The pension industry’s record on leadership diversity is woeful. What, Mona Dohle asks, is needed to speed up the rate of change?
On a beautiful day in May, Christian Cooper, a senior biomedical editor, decided to go for a walk in New York’s Central Park to pursue his hobby of birdwatching. However, he was soon interrupted by a dog walker, who did not keep her dog on a leash, in contravention of the park’s rules. When he politely asked her to comply with the rules, she called the police on him, claiming that he was “an African-American man threatening her life”.
It is one of countless highly-profile examples of the discriminatory treatment black and other ethnic minority people face. The scene could also be applicable to the financial industry. Amy Cooper, the woman who called the police, was head of investment solutions at Franklin Templeton. This raises the question, if she was ready to call the police on an innocent person on camera, how did she engage with people from ethnic minorities in a professional context?
If Christian Cooper was a trustee or chief investment officer of a pension fund asking her a challenging question about the performance of one of the firm’s funds, would she reply with the same professionalism she would have shown to a white person?
The Central Park incident sparked widespread public outrage and, in a sign that times are changing, the asset manager moved swiftly and dismissed her from her role.
Picking up the baton
The financial services industry responded to the outrage over the killing of George Floyd by releasing public statements in support of tolerance and diversity on social media.
The most prominent of these campaigns is the #IAM challenge. This was initiated by, among others, Legal & General Investment Management (LGIM) fund manager and campaigner Justin Onuekwusi. The Diversity Project and the #TalkAboutBlack campaign launched by Gavin Lewis, a managing director at BlackRock, were also involved.
Industry organisations, such as the PLSA and The Pension Regulator, have also picked up the baton. In March, the PLSA published a guide on diversity and inclusion, which came up with a specific set of recommendations to improve trustee diversity. The Pensions Regulator followed suit by announcing in April that diversity would become a key aspect of its work on scheme governance. While these initiatives suggest that the industry is starting to talk the talk, it is still far from walking the walk, as Bev Shah, chief executive and founder of City Hive, argues. “There is definitely growth in awareness but still very little tangible action,” she says. “And there is a still a lot more work to be done on the education side for people to really understand why the action is needed.”
Indeed, a guide published by the PLSA reveals that across the UK pensions industry, 83% of scheme trustees are male and only 2.5% of trustees are under 30. A quarter of pension schemes have all-male trustee boards. As such, the pensions industry scores significantly worse than the average FTSE100 company.
More room in the NEST
While there is a lack of data on ethnic diversity, research by portfolio institutional shows that the top five UK defined benefit (DB) schemes (excluding local government pension scheme investment (LGPS) pools), covering more than £2.2trn in assets, did not have a single BAME (Black, Asian and Minority Ethnic) trustee or executive board member. There are also less than 10 female trustees between them.
While the LGPS pools generally feature more diverse teams and a higher level of female representation, they only have one BAME person represented at board or joint committee level. Some defined contribution (DC) schemes are countering the trend.
It helps if you can put people out of their comfort zone, make them realise what it’s like to be excluded. You have to get to the heart and the head and the guts, you can’t just appeal to the head.
Jane Welsh, Diversity Project
Government workplace pension scheme NEST has one person from a BAME background on its board and another on its executive team. Some 20% of its senior leadership have a BAME background and the organisation targets a 13% BAME representation at its board by 2025. DB schemes, including one sponsored by RBS, have also set similar targets.
Diversity dividend
Ensuring that teams are offering equal opportunities isn’t just a moral imperative, it can also lead to better performance and risk management practices. For example, a McKinsey report shows that companies in the top quartile for ethnic diversity are 33% more likely to outperform their peers while more gender diverse companies are 15% more likely to outperform. Moreover, a 2016 article by David Rock and Heidi Grant in the Harvard Business Review showed that ethnically diverse teams are 58% more likely to price a stock correctly.
