually happening. That is, there is a tendency to look at firm-wide numbers when discussing diversity. It is important to ensure that these reflect true diversity in their distribution across functions and organisational levels.

Diversity of thought

In pursuing a diverse organisation, it is important to understand how diversity contributes to the achievement of our purpose and mission, rather than just ticking the boxes for various physical characteristics. If employees come from similar backgrounds, circles or networks, then we are likely to fail to realise the creativity that results from a diversity of thought and perspective. That is, asset managers might hit internal racial diversity targets by hiring racially diverse candidates with similar educational, social and cultural backgrounds, whilst continuing to make the classic error of hiring the best person for the job, rather than the best person for the team or organisation. Although quotas, internally or externally imposed, are helpful in starting to shift perspectives and hiring practices, diversity of thought is not achieved through compliance, but rather by purposefully preferring culturally diverse candidates with different views and perspectives on investment and life in general.

Race refers only to our physical traits, such as skin or hair colour, while ethnicity classifies people according to religious and cultural backgrounds in addition to physical characteristics. Investment managers should therefore attend to both racial and ethnic diversity in their recruitment. Achieving diversity of thought and perspective requires the investment industry to be open to different views. It requires minorities to be listened to. It requires cultural change.

How do we change?

In order to increase racial diversity and inclusion within the investment industry, in relation to its business practices, allocation of capital and stewardship, we need to acknowledge the problem (and opportunity) as both systemic and cultural. A recent article [5] highlights that organisations tend to have little awareness of their racism, while some purposefully deny the existence of the problem. White employees tend to resist any anti-racism initiatives introduced and be unaware of discrimination that occurs beyond obvious incidents. They do not see the cognitive biases and cultural norms that negatively affect performance evaluations, promotion and hiring practices. In order to truly overcome the problem of discrimination and racism in the investment industry and to realise the benefits of racial diversity, we must acknowledge the existence and magnitude of the problem, and actively pursue the requisite cultural change. Asset managers will need to look for talent outside their networks, which might require positive discrimination and affirmative action. They will need to adopt new hiring and promotion practices in order to build a racially diverse work force. Happily, this is fully consistent with a global and enduring trend towards greater sustainability in business and investment and it is increasingly what their clients expect of them.


1https://www.ey.com/en_uk/news/2020/02/new-parker-review-report-reveals-slow-progress-on-ethnic-diversity-of-ftse-boards(go back)

2https://www.ft.com/content/4e4a457d-6be9-454f-a55f-e9f75d8f8eeb(go back)

3https://bwam.network/bwam-open-letter-to-the-asset-management-community(go back)

4Racism & discrimination in employment in Europe 2013-2017; European Network Against Racism (ENAR); 2017(go back)

5https://hbr.org/2020/09/how-to-promote-racial-equity-in-the-workplace(go back)

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