There are a number of areas where the issue of diversity and inclusion (D&I) particularly impacts the asset management sector. These include: (i) an investor-level focus on the issue; (ii) the potential impact on a fund’s downstream activities; and (iii) the ongoing management of the manager’s business.
Investors are the source of the key input – cash – in the asset management ecosystem and through this can exert significant influence on managers. D&I can be an important issue for certain investors in light of their own stakeholders’ expectations. While unusual, it is not unheard of for a ticket to be rejected by an investor because the relevant manager fails to meet applicable D&I metrics. As a matter of perception, failing to at least engage with the issue could lead to wider questions about a manager’s broader awareness of market forces.
D&I may be raised by investors at a number of touchpoints during a fund’s lifecycle, including as part of initial due diligence, as a regular reporting request and at investor meetings. The focus may be on D&I at the manager level and/or at the level of the fund’s underlying investments (such as the governance of investee companies). Research indicates that D&I has a positive impact on business performance and innovation generally; whether it similarly influences financial performance remains the subject of academic debate.
Funds, when acting as investors, may be able to leverage significant influence on their underlying portfolio businesses through their voting powers and, where relevant, the negotiation of investment terms. Specific fund investor level requests may also trickle down into the fund’s investment process.
As a general point, managers will want to be versed in D&I best practices, to engage in effective talent management and to ensure compliance with applicable laws and regulations.
From a talent management perspective, there are some structural issues peculiar to the industry which can limit progress on D&I at the manager level. These include a focus on carried interest and other long-term incentive plans (which discourage turnover at senior levels) and the need to ‘put skin in the game’ (which could, for example, affect social mobility). In addition, there are often legacy issues associated with how the industry operates, such as a reliance on an individual’s existing networks to build business. Such issues may also discourage high-quality diverse candidates from entering the hiring process.
The issue of diversity is also relevant in the legal sphere generally, as demonstrated by the UK Equality Act 2010 and gender pay gap reporting. More specifically, regulators such as the UK Financial Conduct Authority have started to incorporate diversity issues into the factors they consider when regulating firms. The Irish Central Bank has also been vocal on the issue.
There are a number of practical ways managers can seek to improve their approach. Common themes include improving the pipeline of diverse candidates; retaining and investing in existing diverse staff; developing a powerful network of sponsors for women and minorities; ensuring the firm has visible role models; and promoting an inclusive culture. In doing so, managers should also ensure compliance with applicable laws and regulations – this can be especially challenging, but not unsurpassable, where investment structures and assets span multiple jurisdictions.
By Mikhaelle Schiappacasse, partner, and Nathalie Sadler, associate, Dechert
© 2020 funds europe