Conversely, a lack of diversity could be a sign of poor risk management practices, Shah argues. “We are taught to mitigate our risk by diversification,” she adds. “A multi-asset portfolio will be a mix of asset classes, currencies, sectors, market cap and geographies yet the majority of the people actually making the decisions are similar, whether it is their gender, ethnicity or schooling.
“This limits the cognitive diversity in the team (representative diversity being a proxy). It creates huge risk of group think. “We are firm believers in teams made up of people with different backgrounds, biases and beliefs lead to more robust decision making,” Shah says. “In my opinion every CRO should be having sleepless nights over the lack of diversity.”
What steps are schemes taking
So, what is holding schemes back? According to Jane Welsh, a project manager at the Diversity Project, a cross-company initiative for a more inclusive investment industry, it was noticeable that companies kept reinventing the wheel and making the same mistakes.
“One example is the common belief that if you put everybody in unconscious bias training, it’ll all get sorted. There is quite a lot of academic research that shows that this isn’t actually helpful, it doesn’t necessarily lead to changes in behaviour.
“That isn’t to say that you shouldn’t make people aware of the unconscious bias they have but it needs to be done in a careful way,” she adds. “Storytelling is powerful, hearing experiences from different people helps you relate to them rather than it being an academic idea. It helps if you can put people out of their comfort zone, make them realise what it’s like to be excluded.
A multi-asset portfolio will be a mix of asset classes, currencies, sectors, market cap and geographies yet the majority of the people actually making the decisions are similar, whether it is their gender, ethnicity or schooling.
Bev Shah, City Hive
“You have to get to the heart and the head and the guts, you can’t just appeal to the head,” Welsh says. “People have to really feel it to understand what it’s like to be a black person or somebody from the LGBT community in the industry.”
Pushing for more diverse asset managers
The case for more diversity at pension schemes is a two-way street. Schemes not only have a role to play in facilitating BAME and female representation in their leadership, they can also become an important campaigner for more diversity at the asset managers and companies they invest in, Welsh believes. One attempt to do precisely that is the Workplace Disclosure Initiative launched by ShareAction, supported by, among others, NEST, Border to Coast, Local Pensions Partnership, Northern LGPS, USS and RPMI Railpen.
Border to Coast has made diversity one of its top three priority engagement themes and calls for businesses to improve the ethnic and cultural diversity of boards. The pool proposes that FTSE100 companies should have at least one director from an ethnic minority background by 2021.
Diversity is also high on the agenda of Diandra Soobiah, NEST’s head of responsible investment.
“When we are appointing new fund managers we ask them, as part of the selection process, to disclose their diversity policies for our consideration.
“We want to see what steps they are taking to achieve diversity in terms on gender, ethnicity and backgrounds, and in particular how they’re developing leaders through the organisation. “In the future we’ll be increasing the importance of BAME representation in our engagement with fund managers we work with, seeing it as a way to promote doing the right thing and reduce our investment risk,” Soobiah says.
The way forward
While pension schemes and asset managers appear to be full of good intentions, the data shows a different picture. The pensions industry still has a long way to go to develop a more diverse workforce.
PLSA guidance has put forward a specific set of recommendations for schemes to take on the challenge. This includes contextualised or anonymised recruitment practices, setting up LGBTQ or BAME company networks and offering enough space to spend time together on an informal basis.
Writing letters of support and posting statements on social media does not absolve any company from taking the real action they need to. The entire investment chain needs to be examined and evolved, with pay and pension gaps for gender and ethnicity holding companies to account.
Bev Shah, City Hive
Campaign groups argue that this should not just be a voluntary tick-box exercise, the time has come for asset managers and pension schemes alike to commit to diversity and inclusion targets and to disclose not just the composition of their teams, but also the gender and ethnic pay gap.
“Writing letters of support and posting statements on social media does not absolve any company from taking the action they need to,” Shah says. “The entire investment chain needs to be examined and evolved, with pay and pension gaps for gender and ethnicity holding companies to account.”
