Racial and gender diversity in the asset management industry lags notoriously behind broader workforce statistics, especially when it comes to individuals in investment positions. Illumen Capital’s Katie Twomey breaks down the issue and offers concrete recommendations for financial services organizations.
We know that diverse-owned firms represent just 1.3% of the $69.1 trillion in assets under management within the asset management industry. We also know that this dismal reality isn’t due to lack of talent or a “pipeline problem.”
Women represent 46.8% of the working-age population, according to the U.S. Bureau of Labor Statistics 2020 report but only 23% of venture capital (VC) employees in investment positions. And when looking at race, 18% of the labor force is Latinx and 13% is Black, but Latinx and Black workers each account for just 4% of VC employees in investment positions.
There is more than enough diverse talent available. So why aren’t we seeing women and people of color in VC investment positions? Instead of blaming the conveniently used (but widely debunked) “pipeline problem,” let’s focus on the bias problem.
Bias persists at every layer of asset management, but let’s start with the top of the funnel: hiring. In this piece, I’ll share why, from a compliance and risk standpoint (other than because it’s just the right thing to do) reducing bias in the hiring process should be a top priority. I’ll then share a few actions you can take right away to start on your path toward a more equitable and optimal future for your firm, and in doing so, our global industry.
Performance risk
In a study of discrimination in the U.S. labor market conducted by economists Marianne Bertrand and Sendhil Mullainathan, researchers found that highly qualified Black candidates were less likely to be offered an interview than less-qualified white candidates. Without even knowing it, employers are choosing to hire less-qualified candidates just because of their racial bias.
Imagine the increased job performance that would occur if employers were equipped with the tools to hire the best candidates instead of those that seem like the best. Further, we have evidence that homogenous teams have worse investment outcomes and that diverse teams correlate with better returns. This could be due to a number of factors, including that diverse teams go on to fund diverse founders, opening up their pipeline to a greater opportunity set.
Legal risk
Bias is affecting our hiring decisions, even if we are not aware of it. In the U.K., a court recently found that the Foreign, Commonwealth and Development Office discriminated against a Black employee, with the evidence being indirect unconscious bias. While hard to prove in trial, some are hopeful that this case will set precedent for future discrimination cases. Per the U.S. Equal Employment Opportunity Commission (EEOC), “it is illegal to discriminate against someone (applicant or employee) because of that person’s race, color, religion, sex (including gender identity, sexual orientation and pregnancy), national origin, age (40 or older), disability or genetic information.”
It is now standard practice to share that you are an equal-opportunity employer in job descriptions and on our websites, but are we truly equal opportunity when we haven’t addressed our own biases against protected identities?
Regulatory risk
We know that ESG has been a topic of interest for the SEC. But not until May of this year did the SEC issue its first ESG-related enforcement action against an investment adviser. BNY Mellon Investment Adviser was charged for misstatements and omissions about environmental, social and governance considerations in making investment decisions. This serves as a reminder to be diligent with any and all ESG claims, which sometimes could include claims around DEI (diversity, equity and inclusion) in hiring practices.
Strategies for reducing bias-related hiring risks
As compliance professionals, it’s our job to mitigate risk and to ensure compliance with corporate policies and procedures, FINRA, SEC, state, federal and international regulations. Here are a few strategies in reducing the risks involved when it comes to bias in hiring:
Set targets and expand networks to meet those targets
Set specific recruiting targets and don’t enter the next phase of recruiting until you’ve reached those targets. For example, a target could be that you want your hiring pool to be representative of the labor force population. If you are having trouble meeting those targets, build relationships with diverse networks and post your job description on job boards that are specifically designed to connect under-represented talent to opportunities. Go out and find applicants as opposed to waiting for them to find you.
Remove biased language or requirements from job descriptions
Without knowing it, our bias can show up in the language we use in job descriptions, deterring diverse applicants from applying from the moment they learn about your company. We can create a more inclusive job description through using non-gendered language, removing unrealistic and/or ultra-specific required qualifications and wiping out industry specific jargon. Do we really need someone with this specific master’s degree? Or someone with two years of experience at a top investment bank? What specific experiences and skills are required to be successful in this role? Talk about those instead.
Standardize interview questions
Questions that are asked can determine the direction the conversation will go. In “Biased: Uncovering the Hidden Prejudice That Shapes What We See, Think, and Do,” author Jennifer Eberhardt talks about a Swedish study that found interview questions varied based on the applicant’s ethnicity, asking those with diverse backgrounds about “cultural fit” and asking those that had Swedish-sounding names about “job fit,” focusing in on the applicant’s qualifications. Having standardized interview questions set before the interview forces the interviewer to stay on task and gives each applicant a fair platform to share why they are the best candidate for the role. This also allows employers to more efficiently and equitably compare one candidate to the next.
Think again about how you evaluate background checks
Nearly 40% of the U.S. inmate population is Black. Just as in hiring, we know that the U.S. criminal justice system is riddled with bias. Therefore, by taking a cookie-cutter approach to reviewing background checks, employers could be missing out on top diverse candidates. Instead of focusing on one line within any given check, look at the whole person and remember why you are running the check in the first place. Does this person represent a risk to the success of the firm? Does one past incident impede their ability to perform their job functions today? The answer is likely no.
Reducing our implicit biases is lifelong work. While we work on addressing our biases, we can practice the above strategies that force us to slow down and create friction throughout every step of the hiring process. These strategies can help us reduce our exposure to performance, legal and regulatory risk, and ultimately create more optimal teams, more optimal firms and a more optimal industry.
Katie Twomey is vice president of finance and operations at Illumen Capital. She is passionate about using innovative methods of financing to advance social and economic justice and to positively impact people, communities, sectors and markets. Prior to joining Illumen, Katie led the finance, operations and HR functions at the nonprofit organization, Mama Hope, which aims to create a new global approach to tackling injustice in which communities hold the power and resources they need to drive their own futures. She began her career at Apollo Global Management, providing compliance support to private equity, credit and real estate businesses to ensure compliance with corporate policies and procedures, FINRA, SEC, state, federal and international regulations. She earned a B.S. in management from Boston College’s Carroll School of Management and holds an MBA from the Heller School for Social Policy and Management at Brandeis University.
